94-8-1

SUMMARY OF AGENDA ITEM:

The staff presented to the Board proposed amendments to the California regulations limiting the aromatic hydrocarbon content of motor vehicle diesel fuel (diesel fuel regulations).

Staff modified their originally proposed amendments to the exempt volume provisions to add a new option that would allow small refiners to produce 20 percent aromatic hydrocarbon content diesel fuel (exempt volume) based on: each individual small refiner's crude capacity, an industry average utilization crude capacity for the period 1991-1992, small refiners' ratio of distillate production to crude input, and small refiners' diesel fuel fraction of distillate.

The existing regulation requires that the small refiners' exempt volume be determined as 65 percent of their historic distillate production as reported to the California Energy Commission (CEC) pursuant to the Petroleum Industry Information Reporting Act (PIIRA).

Staff determined that the current method for determining the limit on the small refiners' exempt volumes may be more restrictive than necessary to preserve the Board's original intent. The proposed adjustment to small refiners' allowed volumes of 20 percent fuel represents a more equitable volume limitation.

The effects of this proposal would be to increase the amount of 20% aromatic hydrocarbon content diesel fuel that small refiners could produce from about 11,000 barrels per day (BPD) to about 24,000 BPD. Staff found that the average production costs to comply with the final proposal to the Board would be about 7.5 cents per gallon. The modification to the exempt volume provisions could result in a reduction of the anticipated environmental benefits of the diesel fuel regulation of 3 tons per day nitrous oxide emissions and 0.6 tons per day particulate matter emissions.

In addition, staff also proposed to the Board to delay for small refiners, the effective date of the exempt volume limitations from October 1, 1994 to January 1, 1995, to avoid market adjustments from occurring during the fall harvest season, which is a period of peak diesel demand. Furthermore, this amendment will provide distributors and end-users an additional three months to make adjustments to the small refiners' exempt volume limitations.

No change was proposed for the small refiner having to comply with the requirement to meet the 20 percent aromatic hydrocarbon content limit on October 1, 1994.

Major oil companies testified that the staff's proposals would constitute an unfair change to the diesel fuel regulation which would provide small refiners with an unfair economic advantage. Also, major refiners commented on the need of steadfast regulations which would not be modified, to avoid uncertainty in the diesel fuel market.

Small refiners testified that the staff's modified proposal would not address all of the adverse economic impacts associated with staff's original proposal and that greater flexibility should be granted to small refiners to provide fairness by equalizing the cost of production with large refiners.

Oil marketers and end-users indicated that any loss in small refiner diesel fuel production would constrict available supplies and raise the price of diesel fuel. The effect of tighter supply would be to force the purchase of diesel fuel from large refiners who would in turn control diesel fuel price.

A representative of the California Energy Commission provided a factual basis for considering statewide supply and production.

ORAL TESTIMONY:

Susan Brown                        California Energy Commission

Craig Moyer                         Western Independent Refiners
                                             Association

Charles Walz                         Texaco

James Richey                         ARCO

Stan Holm                              Mobil

Al Jessel                                 Chevron

Melissa Chapman                   Unocal

Patrick Marchbanks               Bruce's Truck Stops

Tom Eveland                          Kern Oil Refinery

Wayne Jeffries                        Kern Oil Refinery

Vernon Blackburn                   Kern Oil Refinery

Jim Tomerlin                            Kern Oil Refinery

Glenn Lingle                             Paramount Petroleum

Al Gualtieri                               Powerine Oil Co.

Carolyn Green                          Ultramar

Evelyn Gibson                           California Independent Oil Marketers'
                                                 Association

FORMAL BOARD ACTION:

Approved resolution 94-52 by a vote of 7-1.

RESPONSIBLE DIVISION:  SSD

STAFF REPORT:  Yes (55 pages)