Joe Sparano
President

May 26, 2005

California Energy Commission
Docket Unit
Attention: Docket 04-IEP-1A
1516 Ninth Street, MS – 4
Sacramento, CA 95814-5512

RE: 2005 Energy Report: Comments Petroleum Infrastructure Needs Workshop

On behalf of the Western States Petroleum Association (WSPA), we appreciate the comprehensive evaluation conducted by the California Energy Commission (CEC) as provided in the CEC report, “An Assessment of California’s Petroleum Infrastructure Needs”. We agree with the Commission’s principal conclusion that “potential problems remain, and further infrastructure expansion will be required over the next 20 years”.

WSPA is a nonprofit trade association representing 26 companies that explore for, produce, transport, refine and market petroleum and petroleum products in California and five other western states. We offer the following comments and recommendations.

First, a summary of our main comments:

General Comments on the Report – The Petroleum Infrastructure Landscape

As you are aware, WSPA has been very involved in commenting with oral testimony and with written comments at workshops and hearings on the development of the 2003 IEPR and all subsequent efforts to develop the 2005 IEPR. We would like to compliment the CEC on its ability to understand and clearly articulate the dilemma that the State of California is facing as it attempts to meet its future transportation energy needs.

The 2003 IEPR noted that the state’s petroleum infrastructure, particularly marine facilities, is becoming constrained, which could lead to supply problems. WSPA appreciates the follow-up since then on the more comprehensive evaluation of the state’s petroleum infrastructure culminating in this latest report.

The 2005 report clearly describes the CEC’s outlook for demand, production and imports of crude oil and clean fuels including gasoline, diesel, jet fuel and residual fuel oil. Even though California’s refineries are operating at near maximum production, the demand for gasoline has historically been increasing at about two to four times the rate of in-state supplies. It is obvious that the CEC clearly understands the constraints to meeting supply needs, whether discussing in-state refinery production, product transportation, marine facilities, pipeline and distribution terminals or petroleum infrastructure permitting.

Current infrastructure expansion projects highlighted by the report will certainly help if they are allowed to proceed. Even then, there will be significant future infrastructure requirements for crude, clean fuels and imports. According to the CEC, additional imports of gasoline, diesel and blending components may lead to twice as many petroleum vessel movements and the need for additional docks, terminals, and storage tanks to support them.

This report does not place as much emphasis on the CEC’s previously stated policy of reducing petroleum dependence by 15% from 2003 levels by 2020. However, WSPA continues to oppose efforts to set arbitrary goals (and therefore investment in additional production capacity) for the cleanest burning fuels in the world, while California’s supply/demand imbalance increases. We do continue to support ways to increase clean-burning supplies and promote a diversified energy portfolio, including continuing research into cost-effective alternative fuel solutions that are not mandated or subsidized.

WSPA Comments on CEC’s Specific Recommendations

The CEC report in its key staff findings indicates that potential problems remain and further infrastructure expansion will be required over the next 20 years. We agree with the general and quantitative assessments that note the capacity of existing marine infrastructure could be reduced as a result of continued pressure to remove petroleum facilities, especially in the Los Angeles basin.

During the recent rulemaking by the State Lands Commission (SLC), WSPA expressed concerns that the SLC Marine Oil Terminal Engineering and Maintenance Standards (MOTEMS) for petroleum marine terminals could diminish existing marine infrastructure essential to importing adequate supplies to meet demand. The CEC report also notes the same concern.

Collaboration between the Energy and State Lands Commissions on decisions related to coastal land use, lease renewals and new construction, when statewide energy issues are impacted, might be a valuable and productive alliance.

WSPA also appreciates the recognition of the concern we raised during BCDC discussions on the importance of receiving timely permits for channel and dockside dredging. The shallow depths of the San Francisco Bay are and will remain a constraint to imports, especially in the case of larger foreign crude oil vessels that will be required to carry the expected increase in foreign crude and product cargoes.

We agree with the CEC conclusion that California’s infrastructure will require expansion in petroleum marine terminal capacity, marine storage, and the gathering pipelines that connect marine facilities and refineries to the main product pipelines.

WSPA offers the following comments on the specific Report recommendations that result in the CEC playing an important role in ensuring that overall state needs are taken into account when local infrastructure decisions are being made.

State Appeals in the Petroleum Marine Infrastructure Lease renewal Process in the Ports of LA and Long Beach

WSPA supports your recognition that the State’s economy and the quality of life in its communities depend upon the efficient, safe delivery of goods to and from our ports and borders. Marine shipments of petroleum play an important role in ensuring California consumers are able to receive adequate supplies of reliable transportation fuels safely and efficiently, every day.

Imports enter through California’s ocean ports facilities, primarily in the Los Angeles basin and the Bay Area. The State’s petroleum infrastructure – marine facilities, refineries, pipelines, and distribution terminals – delivers these fuels to California consumers and businesses.

Several state agencies and the petroleum industry all believe there is a need to preserve, upgrade and increase marine petroleum infrastructure at the port of Los Angeles.

The port is a vital lifeline for transporting the crude oil, gasoline, diesel fuel and fuel components that the people of southern California need to commute to work, shop for groceries and ferry children to their many activities.

CEC is recommending a new state law that would allow appeals of lease renewals for existing petroleum marine infrastructure facilities. In this case, we believe the State may need to play a stronger role in ensuring that both overall state energy needs are met and that local issues are addressed.

WSPA feels strongly that existing petroleum infrastructure should not be eliminated as is occurring in the Port of Los Angeles, where several marine terminals and other key facilities that produce, store or distribute gasoline are threatened. It is imperative that we enhance marine infrastructure to handle additional crude oil and gasoline imports and remove regulatory bottlenecks for pipelines, storage tanks and other infrastructure. The CEC found that the length of time required to acquire permits was a major impediment to new investment in critical petroleum facilities.

State and local policies regarding the Los Angeles and Long Beach ports as well as other ports in the State, must reflect the need for port capacity to handle significantly increasing volumes of crude oil, transportation fuels and other energy products. CEC data shows that regional demand for transportation fuels now outstrips the ability of California refineries to produce them.

More importantly, the gap between consumer demand for gasoline and diesel fuel and the ability of California refineries to supply those fuels is expected to grow five-fold, from about 1 billion gallons in 2003 to about 5 billion gallons in 2020. Much of that gap will have to be filled by imports through Los Angeles and Long Beach ports.

There is no feasible near-term alternative. However, longer term, WSPA supports the economic addition of alternative fuels to California’s energy supply portfolio. In fact our member companies are investing hundreds of millions of dollars in alternative fuels research and development, including Hydrogen fuel cells, gas-to-liquids technology and solar power.

As the ports move forward with their short and long-term planning, it is absolutely vital those plans reflect petroleum infrastructure needs. Specifically, the ports must preserve the existing infrastructure, and add new infrastructure facilities.

WSPA is concerned about existing facilities like the butane storage facilities at Amerigas that are critical to the operation of several Los Angeles area refineries, the LAXT terminal, and existing marine terminals and petroleum storage tanks subject to lease renewals, all of which face some form of resistance to their continued operations. We are also concerned about the Berth 400 project, which is vital to meet today’s need for a southern California terminal that can receive crude oil imports.

As you are aware, CalEPA and the Business, Transportation and Housing Agency (BT&H) are developing a Goods Movement Action Plan (GMAP), and currently holding public workshops for gathering input. WSPA recommended the following additions to the GMAP, that bear mentioning here:

We also appreciate and support the statements that the CEC made in their letter to CalEPA and BT&H dated March 24, 2005, on the draft Goods Movement Action Plan. The letter identified the need for the report to be expanded to include a comprehensive discussion of the critical role California ports play as a key component in the state’s petroleum infrastructure.

WSPA supports the need for collaborative strategic planning between the CEC, CalEPA and BT&H agencies in this area. Port decisions need to consider the possible unintended consequences of local decisions setting transportation fuel policy that impacts the state, without consideration of overall energy supplies needed to meet the state’s growing demand.

As the CEC report notes, “Without further expansion of the marine infrastructure to receive, store, and distribute transportation fuels, especially gasoline, supply disruption and price volatility will continue to be an issue for the California public and economy”.

CEC Participation in Workshop and Public Forums/CEC Role as Permit Facilitator

WSPA believes it is extremely important for the CEC to have a role in workshops and public forums. The CEC has the knowledge and expertise necessary to support decisions that ensure adequate fuel supplies are available to meet the State’s growing energy demands.

Similarly, that expertise would be invaluable if it was utilized when permit applications are being considered and issues arise that may unreasonably delay or terminate a needed energy supply project. Whether the CEC’s role is described as a facilitator, process improver, permit completion specialist, or dispute resolution advisor, effective use of the knowledge of how proposed projects may impact the broader state energy supply/demand balance will be a critical element of our future success.

A way to trigger the facilitator's involvement in permitting decisions is to require local agencies to include the facilitator when requesting agency comments as part of the CEQA process. Last year's proposed legislation described the role of a facilitator more as an agent of the applicant rather than a spokesperson for the state's interest in a healthy petroleum infrastructure.

How this role is defined is important. Local decision makers must be assured and understand that the CEC is not usurping local control, but rather would be providing the necessary energy perspective to ensure an improved and broadened decision making process. It is in this manner that unintended consequences that can affect the State’s energy equation can be avoided.

The CEC can play an invaluable role of clearly articulating the need for energy infrastructure in appropriate and effective balance with environmental concerns and needs. Therefore, it will be important that the CEC proactively engage in environmental regulation/policy debates where petroleum supply capacity may be reduced or actions may result in unnecessarily high costs.

In previous CEC workshops on Best Permitting Practices, WSPA offered the following recommendation - to create a state-level permitting facilitator for energy infrastructure projects important to meeting California’s rising transportation fuel demand. The job would be to:

Collectively, these improvements will allow the petroleum industry to plan and fund economically attractive infrastructure projects more efficiently and with less uncertainty. These projects should enable us to maximize production rates safely, maintain adequate supply/demand balance and reduce potential for shortage-induced price spikes, all while maintaining environmental protection.

Involvement of Local and State Agencies in Petroleum Infrastructure Planning Efforts/ Development of Best Permitting Practices

WSPA is very supportive of determining improvements in the permitting process that could facilitate existing and new infrastructure expansion and increase the State’s supply of transportation fuels. We believe it is important for the CEC to review current infrastructure permitting practices to determine which are productive and those that need improvement, and then develop best practices.

It is important for the CEC to send a message that the state energy agency is not trying to usurp the authority of local government or local/regulatory agencies. Instead, working cooperatively on infrastructure and permitting improvements with all stakeholders including local and regional permitting authorities, will enhance the supply of clean burning transportation fuels and other energy products to the consumers.

It is also important to make clear that no one is here to backslide on environmental protection – we all want a balanced future energy base that is reliable, cost-effective, economically attractive, and environmentally responsible. WSPA has always supported a balanced energy policy for the State, combining facilities upgrades and supply expansion with sound environmental protection initiatives.

WSPA was very involved in commenting at the CEC workshops and hearings on Best Permitting Practices. We noted that our members experienced untenable timelines, excessive data requirements, inordinate mitigation requests and excessive permit conditions. We concluded that the issue is not in CEQA or the local rules themselves, but rather the consistency and effectiveness with which they are applied.

WSPA feels it is important that petroleum infrastructure policy establish:

WSPA believes it is important for the CEC to develop a best permitting practices guidelines document for use by local and state permitting agencies. The guidelines should promote consistent practices, continue to discuss specific problem areas and potential solutions with stakeholders, government and communities, and identify supply infrastructure bottlenecks and environmental challenges.

In reviewing current air district practices, it is apparent that some districts could simplify their job as well as that of the regulated community by revising their mode of operation. One example provided by one of our members relates to the permitting of a cogeneration stack. Logically, one would think a permitting agency should focus on the stack and write the permit around stack conditions with analyzers that can and must be calibrated on a given frequency. The Districts, however, often want to delve into areas that they have minimal knowledge of, or are not relevant to the permit. In the cogen stack case, for example, the district staff may begin to investigate the process itself, regulating items such as steam to fuel ratios. Guidelines for all permitting agencies could potentially solve this kind of problem.

When reviewing the best permitting practices it will be important to analyze how the permitting went for specific projects and any delays that may have been experienced. The CEC report discusses planned or ongoing expansions, but does not necessarily note what the industry had to go through to receive the necessary permits (e.g. signing a good neighbor agreement that required additional community based expenditures to get the permits, or negotiating a project labor agreement to reduce or eliminate opposition from labor interests).

Another example that the report notes is the process for obtaining dredging permits in the San Francisco Bay. It had taken up to nine months working with the Bay Area Conservation and Development (BCDC) commission staff to obtain routine maintenance dredging permits that should have been completed in 30 days or less. Delays in issuing dredging permits can cause unnecessary delays for tankers carrying imports of crude oil and petroleum products, possibly reducing the supply of fuels for consumers and adding costs.

WSPA is pleased to note that as a result of the CEC’s and others ability to communicate the importance of infrastructure to delivering adequate supplies to meet state energy demands, the Bay Area dredging approvals have been significantly expedited. Now, when energy consequences enter the policy debate, the local agency is incorporating supply considerations into timelines without jeopardizing environmental protection.

WSPA would also like to clarify a portion of the report text that says vessel "lightering" is a common practice. For California’s waterways and harbors, it is not common. Lightering is a traditional and long-practiced maritime technique involving transfer of a portion of a larger vessel’s cargo to another, smaller vessel. It is typically used when a long-haul vessel is loaded with cargo to an extent that causes the vessel to exceed the arrival port’s local water depth limitation.

Lightering can involve a higher environmental protection risk, since cargo is transferred between two vessels “on the water.” There are also costs and time delays involved in the activity, all of which may contribute to supply deficiencies and higher costs to the consumers.

California refineries that must regularly dredge their dock sites typically send ships from the crude source “light loaded,” to accommodate silting that impacts the safe berthing depth at their facilities, and to avoid lightering. Unfortunately, less crude arrives at the refineries than may be needed to sustain full production. Over time, with California refineries typically operating at well over 90% capacity utilization, production that is lost cannot be made up, resulting in less product supply available to meet demand.

In addition, when inadequate water depth exists at the refinery terminal but the tanker is already on the way, the refineries may have to divert the incoming crude tanker to another port if its load creates too deep of a draft. Both situations are typically avoided when BCDC consistently issues timely maintenance dredging project approvals that are incorporated into a facility’s overall dredging permit that has already been approved by BCDC.

Over the past year, the dredging community has engaged BCDC on the timely issuance of dredge approvals with success. The feedback we’ve received indicates favorable service from BCDC at this time.

Connection Between Infrastructure Expansion Requirements and Measures that Reduce Demand for Petroleum Fuels – GHG

WSPA would like to note that no matter how aggressively or effectively GHG regulations or alternative fuels are introduced, there is still a projected large gap between meeting demand and available, locally produced supplies. The state must move aggressively to address this problem. WSPA believes any demand reduction or mandates or fees to subsidize alternatives will jeopardize those projects and other company investments in infrastructure.

Access to California Fuel Market by Independent Traders

It appears the CEC is suggesting establishing some kind of "arbitration mechanism" so independent traders can resolve access issues. WSPA is concerned that the report lacks clarity on the specifics of how this would work. More importantly, WSPA has traditionally been opposed to government intervention in the marketplace and would view the CEC’s intervention as not being in the best interest of the free-market.

SLC Marine Oil Terminal Engineering and Maintenance Standards (MOTEMS)

As noted earlier in this letter, WSPA participated in the SLC rulemaking on MOTEMS. We expressed concern about the unintended consequences on petroleum supply resulting from these costly, prescriptive, overreaching and overly burdensome regulations.

WSPA expressed concern to the SLC that the regulations exceed what is necessary to prevent a significant oil spill. We were hoping for a more reasonable regulation that evaluates the reliability of the state’s marine terminals, without mandating costly upgrades that will not further protect the environment and are not cost-effective.

WSPA believes it would be important for the CEC to work more closely with the SLC as the ultimate owner of the state asset, to be sure the state's interests are protected. Perhaps legislation should be considered requiring SLC approval of, or comment on, port decisions regarding petroleum infrastructure.

The SLC role could involve facilitating the smart, environmentally sound use of all tidelands. That agency could take responsibility for the land they have under their jurisdiction by setting conditions for any changes that impact vital state interests.

For example, SLC could evaluate whether a proposed action by a local entity (loss of a facility -- Amerigas) would impact state interests. If no state interest is jeopardized, then the local decision making authority could take the action. But, if the state's interests were at risk, then local groups would have to find an alternative means for achieving their goals.

Federal Funding for Adequate Depth in Pinole Shoal in San Francisco Bay

WSPA supports the recommendations to pursue the necessary federal funding for ensuring adequate depth in the San Francisco Bay. We also support funding for other bays throughout the State essential in ensuring petroleum vessels can navigate safely to marine onshore facilities to deliver crude, products, and blend stocks to market.

Statewide One-Stop Permitting Process for Petroleum Infrastructure

The recommendation for one-stop permitting at the state level has not been well received throughout the state due to concern over loss of local decision-making authority. Perhaps the CEC would be better served to focus their efforts on CEC participation in workshops and public forums and as Permit Facilitator, along with a formal role in petroleum infrastructure planning efforts and development of Best Permitting Practices as noted above.

WSPA appreciates the opportunity to provide comments on the CEC Infrastructure Report. We believe your work is an excellent and comprehensive review of the supply and demand concerns that face California and its consumers of energy. There is no doubt that California’s fuel supply needs strategic improvements.

WSPA believes that to provide Californians with reliable transportation fuels, the State needs to pursue a number of initiatives to remove government barriers to petroleum infrastructure. These initiatives include enhancing marine infrastructure, not eliminating existing petroleum infrastructure, and removing regulatory bottlenecks for the addition or upgrade of pipelines, storage tanks, and other petroleum facilities.

Please contact me with any questions you have or any additional information that you may need.

Sincerely,

Joe Sparano

Cc:
Commissioner John Geesman
Commissioner James Boyd