Joe Sparano
President

May 27, 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 on Petroleum Reduction Options

On behalf of the Western States Petroleum Association (WSPA), we appreciate the opportunity to comment on the documents released by the Commission as part of the May 17 Workshop on Petroleum Reduction Options. 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.

General Comments – Demand, Petroleum Reduction

WSPA understands the purpose of the May 17 workshop was to obtain the active participation of all interested parties in analyzing options to reduce petroleum fuel use. However, we question whether reducing petroleum fuel use, rather than adding to the existing supply of clean petroleum fuels while looking at fuel diversity, is the pathway to future energy supply sufficiency.

There are four reports that make up this section of the 2005 IEPR. One of them, “Options to Reduce Petroleum Fuel Use,” was released late on the day before the workshop, and another, “Addendum to: Options to Reduce Petroleum Use” wasn’t available until two days after the workshop.

It is not reasonable to expect stakeholders to review such important information overnight and comment specifically by the next day, nor is it reasonable to produce key documentation after the workshop that forms the basis for all the summary statements in the first document. We believe the workshop should have been delayed to allow at least a two-week period of review time for all six documents that were the subject of the workshop.

The CEC’s report indicates that to achieve the petroleum fuel reduction goal in the 2005 IEPR, a combination of efficiency and alternative fuel options will be needed. The report further observes that the new greenhouse gas regulation will, when fully implemented in 2016, result in a 30% reduction in fuel demand as compared to automobiles built prior to 2009.

It is disappointing that there does not seem to be any further analysis that says the greenhouse gas regulation, along with a few other measures like fuel-efficient replacement tires, consumer driving tips, and truck stop electrification, would be sufficient for the state to achieve a natural (that is unforced, unsubsidized) reduction in the growth of petroleum fuels use.

We are all aware that some alternative fuels currently under development will eventually achieve significant market acceptance and penetration. 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.

However, it seems reasonable to ask why the state needs to continue focusing on mandates for reductions in petroleum fuel use. A number of the alternative fuels considered in the reports do not appear to be economically attractive or practical for near-to-mid-term mass use, without very significant state subsidies and investments, and higher consumer costs.

These same alternative fuels were unattractive in the 2003 report. Therefore, we recommend these be clearly identified and culled out from the ongoing list of options.

Again, WSPA opposes policies that call for reducing demand for the cleanest burning petroleum fuels on the planet. This will reduce the potential for investment in additional production capacity. To be more specific, WSPA continues to oppose any efforts to reduce petroleum demand while California’s supply/demand imbalance increases. The imbalance is likely to increase if the CEC continues to pursue its previously stated policy of reducing gasoline and diesel fuel demand by 15% from 2003 levels by 2020.

Alternatively, we support a “Petroleum Plus” approach to California’s energy supply future. This means increasing existing clean-burning supplies, while promoting and funding research and development of cost-effective alternative fuel solutions that are not mandated or subsidized. Some of WSPA’s members are already developing alternative fuels that will augment the state’s existing clean energy supplies, and will result in a more diversified energy portfolio.

We understand the challenge the State of California is facing as it attempts to meet its future transportation energy needs. However, we believe that California’s energy future needs to include a diverse suite of the most cost-effective and clean fuels to keep the economy moving forward, and to retain a good quality of life in the state.

WSPA also has some additional observations on the CEC’s transportation energy demand forecast.

First, the CEC demand forecast reinforces the infrastructure report conclusion that additional petroleum infrastructure will be needed to fill the gap between in-state production of refined products and consumer demand.

Second, the CEC demand forecast assumes a significantly reduced demand for gasoline based on the assumption that the new greenhouse gas regulations will be implemented on schedule. If that does not occur, there will be even a greater need for petroleum infrastructure expansion.

Finally, all of the major demographic and economic assumptions and other growth factors that drive transportation energy demand call for lower than historical growth rates. This includes a lower than historical average population growth over the next 20 years, reduced immigration and a lower birth rate. In addition, the base case gasoline price forecast is significantly higher than the 2003 IEPR assumption.

Therefore there is a risk that the product demand forecast could easily be understated, if the future growth rates of some of these key California demographic and economic indicators are higher than forecast. If that is the case, more supplies of cleaner burning transportation fuel will be required to fill the gap.

Alternative Fuels

Specific to the Alternative Fuels Commercialization report, we have a few general process comments and some specific observations:

Process:

With respect to the staff work on alternative fuels over the past year plus, CEC provided WSPA with the opportunity to participate in three of the alternative fuel working groups: Biodiesel, Gas To Liquids and Ethanol. Consistent with prior WSPA requests relating to staff’s alternative fuel reports, WSPA requests that in all CEC documentation our trade association be listed as a "monitor", not a member of the three working groups.

We would like to also have a footnote near the three working group member listings that states, “WSPA has no information or opinion on future market share or penetration of any fuel or fuel blending component. WSPA does not agree or disagree with the working groups conclusions.” These are important notations in the context of anti-trust law and we request the Commission make this accommodation.

Although staff attempted to obtain significant stakeholder input, we understand this was not always possible and, in fact, during a recent alternative fuel stakeholder survey, the feedback to staff was very limited. In some of the alternative fuels section write-ups the words “the stakeholders advocate…” are used to reflect a broad consensus view. We believe this is not an accurate depiction of the situation.

It is more accurate for the words in the report to refer to “…some stakeholders views.” WSPA recommends the sections be rewritten more in the fashion of the ethanol section, which specifically identifies and references input from a variety of ethanol interest and stakeholders.

Specific Observations:

As previously noted, WSPA does not support government intervention in the marketplace. Therefore, we do not support the significant subsidies and mandates that the report indicates will be needed to move a number of the alternative fuels towards the targeted market share goals.
On the other hand, we find this particular report better balances the pros and cons of alternative fuel penetration than earlier attempts. It is interesting that the report indicates, “…The state may need additional suggestions to meet the non-petroleum fuel goals of 2020.”

The section on CNG medium and heavy-duty vehicles as replacements for diesel vehicles appears to conclude that these CNG options provide anywhere from a negative direct net benefit to a positive benefit depending on the assumptions used to develop the scenarios. The conclusions also seem to indicate that although the public may save over the time period of the analysis, however, there is also a significant loss in government revenue.

In addition, the document says that although CNG is an attractive environmental option, the limited availability of refueling facilities and the higher vehicle purchase prices have affected the sale of this fuel option, and the diesel options actually have very high direct net benefits. We agree that diesel offers significant benefits to the state, and appreciate the state maintaining a fuel neutral approach, which is the right policy path for California.

In terms of funding for the alternative fuel programs, there is a recommendation that a Carl Moyer-type program be set up, but the report also states, “Since the Carl Moyer program funds the most cost effective projects, alternative fuel projects will not be very high on the list." That seems to be a very important point.

Two other comments in the report are worth noting. First, “Compared with the other alternative fuels, hydrogen commercialization has the most barriers to overcome, ” and second, “Gas-to-liquid diesel fuel use in California appears to have one of the most difficult market thresholds to cross.”

Although these two alternative fuels show promise for the future, the comments above suggest that more work needs to be done before they are ready to replace petroleum fuel.

In conclusion, WSPA might have additional comments as we initiate a more detailed review of the Addendum document, and we look forward to participating in coming workshops and hearings on this topic. If you have any comments or questions on our letter, please don’t hesitate to contact me.

Sincerely,

Joe Sparano