BACKGROUND

Grand Canyon Visibility Transport Commission

In June of 1996 the Grand Canyon Visibility Transport Commission recommended, among other things, to "support adoption of federal Tier II (vehicle emission) standards" and to "request that EPA explore broader application of and additional reductions in the sulfur content of both gasoline and diesel fuel."

WRAP Mobile Source Forum

In the spring of 1998, EPA announced its intention to proceed to rulemaking on adoption of national Tier 2 vehicle emission standards and a companion program to substantially reduce the sulfur content of gasoline. Shortly thereafter, the WRAP Mobile Source Forum decided to study this issue and consider developing comments for the WRAP to make to EPA. In May of 1999, EPA proposed stringent new national Tier 2 vehicle emission standards and a companion gasoline sulfur regulation. Concurrently, EPA issued an advanced notice of proposed rulemaking with respect to further regulating the sulfur content of diesel fuel.

Western Governors' Association

In June of 1999, ten Governors from the Western Governors' Association requested that the WRAP Mobile Source Forum make recommendations on how to address their concerns about the impact of EPA's proposed rules

on small refineries in the West (attachment 1). While the Governors indicated they have "long been concerned about improving and maintaining the good air quality in the West" and "recognize that sulfur in gasoline must be controlled," they expressed specific concern that "despite the provisions in the proposed [EPA] rule for small and medium size refineries, there may nonetheless be a number of these industries that are not able to comply with the low sulfur requirements and may be forced to close." The Western Governors asked the Forum specifically to "evaluate the relative merits of a national versus regional sulfur standard, develop recommendations for allowing small and medium size refineries the ability to comply with new standards in a manner that is practically and economically feasible, and make recommendations regarding any further required technical studies."

Mobile Source Forum Tier 2/Gasoline Sulfur Drafting Team

The Mobile Source Forum responded to the request of the Western Governors by forming a drafting team to develop recommendations to be considered by the Forum and ultimately the WRAP. The drafting team was composed of seven members representing major interests (attachment 2).

EPA'S PROPOSED TIER 2 MOTOR VEHICLE EMISSION STANDARDS AND GASOLINE SULFUR CONTROL REQUIREMENTS

Proposed Standards

EPA has proposed new national vehicle emission standards that would be phased in beginning with the 2004 model year. EPA has proposed to reduce the sulfur levels in gasoline from a national average of more than 300 ppm to an average of 30 ppm. These standards would be phased in beginning on October 1, 2003. EPA indicates the reduction in the sulfur content of gasoline is needed because sulfur fouls catalytic converters, the devices that destroy a major portion of the emissions from vehicles. With a combination of the new vehicle emission standards and much lower gasoline sulfur levels, emissions from passenger cars would be 77% cleaner than today's new models and emissions from SUV's and other light?duty trucks would be 95% cleaner than today's new models.

Proposed Refinery Provisions

EPA proposes to phase in a gasoline sulfur standard of 30 ppm annual average with a maximum per gallon cap of 80 ppm. Under EPA's proposal, most refineries would be given until January 1, 2006 to comply with these standards. Small refiners would be given an additional two years to comply and, if necessary, could request an additional two?year economic hardship extension that would delay compliance until January 1, 2010. EPA's proposed standards for small refiners were developed under the Regulatory Flexibility Act, a statute designed to provide compliance flexibility for small businesses. EPA used a provision of a Small Business Administration definition for a small refiner in its proposed rules, which is a company with 1500 employees or less (hereafter referred to as a "SBREFA" refiner).

Expected Air Quality Benefits

When the Tier 2 program is fully implemented in 2030, that is when the national vehicle fleet will have turned over to essentially all Tier 2 vehicles, the proposed standards will reduce NOx emissions from vehicles by about 74% and particulate matter, or soot, from vehicles by about 84%. These reductions will greatly help to reduce and prevent ground level ozone, PM2.5 and regional haze air quality problems, as well as address other air pollution problems such as acid deposition and toxic air pollutants. Additionally, the early reductions in sulfur content of gasoline will provide substantial immediate air quality improvements from the current fleet of vehicles.

WRAP COMMENTS, RECOMMENDATIONS AND RATIONALE

The following recommendations of the WRAP are made to address concerns of western inland small refineries about the impact of EPA's proposed national gasoline sulfur control program while at the same time providing for compliance with the proposed national low sulfur gasoline standards. When the WRAP was examining the concerns of small, geographically isolated western inland refineries, the WRAP also recognized that some of the compliance concerns raised by these refineries also were raised by similarly sized refineries elsewhere. Accordingly,

the WRAP has recommended revisions to EPA's proposal that would apply nationally, with a few exceptions discussed below. These recommendations will not significantly delay nor significantly reduce the overall effectiveness of EPA's proposed national sulfur control program. Indeed, by further staggering refinery compliance, the WRAP's recommendations should help address general refinery concerns that have been raised about the number of refineries required to meet the final national sulfur standards by January 1, 2006. EPA should maintain a dialog with the WRAP regarding any significant changes EPA may be considering to its proposal that may interact with or have a direct effect on these recommendations, as they are fundamentally premised on EPA's currently proposed program. Also, these recommendations are not intended to apply to EPA's forthcoming diesel fuel sulfur control program. EPA needs to gather accurate data on sulfur levels in diesel fuel before the WRAP can evaluate the applicability of its recommendations to a new diesel sulfur control program. Finally, no recommendations are being made with respect to the SBREFA program, and it is explicitly intended that the 2?year economic hardship extension that is available under SBREFA not be available to the new small refinery category recommended herein.

National versus Regional Sulfur Program.

A consensus in the WRAP exists to support a national gasoline sulfur control program to help protect western air quality if EPA adopts a program that recognizes the regional characteristics and circumstances of inland western refineries as reflected by the recommendations and rationale that follow.

Rationale

Refineries in the inland West are mostly small to medium size and, in the geographically isolated Rocky Mountain region, they are all in the smaller size category. EPA's proposed SBREFA refiner definition does not encompass the majority of these refineries. EPA acknowledges that it is proportionately more costly for small refineries to install desulfurization equipment. Small refineries are concerned they will have a much more difficult time competing for engineering and construction resources if their compliance time under a national program is the same as large refineries. Small refineries indicate they need relief in the form of relaxed compliance schedules and interim standards compared to large refineries in order to avoid possible closures that could result in regional gasoline shortages. The WRAP recommendations are designed to give these refineries additional compliance flexibility in a manner that is rational, equitable, sensitive to air quality concerns, and sensibly integrated with other aspects of EPA's national proposal.

The short and long term air quality benefits of a national sulfur control program for the West are recognized by the WRAP in terms of remedying existing and preventing future adverse health impacts from motor vehicle emissions, reducing regional haze, acid deposition and positively addressing conformity of transportation plans with air quality plans. Data submitted by the auto industry suggest that there is at least some irreversible adverse effect on certain vehicle emission control systems from sulfur in gasoline and that this effect will worsen with emerging new technologies. Several stakeholders strongly believe that a national sulfur control program compared to a regional program would better address this problem, given the mobility of motor vehicles between states and regions. Finally, the WRAP believes that there are few alternatives that could be implemented at the state or local level to provide the degree of motor vehicle emission control that would be provided by EPA's proposed national Tier 2 Motor Vehicle Emissions Standards and Gasoline Sulfur Control Requirements.

The net effect of the WRAP recommendations on EPA's proposed national program to reduce the sulfur content of gasoline would be to diminish the total possible reductions in sulfur content of gasoline

in the 2004 through 2007 national program implementation period to 98% of what it would be under an unaltered program. This would be a relative indication of the national loss in vehicle emission control and potential air quality improvement from the WRAP recommendations.

Definition of Small Refineries

A third category of refineries should be created in addition to the large refinery and the SBREFA category proposed by EPA that would encompass small refineries. This category should be defined as refineries with a 1998 crude oil throughput of 60,000 bbls/day or less as reported to the federal Department of Energy. EPA should seek to resolve any accuracy issues that may arise regarding this database. Refineries in NOx SIP call states with a crude oil throughput of 50,000 bbls/day or more, as well as refineries outside the continental U.S. should be excluded from this category.

Rationale

There are a large number of relatively small and medium size refineries in the country compared to large refineries. These smaller refineries collectively represent a small amount of the nation's refining capacity. For instance, 91 of the 154 refineries in this country have a refining capacity of less than 75,000 bbls/day, yet they represent only about 20% of the nation's refining capacity. The majority of these refineries are in the West. In the Rocky Mountain PADD IV area (U.S. Petroleum Administration for Defense Districts), all are in this size category, and, currently, PADD IV has the most isolated petroleum distribution system in the U.S. In fact, almost the entire volume of gasoline manufactured by the small refineries in this area is sold and used in this region.

Current information indicates there would be 15 refineries in the nation categorized as SBREFA refineries. There are concerns in the refining industry that this would exclude many small refineries of similar size (crude oil capacity) to SBREFA refineries which do not fall within EPA's proposed SBREFA definition of a company that has 1500 employees or less . In the PADD IV area, based on current information, all sixteen refineries are comparable in size to those included in EPA's SBREFA refiner category, although a number of these refineries are owned by major companies with relatively large national refining capacity. Five of these sixteen would actually qualify for SBREFA treatment.

The oil industry believes that small refineries, owned by large or small companies, would face proportionately higher costs to install desulfurization equipment compared to large refineries. They also believe that small refineries likely will be lower on the priority list for desulfurization equipment and construction vendors, making the ability to achieve compliance on the same schedule with large refineries problematic.

In particular, the refining industry is concerned that EPA's SBREFA refiner definition of small refiners, based on employment (companies with 1500 employees or less), does not directly relate to the gasoline producing capacity of the company. Some companies with over 1500 employees, because of interests in other non?refining businesses, have been excluded from the SBREFA definition even though they own small refineries that are in the same size range encompassed by EPA's proposed SBREFA definition. Refiners in the inland West also expressed concern that EPA's proposed definition does not recognize the economic competitiveness between small non?SBREFA refineries located in the same geographic area as SBREFA refineries. The refining industry is concerned that these similar size small refineries would be at a significant competitive disadvantage with refineries that qualify under the SBREFA definition.

Several alternatives were considered for developing a more workable definition of small refineries, to address the refining industry concerns. In particular, the refining industry suggested that a workable definition to address the inland western refineries' issues would be to include all small refineries operating within and near the unique PADD IV area. Based on industry concerns, it was also desired to select a definition that was not dependent on the refining capacity of the corporation. Further, to ensure a reasonable approach that was based on sound information, a definition was developed that would be fairly applied nationwide, that excludes certain refineries that would be in extremely sensitive air quality areas and that would not apply outside the continental U.S.

It was concluded that a definition of small refineries based on a crude oil throughput of 60,000 bbls per day (barrels per calendar day as reported to the federal Department of Energy) or less best fit desired criteria when coupled with an exclusion for refineries in states subject to EPA's NOx SIP call with crude oil throughput of 50,000 bbls/day or more and refineries outside the continental U.S. (attachment 3). The refineries in NOx SIP call states are recommended to be excluded because a principal goal of EPA's Tier 2 vehicle standards is to control NOx emissions; therefore, it would be inappropriate to include any but the smallest refineries in areas needing immediate NOx reductions (e.g., NOx SIP call states). Refineries with crude oil throughput of less than 50,000 bbls/day in NOx SIP call states are not included in this exclusion provision because they are considered the smallest refineries in the country that still deserve special small business protection. Small refineries outside the continental U.S. are recommended to be excluded because insufficient information was available to evaluate the multi?faceted implications of these recommendations in such areas.

Small Refinery Interim Sulfur Standards

Refineries in the new small refinery category should be subject to interim phase?in period gasoline sulfur standards of a 300 ppm per gallon cap and a 150 ppm annual average. These standards should apply to only the first three years of the 4?year interim phase?in period, that is 2004 through 2006. Small refineries should be required to meet the proposed national gasoline sulfur standards of an 80 ppm per gallon cap and 30 ppm annual average beginning January 1, 2007. Small refineries should be allowed to demonstrate compliance with the recommended interim and proposed national annual average standards with the use of sulfur credits generated by the proposed banking and trading program.

Rationale

The WRAP considers progress of small refineries towards the manufacture of low sulfur gasoline meeting the national standard an extremely important goal. In fact, the proposed interim gasoline sulfur standards of a 300 ppm per gallon cap and a 150 ppm annual average requires small refineries to demonstrate they are producing lower sulfur gasoline during the compliance phase?in period. It was felt that it would be reasonable and equitable to establish these sulfur standards and a phased?in compliance time for the new small refinery category somewhere in between the stringency of the proposed requirements for large refineries and SBREFA refiners. Under EPA's proposal, large refineries would be subject to a 2?year phase?in program essentially beginning in 2004 and would be required to achieve the proposed national 30 ppm annual average and 80 ppm per gallon cap by January 1, 2006. Large refineries would be subject to a 300 ppm per gallon cap in 2004 and a 180 ppm per gallon cap in 2005. They would be subject to the proposed national 30 ppm annual average standard during this period that could be met with sulfur credits generated by the proposed banking and trading program. Corporations would be subject to a 120 ppm corporate annual average in 2004 and 90 ppm in 2005. Sulfur credits could not be used for demonstrating compliance with the cap and corporate average.

SBREFA refiners would be subject to a 4?year phase in program also beginning in 2004. SBREFA refineries with current sulfur levels near the national average sulfur content of gasoline (330 ppm) would be subject to a 450 ppm per gallon cap and a 200 ppm annual average for the full four?year interim phase?in period. SBREFA refineries with current sulfur levels above the national average sulfur content of gasoline would have higher annual average standards up to a maximum of 300 ppm but their cap would remain at 450 ppm. SBREFA refineries with current annual average sulfur levels between 200 ppm and 300 ppm would continue to have an annual average standard of 200 ppm but their cap would range from 300 ppm to 450 ppm. SBREFA refineries with current annual average sulfur levels below 200 ppm would have lower caps and annual average standards. Sulfur credits could not be used for demonstrating compliance with the cap and annual average.

A 3-year phase in program for the new recommended small refinery category was felt to be adequate to provide the needed compliance flexibility for these refineries. This schedule would, in particular, more equally spread out the equipment procurement and construction schedule among the whole industry to avoid potential logjams that would most likely jeopardize small refineries' abilities to achieve timely compliance.

A 300 ppm per gallon cap and 150 ppm annual average for the 3?year phase in program were felt to be reasonable middle ground standards between applicable large refineries and SBREFA refiners standards (attachment 4). These standards would help ensure that refineries producing very high sulfur fuel and others at or above the national average are required to make a significant reduction in the sulfur content of that gasoline during the interim phase?in compliance period.

4. Averaging, Banking and Trading

To provide additional flexibility to achieve compliance, it is recommended that small refineries be allowed to participate in a limited banking and trading program. Early actual reductions in sulfur content of gasoline between 2000 and the beginning of the compliance phase in period (January 1, 2004) should be allowed to be counted as sulfur reduction credits to be used internally or interchangeably with any other small or large refinery or refiner credits generated pursuant to EPA's proposed rules. Credits should be allowed for actual reductions below an annual average of 300 ppm in 2000?2001 and 225 ppm in 2002 and 2003 or from the actual annual average, which ever is lower. Credits should also be allowed in the phase in period (January 1, 2004 to December 31, 2006) for actual reductions below the 150 ppm annual average standard.

Rationale

It is believed the recommended banking and trading program for small refineries would be somewhat more restrictive then the banking and trading program proposed by EPA for large refineries. Even though large refineries would have a lower trigger point for generating credits (150 ppm), EPA would allow credits to be calculated from the refineries' baseline even if it is well above the national average of about 300 ppm. This policy of giving credits for reductions from high sulfur baselines as proposed by EPA is questioned. It is particularly felt that, in light of the other benefits suggested, small refineries should not be given this reward for reducing sulfur from relatively high levels, which can be done with relatively low cost techniques because these refineries are already getting the benefit of an extended compliance period as well as less stringent phase?in period standards.

5. Corporate Average

The annual average sulfur content for small refineries should be accounted for in the applicable corporate annual average standards required in EPA's large refinery's program.

Rationale

The underlying concept for all recommendations is to give small refineries limited compliance relief. There is no intent to give corporations with multiple refineries direct relief. Therefore, it is reasonable to maintain the compliance requirement for corporations to include all refineries, large and small, in the corporate average as embodied in EPA's current proposal.

6. Anti-backsliding

Small refineries should be subject to an anti?backsliding requirement to prevent significant increases in sulfur content from their baseline level, which should be specifically defined by EPA.

Rationale

Some refineries have current gasoline sulfur levels that are well below recommended phase?in period standards. SBREFA refiners, which are given compliance relief in EPA's proposed regulations, are subject to phase in period sulfur limits which in essence is an anti?backsliding provision that would prevent increases in sulfur levels from their actual baseline level. It is reasonable, in light of recommending to give non?SBREFA small refineries additional compliance flexibility, to also subject these non?SBREFA small refineries to an anti?backsliding provision.

The WRAP recognizes that there are concerns with guarding against backsliding in sulfur content from current levels while at the same time allowing reasonable operational flexibility. Restrictions are necessary to ensure there is no significant backsliding at any individual refinery. This will help preserve the overall reductions in sulfur levels during the interim compliance period in areas affected by these recommendations. It is not clear that using the existing EPA anti?dumping provisions would be appropriate to use as an anti?backsliding program to prevent significant increases in emissions from Tier 2 vehicles. Other options that may be viable include allowance for a small percentage or absolute increase in sulfur levels over baseline levels. Because of the lack of data available to the WRAP to predict and analyze the factors relevant to a well?designed anti?backsliding program, it is suggested that EPA practically define "anti?backsliding" to protect existing achievements in low sulfur gasoline levels.

Impact of Recommendations on Other Areas

The recommendations made by the WRAP are sensibly integrated with EPA's proposal. They should help in addressing general concerns that have been raised about the number of refiners required to comply by January 1, 2006 by more evenly staggering construction of desulfurization equipment by refineries, including SBREFA refineries, over the 4?year program phase?in period. They should also provide justified relief for an appropriate, but small number of refineries outside the Rocky Mountain area. The WRAP recommendations should not give rise to higher sulfur gasoline in the Rocky Mountains. Indeed they would prevent backsliding and spur refineries with particularly high sulfur gasoline to begin making early reductions in sulfur.

Rationale

Consideration was given to the impact of the WRAP recommendations on areas inside PADD IV and outside the West. There are some small refineries in the eastern part of the country that were not encompassed by the SBREFA refinery definition but who would justifiably benefit from the proposed

definition. Some of these refineries were not included under SBREFA because their parent corporation, with more interests than just refining, had more than 1500 employees, even though the small refinery owned by the corporation included only a fraction of this employment.

The recommended small refinery program would most likely result in a much more equal spread of construction of refinery desulfurization equipment over the 4?year interim phase?in period throughout the country. This should help to avoid problems in achieving timely compliance because of potential construction logjams.

The WRAP is concerned with the air quality problems in the Rocky Mountain West and recognizes the importance of making continued air quality progress in this region of the country. Accordingly, the WRAP has recommended interim compliance standards, anti?backsliding provisions, and only a one-year extension in achieving compliance with the proposed national low sulfur fuel standards to try and ensure adequate protection of western air quality while addressing concerns raised by the refining industry. The net effect of the WRAP recommendations on the PADD IV (Rocky Mountain area) would be to diminish the total possible reduction in sulfur content of gasoline in the 2004 through 2007 national program implementation period to 83% of what it would be under an unaltered program.

In addition, evaluation of the likely impact of WRAP recommendations on major urban areas in the Rocky Mountain area during the interim compliance period concluded that it would be unlikely that sulfur levels in gasoline would rise in these areas and likely they would decrease some because of the recommended interim requirements. Finally, the WRAP received comments regarding public disclosure of low sulfur gasoline availability. Because there will be different sulfur levels in gasoline on the market for several years during the phase?in period, the WRAP recommends EPA explore methods, including incentives, to encourage voluntary retail disclosure of low sulfur gasoline levels where practical.