COlXffiADO'S OXYGENATED FUELS PHOGSAM:
ECONOMIC EVALQATIOff OF THE FIRST TEAR
Prepared for:
Michael Shelby
U.S. Environmental Protection Agency
OPPE
Washington, DC
Prepared by:
josfaua B. Epel
Ari H. Kichelsea
Robert D. Rove
RCG/Hagler, Bailly Inc.
P.O. Drawer 0
Boulder, CO 80306
Work, performed under contract #68-01-7469 and vork assignment #88-27.
Kention of trade oases does not constitute an endorsement of any product
flra.
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Table of Contents
Page
EXECUTIVE SUMMARY		B-l
I.	Background and Objectives of the Analysis....		B-l
II.	Results of the Analysis					E-4
1.0 INTRODUCTION AND OBJECTIVES		1-1
1.1	Introduction						1-1
1.2	Objectives of this Report				1-2
2.0 BACKGROUND ON THE COLORADO PROGRAM AND OXYGENATED FUELS		2-1
2.1	The Colorado Program		2-1
2.2	Vhat Are Oxygenated Fuels?		2-3
2.3	Selected Issues la Implementing An Oxygenated Fuels Program..	2-5
3.0 THE COLORADO PETROLEUM INDUSTRY		3-1
3.1	Gasoline Production and Distribution				3-1
3.2	Historical Market Shares and Prices of Ethanol and HTBB
Blends	-		3-6
3.3	Market Share and Prices of Ethanol, MTBE and Clear Gasoline
During the Mandatory Program			.		3-11
4.0 ECONOMIC IMPACTS OF THE OXYGENATED FUELS PROGRAM		4-1
4.1	Engineering Costs Incurred By Refiners and Distributors		4-1
4.2	Oxygenate Costs and Values....		4-5
4.3	Denver and Regional City Rack Prices			4-12
4.4	Denver Retail Prices				4-26
4.5	Regional Comparison of Retail Prices.				4-36
4.6	Fuel Bconoay Penalty		4-39
4.7	Other Social Impacts and Costs						4-40-
5.0 SUMMARY OF ECONOMIC IMPACTS		5-1
BIBLIOGRAPHY
APPENDIX A
APPENDIX B

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LIST OF TABLES AND FIGURES
Figure E-l
Table B-l
Executive Sunary
Hap of Colorado Regulation 13 Program Area
Summary of Colorado's Oxygenated Fuels Program Costs
Figure 2-1
Chapter 2.0
Kap oE -Colorado Regulation IS Program Area
Figure 3-1
Figure 3-2
Pigure 3-3
Figure 3-4
Table 3-1
Table 3-2
Chapter 3.0
Colorado Monthly Gasoline Consumption
Front Range Colorado Physical Supply of Refined Products
Monthly Blended Bthanol Gas Consumption
Bthanol, MTBB and Crude Prices
MTBB and Bthanol Prices (Cents Per Gallon)
Gasoline Sales Summary
Chapter 4.0
Table 4-1	Annualized Coat of MTBB Related Bquipaent Expenditures
Table 4-2	First Tear Costs Related To Bthanol
Table 4-3	MTBB Blending Costs and Octane Value
Table 4-4	Bthanol Program Impacts, Costs to Nev and Previous Consumers
Figure 4-1	Rack Gasoline and W7I Crude Oil Prices
Figure 4-2	Regional Regular Gasoline Rack Prices
Figure 4-3	Regional Unleaded Gasoline Rack Prices
Figure 4-4	Regional Premium Gasoline Rack Prices
Table 4-5	Regional Price Differences Compared Pith Denver
Table 4-6	Range in Regional Unleaded Rack Prices Compared to Denver
Table 4-7	Statistical Comparison of Rack. Price Fluctuations
Table 4-8	Regional Comparison of Changes in Rack Prices Over Tine
Figure 4-5	Denver Retail Gasoline Price Survey
Figure 4-6	Rocky Mountain Nevs Gas Price Survey
Table 4-9	Summary of the Denver Retail Price Survey Prices in Cents
Per Gallon
Figure 4-7	Denver Regular Retail Gasoline Prices
Figure 4-8	Denver Unleaded Retail Gasoline Prices
Figure 4-9	Denver Premium Retail Gasoline Prices
Figure 4-10	Regional Unleaded Retail Gas Prices
Table 5-1
Chapter 5.0
Summary of Colorado's Oxygenated Fuels Program Costs

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Colorado's Oxygenated Fuels Prograa:
Economic Evaluation of the First Year
EXECUTIVE SUMMARY
I. BACKGROUND AND OBJECTIVES OF THE ANALYSIS
The Colorado oxygenated fuels program, Regulation 13, v&s enacted to reduce
carbon monoxide emissions frost motor vehicles la the non-attainment areas of
the Front Range of Colorado (see Figure E-l). Regulation 13 requires that all
gasoline sold in carbon monoxide non-attainment areas during the high
pollution months of November through February contain a specified minimum 2
percent oxygen content by weight. The minimum oxygen requirement can be met4
by blending 10 percent ethanol (3.52 oxygen), 111 MTBE (2.OX oxygen) or other
oxygenates that have obtained an Environmental Protection Agency valver. In
the first year of the program, the oxygen content standard vas reduced to 1.5
percent and the mandatory blending period shortened to January and February,
1988 to allow the petroleum and oxygenate marketing industries sufficient time
to meet program requirements.
The blending of oxygenated fuels in all gasoline during the high pollution
months has been projected to reduce ambient carbon monoxide levels by 8 to 14
percent. The lower oxygen content of air at high altitude (18 X lower than
sea level) causes most motor vehicles to burn fuel inefficiently and create
excessive carbon monoxide emissions. Blending oxygenates with gasoline
compensates for the lack of oxygen in the high altitude areas and reduces
motor vehicle tailpipe emission.
Throughout the analysis and Rulemaking process that led to the development of
the program, numerous concerns about the consequences of the program vere
raised. These included: the costs that vould be borne by consumers and
Industry; potential motor vehicle driveability and maintenance problems, which
could result in a lack of public acceptance; the market shares oxygenates
vould control at different oxygen requirements; potential decreases in
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Figure E-l
Map of Colorado Regulation 13 Progran Area
Air Program area within heavy box.

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gasoline fuel economy; the cost effectiveness of the program as a strategy to
reduce carbon monoxide exceedances and others.
The Colorado Department of Health and the trade association of the petroleum
industry had economic analyses conducted prior to the program. These studies
provided a large range of cost per gallon estimates of $.005 to $.08. The
range in cost estimates are based on assumptions of the market penetration of
a particular oxygenate, and whether other states in the region vould adopt
similar programs and constrain the availability of oxygenates. In addition to
being computed in advance of the program, these estimates are based upon
projected engineering costs that do not reflect market behavior.
This analysis vas undertaken to track the program before and during
implementation vlth the focus upon the costs of meeting the requirements.
Specifically this vork:
o Tracked rack and retail prices,
o Tracked and compared average retail and rack prices in Denver and other
cities,
o Reexamined actual incremental engineering costs for production and
distribution,
o Examines octane benefit derived from blending vith oxygenated fuels,
o Tracked and addressed market penetration by type,
o Examines the cost per gallon and cost per ton of the program, and
o Provides related information on other selected aspects of the program.
The first four elements provide alternative methods to examine the cost per
gallon incurred by citizens and the cost to Industry of the program.
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II. RESULTS OF THB ANALYSIS
Market Penetration
The major suppliers of gasoline into Colorado met the program oxygen
requirement by blending 8 percent HTBE in approximately 95X of the gasoline
sold in the program area. A special sub-octane grade of gasoline vas produced
to permit the blending of ethanol during the program.
In October of 1987, the ethanol blended gasoline market had decreased to 2.1
percent, dovn from 20 percent in 1986, due to the elimination of a state tax
credit for ethanol and other factors. During the program, ethanol had a
market share of 5.3 percent. During the Regulation 13 rulemaking, members of
the Air Quality Control Commission assumed that ethanol might capture an equal
share of the market under a standard requiring 1.5Z oxygen.
The most probable reasons for the limited market share actually experienced
for ethanol Includes the short term of the program in the first year; the
concerns of major marketers, retailers and consumers about the suitability of
ethanol; and the constrained quantity and quality of gasoline to blend vlth
ethanol.
Production And Distribution Cost Estimates
One approach used to evaluate the incremental economic impacts of the program
vas to compute the Incremental blending and distribution costs associated vlth
the program.
MTBB. Strictly blending higher priced MTBE into base gasoline vould Increase
the price of gasoline In Denver betveen about 2.0 and 2.4 cents per gallon.
However, blending MTBE Into gasoline increases the octane, and by adjusting
other components that offset much of the price impacts a standard 85 octane
regular gasoline can be produced. The net effect is estimated to Increase
production costs by betveen 0.4 and 0.8 cents per gallon. Adding HTBE reduces
RVP, which can also further offset blending costs by the use of cheaper
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butanes to gain octane. The price Impact of this butane substitution vas not
computed.
Capital costs incurred by individual producers and distributers of HTBE
blended gasoline ranged from no costs (obtaining gasoline through exchanges)
to building or purchasing rail off loading facilities, piping to storage, new
storage tanks and in line blending equipment. These equipment purchases have
productive use lives of multiple years, and, moreover, can be used for other
purposes during non-program months. To account for these factors, equipment
costs vere annualized and apportioned entirely to the program for an upper
bound estimate of 0.005 cents per gallon. For a central case estimate, these
equipment costs vere allocated for year round use for an estimate of 0.0005
cents per gallon.
Bthanol. The distribution of ethanol can require the replacement of filters
and cleaning of storage tanks. Assuming a maximum of 20 stations switching
from regular gas to ethanol for the program (based on the increase in ethanol
gasoline volume)) these costs vere estimated to range from 0.03 cents (as a
central case estimate) to 0.09 cents (as an upper bound estimate). The
central case allocates the cost over one year, the upper case allocates the
entire cost to the tvo-month program.
The estimated impact of svitchlng to ethanol includes the change in price of
ethanol related to any changes in the dominant MTBB gasoline price (estimated
to be up to 1.3 cents per gallon). Bthanol users, vho prior to the program
purchased blended gasoline vlth an 87.5 octane, purchased ethanol blends
during the program vlth 85 octane because only subgrade gasoline vas available
for blending vlth ethanol. The value of the octane impact vas computed to be
betveen 2 and 3.7 cents per gallon for those individuals vho, used ethanol
prior to and during the program. Nev ethanol users vere estimated to have a 1
to 2 cent cost reduction per gallon.
As an alternative method of determining vhether the program significantly
impacted lover gasoline prices, relative rack prices in Denver and other
cities vere compared. The rack price data can be interpreted to shov either
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that Denver's prices declined relative to select cities or that conversly,
there vas a cost Impact. However, the intrinsic, relative short-term
fluctuations in rack, prices across regional cities undermines the statistical
validity of this approach for detecting small short-term price impacts from
any one cause, and it cannot be defensably used to Independently calculate
program costs at the rack level.
A retail price survey vas also conducted in Denver and historic Denver retail
prices vere compared to other cities. As vlth rack prices, no definite
conclusions about the program price Impacts can he drawn from this analysis.'
Fuel Bconomy Impacts
Reductions or increases in gasoline consumption occur vlth oxygenated fuels,
depending on the type of pollution controls on a motor vehicle. Using
Colorado Department of Health assumptions on fuel economy penalties by
oxygenate, pollution control type and existing vehicle fleet mix resulted in
calculated average fuel mileage penalties of up to 0.22 percent, or a $0,002
per gallon reduction in value.
Clear Gas
Some motorists in non-program areas used clear gasoline that bad been trucked
in from out-of-state. Clear gasoline vas generally sold at a price equal to
or exceeding HTBE blended gasoline. Assuming 4.4 million gallons of clear gas
sold per month at a price penalty of up to $0,013 per gallon (maximum HTBE
price increment) this cost increment during the program vould have been
$112,463.
Other Impacts
Administrative and planning costs by industry and government did occur, but
vere not quantified. Similarly, the ethanol industry is reported to have
experienced loss of market share attributable to a shortage of sub-octane
gasoline, but the costs are not identifiable vith any certainty.
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Total Cost Of The Program
The range of costs Identified are summarized in Table B-l. Total costs
statevlde ranged from $1,013,481 (central bound estimate) to no more than
$3,559,604 (upper bound estimate). The lover bound estimates are zero. The
costs vere largely Incurred by Colorado residents in the AIR area (722),
although residents in non-program areas may have Incurred costs due to the
Colorado petroleum distribution structure resulting In most of the state
converting to oxygenated fuel. These costs are included in both the central
and upper bound estimates. The central average price increase per gallon
attributable to the program is $0.0045.
Cost Per Ton of Pollutant Removal
The Colorado Department of Health has estimated that a 942 market share of 82
HTBB and 62 market share ethanol (102) reduced ambient Carbon monoxide levels
in the Denver Metropolitan area from 82 to 112* or from 160 to 220 tons per
day. Using state-vide central and upper case cost estimates, and applying the
carbon monoxide reductions to five days a veek, the dollar per ton cost of the
program vould be $154.49/ton (Central estimate) to $542.62/ton (upper-bound
estimate) for an 82 reduction and $112.36/ton to $394.63/ton for an 112
reduction.
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Table E-l
Senary of Colorado's Oxygenated Fuels Prograa Costs
($ 1988)
Cost
Central
Dollars
Upper
HTBB
Capital Equipment
HTBB Purchase
Octane Value Added
Total MTBK Cost
Ethanol
Cleaning Costs
Market and Octane Costs
Total Ethanol Costs
Clear Gasoline
Fuel Economy Penalty
Total All Gasoline
$ 110,044
4,198,100
-3.358.480
949,664
1,017
62.800
63,817
$1,013,481
$1,031,546
5,037,720
-3,358.480
2,710,786
29,260
282,575
311,835
112,463
424,520
$3,559,604
Cost Impacts By Location
Dollars
Cost	Central	Upper
AIR AREA - Total $	$763,837	$2,615,536
-	S/Gallon	$0.0046	$0.0159
-	$/Household	$0,868	$2.97
REST OF STATE - Total $	$249,644	$943,968
-	$/Gallon	$0.0039	$0.0148
-	$/Bousehold	$0,729	$2.75
* Total costs statevlde* Sales volume during the tvo-month program: ethanol
9,419,000; HUE 209,905,000; and Clear Gasoline 8,651,000.
i'l l~ii
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1.0 DttBODQCnOW AMD OBJECTIVES
1.1 BJTRODOCTIOH
The Denver metropolitan area has been listed by the EPA as having the vorst
carbon monoxide pollution in the nation. In 1986, the Denver metropolitan
area exceeded the CO NAAQS thirty-six times, and the single highest exceedance
of the standard In the nation was recorded In dovntovn Denver (Metropolitan
Air Quality Council, 1987).
To meet the Pederal health standard, carbon monoxide emissions in the Denver
metropolitan area vlll have to be reduced by 50 percent. Eighty-five percent
of the carbon monoxide emissions are created by motor vehicles. Therefore,
strategies designed to reduce carbon monoxide must either reduce motor vehicle
exhaust emissions or reduce vehicle miles travelled (Metropolitan Air Quality
Council, 1987).
The Interim CO State Implementation Plan for the Denver Metropolitan Area
identified oxygenated fuels as the most effective carbon monoxide reduction
strategy available to the metropolitan area to help reduce ambient carbon
monoxide levels to meet the Federal health standards (NAAQS) and to avoid up
to $30 Billion annually in federal sanctions. Oxygenated fuels are gasolines
blended vlth a component or components containing oxygen: either alcohols or
ethers. These fuels are asserted to be effective In reducing motor vehicle
exhaust emissions by up to 34 percent (Colorado Department of Health, 1985).
The carbon monoxide emission reductions due to oxygenated fuels are dependent
on the type and concentration of oxygenate used and the emission controls
present on a motor vehicle. The tvo oxygenates that vere given the most
consideration in developing the Colorado oxygenated fuels regulation vere
ethanol and MTBB.
Analysis of the effectiveness of oxygenated fuels by the Colorado Department
of Health estimated that a mandated program could reduce ambient carbon
monoxide levels by 8-16 percent (Oxygenated Fuels Task. Force, 1986).
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BPA and local air quality officials throughout the country are also examining
the use of oxygenated fuels to reduce carbon monoxide in other non-attainment
areas. In Arizona, oxygenated fuels may soon be mandated either by EPA in
response to a court order or through bills pending in the Arizona Legislature.
In Washington, D.C., several proposed revisions to the Clean Air Act require
the use of oxygenated fuels in carbon monoxide non-attainment areas. Other
proposed Federal legislation would require the blending of ethanol (an
oxygenate) in a large portion of gasoline sold in the United States for both
energy and air quality reasons.
1.2 OBJECTIVES OF THIS REPORT
The objectives of this analysis are to provide improved estimates of the costs
of the Colorado oxygenated fuels program based upon the actual experience.
Prior to the oxygenated fuels rulemaking, economic analyses of the proposed
Colorado program vere conducted for the Colorado Department of Health (BBC,
1987) and for the trade association of the petroleum Industry (EAI, 1987).
Both analyses took similar approaches: they projected expected engineering
costs of complying vlth different oxygen content requirements and estimated
per gallon cost increases attributable to different market share scenarios.
Interestingly, the results of those tvo studies differed dramatically. The
State estimates varied from $.005 to $.035 per gallon vhlle the Industry
estimates ranged from $.042 to $.08 per gallon.
The results of both prior studies are subject to question as substantial
acknowledged uncertainty existed In many of the estimates. Engineering cost
estimates also often ignore mitigating behavior on the part of producers and
consumers, which may result in overstated cost estimates. Subsequent to the
completion of the program, EAI (1988) and Amoco Oil have produced revised
estimates of the program costs (Denver Post, March 29, 1988) based upon
comparisons of changes in the wholesale price of gasoline in Denver and other
cities, from which a $.022 to $.047 per gallon price Impact is estimated, plus
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they added an assumed fut economy decre-jes of three percent per vehicle to
yield an estimated total cost of $14 million in the first year of the program.
Because the Colorado program is the only mandated oxygenated fuels program in
the nation, the Environmental Protection Agency, Office of Policy and Planning
Evaluation, contracted for this analysis of the economic impact of the
Colorado program. This analysis vas conducted prior to and during the actual
implementation of the program (January and February, 1988) to obtain the most
accurate and timely information on actual program costs. This analysis
considers:
o Engineering and production costs considering actual facility and
cleaning costs as veil as component substitution in the production of
oxygenated gasoline,
o Changes, and valuation, of octane in gasoline,
o Market penetration of the oxygenates in the Front Kange and Statevide,
o The ability to reveal market price impacts using comparisons of rack and
retail prices, and
o The cost of fuel economy losses based upon the Colorado Department of
Health assumptions.
This analysis also briefly touches upon the Issues and evidence concerning the
other social costs of the program.
The remainder of the report Is divided into four sections:
o Chapter 2 introduces the Colorado program: vhat oxygenates are and
selected Issues of concern in implementing an oxygenated fuels program.
o Chapter 3 revlevs the Colorado petroleum Industry, and market shares and
prices for ethanol, MTBB prior to and during the program.
o Chapter 4 estimates the economic costs of the program;through review of
engineering costs, market prices and other social impacts including
reduced fuel economy.
o Chapter 5 summarizes the results and relates them to estimated tons of
carbon monoxide reduction.
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2.0 BACKGROUND OH THE COLORADO PROGRAM AMD OXYGENATED POKLS
2.1 THE COLORADO PROGRAM
Colorado's oxygenated fuels program (Regulation 13, Appendix B) vas
established in June, 1987 (Code of Colorado Regulatlonst 5 CCS 1001-16, 1987).
In the first year of the program the implementation period vas January 1
through March 1,1988. The first year of the program established a shorter
program duration (tvo months) and lover oxygen standard (1.5 percent) than the
requirements of the second and subsequent years to allov the petroleum
industry time to adjust to the production and distribution of oxygenated
fuels. In the subsequent years of the program, Regulation 13 requires all
gasoline to contain a minimum of tvo percent oxygen content (by velght) as the
optimal oxygen level that vlll achieve maximum CO reduction and encourage
healthy competition betveen ethanol and MTBB. Program implementation In
subsequent years vlll be November 1 through March 1, vhich Is during the high
pollution season.
Pursuant to Regulation 13, the Air Pollution Control Division established a
mechanism for spot testing the oxygen content of gasoline at retail stations.
The Division employed five personnel to obtain fuel samples, and one staff
member to maintain records. The Division conducted 556 inspections and Issued
45 Notice Of Violations to retail service stations found to have failed to
meet minimum oxygen content requirements (Colorado Department of Health,
1988).
Oxygenated fuels are mandated only in the areas of Colorado vhere the CO NAAQS
are violated in the Front Range of Colorado (Figure 2-1). Hovever, because of
the gasoline distribution system in Colorado, substantial portions of the
State appear to also have been impacted by Regulation 13 during the first year
of the program.
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Figure 2-1
Map of Colorado Regulation 13 Program Area
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In addition to regulating the distribution and oxygen content of gasoline, the
oxygenated fuels progran vas designed vlth the intent of olnlolzing potential
drlveablllty problems that could be caused by the use of oxygenates (see
Section 2.3). Regulation 13 vas predicated on state lav that requires all
gasoline meet fuel volatility standards (ASTM D-439) to minimize drlveablllty
problems. State lav exempts gasoline blended vlth ethanol from meeting ASTM
D-439; hovever the base gasoline must meet ASTM specifications (see Section
2.3).
In accordance vlth State lav, the Oil and Gas Inspector of the Division of
Labor Is required to test and ensure that all gasoline sold in Colorado meets
appropriate ASTM and octane requirements. The Oil and Gas Inspector checks
fuel sold at refineries and terminals and conducts spot checks of retail
service stations. If gasoline does not meet the appropriate ASTM or octane
requirements, the Inspector can require that the fuel be removed from the
market.
2.2 VHAT ABE OXYGENATED FUELS?1
Oxygenated fuels vere first used in response to the oil embargoes of the
1970s. In an effort to reduce demand for imported oil, ethanol usage vas
encouraged through federal tax Incentives to substitute ethanol for gasoline.
Oxygenated fuels also came into demand as octane enhancers In the early 1980s.
The demand for all oxygenates as octane enhancers accelerated vhen the
Environmental Protection Agency required that the levels of lead in gasoline
be reduced. Prior to the EPA's lead phasedovn policy, lead vas utilized
extensively as an octane booster in gasoline (1988).
Studies conducted by the EPA and papers presented by the Society of Automotive
Engineers initiated the examination of using oxygenated fuels as a pollution
^References to exhibits refer to documents produced for the Colorado Air
Quality Control Commission Rulemaking hearings, June 18 and 19, 1987.
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reduction strategy. The State of Colorado began Investigating the possibility
of utilizing oxygenated fuels as a carbon monoxide reduction strategy In 1978,
and conducted a series of studies that demonstrated use of oxygenated fuels
appears to significantly reduce carbon monoxide emissions (Colorado Department
cf Health, 1987).
The Clean Air Act (42 USC 7401 et sec.) established limitations on products
that can be blended vith unleaded gasoline. The restrictions established in
Section 211 of the Act reduces the pool of available oxygenates to those that
have obtained EPA approval. Currently, there are 8 oxygenates that possess
EPA approval: ethanol, MTBE, the DuPont Waiver, Oxlnol, Octamix, TAME, DIPB
and TBA.
The composition of the available oxygenates all differ significantly.
However, the oxygenates can be divided Into tvo general categories:
o Alcohols; (ethanol and methanol) These include ethanol, TBA and the
methanol based oxygenates (trade names; the DuPont vaiver, Oxlnol and
Octamix)
o Ethers: These include MTBE, TAME and DIPE (Renevable Puels
Foundation, Technician's Manual, 1987).
Bthers are derived from blending various petroleum feedstocks. Currently, the
EPA vaiver permits the blending of a maximum of 11X MTBB by volume vith
gasoline. 112 MTBB is the equivalent of 2X oxygen content by velght. TAMB
and DIPB are permitted up to a 22 oxygen content (Renevable Fuels Foundation,
1987).
Ethanol is produced through the fermentation of agricultural products (corn,
wheat, milo etc.) to produce a fuel grade alcohol. The EPA.vaiver allovs the
blending of up to 10Z ethanol (90Z gasoline, 10Z ethanol), which produces an
oxygen content of 3.5Z. Ethanol is almost always sold at 10Z by volume to
take advantage of Federal tax credits (Renevable Fuels Association, 1987).
Methanol can be produced from almost any carbon source, such as crude oil,
coal, biomass, etc. Currently, the least expensive method of producing
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methanol Is utilizing natural gas as a feedstock. Methanol Is always blended
vith other alcohols (cosolvents). The Oxlnol vaiver permits the blending of
9.6X oxlnol vith gasoline and produces an oxygen content of 3.5%. The Dupont
Vaiver permits a maximum 3.72 oxygen from blending up to 5X methanol plus a
minimum 2.5Z cosolvent alcohol.
2.3 SELECTED ISSQBS HI SfFLBMERTIMG AH OXTGEHATHD MKLS PROCTAM
Throughout the development of Regulation 13 certain key concerns vere raised
as possible impediments to the implementation of the oxygenated fuels program.
This section briefly describes concerns and costs of the oxygenated fuels
program in Colorado. These include Issues that affect both oxygenates and
gasoline such as volatility control, and concerns that are more pronounced
vlth oxygenated fuels than gasoline, such as the solvent nature of alcohols,
phase separation and materials compatibility.
Volatility
Gasoline is blended to achieve certain quality control specifications. One
important fuel quality specification is the ability of a fuel to vaporize
(change from a liquid to a vapor). The rate of vaporization (referred to as
volatility) vlll determine how veil a fuel vlll perform under varying
conditions. Volatility guidelines are established by the American Society of
Testing and Materials (ASTM) and are generally followed by gasoline refiners
and blenders. These volatility guidelines include standards for Reld Vapor
Pressure (RVP), distillation profile and vapor/liquid ratio (ASTM, 1986).
Meeting ASTM volatility standards is critical to ensuring proper motor vehicle
performance. The ASTM standards reflect temperature during seasons, climate
and altitude. Gasoline is olended to meet conditions governed by the
applicable standard in a geographic area. A fuel vlth a low volatility in
cold veather may have trouble starting. A fuel vith high volatility in hot
weather may vapor lock, and stall.
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Blending alcohols vlth gasoline raises the volatility of the gasoline
(toqrgenated Fuels Task Force, 1986). Colorado lav requires that all finished
gasoline or gasoline blends (except ethanol) meet ASTM volatility standards.
State lav requires that ethanol be blended vlth a gasoline that meets ASTM
standards.
An issue throughout the development of Regulation 13 vas vhether the exemption
o ethanol from ASTM standards vould increase the likelihood of vapor lock and
create drlveability problems for Colorado aotorists. The basis for the
concern vas the possibility that gasoline blended vith ethanol that exceeds
ASTM standards may gain significant market penetration during the non-vlnter
vara veather months and increase the possibility of vapor lock. Hovever, in
approving the Regulation 13, the Commission concluded that increased vapor
lock vould not likely be a problem because other states have substantial
ethanol penetration year round, and the use of oxygenated fuels vas mandated
only for the cold veather months of November through February.
In addition to mitigating drlveability problems, RVP controls can reduce
evaporative emissions (Oxygenated Fuels Task Force, 1986). Gasoline vlth a
high RVP produces more evaporative emissions, which contribute to the
formation of ozone, than a lov RVP gasoline. The addition of ethanol to a
gasoline vlth a high RVP (permitted by ASTH and Colorado Lav) can increase the
tendency of the gasoline to form evaporative emissions (NAP, 1987). Hovever,
ozone formation in the Denver metropolitan area is a summertime phenomena,
and, in approving Regulation 13, the Commission concluded that even if ethanol
achieved substantial year-round market penetration, the increased evaporative
emissions attributable to ethanol vould not significantly exacerbate Denver's
ozone problem.
Materials Compatibility and Solvent Nature of Alcohols
Alcohol fuels have characteristics that require they be transported, stored
and blended differently than gasoline. These distinctive handling require-
ments create expenses not normally incurred by gasoline marketers.
Additionally, some fuel systems in early model motor vehicles (1960 models and
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earlier) had elastpmers (rubber parts) that vere not fully compatible vith
alcohols. Introduction of alcohols into a fuel system of an early model motor
vehicle could cause the elastomer to svell and force the premature replacement
of the elastomer.
Alcohols also have the ability to remove deposits that have built up in the
inside of vehicle gasoline tanks, storage tanks or pipelines. Vhen alcohol
blends are Introduced into a storage tank, the deposits can be released. The
release of deposits can result in clogging of a vehicles fuel filter or result
in having impurities in a fuel. Alcohols are not shipped through pipelines
because of the their ability to release impurities.
The Commission heard testimony that older cars (frequently ovned by less
affluent motorists) vere susceptible to experiencing the potential problems
that alcohol fuels are alleged to create. At issue vas whether mandating
oxygenated fuels vould result in videspread use of ethanol and the resulting
possibility that owners of older cars may be required to incur expenses not
associated vlth the use of unblended gasoline. The Commission concluded that
the risk posed by ethanol vas acceptable, and consumers vould have the
opportunity to use KTBE if they chose.
Phase Separation
Alcohols, unlike gasoline and ethers, are soluble vlth vater. If there is
vater In a gasoline storage tank, and alcohol is introduced into that tank,
the vater and alcohol can mix and form a distinct vater and alcohol layer.
This is referred to as phase separation.
If phase separation does occur in a gas tank, the engine vlll not be able to
burn the vater-alcohol layer, and the vehicle vill have driveability problems.
There are a number of maintenance steps taken by blenders and retailers of
ethanol to avoid phase separation and the release of impurities created by the
solvent nature of alcohols. The maintenance practices (and costs) range from
simply changing filters on pumps, to pumping storage tanks dry prior to
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Introduction of blended fuels to cleaning and drying the tanks. The costs of
these procedures are discussed In Chapter 4.1.
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3.0 THE COLORADO PETROLEUM INDUSTRY
This section provides an introduction to the production and distribution of
gasoline and oxygenates in Colorado, vhich serves to highlight those companies
affected by the program. Additional background on the Colorado petroleum and
oxygenate industries can be found In BBC (1987) and KAI (1986, 1987). The
chapter also addresses market penetration and prices of ethanol and MTBB prior
to and during the program.
3.1 GASOLENE PRODUCTION AND DISTRIBUTION
Bight petroleum companies are the primary suppliers of an average of 101t340
barrels (42 gallons per barrel) per day of gasoline into Colorado in 1986
(1987). Figure 3-1 shovs the actual monthly sales of gasoline from 1986
through January 1988. In January 1988, the first month of the program,
2,750,000 barrels of gasoline were sold in Colorado. The Regulation 13
program area consumes approximately 72 percent of the gasoline sold in
Colorado (BBC, 1987).
Gasoline sold in Colorado is supplied either by tvo local refineries or is
shipped through one of the four pipelines that have access to Colorado's Front
Range (see Figure 3-2). The tvo local refineries are Conoco and Total, each
of vhich is located in Commerce City. These tvo refineries produce 33,300
barrels per day (BPD) of the gasoline sold in the State. Both refineries have
approximately 15 percent of the gasoline market in Colorado.
Each of the four pipelines serves different refineries and move varying
amounts of gasoline into Colorado (1986 estimates from EAI, 1987):
o The Vyco pipeline serves the Amoco and Frontier Refineries and moves
approximately 24,600 BPD into Colorado.
o The Phillips pipeline serves Phillips Petroleum and Diamond Shamrock and
moves 15,300 BPD.
o The Chase pipeline serves Texaco and others and moves 14,400 BPD.
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Figure 3-1
Colorado Monthly Gasoline Consumption
C <0
O X)
> ID
ofc
o
170
160 -
150 -
140 -
130 -
120 -
110 -
100 -
90
7/85 10/85 1/86 4/86 7/86 10/86 1/87 4/87 7/87 10/87 1/88
Month/Year
Source: Colorado Department of Revenue, 1988

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Figure 3-2
FRONT RANGE COLORADO
PHYSICAL SUPPLY OF REFINED PRODUCTS
0 1986
0 UNITS: ANNUAL AVERAGE BPD
0 PRIMARY SUPPLIERS SHOWN
SINCLAIR PL
MOGAS
13500
JET
600
OIST
2700
SINCLAIR
WYCO
PL
MOGAS
24600
JET
2250
DIST
6100
AMOCO,
LARCO, FRONTIER
MISC TRUCKS-
MOGAS 200
JET	0
D1ST 400
FRONTIER, CRA,
SINCLAIR
TOTAL
SUPPLY
MOGAS
10 1340
JET
29450
DIST"
2 5440
TEXAS PANHANDLE
PHILLIPS PL
TRUCKS
MOGAS 15300
40
JET 5700
0
DIST 3500p
40
Source: Energy Analysts International Inc., 1987
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o The Sinclair pipeline Is a proprietary pipeline and moves 13,500 BPD.
o Trucks aove only 600 BPO into the Front Range.
Kthanol Production and Distribution
The Coors Brewery in Golden, Colorado is the only existing source of ethanol
production in Colorado. Coors can produce up to 120,000 gallons of ethanol a
month from its beer vaste stream and yeast production process. To ensure
product quality vhich meets industry standards, Coors adds a detergent and
corrosion inhibitor package to their ethanol. The volume of ethanol
production is seasonal, vith the least production occurring in December,
January and February, the time frame of the mandatory program. Assuming its
maximum production capacity, Coors vas capable of producing 25.7 percent of
the ethanol used during the program, or 1.4 percent of the total oxygenate
needed to meet the requirements of a 100 percent ethanol program.
Of the approximately 65.4 thousand barrel per day ethanol production in the
United States in 1986, 63 percent of the production capacity is located in the
Midwest (EAI, 1987), with Archer Daniels Midland of Illinois having 50 percent
of the nations' production capacity (Oxygenated Fuels Task Force, 1986).
The three primary ethanol marketers in the program area (Bthanol Managment
Company, Spruce Oil and Vestern Refining) obtain their ethanol either from
Coors Brevery In Golden, Colorado, or by rail from Archer Daniels Midland. A
lOOt ethanol penetration during the mandatory program vould have required
approximately 6,387.0 barrels per day for the program area and 8,870 barrels
per day Statevlde or 9.8Z and 13.6Z respectively of the national dally ethanol
production capacity.*
*Analysis of the volume of oxygenate necessary to meet the requiremen
of the program must be based on the gasoline sold in the Front Range ar?
However, blended fuel was sold throughout the entire State.
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MTBK Production, Pricing and Distribution
MTBB is a petroleum based chemical produced from tvo refinery products,
isobutylene and methanol. The price of MTBB is directly related to the price
of crude oil, the price and availability of feedstocks, and the price of
substitute octane blend stocks such as toluene. Vhlle HTBE prices generally
track vith the price of crude petroleum, supply-demand imbalances of MTBB and
required feedstocks result in price fluctuations. The overall demand for
octane blend stocks has increased vith the phasedovn of lead In gasoline.
Toluene, a petroleum based product that is not an oxygenate, Is another
commonly used octane enhancer and a substitute for MTBB. Because of Its
substltutability, the price of toluene constrains the price of MTBB. In the
last fev years the demand for toluene as a chemical feedstock has increased
its relative price giving HTBE an economic edge In enhancing gasoline octane
(BBC 1987).
MTBB is used as an octane enhancer in other areas of the country because of
its high octane value (blending octane of 108-112) and lov volatility (RVP 8).
In Colorado, small amounts of HTBB in lov concentrations (2-4 percent) vere
blended prior to the program to boost gasoline octane. To meet the Colorado
Regulation 13 oxygen requirement, MTBB vas blended vith gasoline In an.8
percent mixture.
U.S. production capacity for MTBB in 1987 vas approximately 81.7 thousand
barrels per day nationally. Approximately 91 percent of the production
capacity Is in Texas, vith tvo companies, ARCO Chemical and Texas
Petrochemical, possessing 68 percent of domestic MTBB production capacity
(Colorado Department of Health, 1987). MTBB production^ vas projected to
increase to 100,000 BPD by the beginning of 1988 (BBC, 1987). HTBB is also
imported into the U.S. MTBE can be transported into Colorado either by rail
or, when it is blended in gasoline, through a pipeline.
Based on January, 1988 sales, a 1002 penetration of 8 percent HTBE during the
mandatory program vould have required approximately 5,100 barrels per day for
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the progran area, and 7,096 barrels per day Statevide. A 100X MTBB program
vould represent 6.22 and 8.7X respectively of the dally national MTBB
production capacity. A 100X MTBB program (using January, 1988 gasoline
volumes) using 112 MTBB vould represent 8.6Z and 11.9Z of the 1987 dally MTBB
production.
Retail Betvork
There are approximately 3,210 service stations in Colorado, vith 1,589 located
on the Front Range. Non-branded suppliers and bulk consumers account for-one
third of total gasoline sales In Colorado. Among branded retailers in
Colorado, Amoco had 13Z of the market, Conoco 12.8X, Texaco 10.3X, Phillips
6.72 and the rest Is divided among numerous other branded retailers (BBC,
1987). In the program area, ethanol vas sold in sixty non-branded retail
stations.
3.2 HISTORICAL MARKET SHARKS AND PRICKS OF ETHANOL AND MTBB BLENDS
gfhannl
Of the tvo oxygenates available during the mandatory program, only ethanol has
a history of substantial market penetration in Colorado. Historically, the
periods of greatest ethanol sales growth and decline correspond vith the
adoption and elimination of a Colorado five cent per gallon ethanol tax
credit. The State of Colorado provided a five cent per gallon tax credit for
ethanol from July of 1978 to June of 1986. Figure 3-3 shovs historical
Colorado Department of Revenue Statevide sales of ethanol prior to and during
the mandatory program and industry estimates of ethanol sales. During the
program ethanol use represented 0.6 percent of U.S. production.
Federal tax incentives lover the gross cost of ethanol so that it can be
economically blended vith clear gasoline. Ethanol is generally priced so that
the net tax cost of the blended product vill be tvo cents per gallon belov the
rack price of gasoline. The tvo cent difference may be used to pay for some
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Figure 3-3
Monthly Blended Ethano
Colorado
~1IIIIII1III1IIIT
7/85 10/85 1/86 4/86 7/86 10/86
Month/Year
E Colorado Department of Revenue
Gas Consumption
data not available
TIII!II1IIII
1/87 4/87 7/87 10/87
+ Ethanol Marketing Sources

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of the costs of selling ethanol, such as tank cleaning, to Increase the
retailers' margin or passed along to the consumer. In the Denver area retail
ethanol blended gasoline prices average about a cent less than other gasoline,
but varies by retailer.
Ethanol prices are site specific depending on the supplier, market, method of
transport (rail or truck) and incentive programs. The delivered price of
ethanol does not include the federal tax Incentive.
OTBK
There is virtually no history of MTBB sales in Colorado prior to the mandatory
program. Small concentrations of MTBB (blended at 3-4Z) vere sold in the
premium gasoline of some major retailers In the State prior to the mandate.
Independent marketers blended MTBE in gasoline prior to the mandate. For
proprietary reasons, concentrations and volumes of MTBE sold in the State are
not available.
MTBE is sold at the Gulf Coast price plus transportation. Figure 3-4 and
Table 3-1 shov the Gulf Coast spot market price of MTBB. Transportation costs
vary by company, shipment size and other factors. On average, approximately 8
to 10 cents per gallon must be added to the Gulf Coast price for rail
transportation costs to Denver (Colorado Department of Health, 1987).
Prior to the program, concern vas expressed about increases in oxygenate
prices resulting from the Colorado program demand (EAI, 1987). Colorado
demand for MTBE and ethanol vas small relative to production capacity and,
according to industry sources (ARCO Chemical, the primary supplier of MTBB),
did not have an impact on oxygenate prices. Statewide Colorado use of MTBB in
January vas 8.0 percent of daily U.S. production.
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Figure 3-4
Ethanol, MTBE and Crude Prices
(Cents per Gallon)
Date 1987-1988
~ Ethanol	+ MTBE	^ Crude

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Table 3-1
MTBK and Kthanol Prices
(Cents Per Gallon)
Date
Bthanoll
MTBK2
November 24
85.00
72.50
November 30
85.00
72.50
December 8
85.00
67.50
December 15
85.00
65.00
December 22
86.00
64.00
January 4
86.00
62.00
January 11
87.00
58.00
January 18
87.00
63.00
January 25
86.00
70.00
February 1
87.00
70.00
February 8
87.00
70.00
February 15
87.00
69.00
February 22
87.00
68.00
February 29
90.00
69.00
1	Delivered Price to Denver excluding the federal tax incentive of 10 percent
or 60 cents per gallon.
2	Gulf Coast Spot Market Price. 8 to 10 cents per gallon must be added for
rail delivery to Denver.
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3.3 HABKBT SHAKE AND PRICKS OF ETHANOL, MTBB AMD CLEAR GASOLINE DURING THB
MANDATORY FBOfSAM
The volume of a particular oxygenate used during the mandatory program is
dependent on the percentage of the market the oxygenate possesses and the
oxygen content requirement of Regulation 13. In the first year of the
program, 8 percent MTBE vas used to meet the 1.5 percent oxygen standard. Ten
percent ethanol (3.5X oxygen) vas blended vith gasoline to take advantage of
federal tax credits. The sales of gasoline during the program months of
January and February 1988 are summarized in Table 3-2.
In preparation for and during the mandatory program, the four pipelines
shipped gasoline blended vlth MTBB into Colorado for most of December and all
of January and February.2 The practical result of MTBB being blended vith all
gasoline transported into, and refined in, the State vas the virtual
elimination of any gasoline suitable for blending vlth ethanol, as is normally
done. To ensure the availability of a blending stock for ethanol, the
Governor met vlth representatives of the refineries that service Colorado and
arranged for the production of gasoline suitable for blending vith ethanol.
Consequently, a special non-oxygenated "sub-octane" gasoline (82.5 octane
unleaded regular, 84 octane regular) vas produced to allov the blending of
ethanol. Three refineries, Conoco, Total and Sinclair, vere the only
suppliers of sub-octane gasoline. The sub-octane gasoline sold for one cent
less per gallon than unleaded gas. The rack prices of MTBB and ethanol just
prior to and during the program are summarized in Figure 3-4 and Table 3-1.
2Several refiners and blenders began to produce and distribute oxygenated
fuels by mid-December. The earlier start vas necessary to ensure that retail
stations vould have oxygenated fuels by January 1, 1988. Regulation 13
required that the type of oxygenate blend be posted on pumps in the program
area from January 1 through February 29. Gasoline vith ethanol vas already
required to be posted. Prior to the program some stations may have carried
HTBB blended gasoline vlthout knowing it. Less than three percent of the
stations reported selling MTBB blended gasoline in the December 13, 1987
RCG/Hagler, Bailly Inc. retail price survey.
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Table 3-2
Gasoline Sales Sunary
1988 January/February

Progiaa Area
Statewide Area
Gallons
Z
Gallons
Z
Bthanol
9,419,000
5.8
9,419,000
4.1
Clear Gasoline

--
8,651,000
3.8
KT6E (1U)
3,672,000
2.3
3,672,000
1.6
HTBE (8Z)
148.488.000
91.9
206.233,000
90.5
Total Sales
161,579,000
100
227,975,000
100
Sources: Colorado Department of Revenue, Colorado Department of Health
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Ethanol
Using Department of Revenue estimates, ethanol blended gasoline sales (In the
Regulation 13 program area) of approximately 3,318,000 gallons in December and
4,530,500 gallons in January represent 4.1 and 5.8 percent, respectively, of
the oxygenate market. This vould represent an ethanol sales Increased 36Z
from December to January. However, ethanol marketing industry sources,
contrary to Colorado Department of Revenue determinations, have estimated that
ethanol sales for the program period actually decreased slightly based upon
their sales records. No explanation for these different estimates has been
determined by either source.
An issue of Interest to air quality officials is vhy there vas not greater
market penetration of ethanol during the mandatory program, and whether
ethanol penetration vlll increase next year. There are a number of apparent
explanations for the veak sales of ethanol during the program. Bthanol vas
carried only by independent stations because the major gasoline marketers vere
not prepared to make the adjustments necessary to accommodate ethanol.
Ethanol, unlike gasoline or MTBB, is not fungible (it cannot be shipped via
pipeline, and requires special handling) and the short period betveen adoption
of Regulation 13 and implementation of the program vould have required changes
in operating procedures.
Some marketers also argue that consumers do not accept ethanol as a product
and are unvllllng to risk consumer rejection of the oxygenate they market.
Hovever, it is interesting to note that some of the major petroleum marketers
in Colorado (Amoco, Conoco, Sinclair and Texaco) currently sell ethanol in
other states.
Another proposed explanation for ethanol's small market penetration Is the
lack of an assured supply of gasoline suitable for blending vith ethanol,
vhich may have constrained sales. Ethanol marketers vere restricted in the
amount and quality of gasoline that vas available for blending during the
months of December, January and February. Bthanol Is traditionally blended
vith gasoline to produce a product vhlch has a higher octane number (tvo to
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three octane points) than gasoline. Selling a high octane product Is a
marketing tactic of retailers of ethanol blends.
The unavailability of clear gasoline during the program forced ethanol
marketers to either use sub-octane gasoline or ship gasoline in from Vyoming
or Kansas If they wanted to use clear gasoline to produce a final high octane
product. At least one ethanol retailer discontinued selling ethanol blended
product because of the unavailability of clear gasoline.
Additionally* the sub-octane gasoline vas reportedly not alvays available in
sufficient quantities for blending vith ethanol. Any of, or a combination of
all of the above reasons may explain vhy ethanol did not gain a larger share
of the oxygenate market.
MTBB
MTBB fulfilled most of the oxygenate demand for the months of December,
January and February. During the program, an estimated 210 million gallons of
HTBB blended gasoline vas sold In Colorado. Of the MTBB sales, approximately
3.7 million gallons contained MX MTBB, the remainder vas blended at the 82
level (Colorado Department of Health, May, 1988).
Clear Gasoline
Although most of the gasoline sold in the State is transported into the Pront
Range, some non-oxygenated "clear gasoline" (not sub-octane) vas transported
into the Western Slope and the eastern plains (geographic areas outside the
mandatory program area) via truck during the program months. Product vas
moved into the Vestern Slope from Utah and Nev Mexico. Approximately
3,000,000 gallons of clear gasoline vas sold on the Vestern Slope in January
1988.
On the Front Range and eastern plains approximately 1,470,000 gallons of clear
gasoline, 1.7 percent of statevlde gasoline sales vas brought in from Vyoming
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and Kansas by truck. Some of the clear gasoline vas used to blend vlth
ethanol, and the rest vas marketed as oxygenate free gasoline.
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4.0 BOOHOMIC IMPACTS OF THE OXYGEHATRD PPKLS PB0G8AM
Videly varying economic Impacts of Colorado Regulation vere Bade prior to
program Implementation. This study uses several methods and alternative data
sources to quantify the actual industry and consumers economic Impacts of the
program. This section presents the analyses of:
o	Capital equipment costs incurred by refineries and distributors,
o	Oxygenate costs and values,
o	Denver and regional city rack prices,
o	Denver and regional city retail prices, and
o	Changes In fuel economy.
4.1 ENGIHKERING COSTS IHCURRED BY REFINERS AND DISTRIBUTORS
The estimated costs of Implementing Regulation 13 vere based, in part, on the
Infrastructure costs Incurred by the producers and distributors of gasoline
and oxygenates. These costs Included:
o Building or refurbishing storage facilities,
o Constructing rail unloading facilities,
o Piping from unloading facilities to storage tanks and
o Purchasing In-line blending equipment to enable refineries and terminals
to blend and distribute oxygenated fuels.
The suppliers of gasoline and blenders of oxygenates vere contacted to
determine the actual costs of implementing the program. The information
provided for this study will be presented in aggregated form to ensure the
confidentiality of the proprietary information. All major, participants in the
Colorado petroleum industry vere contacted and vere generally very cooperative
in providing information on a confidential basis (See Appendix 1 for a list of
contacts).
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Costa To Refiners, Distributors and Retailers Related To MTBB
Rail Off Loading and Blending Equipment. The costs Incurred by Individual
suppliers for the purchasing and building of rail off loading and in-line
blending equipment varied from no cost (suppliers who obtained blended
gasoline through exchanges) to $750,000 (for an unloading facility, piping to
a storage tank and In-line blending equipment). The aggregated cost for all
identified rail off-loading and blending facilities totaled $2,925,000
(Conversations vlth gasoline and oxygenate distributors).
Storage Tanks. The refineries and terminals that supply product into Colorado
possessed different storage capacity. Some suppliers utilized available tanks*
others vere required to rededicate existing storage tanks, and some suppliers
vere required to construct nev tanks (the upper bound expense for constructing
a nev tank vas $750,000). The aggregate cost for providing tanks to store KTBB
and sub-octane gasoline totalled $2,100,000 (Conversations vlth gasoline and
oxygenate distributors).
Annualized Cost of Equipment. The above equlpaent Installed to meet the
requirements of Regulation 13 generally has a life expectancy of 10 to 30
years. Therefore, the cost of the equipment should be annualized, and not
charged exclusively to the first year of the program. further, such
equipment can be used by a refinery or terminal year round for purposes other
than blending oxygenates during the four months of the program. For the
purpose of this analysis, ve have calculated the annual cost of complying vlth
Regulation 13 in tvo vays (Summarized in Table 4-1):
1.	As an upper bound on costs, amortizing equipment at 10 percent vlth a
tax life seven years (Tax Reform Act of 1986) and assuming the equipment
is useful only during the program; and	~
2.	As a central estimate, amortizing the	equipment at 10 percent over 15
years and assuming the equipment	can	be utilized the entire year and
therefore, allocating the cost of	the	equipment to the program in
proportion to the months used for	the	program.
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Table 4-1
Aimuallzed Cost of HIBB Related Equipment Expenditures
Cost Of Equlpaent	Upper	Central
Rail, Piping Blending $2,925,000
Storage	$2,100,000
TOTAL:	$5,025,000 $1,031,546/year	$110,044/year
Sources: Amoco Oil, Conoco, Dlanond Shamrock, Exxon, Prontler Oil, Phillips
Petroleum, Sinclair Oil, Spruce Oil, Texaco Oil, Total Petroleum, Vestern
Refining.
Utilizing the upper bounds of the engineering costs attributable to the first
year, and attributing the entire annual cost to only the program months
(January and February) gasoline sales, the engineering cost per gallon of MTBS
mixed gasoline is $0.0049. This upper bound cost vould be half this amount in
a four-month program. Using the central case estimates, the per gallon
engineering cost for tvo months vould be $0.0005. Of tbe tva prior studies,
BBC, (1987) projected a capital cost related to using HTBB of $0,006 per
gallon and BAI (1967} estimated HTBB capital costs (la total dollars on a
seasonal basis) of $4.4 million.
Meeting the 2.0 percent oxygen standard in the second year of the program
could require some refineries and terminals to incur additional engineering
costs. To avoid the logistical problems created by the program (see Section
4.7) the refineries and terminals that vlll be blending MTBB shipped by
railcar vlll have to dedicate an additional 50,000 barrel tank for storage of
HTBB. In addition to providing the additional storage capacity, the blender
will have to take shipment of the MTBE in August of 1968, and not receive the
benefit before November 1, 1988.
Refinery operators have estimated that the cost of providing the storage for
the next years program will exceed the amount spent in the first program year.
Assuming all eight refineries are required to build new HTBB storage
capacity, at the upper case of $750,000 each (for a total of $6 million), the
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annualized central case estimate of per gallon engineering costs attributable
to the 1988-1939 program vould be $.0017 (assuming statevlde monthly
consumption of 115,500,000 gallons per month).
Cleaning Of Tanks Related To Kthanol
The standard procedure for the handling and distribution of ethanol is to
ensure that storage tanks are clean and contain no water to minimize the
possibility of phase separation and the release of deposits (because of the
solvent nature of alcohols). The cost estimates conducted prior to the
rulemaking established a range of service station maintenance costs of $25 to
$4000.
The actual costs of preparing a service station to handle ethanol tended
towards the lover end cost estimates (summarized in Table 4-2). Stations
Incurred costs of $20 to $49 per pump hose for changing filters and puap
castings. There were approximately 60 service stations on the Pront Range
that distributed ethanol blended gasoline during the program. Less than 20 of
the stations started blending ethanol during the program. The stations that
were blending vlth ethanol prior to the program therefore did not Incur added
preparation expenses due to the rulemaking.
The stations that incurred the greatest expense are those that required that
vater/gasoline mixture be removed from their tanks. Vater from a tank must be
treated as a hazardous vaste, and disposal of the liquid is the greatest cost
in the cleaning process. The expense of drying a storage tank ranged from $90
to $250 per tank. Approximately 50 to 70 storage tanks were dried and cleaned
vith a total cost range from $4,500 (50 x $90) to $17,500 (70 X $250)
(Conversations vith ethanol blenders and tank cleaning firms).
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Table 4-2
First Tear Costs Related To Ethanol
Total Estimates
Lover Upper
Itea	$ Per Unit	# of Stations	Bound Bound
Filters $20-49 average	20 (4-12	$1,600 - 11,760
(per pump hose)	pump hoses/Station)
Tank Cleaning $90-250 Tank	50-70	$4,500 - 17,500
TOTAL: -		$6,100 -$29,260
Sources: Bthanol Management Company, Kubat Equipment and Service Company,
Spruce Oil, Western Refining.
Assuming that twenty service stations Incurred the range of cleaning costs and
sold equivalent amount of blended gasoline as all stations selling ethanol
blends, the per gallon cost of cleaning the stations vould have been an upper
case cost of $.01 and the central case of $.002. Hovever, assuming that the
same stations continue to sell ethanol year round, the costs of preparing a
station are spread out over the entire year, and the per gallon cost Is
reduced to $.0017 and $.0003 respectively. Of the tvo prior studies, one
estimated that the velghted average cost of preparing a service station vould
be $735.00. The other study estimated that service station preparation vould
cost retailers $.01 per gallon.
4.2 OXYGEHAIE COSTS AND VALUES
This section examines the production costs and octane values of blending MTBE
and ethanol into base gasolines to meet the 1.5 percent oxygen requirement of
the Colorado program. The gross costs of MTBE and ethanol are higher than the
cost of the base gasolines they replace. This by Itself vould indicate higher
production costs for gasoline blended vlth these oxygenates. Hovever, because
they boost the octane rating, a higher octane gas, vlth a higher market value,
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may be sold or other lover price octane components may be substituted to
offset some or all of their cost.
4.2.1 MTBK Blending Costs
MTBE delivered to Colorado during the program averaged between 70 and 80 cents
per gallon. In relative terms, this vas 20 to 30 cents per gallon above
gasoline during the program, or 140 to 160 percent of the cost of base
gasoline. Relative prices are Important in analyzing costs because gasoline
and HTBE prices change over time. The program price differential between MTBK
and gasoline is in the same range as historical relative prices shown by BBC
(1987). A study by Energy and Environmental Analysis, Inc. (1987), using new
plant economics at current petroleum prices, projects MTBB prices to remain
about 25 cents more per gallon than base gasoline, thus maintaining the same
price differential.
The change in cost from adding HTBE can be calculated from the prices and
amounts of base gasoline and MTBE added per gallon of blended gasoline.
Multiplying the price per gallon times the percent of that component in the
finished product and then summing the costs vill yield the cost of the
product. The cost of blended gasoline can then be compared to the cost of
unblended gasoline. For example, in a gallon of blended gasoline, 92 percent,
is base gasoline and 8 percent is MTBB. Assuming a price of 50 cents per
gallon for base gasoline the component cost is $0.46 ($0.50 X .92) per gallon.
Assuming the higher program price of 80 cents per gallon of MTBB, the cost is
$0,064 ($0.80 X .08) per gallon. The blended gasoline cost per gallon vould
therefore be $0,524 or 2.4 cents more per gallon than base gasoline if no
other considerations are made. Assuming the program average price of $0.75
per gallon of MTBE, the blended gasoline cost vould be $0,520 or 2.0 cents per
gallon more than base gasoline (see Table 4-3). These estimates of 2.0 to 2.4
cents/gallon serve as the central and upper bound estimates o program changes
in production costs.
The addition of MTBE increases the octane of the base gasoline by
approximately tvo numbers, vhlch has a value to producers and consumers. One
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Table 4-3
MTBE Blending Costs and Octane Value
	MTBE Blending Costa 	
Blending	Price Per Percent Of	Cost Per Gallon
Component	Gallon	Gallon
I. MTBE Blending Costs
Base Gasoline	$0.50 x 0.92
MTBB	$0.75 - 0.80 x 0.08
Total	1.00
Change in cost per gallon (Blended cost - $0.50)
H. Octane Substitution Value
Change in Octane tines Octane Value (2 x $0,008)
TTT. Total MTBE Blending Cost and Octane Value Ipact
$0,004 - 0.008
(added cost)
$0.46
$0,060 - 0.064
$0.520 - 0.524
$0,020 - 0.024
(added cost)
-$0,016
(Saving)
Note: Assumes 50 cents per gallon for base gasoline and actual MTBE program
prices o 75 and 80 cents per gallon for central and upper cost estimates.
Octane substitution value is based on oil Industry figures of 0.8 cents per
octane gallon. This is a conservative estimate of octane value and does not
include additional octane value obtained through the increased use of butane.
Actual octane value varies by refinery feedstock, equipment, and operation.
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method that can be used to estimate producer octane value is to compare the
difference betveen unleaded regular and premium gasoline. Their rack prices
differ by approximately 6 cents vhlle their octane differs by 4 points (89 vs
85). Using this method, the octane value Is approximately 1.5 cents per
octane number per gallon. Although this estimate is probably on the high
side, because it Includes wholesale profits as veil as production costs. It
demonstrates that octane has value.
As illustrated, increased octane gasoline available from strictly blending
HTBB could have been sold at a higher price or, as actually occurred,
producers could maintain the octane at normal preprogram levels (85 unleaded,
86.5 regular and 89 premium). By substituting HTBB octane for other octane
components, the cost of producing gasoline Is decreased by the amount of
octane components substituted. This savings is the production value of
octane. Octane costs vary by refinery feedstock and equipment. Refineries
with higher octane costs vlll receive larger benefits of octane enhancers than
refineries vith lover octane costs. The production cost to Increase octane by
one number has been estimated at 0.8 cents per gallon (BBC 1987) and 1.0 cent
per gallon (George Yogis, ARCO Chemical, AQCC testimony June 4, 1987).
HTBB increases the octane of blended gasoline by approximately tvo numbers.
Using a value of 0.8 cents per octane number, the octane value of HTBB through
substitution of other inputs is 1.6 cents per gallon of gasoline. The 1.6
cents per gallon offsets the purchase cost of HTBB (see Table 4-3).
Therefore, the net change in production cost of blending KIBE including octane
value ranges from 0.4 to 0.8 cents per gallon. Confidential industry sources
have confirmed these are reasonable estimates of the production costs of
blending KTBE. Octane substitution benefits estimated here may be
conservative as evidenced by the economic use of HTBB in other areas of the
country and by the possible continued use of HTBB after the program by three
companies in the Denver market.
Another form of HTBE octane substitution Is also possible that vould Increase
the blending valve. Additional octane value, other than the direct boost of
HTBB, can be derived through butane substitution. Butanes are an abundant,
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lov cost octane enhancer, but only limited amounts can be added to most
gasolines because of their high RVP (55). Because HTBB lovers the vapor
pressure o gasoline (RVP of KTBK = 8, RVP of gasoline  14) vhen blended,
additional lov cost butane can also be blended to Increase octane Instead of
using more expensive octane components.^ The value of the substitution is
termed the butane credit. BBC (1967) estimated the butane credit at 0.2 cents
per gallon for 11 percent HTBB gasoline. The amount of credit depends on the
price and availability of butane and the composition of the base gasoline.
Because of the complexity and variability of refinery operations, butane
octane credit vas not Included in the estimate of HTBB octane value. The
Inclusion of butane credit vould increase the substitution value and lover the
total cost of blending HTBB.
Based on the amount of MTBE blended gasoline produced during the tvo-aonth
program without acknowledging the value of octane, the oxygenate purchase coat
of the program ranged betveen $4,198,100 and $5,037,720 or $0,020 to $0,024
per gallon of blended gasoline. This serves as an upper bound estimate on the
blending cost components. Vhen adjusted for the value of octane, the cost of
blending MTBE ranged from 339,620 to $1,679,240 or from $0,008 to a central
estimate of $0,004 per gallon of gasoline.
4.2.2 Kthanol Costs
Although ethanol vas marketed economically before the program, some consumers
incurred program Induced costs as a result of the ethanol pricing strategy and
base gasoline substitutions. Because of the fixed margin pricing strategy of
ethanol blends, the price of ethanol follows the price of the dominant
gasoline. If the price of other gasoline increases because of the cost of
blending HTBB, the price of ethanol blend vould also increase. Gasohol
consumers vould pay more even if the cost of producing ethanol blend had
decreased.
*The vlnter RVP of gasoline in Denver averages 14 and must be below 15 to
meet ASTH requirements (Staff Statement to the AQCC Concerning Proposed
Regulation 13, June, 1987).
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Previous ethanol users vho stayed vith ethanol nay have Incurred Increased
prices and reduced product value because the octane of ethanol blend during
the program vas reduced as compared to before the program. Ethanol blend
prior to the program had an octane rating tvo to three points higher than the
same grade of non-ethanol gasoline. This vas considered a consumer selling
point of ethanol blends. During the program, ethanol vas blended vith lover
octane "subgrade" gasoline. The finished blend using subgrade vas the same
octane as other gasoline. The program induced cost vas the 2 to 3 point
reduction In octane. The subgrade vas provided at a slightly lover cost, from
one half to one cent per gallon less than MTBE blended gasoline, and vas the
only gasoline available for blending vith ethanol. The ethanol blend gasoline
to unblended gasoline price margin before the program vas approximately 1.5 to
2.0 cents per gallon. The reduction in cost of the subgrade (relative to
gasoline) alloved blenders of ethanol to maintain the price margin betveen
gasoline and ethanol blend, thus, offsetting program costs and/or Increasing
their profit margin. Maintaining the ethanol blend to gasoline price margin
results in a cost to the consumer by the save $/gallon amount of the MTBB
gasoline price increase. (The price increase Is in relative terms. For
example, the retail price of gasoline declined during the program( but ethanol
blend may not have declined as much as it vould have vlthout the program.)
The consumer cost Incurred depends on the type of gasoline that vas purchased
before and during the program (see Table 4-4). For example, assuming up to a
$0.01 per gallon increase in the cost of gasoline because of blending HTBE,
the retail prices of both HTBE and ethanol blends of gasoline vould Increase
by up to $0.01 per gallon. Consumers that purchased ethanol blends before the
program and during the program paid up to $0.01 due to the MTBE effect (line 4
- line 2 in Table 4-4). Consumers that svitched from gasoline to gasohol
during the program paid $0.01 less per gallon (line 4 - line-1) due to the
ethanol retail pricing strategy. If the change in price of blending MTBE vas
zero, then the consumer change in price vould be zero.
Previous ethanol consumers also experienced a reduction in octane. For the
central estimate of this impact, a production cost of 0.8 cents per octane
gallon (2.5 octane reduction) vas used. The producer value of 1.5 cents per
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Table 4-4
Bthanol Program Impairs,
Costs to Rev and Previous Consumers
Fuel Costs	$ per Gallon	Octane
Before Program
1.	Gasoline	0.85	85
2.	Ethanol Blend	0.83	87.5
Poring Program
3.	HTBB Gasoline	0.85-0.86	85
4.	Ethanol Blend	0.33-0.84	85
Program Induced Change in Costs
5.	Ethanol Blend to Ethanol	-2.5
Blend (line 4 - line 2)
-	Price Impact	0.0 to +0.01
-	Octane Value Reduction	0.02 to 0.037
-	Total Impacts	0.02 to 0.047
(added costs)
6. Switching from gasoline to
Ethanol Blend (line 4-line 1)
-	Price Impact	-0.01 to -0.02
-	Total Impacts	-0.01 to -0.02
(added savings)
Assumes, Cor the purpose of sample calculation, preprogram unleaded prices of
$0.85 and $0.83 vith an ethanol octane boost of 2.5 and maintaining $0.02
retailer price margin. Costs of the program are from changes in base gasoline
costs, changes in MTBE gasoline prices, and loss of octane. The cost to
previous consumers is the total of the cost increase in other gasoline (0.0 to
0.01) plus the loss in octane value. The cost (benefit) to new consumers is
the cost reduction in ethanol blends.
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octane gallon (2.5 octane reduction) vas used. The producer value of 1.5
cents per octane gallon vas used for the upper estimate of this Impact. The
value of reduced octane ranged front $0.02 to $0,037 per gallon for ethanol
blends as compared to the previous use of ethanol. Assuming an upper bound
cost increase of HTBE OF $0,013 per gallon (calculated figure from equipment
and blending costs), the total program cost for previous ethanol blend
consumers ranged from $0.02 to $0.05 per gallon. The total program cost
(benefit) to nev ethanol blend consumers ranged from $-0.01 to $-0.02 per
gallon.
4.3 DENVER AND REGIONAL CITY HACK PRICES
Gasoline rack (vholesale) price behavior in Denver vas analyzed for Impacts of
the oxygenated fuels program. Rack prices reflect crude oil purchase costs,
refining and blending costs, cost of the oxygenate, and vholesale marketing
and distribution costs and profits. During the program period, Denver rack
prices Include the cost of HTBE, except for sub-octane gasoline. Based on the
actual engineering and other costs Incurred ve vould expect only a negligible
or small change in rack prices attributable to the program (approximately zero
to 0.013 cents per gallon).
Estimates of price Increases from $0,034 to $0.06 vere made prior to the
program by BBC and EAI). This section analyzes the actual price behavior of
Denver and other cities to see If these price changes can be verified.
4.3.1 Denver Back Prices
To distinguish program related price changes, adjusted for etude oil, other
market factors and seasonal trends, previous and current program period price
movements and changes in margins were examined. Figure 4-1 shows Denver
monthly average rack prices by grade. A two-year time span was selected to
examine historical trends in Denver rack prices. Prior to and during the
oxygenated fuels program Denver rack prices declined and then held steady.
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Crude oil Is at substantial component of the cost of gasoline. Vest Texas
Intermediate (VTI) crude oil spot prices from January 1986 through February
1988 are also shovn in Figure 4-1. VTI vas recommended by the oil Industry as
being representative of U.S. crude oil price movements. Gasoline prices
basically follov crude oil costs. Market imbalances rather than changes in
component costs are attributed to the difference in rack and crude oil price
trends.
Based on seasonal gasoline demand patterns, adjusted for crude oil price
changes, one might expect Denver prices to rise In the summer vlth the hlgfi
tourist demand in the rocky mountains and decline in the vinter. Denver
seasonal rack prices do not consistently follov this trend. Prices during the
vinter of 1986 vere falling sharply; prices during the vinter of 1987 vere
rising; and prices during the program vinter of 1988 vere steady. The
previous seasonal price trends do not explain program price trends.
Despite large overall price fluctuations, the margins betveen grades in Denver
have remained fairly stable. Regular leaded and unleaded prices remain very
close vlth leaded gasoline slightly higher since January of 1987. Premium has
been and continues to be priced 5 to 6 cents above regular and unleaded
gasoline. Sub-octane gasoline used for blending vlth ethanol only became
available in December 1987, in preparation of the program. The sub-octane vas
1.5 to 2.S points lover than standard octane or MTBB blended gasoline during
the program and sold for half a cent to a cent less (the octane varied by
source and time; the price by brand name). Based on octane value, the sub-
octane vould have been expected to cost even less than it did. Increased
production, storage and distribution costs of separate clear grades of
gasoline in addition to the full line of MTBB blends vere cited for the small
difference in sub-octane gasoline prices.
4.3.2 Comparison Cities
Based on the changes in Denver rack prices there vas little or no cost
increase of the program. Hovever, because of other concurrent market changes
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Figure 4-1
Rack Gasoline and WTI Crude Oil Prices
Denver
Month/Year
~ PRE	+ UNL	~ REG	A SUB	X WTI
Source: Rock prices from Petroscan. Crude oil west Texas intermediate prices from the Oil and
Gas Journal Energy Data Base.

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(including crude oil and inventory changes) Denver rack prices should not be
analyzed in isolation. Relative price analysis is necessary to determine if
Denver prices significantly increased or decreased relative to other non-
oxygenated fuel regions. Other city rack prices are compared vlth Denver for
changes in relative prices, historical relationships, previous program period
trends and actual program period price relationships. To have meaningful and
accurate comparisons, other cities should track closely to Denver prices.
Back price changes in Denver vere compared vlth rack price changes in Kansas
City, KS; Salt Lake City, UT; and Tulsa, OR to determine if program price
changes can be separately identified and if so, hov much prices before and
during the oxygenated fuels program Increased or decreased relative to other
markets. These cities vere selected for comparison based on gasoline supply
and market similarities vlth Denver and based upon Industry recommendations.
A partial list of the attributes sought for comparison regions Includes: a
combination of refinery and pipeline supply; delivery from the same pipelines
or refineries; similar market size; geographic locations in or Influencing the
rocky mountain region; and regions vlth little or no current oxygenate use.
Representatives from the oxygenated fuels and oil industries indicated that no
other city is directly comparable vith Denver because of its unique market
structure. Hovever, at the Colorado Department of Health, February 4, 1988
Oxygenated Fuels Program meeting, Industry representatives did agree that
Denver prices should not be vieved In Isolation and recommended that Kansas
City, Salt Lake City and a mid-vest petroleum producing city,such as
Tulsa,vould be the most suitable comparison cities.
Kansas City, Salt Lake City and Tulsa are connected by pipelines and/or the
same refineries that supply Denver. Kansas City, Salt Lake City and Tulsa are
roughly comparable in market size. The refinery at Eldorado supplies Kansas
City by pipeline, ties into other mid-vest pipelines and supplies Denver
through the Chase pipeline. Tulsa, which is in Petroleum Administration for
Defense District 3 and Is part of "the Group" of interlinked oil producing
cities, is considered representative of industry conditions because of its
central location, supply of crude oil and extensive pipeline distribution
system vhich Interconnects Tulsa vith other refineries and markets. Salt Lake
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City Is In the rocky nountain region and is served by the same refinery (Amoco
in Caspert Vyomlng) that supplies a substantial share of the Denver market via
the VIGO pipeline. All of the comparison regions have little or no current
oxygenate use. Other cities, such as Casper, Wyoming, are also connected to
the Denver market, but vere not used for comparison because they differ
significantly in market supply, size and/or structure.
Each of the cities selected for comparison satisfies many of the criteria
attributes. Hovever, no city is exactly comparable with the Denver market.
Gasoline markets are unique, and prices can and do change Independently of
other markets. Reasons for differential price changes, other than costs of
the oxygenated fuel program, Include: differences In refining and distribution
costs, changes in inventories, changing price margins (profits), market
competition and supply and demand imbalances. One attribute that
distinguishes Denver from most other markets of the same size Is its
limitation in responding to supply-demand imbalances. Kansas City, Salt Lake
City and Tulsa have the ability to import and export gasoline, vhile Denver
does not. Denver is at the end of the pipelines and only imports gasoline.
Octane numbers in Denver and the rocky mountain region are tvo numbers lover
for the same grades of gas than for the rest of the country. Octane numbers
In the rocky mountains are 85 for unleaded, 87 for regular and 89 for premium.
This precludes effectively comparing rack prices in Denver to those in other
cities outside of the region.
4.3.3 Back Price Changes in Comparison Cities
The reason for examining rack prices in comparison cities is to separate price
changes due to natural market forces from program related price changes.
Seasonal movements, relative city price relationships and monthly price
variations are analyzed. Identifying these relationships and changes in the
price are necessary to be able to verify estimates of program price impacts.
Over the past tvo years, vith notable exceptions, overall rack prices In the
comparison regions have tended to move together, obviously follovlng major
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movements In crude oil prices and widespread market Impacts. Figures 4-2, 4-3
and 4-4 shov the monthly average rack prices for regular, unleaded and premium
gasoline In Denver and the three comparison regions from January 1986 through
February 1988. Rack prices of the different grades of gasoline change in a
closely related manner. Because of this, and in order to simplify the
discussion, only regular unleaded gasoline, which comprises the largest share
of the market (53 percent; BBC 1987) is addressed in the subsequent
discussion.
Tvo exceptions to the general trend of parallel movements in regional prices
vere vhen prices diverged in the summer of 1986 and diverged even more
dramatically In the fall of 1987. Regional prices converged in the vlnter of
1986-1987 and appear to be converging again in the vlnter of 1987-1988. In
discussions vith the oil industry, no specific reasons could be given for the
changes in these spreads or relative prices.
Seasonal changes in prices and gasoline demand vere examined to see If they
could explain variations in relative city prices. The volume of gasoline
demanded in Denver Increases vith tourism in the summer and decreases In the
vlnter. Prices vould normally be expected to track vith demand, hovever, rack
prices have not consistently folloved this seasonal pattern in previous
program periods. Prices fell rapidly during the vlnter of 1986 and generally
rose over the vlnter of 1987. In the fall of 1987, prices fell sharply, but,
during the program, prices in Denver vere steady and prices in tvo of the
three comparison regions (Kansas City and Tulsa) vere rising. Only in Salt
Lake City, vhere prices had peaked one to three months after the other
regions, vere prices still falling. Seasonal price trends vere not consistent
in explaining relative rack price variation.
Considerable change has occurred in the relative rack prices among cities in
the region. For example, during 1986 and the first half of 1987, Denver's
rack price generally ranked in the middle of the comparison cities, but also
ranged from the lovest prices (twice) to the highest prices (twice). In
August of 1988, five months before the program, Denver rack prices were higher
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Figure 4-2
Regional Regular Gasoline Rack Prices
(Cents per Gallon)
&A
/' \ X
V'
n-lrjr	r
"i i"r
!	T ..r-T__r
1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9/87 11/87
DEN
Month/Year
+ KC	O SLC
TUL
Source: Petroscan

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c
o
G
\
m
+i
c
o
u

u
u
Q.
Figure 4-3
Regional Unleaded Gasoline Rack Prices
(Cents per Gallon)

A
' ^ V	^
.*-%? ,-V \
/p^ ^
y
W ^
'I	1	1	rI	1T !	1 , f- ,	,	,	!	j	
1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9/87 11/87 1/88
DEN
Month/Year
KC	O SLC
TUL
Soun. : Pc L cos can

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Figure 4-4
Regional Premium Gasoline Rack Prices
(Cents per Gallon)
Month/Year
~ DEN	+ KC	O SLC	A TUL
Source: Pe t roscan

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than all of the comparison cities. After this peak, Denver prices fell
rapidly and then leveled off.
Historically, the above type of relative price fluctuation is not unusual when
comparing cities. This therefore Halts the ability to detect relatively
small price changes and assign the difference to any one source of Impacts.
In fact, to verify or quantify specific program Impacts, the regional and
temporal variability in prices must be smaller than the price Impact to be
Identified.
Table 4-5 shows the inter-city difference In price as compared to Denver by
month for 1986 through February 1988. Figures 4-2 to 4-4 and Table 4-5, show
there are limited consistent relative price trends. Prices in each comparison
city fluctuate from below and to above Denver prices over the course of a few
months, apparently due to variability In local market pressures. The relative
price changes can be quite large and do not follow simplistic patterns.
The rack price spread between the comparison cities is highly variable and has
ranged from a high of 13.86 cents per gallon (1/1986, Tulsa-lov and SLC-hlgh)
to a low of 2.6 cents per gallon (8/1986, SLC-lov and KC-hlgh) for unleadc
gasoline. Immediately prior to the program, the price spread was 12.1 cei
per gallon (12/87, Tulsa and SLC). In the last month of the oxygenated fuels
program, Denver prices were just a quarter of a cent higher than SLC and the
spread between the four cities had narrowed to only 3.26 cents per gallon, a
change In the spread of almost 9 cents per gallon.
Month to month fluctuations in rack price in comparison cities as compared to
Denver, are large. Historical variations in comparison city prices are much
larger than the estimated impacts of the program. A comparison of the
relative price differences in January of the program shovs that they are not
consistent with previous January price spreads but, are veil within the range
of observed historical price differences. It appears impossible to identify
small (even the 3 to 6 cent pre-program estimates) short-term program related
changes in rack price when there are larger non-program related price changes.
Table 4-6 summarizes the variability in rack prices relative to Denver from
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Table 4-5
Regional Price Differences Compared VI th Denver
(Unleaded Gasoline, Cents per Gallon)
Price Relative To Denver
Date
Denver
Kansas City
Salt Lake City
Tulsa
1/86
71.15
2.82
9.20
-4.30
2/86
55.56
-0.72
11.12
-2.68
3/86
45.06
-0.46
4.01
-2.02
4/86
46.85
2.31
0.09
0.28
5/86
51.57
6.98
- 2.37
4.39
6/86
54.64
-4.18
4.52
-5.69
7/86
41.74
-2.54
11.53
-3.72
8/86
47.69
1.72
- 0.92
-0.40
9/86
48.02
-1.59
- 1.15
-3.14
10/86
43.85
0.46
1.21
-1.51
11/86
44.70
0.97
- 0.29
-0.50
12/86
43.38
1.31
- 0.45
-0.12
1/87
49.68
2.44
- 2.73
0.49
2/87
50.58
-0.24
1.96
-1.77
3/87
51.05
2.60
1.94
0.61
4/87
53.04
1.89
- 2.12
0.33
5/87
54.66
2.63
- 2.46
1.09
6/87
57.77
1.53
- 2.04
-0.19
7/87
61.56
0.72
- 3.01
-1.16
8/87
68.11
-6.17
- 2.53
-7.29
9/87
64.45
-8.51
3.92
-9.44
10/87
58.18
-0.58
6.59
-2.34
11/87
55.64
0.12
5.45
-0.99
12/87
50.91
-4.25
6.81
-5.29
1/88
50.04
-3.57
2.84
-4.86
2/88
50.03
-1.95
- 0.24
-3.26
Source: Petroscan for monthly prices. Positive prices are above Denver,
negative price belov.
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Table 4-6
Range In Regional Unleaded Rack Prices Compared to Denver
(Price Difference In Cents per Gallon)
Range in Prices
Kansas City
Salt Lake City
Tulsa
Jan 1986 - Feb 1988



Above Denver
7.0
11.5
4.4
Belov Denver
8.5
3.0
9.4
Range
15.5
14.5
13.8
Program Period



Rack Price Relative



To Denver



Jan 1986
-2.8
9.2
-4.3
Jan 1987
2.4
-2.7
0.5
The range In prices represents Petroscan monthly price difference between
Denver and each city.
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January 1986 through February 1988. During this time, monthly price
differences in the comparison cities have ranged from 9.4 cents per gallon
below Denver to 11.5 cents per gallon above Denver.
The one-month fluctuation in Denver prices during the period 1/86-2/88
averaged 4.2 cents per gallon and ranged from 0.01 to 15.69 cents per gallon.
Comparison cities one month price changes relative to Denver averaged 2.5 to
2.7 cents per gallon and ranged from 0.02 to 12.5 cents per gallon. The tvo-
month fluctuation in relative prices averaged from 3.4 to 4.6 cents per gallon
with a range of from 0.03 to 13.9 cents per gallon (see Table 4-7).
Again, this highlights the fact that large (relative to the projected program
impacts) relative price impacts over short periods of time are common due to
natural market forces suggesting that small relative price changes are not
likely to be defensibly attributed to any one factor such as Regulation 13.
Because short-term price changes in comparison city prices do not track
exactly with Denver, evaluation of program Impacts based upon relative changes
in prices are completely dependent on the time frame selected. During the
program, Denver rack prices held steady in absolute terms and actually
declined relative to tvo out of the three comparison cities. Kansas City and
Tulsa prices Increased by approximately 1.6 cents per gallon relative to
Denver, while Salt Lake City prices declined by 3.1 cents per gallon relative
to Denver. An analysis based only on rack price changes in these four cities
during only the program months would indicate program benefits (relative
price decreases in Denver) from blending with oxygenated fuels rather than
costs, but again this is likely to be a spurious unsubstantiated result.
Comparing regional price changes over other time periods associated vlth the
program yields a variety of different results and program costs (see Table 4-
8). A comparison of regional price changes between December 1987, when fuel
blenders began program implementation, and February 1988, the last month of
the initial program, indicates that Denver prices declined relative to two out
the three comparison regions. Between November 1987 and February 1988 rack
RCG/Hagler, Ballly Inc.
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Table 4-7
Statistical Comparison of Rack Price Fluctuations
(January 1986 - February 1988)
Kansas City Salt Lake City Tulsa
One-Honth Average Change
4.7
4.4
4.4
Standard Deviation
4.0
4.1
3.9
One-Konth Relative
Average Price Change
2.7
3.1
2.5
Standard Deviation
2.7
3.0
2.4
Tvo-Honth Relative
Average Change
3.7
4.6
3.4
Standard Deviation
3.1
3.9
2.7
Three-Month Relative
Average Change
3.6
4.7
3.3
Standard Deviation
2.6
3.9
2.5
KOTES: One-Nonth figure = changes In price spread between comparison city and
Denver over a one-month period in absolute value. Two and three month
price changes are calculated the same vay.
ROG/Hagler, fiallly Inc.
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Table 4-8
Regional Comparison of Changes in Back Prices Over Time
		Change In Price 		
Comparison	Kansas Salt Lake	Comparison
Period	Driver City City	Tulsa City Average
Jan-Feb 88
Regular	0.06	1.83	-3.13	1.71	+ .14
Unleaded	-0.01	1.61	-3.09	1.59	+ .04
Premium	-0.02	1.64	-3.14	1.65	+ .05
Dec 87-Feb 88
Regular	-0.82	1.76	-7.96	1.34	-1.62
Unleaded	-0.90	1.42	-7.93	1.15	-1.79
Premium	-0.88	1.45	-7.98	1.15	-1.79
Nov 87-Feb 88
Regular	-5.52	-7.34	-11.33	-7.70	-8.79
Unleaded	-5.61	-7.69	-11.30	-7.88	-8.96
Premium	-5.59	-7.76	-11.48	-7.88	-9.04
August 87-Feb 88
Regular	-17.99	-13.51	-15.82	-13.85	-14.43
Unleaded	-18.08	-13.86	-15.79	-14.05	-14.57
Premium	-18.15	-13.87	-16.05	-14.05	-14.66
Source: Petroscan, 1988.
ROG/Eagler, Bailly Inc.
4-26

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prices In the three comparison regions declined approximately 1 to 3 cents
more per gallon than the change In Denver prices. A comparison of regional
price changes between August 1987, when market prices peaked, and February
1988 shovs that Denver prices fell by 2.5 to 4.0 cents per gallon more than
the prices In the other comparison cities.
4.4 DENVER RKTATL IBICES
Changes In costs that are common to producers, distributors or retailers are
likely in large part to be passed on to the consumer in competitive markets
through changes in retail prices. Although some companies may incur
substantial individual .costs that cannot be passed through to consumers,
retail prices often reflect changes in costs to the industry as a vhole.
Changes in Denver retail prices are of Interest In evaluating industry costs
and consumer price Impacts of program. Retail prices may also Indicate if
there vere different Impacts by type of blend.
Unfortunately, it is difficult to obtain timely, reliable retail price
information and impossible to find retail price Information by blend. One of
the fev available sources of Denver retail prices Is the Rocky Mountain News,
vhlch conducts a weekly price survey of ten Denver stations. However, blends
are not identified in the survey and the sample size is too small to provide
reliable price comparisons. For these reasons, Hagler, Ballly Initiated its
own retail price survey to track gasoline prices by blend during the program.
The Denver Retail Price Survey
RCG/Hagler, Ballly Inc. conducted a bi-monthly survey in the Denver-metro area
to track changes in retail gasoline prices, by grade and by blend, prior to
and during the oxygenated fuels program. The Denver-metro area is the single
largest retail market affected by the program with approximately 60 percent of
the affected population (Denver Regional Council of Governments). A
stratified sample of 106 retail stations vas selected to be surveyed based
upon the Colorado Oil and Gas Inspectors list of 760 retail stations in the
RCG/Hagler, Ballly Inc.
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Metro-Denver area. The survey includes retailers in Denver, Aurora, Commerce
City, Littleton, Bnglevood, Lakevood, Wheat Ridge, Arvada, Federal Heights,
Thornton, Westminster, Northglenn and Boulder.
Retail prices by gasoline grade (regular, unleaded and premium) and by
identified oxygenate blend (MTBE or ethanol) vere collected every tvo veeks
from December 13, 1987 through February 28, 1988. Only self service prices
vere collected to eliminate the vide variations in full service profit
margins. The final survey captured approximately 14 percent of the Denver-
metro market.
Results of the Denver Price Survey
Denver retail prices for both blends and all grades of gasoline declined
during the oxygenated fuels program. Figure 4-5 shovs the average price of
MTBB and ethanol blends for regular, unleaded and premium gasoline by survey
period. Prices fell as oxygenated blends vere phased in during December,
Jumped by approximately of 3 cents per gallon in old-January and then fell to
belov preprogram price levels. A comparison vlth movements in rack prices
does not explain the sudden Increase then decrease of Denver retail prices in
January. Similar retail price movements are also observed in the Rocky
Mountain Nevs survey, as summarized in Figure 4-6, although the Rocky Mountain
Nevs Survey did not examine price movements by blend and only sampled ten
stations in the Metro-area. The Rocky Mountain Nevs retail survey prices
differed from the Denver retail price survey by from +2.5 to -1.5 cents per
gallon.
The Denver retail survey revealed a high correlation betveen station location
and price. Stations located in close proximity almost alvays had comparable
prices, regardless of the price level or oxygenate used, vhile prices betveen
locations varied videly. The existence of many local competitive markets
underlines the importance of having a large sample size and a videly
distributed survey.
RCG/Hagler, Ballly Inc.
4-28

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c
o
o
cn
0
+
c
o
u

L.
Q.
n
o
O
Figure 4-5
Denver Retail Gasoline Price Survey
MTBE and Ethanot Averaged Prices
12/13/87
1/3/88
1 /16/88
1/30/88
Survey Date
Unleaded
~ Regular	+
Source : RCG/Hagler, Bailly, Denver Retail Price Survey
2/14/88
Premium
2/28/88

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Denver retail prices declined prior to and overall during the oxygenated fuels
program. During the program period (January 1 through March 1), the average
price of both oxygenate blends declined by 1.92 cents per gallon for regular,
2.58 cents per gallon for unleaded and 2.29 cents per gallon for premium (see
Table 4-9). A decline of from 1.6 to 2.7 cents per gallon vas also observed
immediately prior to the program. To measure consumer price impacts of the
program vith retail prices, changes in retail prices should be directly linked
vlth changes in rack (industry) prices. Over the December through February
period, rack prices only declined by about tvo cents per gallon, less than the
4 to 5 cent drop in retail prices. However, this smaller change in rack
prices follovs a sharp drop in rack prices throughout the fall. Hypotheses
about the difference betveen program period retail and rack price movements
include: that retail prices lag behind changes in rack prices; that
inventories built up at the retail level; and that retail competition
increased, resulting In reduced retailer profit margins. In either case,
changes (decreased) in retail prices are larger than the changes (decrease) in
rack prices and therefore cannot be used to reject above engineering costs
estimates of the relative small program costs.
Other retail market changes occurred during the program, vhich also made it
difficult to distinguish program related impacts. Regular gas (vithout
oxygenated added), vhich has traditionally been priced belov unleaded gasoline
at the retail level, vas at some retail stations priced the same as or above
unleaded gas during the program. Regular gas has been and Is priced slightly
higher at the wholesale level. The pricing change brings the regular-unleaded
retail price spread in line vith the rack price spread. Changes in gasoline
grades have also ocurred. Texaco has discontinued distributing regular leaded
gasoline and is selling a mid-grade (87 octane in Colorado) unleaded gasoline
In its place. The midgrade gasoline vas excluded from the survey.
Differences In Blended Gasoline Prices
There vere significant differences betveen the prices of oxygenate blends.
Figures 4-7, 4-8 and 4-9 and Table 4-9 shov the average prices of MTBE and
ethanol blends by grade of gasoline. Bthanol blends vere lover in price for
RGG/Hagler, Bailly Inc.
4-30

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Figure 4-6
Rocky Mountain News Gas Price Survey
Blends Not Identified

94

93

92

91
~-v
C
90
0

"a
o>
89
\

3
c
88


u


87
0

u

'lI
a.
86
0)

o
e>
85

84

83

82

81
Source:
~ Regular
Denver, Rocky Mountain News
Survey Date

-------
c
o
o
o
N
a
c
o
u
N_X
o
u
u
Q_
o
o
o
86
Figure 4-7
Denver Regular Retail Gasoline Prices
By Blend
85
84 -
83
82 -
81 -
80
1/3/88
1/16/88
1/30/88
Survey Dote
+ Ethanol
2/14/88
2/28/88
~ MTBE
Source: RCG/Hagler, Bailly, Inc., Denver Retail Price Survey

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c
o
*0
a>
B)
+>
C
o
u

u
*C
0.
a
o
O
90
89 -
88 -
87 -
86 -
85 -
84 -
83 -
82
Figure 4-8
Denver Unleaded Retail Gasoline Prices
By Blend
1/3/88
1/16/88
1/30/88
2/14/88
2/28/88
Survey Date
~ MTBE	+ Ltnonol
Source: RCG/Hagler, Bailly, Denver Retail Price Survey

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c
0
0
u>
\
n
+>
c
o
u

u
r
L
n
o
0
101
100
99 -1
98 -I
97 -
96 -
95 -
94 H
93 -
92
Figure 4-9
Denver Premium Retail Gasoline Prices
By Blend
1/3/88
1/16/88	1/30/88
Survey Dote
~ MTBE	+ Ethanol
2/14/88
2/2B/88
Sourc
RCC/llagler, Bailly, Denver Retail Survey

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Table 4-9
Snuy of the Denver Retail Price Survey
Prices In Cents Per flallnn
Pre-Pragran	Program
	Average Price By Survey Date	 Price	Price
Grade Change	Change
and Blend Dec. 13 Jan. 3 Jan. 16 Jan. 30 Feb. 14 Feb. 28 Dec. 13-Jan.3	Jan.3-Feb.28
REGULAR
84.28
82.66
85.28
83.93
82.14
80.74
-1.62
-1.92
MTBE
*
82.90
85.46
84.07
82.10
80.84
*
-2.06
Ethanol
83.90
81.21
84.21
83.10
81.97
80.17
-2.69
-1.04
Observations
85
86
88
102
103
103


unleaded
87.71
86.13
89.56
87.40
85.29
83.55
-1.58
-2.58
MTBB
*
86.22
89.90
87.54
85.30
83.67
*
-2.55
Ethanol
87.26
85.59
87.52
86.43
85.17
82.83
-1.67
-2.76
Observations
89
89
91
106
106
106


PREMIUM
101.07
98.34
100.26
99.10
97.21
96.05
-2.73
-2.29
MTBE
*
98.41
100.46
99.26
97.34
96.31
*
-2.10
Bthanol
98.50
97.40
97.57
97.04
95.50
92.70
-1.10
-4.70
Observations
58
57
59
69
69
69


Source: ROG/Eagler, Ballly Inc. Denver Retail Price Source, The gasoline grade average is for
all blends in the sample
* Less than 2X of the stations reported having KIBE in the December 13 price survey.
BOG/Hagler, Bailly Inc.
4-35

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all grades. Premium gasoline had the largest price spread betveen blends
ranging from 1.8 to 3.6 cents per gallon. The price spread betveen HTBB and
ethanol blends vas about the same for regular and unleaded gasoline. The
spread betveen unleaded gas blends Increased In mid-January to about 2.4 cents
per gallon along vlth the Increase in prices, decreased to about 0.1 cents per
gallon in mid-February as retail prices fell and then increased to about 1.0
cents per gallon by the end of February.
While a difference in blend prices vas to be expected because of the vay
ethanol blends are priced, reasons for the changes in the price spreads are
uncertain. Ethanol blends are generally priced approximately 2.0 cents per
gallon less than other gasoline at the wholesale level. Retailers have the
option of passing on this savings, minus additional ethanol related costs such
as tank preparation, or increasing their retailer profit margin. One
consequence of this pricing policy is that the rack price of ethanol blends
vlll follov the rack price of other gasoline. If HTBB gasoline prices
increase so vlll rack prices of ethanol blends. Increased competition In the
retail market may pressure prices closer together, reducing profit margins and
narrowing the spread. Ethanol blend retailers have indicated that they price
in competition vlth the stations In their local area, maintaining their profit
margin If possible but, If competition demands It, they vlll lover prices
passing some of the savings on to the consumer. The conpetltive local pricing
observed In the Denver retail survey provides evidence of this type of
behavior.
4.5 REGIONAL COMPARISON OF RETAIL PRICKS
Retail prices in Denver vere compared vlth retail prices in Kansas City, Salt
Lake City and Tulsa to determine If prices before and during the oxygenated
fuels program Increased or decreased relative to other cities. These cities
vere selected for comparison based on industry recommendations of
comparability and similarities in market structure, a combination of refinery
and pipeline supply, service by the same pipelines supplying Denver,
RCG/Hagler, Ballly Inc.
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geographic location and market size (see Section 4.3 for sore detail on
comparison city selection).
There are very fev sources of timely retail price information available.
Retail information collected by the U.S. Department of Bnergy and published in
the Monthly Refinery Report is not available until three to five months after
the survey period. Retail unleaded gasoline prices for the four comparison
cities for January 1986 through February 1988 vere available from the Oil and
Gas Journal. This data provides a good indication of price trends, but it Is
not as reliable in providing precise prices because the data is adjusted using
changes from base retail price levels.
More than tvo years of data vere used to evaluate historical retail price
relationships between cities. Figure 4-10 shows the monthly unleaded retail-
prices for Denver and the three comparison cities.
Retail prices over the past tvo years have followed the same general trends in
all four regions reflecting major fluctuations in the price of crude oil.
Kansas City has usually had the lovest retail prices, followed by Tulsa,
Denver and Salt Lake City. Prices in Denver and Salt Lake City Increased
relative to Kansas City and Tulsa during the summers of 1986 and 1987. After
the 1986 increase, Denver prices tracked at a level more closely with Salt
Lake City than with Kansas or Tulsa. This can be attributed in part to a July
1, 1986 six cent per gallon tax Increase in Colorado that brought Denver
retail prices nearer to the level of Salt Lake City. After tracking more
closely vlth Salt Lake City prices in August of 1987, Denver prices started
falling more rapidly, diverging from Salt Lake City prices. Salt Lake City
prices were still falling during the program but, remained above Denver
prices. Kansas City and Tulsa price levels compared to Denver also fluctuate
over time. The fluctuations in intercity retail prices make it impossible to
quantify impacts that may be attributable to the oxygenated fuels program.
Retail price changes do not consistently follow the wholesale cost of gasoline
on a month-to-month basis. Comparisons of retail and rack prices in each
region yielded widely fluctuating price margins that did not follow a
ROG/Hagler, Ballly Inc.
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Figure 4-10
Regional Unleaded Retail Gas Prices
c
o
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o>

c

u

t,/
0)
a
O
tiiiiiiiiiiiiiiit~ niiir
1/86 3/86 5/86 7/86 9/86 11/86 1/87 3/87 5/87 7/87 9/87 11/87 1/88 3/88
~ DEN	+
Source: Oil and Gas Journal Energy Data Base
Date
SLC	O
TUL
KC

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consistent pattern over time. The fluctuations In retail-rack price margins
and changes in the relative city retail prices make It virtually impossible to
identify program related retail costs with this data.
4.6 FUEL ECONOMY PENALTY
Throughout the Regulation 13 rulemaking there has been concern that the
program could Increase gasoline consumption and create additional expenses for
consumers. As recently as March 29, 1988 Denver newspapers reported a	Q ^trj y
petroleum Industry analysis vhich estimated a mileage penalty of 55.6 million, y ,j ks
An analysis of the literature on oxygenated fuels and gasoline consumption by
the Colorado Department of Health concluded that the type of pollution
controls on an automobile determines the effect oxygenated fuels has on
gasoline consumption (Colorado Department of Health, 1987). Using the Health
Department figures, fuel economy losses are calculated in relation to fleet
composition, the mileage penalty associated vlth a particular control-
technology and market share of oxygenates during the program.
As Table 4-10 illustrates, the fleet mix and Colorado Department of Health
assumptions on fuel economy changes shovs an average fuel economy change of
less than one percent. Using the January and February statevlde gasoline
consumption figures of 329.4 million gallons, an average price of about $0.87
per gallon and the vorst case fuel penalty scenario of 0.22X, the cost to
consumers vas $420,000. Equlvalently, one could consider each gallon of gas
as, on average, having 0.22* or a $0,002 reduction In value during the first
year of the program.
BCG/Hagler, Bailly Inc.
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Table 4-10
Fuel Econoiiy Changes
X Changes In Fuel Bconoay
Control Technology
Z of Fleet
MTBB
Kthanol
Non-Catalyst
Catalyst
Closed Loop
Veighted Average:
34Z
41Z
25*
100X
o.ox
+1.3X
-IX-3X
-.22X to + .28X
-0.3X
+0.3Z
-0.3S
-.051
Source: Estimates of percent change in fuel economy from the Colorado
Department of Health, 1987.
4.7 OTHER SOCIAL IMPACTS AND COSTS
Industry Administrative Costs
In January, 1988 approximately 8.4 million gallons of MTBE vas transported
into Colorado either by rail or, when blended vith gasoline, via pipeline.
Gasoline containing MTBE vas transported through the Chase and Phillips
pipelines (30 percent of the Colorado market). The remaining 5.88 million
gallons (70 percent of total MTBE sales) vas transported to Colorado or
Wyoming for blending in approximately 200 rail cars (30,000 gallons per car).
The Incremental rail costs are incorporated into the HTBE production cost
estimates in Section 4.1. Hovever, gasoline marketers vho obtained MTBE by
rail vere inconvenienced by the logistical difficulties of obtaining shipment
o MTBE. The gasoline distributors vere confronted vith the unavailability of
MTBE shipments and vere occasionally forced to borrov MTBE from other
distributors until a shipment arrived.
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Govermental Coats
The Colorado Department of Health and the Oil and Gas Section of the
Department of Labor Incurred costs enforcing Regulation 13. The Health
department purchased nev equipment to test for oxygen content and hired staff
take fuel samples and to respond to inquiries on their telephone Hotline.
Costs Outside The Program Area
Almost all of the gasoline sold in Colorado contained oxygenates* Any costs
associated vith the program vere borne by all Coloradans. However, soae
motorists in non-program areas used clear gasoline, vhlch had been trucked In
from out-of-state (see Section 3.3) adding transportation costs over the
normal delivery procedures. Clear gasoline generally sold at a price equal or
exceeding HTBE blended gasoline (Conversations vith industry representatives),
rather than belov HTBE blended gasoline, as might have occurred vithout the
program. Assuming 8.6 million gallons sold during the program at a price
penalty of up to $0,013 (maximum HTBE price Increase) results In an added cost
during the first program year of $112,000. If there is a strong demand for
clear gasoline in future years, petroleum marketers should be able to provide
the product.
Maintenance Costs
Testimony given prior to and during the rulemaking established the possibility
that use of oxygenated fuels would result in some drlveabillty problems and
maintenance expenses (clogged fuel filters, deterioration of rubber parts).
The Department of Health Hotline, and an Informal tracking of fuel related
repairs by the Automobile Association of America did not reveal any
quantifiable increase In maintenance costs caused by the use of oxygenated
fuels.
HOG/Hagler, Bailly Inc.
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Potential Increases In Ozone
Testimony was presented prior to and during the rulemaking that a large year-
round penetration of ethanol could increase hydrocarbon emissions, and
exacerbate the existing summer time ozone problem. Analysis by the Colorado
Department of Health has concluded that even vith a 100 percent penetration of
ethanol (exempted from ASTM) during the non-vlnter months, the overall
Increase of evaporative emissions vould increase ozone from the current
highest recorded levels of 0.13-0.15 parts per million to 0.15-0.17 PPM
(Colorado Departaent of Health, 1985).
BOG/Hagler, Ballly Inc.
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5.0 Sumaary of Economic Impacts
Table 5-1 summarizes the range of costs estimates of Colorado's first year
Regulation 13 program. Total costs statewide ranged from $1,013,481 (central
bound estimate) to no more than $3,559,604 (upper bound estimate). The lover
bound estimates are zero. Program costs varied by oxygenate blend. MTBE
blends comprised about 95X of the gasoline sold in the program area.
The costs were largely incurred by Colorado residents in the AIR area (72X),
although residents in non-program areas may have Incurred costs due to the
Colorado petroleum distribution structure resulting In most of the state
converting to oxygenated fuel. These costs are Included in both the centred
and upper bound estimates. The central average price increase per gallon
attributable to the program is $0.0046, the cost per program area household Is
$0.87.
The economic impacts estimated in this costing analysis, which are based upon
Incremental capital equipment and blending costs are not rejected by careful
examination of rack prices in Denver and other cities. No substantive
Increase In Denver rack prices relative to comparison cities can be defended.
In fact, if price trends are analyzed in the cities recommended by the
petroleum and oxygenate industries (Section 4.3.2), Denver's prices during the
program months appear to decline relative to those cities. However, it is
Important to note that the intrinsic, relative short-term fluctuation in rack
prices across regional cities due to local market forces is of such magnitude
that small short-term impacts due to a program like Regulation 13 are unlikely
to be defensibly quantified using this approach. Therefore, the recent
estimates by EAI (1988) are likely to have little or no statistical validity.
In fact, alternative analysis of their data indicates numerous alternative
conclusions, all with little or no statistical power.
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Table 5-1
Suniy of Colorado's Oxygenated Fuels Prograa Costs
<$ 1968)

Dollars
Dollars/Gallon
Cost Category*
Central Cost
Kstlaate
Upper Bound
Estimates
Central
Estimates
Upper
Estimates
HTBB
Capital Equipment
MTBE Purchase
Octane Value Added
Total MTBE Cost
$ 110,044
4,198,100
-3,358,480
949,664
$1,031,546
5,037,720
-3,358,480
2,710,786
0.0005
0.020
-0.016
0.0045
0.0049
0.024
-0.016
0.0129
Bthanol
Cleaning Costs
Market and Octane Costs
Total Ethanol Costs
1,017
62,800
63,817
29,260
282,575
311,835
0.0003
0.0066
0.0069
0.009
0.03
0.039
Clear Gasoline
0
112,463
0
0.013
Fuel Economy Penalty
0
424,520
0
0.002
Total All Gasoline*
$ 1,013,481
$3,559,604
0.0045
0.016
Cost Impacts By Location




Dollars


Area and Iapact
Central Case
Estlntes

Upper Bound
Estimates
AIR AREA - Total $
-	^/Gallon
-	$/Bousehold
$763,837
$0.0046
$0,868


$2,615,536
$0.0159
$2.97
REST OF STATB - Total $
-	$/Gallon
-	$/Household
$249,644
$0.0039
$0,729


$943,968
$.0148
$2.75
* Total costs statevide. Sales volume during the tvo-month program: ethanol
9,419,000; HTBB 209,905,000; and Clear Gasoline 8,651,000.
RCG/Hagler, Bailly Inc.
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Cost Per Ton of Pollutant Keaczal
The Colorado Department of Health has estimated that a 942 market share of 82
HTBE and 62 market share ethanol (102) reduced ambient Carbon monoxide levels
in the Denver Metropolitan area from 82 to 112, or from 160 to 220 tons per
day. Using state-vide central and upper case cost estimates, and applying the
carbon monoxide reductions to five days a week, the dollar per ton cost of the
program vould be $154.49/ton (Central estimate) to $542.62/ton (upper-bound
estimate) for an 82 reduction and $112.36/ton to $394.63/ton for an 112
reduction.
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BIBLIOGRAPHY
American Society of Testing and Materials (ASTM) 1986. Annual Book Of ASTM
Standards, 1986, Philadelphia.
ARCO Chemical. 1987. "Testimony of George Yogis Before the Air Quality
Control Commission, June 18 and 19." Denver, CO.
Alberta Gas Chemicals, Inc. 1987. "Exhibit Before the Air Quality Control
Commission, June 18 and 19, 1987." Denver, CO.
Brovne, Bortz and Coddington, Inc. (BBC). 1987. Economic Impact Analysis and
Market Assessment of A Colorado Oxygenated Fuels Program. Report to the
Colorado Department of Health. January, Denver, CO.
Colorado Code of Regulations, 1987, Denver, CO.
Colorado Air Quality Control Commission. 1987. Transcript of Hearings, In
the Matter of Proposed Regulation 13. June 18 and 19, Denver, CO.
Colorado Department of Health, 1983. Effects of Bthanol-Blended Fuel on Motor
Vehicles at High Altitude. September, Denver, CO.
Colorado Department of Health. 1985. Bthanol Blended Fuel as a CO Reduction
Strategy at High Altitude. August, Denver, CO.
Colorado Department of Health. 1987. Staff Statement to the Air Quality
Control Commission Concerning Proposed Regulation 13. June 18 and 19,
Denver, CO.
Colorado Department of Health. 1988. Briefing to the Air Quality Control
Commission. March 17.
Energy Analysts International, Inc. (RAI). 1987. Impact of A Mandated
Blended Fuel Program on Consumer Costs, Product Supply and Economics. June
4, Denver, CO.
Metropolitan Air Quality Council. 1987. "Interim Carbon Monoxide State
Implementation Plan for the Metropolitan Denver Non-Attainment Region."
June, Denver, CO.
Renevable Fuels Association. 1987. Testimony Before the Air Quality Control
Commission. June 18 and 19, Denver, CO.
Renevable Fuels Foundation. 1987. "Changes in Gasoline and the Automobile
Service Technician.11 Washington, DC.
Oxygenated Fuels Task Force. 1986. "Report and Recommendations of the
Oxygenated Fuels Task Force." October 29, Denver, CO.
RCG/Hagler, Bailly, Inc.
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National Advisory Panel on Cost Effectiveness of Fuel Bthanol Production
(NAP). 1987. Puel Bthanol Cost Effectiveness Study. Pinal Report.
October, Washington, DC.
RGG/Hagler, Bailly, Inc.
-2-

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APPENDIX A

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APPENDIX A
List of Persons Interviewed
RCG, Hagler, Bailly vould like to express its appreciation to the following
people vho generously provided us vith invaluable Information.
Individual
Company
Mike Barvig
Spruce Oil
Barbar Bauerle
Automobile Association of America
Ken Buckler
Total Petroleum Inc.
Pete Coggeshall
Amoco Corporation
Vern Combs
Pennzoll Products Company
Dick Coven
Sinclair Oil Company
Jan Cool
Exxon
Dennis Creamer
Conoco Inc.
Tom Dunn
Colorado Department of Revenue
Dick Ervin
Texaco
Jerry Gallagher
Colorado Department of Health
Ron Hagmier
Ventra, Inc.
Ted Holman
Colorado Department of Health
Lance Hoboy
Vestec Petroleum
Loren Hoboy
Vestern Refining
Jim Kaiser
Sinclair Oil Company
Jeff Kramer
Frontier Oil and Refining
Tom Lareau
American Petroleum Institute
Jerry Levine
Amoco Corporation
Kim Levo
Colorado Department of Health
Sandra Nobbe
Oil and Gas Journal
Stan Lomax
Texaco
Bob MeHall
Diamond Shamrock
Dave Meyers
Conoco Inc.
Bill Piel
ARCO Chemical Company
Dick Piper
Phillips 66 Company
Hike Povell
Colorado Department of Labor, Oil
Joe Scott
Chase Transportation
John Snodgrass
Diamond Shamrock
Patty Stolp
Bthanol Managment Company
Jim Suttle
Chase Transportation
Rod Voight
Archer Daniels Midland
Jack Vilkins
Kubat Equipment
Ron Villiams
Gary Refining
George Wright
Coors
Darcy Void
Total Petroleum Inc.
George Yogis
ARCO Chemical Company

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APPENDIX B

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e I9C7 THE PUBLIC RECORD CORPORATION
AU. worn RESERVED
10CR7 7-87
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RE6ULATI0N NO. 13
"The Reduction of Carbon Monoxide Emissions from Gasoline
Powered Motor Vehicles through the use of Oxygenated Fuels"
OXYGENATED FUELS PROGRAM
I. Statement of Intent, Area of Application, and Definitions
A.	Statement of Purpose
The purpose of this regulation Is to reduce carbon monoxide
and particulate emissions from gasoline powered motor vehicles 1n
the AIR Program area through the winter time use of oxygenated
gasolines. The attached Statement of Basis, Statutory Authority
and Purpose, and Fiscal Statement are Incorporated herein, for the
purpose of reference only, as Sections IV. and V., respectively.
B.	Area of Application
This regulation shall apply to the AIR Program area as
defined 1n C.R.S. 42-4-307 (11).
C.	Definitions
The following terms shall have the following meaning when
used In this regulation:
1.	"AIR Program" means those parts or all of Colorado's Front
Range counties as defined In C.R.S 42-4-307 (11).
2.	"Commission" means the Colorado Air Quality Control
Commission.
3.	"Division* means the A1r Pollution Control Division of the
Colorado Department of Health (CDH).
4.	"Motor Vehicle" means any self-propelled vehicle which 1s
designed primarily for travel on the public highways and
which Is generally and commonly used to transport persons
and property over the public highways. For the purpose of
this regulation, motor vehicles shall refer to spark
Ignition motor vehicles which use on a part or full time
basis, gasoline or gasoline-type products.
5.	"MTBE" means methyl-tert-butyl-ether.
6.	"Oxygenated Fuels" means gasolines blended with a component
or components containing oxygen, generally an alcohol or
ether.
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7. "Class A Motor Fuel" means any gasoline type product as
defined In C.R.S. 8-20-202.
II. REQUIREMENTS OF THE OXYGENATED FUELS PROGRAM
A.	Class A Fuel Requirements
1.	Beginning January 1, 1988, to March 1, 1988, no Class A
motor, fuel shall be supplied or sold by any person Intended
as a final product for fueling of motor vehicles within the
AIR Program Area, or sold at retail, .or sold to a private
fleet for consumption, or Introduced Into a motor vehicle In
the AIR Prograa area by any person, unless the fuel has at
least a 1.51 oxygen content by weight. Oxygenated fuel
containing 81 by volume MT8E shall be considered equivalent
to 1.5X oxygen content by weight.
2.	Beginning November 1, 1988, to March 1, 1989 and for each
period of November 1 to March 1 thereafter, no Class A aotor
fuel shall be supplied or sold by any person Intended as a
final product for fueling of motor vehicles within the AIR
Program area or sold at retail, or sold to a private fleet
for consumption, or introduced Into a motor vehicle in the
AIR Program area by any person unless the fuel has at least
a 2.OX oxygen content by weight. Oxygenated fuel containing
IIS by volume MTBE shall be considered equivalent to 2.0X
oxygen content by weight.
3.	All oxygenated motor fuel shall be labeled at the pump
.during the periods stated In Sections II.A.I. and II.A.2.,
Identifying the type and amount of oxygenate contained In
the motor fuel, 1n accordance with labeling criteria
developed by the Division consistent with any applicable law.
B.	Reporting and Review Requirements
1. The A1r Pollution Control 01v1s1on, In consultation with the
State 011 and Gas Inspection Section, the Environmental
Protection Agency, the fuel refiners, oxygenate
manufacturers, marketers and retailers, the Colorado Auto
Dealers, lead air quality planning agenlces, motorists and
environmental organizations, shall prepare a report, to be
filed with the Commission, on April 15 of each year
regarding the results of the Oxygenated Fuels Program, with
particular attention to a cost/benefit analysis, to include
such factors as air pollution reductions obtained from the
program, drlveabllity problems, 1f any, the cost of the
program to motor vehicle owners, refiners, marketers and
retailers of the fuel, and other Information which 1s
relevant to whether the oxygenated fuels program should be
continued. The Division shall also work with all
appropriate entitles to develop and Implement a public
education program.	/
S CCR1001-16
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C 1917 THE PUBLIC RECORD CORPORATION
all ughti reserved
10CR7. 7-87
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2. At its May meeting of each year, the Commission shall
consider, in light of the report and other available
Information, whether the oxygenated fuels program should be
modified, expanded, or terminated by rule, and the
Commission shall transmit to the General assembly the report
of the Division and the results of the Commission's
consideration.
C.	Enforcement/Penalties for Non-Compliance
Compliance with the requirements of this regulation shall be
monitored and enforced by the Division. Tolerance for
measurements of fuels defined In Section 1I.A.1. and 2. shall be
determined by the Division and shall be consistent with reasonable
practices. Pursuant to Section 25-7-lll(f), the Olvlslon may
designate any appropriate agency of the State to assist 1n the
monitoring and enforcement of this regulation. The Division shaTl
make every effort to coordinate monitoring and enforcement of this
regulation with the current duties of the State Inspector of 011s,
conducted pursuant to C.R.S. 8-20-101 et seq.
D.	Severability
The provisions of this, regulation are severable, and If any
provisions, or the application of the provisions to any
circumstances, 1s held Invalid, the application of such provision
to other circumstances and the remainder of this regulation shall
not be affected.
111. REFERENCED MATERIAL
Pursuant to C.R.S. 24-4-103 (12.5), the following materials
referenced 1n this regulation are available for public Inspection
during normal working hours, or copies are available upon request at
cost, from the Technical Secretary of the A1r Quality Control
Commission, Ptarmigan Place, 3773 Cherry Creek Drive North, 3rd floor,
(303 ) 331-8597: C.Tt.'S. 42-4-307 (11), C.R.S. 8-20-202, C.R.S.
8-20-204, C.R.S. 8-20-229, C.R'.S. 24-4-103(12.5), C.R.S.' 6-4-101 et
seq, C.R.S. 25-7-lll(f), C.R.S. 8-20-101 et seq.
IY, STATEMENT OF BASIS, SPECIFIC STATUTORY AUTHORITY AND PURPOSE
The primary purpose of Regulation No. 13 is to reduce ambient levels of
carbon monoxide along the Front Range of Colorado. To achieve this reduction,
Regulation 13 will institute an oxygenated fuels program throughout the AIR
Program area during the period of January 1 to March 1 of 1988, and for each
period of November 1 to March 1, thereafter. The Commission has determined
that a voluntary program from November 1, 1987 through December 31, 1987 would
be of great benefit to the public and will result In air quality benefits by
reducing carbon monoxide, and directs the Division to proceed with
coordinating and implementing such a voluntary program.
An oxygenated fuels program is a necessary step for Colorado to attain
the National Ambient Air Quality Standard (NAAQS) for carbon monoxide. Of
primary concern is the eight hour, long term carbon monoxide standard, which
provides for an eight hour carbon monoxide limit of 9 PPM. Having more than
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5 CCR 1001-16

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*Q
one exceedance of this standard per year constitutes a violation of the carbon
monoxide NAAQS. Areas along Colorado's Front Range, especially 1n Denver,
have consistently failed to Beet this standard.
Use of oxygenated fuels reduces carbon monoxide emissions from gasoline
powered notor vehicles. The technical basis for this determination 1s as
follows:
Most carbon monoxide emissions along Colorado's Front Range are
from motor vehicles. It Is estimated that 1n 1987, 77X of the
areas CO emissions are from motor vehicles.
Oxygenated fuels, containing oxygen via an alcohol or ether
blended with gasollone, have been shown, through testing by CDH
and others, to be effective at lowering carbon monoxide emissions
from motor vehicles. Reductions are directly attributable to the
oxygen contained 1n these fuels, by leaning the air/fuel ratio.
Host gasoline powered motor vehicles are set up to run	slightly
rich at sea level. Unless these vehicles are	altitude
compensating, they will be further enriched as the	altitude
Increases, since there Is less oxygen present.
The amount of leaning Is directly proportional to the level of
oxygen contained 1n the fuel. The higher the percent of oxygen In
the fuel, the leaner the effective air to fuel ratio will be. As
the air to fuel ratio becomes leaner, CO emissions are reduced.
Thus, at Colorado's altitudes, most vehicles run richer than at sea
level. This excess fuel results 1n less complete combustion and thus
Increased carbon monoxide emissions. Oxygentated fuels counter-act these
factors.
Since vehicles are running rich at high altitudes, the enleanlng effect
of oxygenated fuels Is not anticipated to result In vehicle drlveablllty
degradation.
Current State law prohibits the Commission from requiring ASTM Reed
Vapor Pressure (RVP) standards for ethanol blends. There 1s no undue concern
with the lack of RVP standards on ethanol blends for the following reasons.
First, Regulation No. 13 Is being proposed as a wintertime only program.
Volatility Induced vapor lock Is primarily a summertime problem. Marketing
ethanol blended gasoline during the other eight months of the year would be
the decision of Individual fuel marketers. Second, data provided by the State
Inspector of Oils Indicates that the vast majority of gasoline sold In
Colorado during 1986 was significantly below the applicable maximum RVP
standard. In terms of ethanol blending, this Implies the majority of gasoline
could have been blended with ethanol and remain within RVP limits. State law
C.R.S. 8-20-204, as revised July 1, 1986 1s largely responsible for this lower
RVP gasoline. The Commission would prefer to have appropriate ASTM RVP
standards apply to all final oxygenated fuels but recognizes that the Colorado
General Assembly has this prerogative
S CCR1001-16

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S ran THE PUBLIC RfcCORD COAPOHATION
ALL RIGHTS RESEXVED
10CR7, 7-87
PigiS
The Commission encourages and directs the Division to wort with
non-retail rotor fuel suppliers to keep adequate records and Inform purchasers
of non-retail fuel regarding the amount and type of oxygenate In the fuel
supplied to and 1n the AIR Program area.
The oxygenated fuels program provided In Regulation No. 13 will be fn
effect for the period of January 1 to March 1 of 1988 and for each period of
November 1 to March 1, thereafter. This tine period is being used for the
following reasons:
High levels of carbon monoxide are experienced fn Denver and
Colorado's Front Range during- the winter months. For the most
part exceedances of the CO standard occur between November 1 and
March 1 of each winter.
There are several environmental, climatic and geographic reasons
for these high winter-time concentrations. These Include a large
motor vehicle fleet, traffic congestion, high altitude, cold
weather and atmospheric temperature Inversions.
High CO concentrations In Colorado are brought about In part by
Colorado's altitude and cold weather. At higher altitudes and
colder temperatures, motor vehicles tend to have less efficient
fuel combustion, resulting in Increased levels of CO.
Another cause of high carbon monoxide concentrations is the
incidence of winter-time temperature inversions which can develop
during the evening. An inversion will trap pollutants such as
carbon monoxide near the surface. In these conditions of stagnate
air, extremely high concentrations of carbon monoxide build and
collect.
If the marketplace for Class A motor fuel operates 1n an open and
competitive manner, a number of oxygenates should be available for use In the
AIR Program area which, when blended with a base fuel, will produce oxygenated
fuels that meet this regulation. Any attempt to limit the choice of
oxygenates available in the AIR Program area between December 1 to March 1 of
1988 and for each period of November 1 to March 1, thereafter, while this
regulation is 1n effect, through a combination, conspiracy, trust, pool,
agreement or contract intended to restrain or prevent competition in the
supply or price of base fuels suitable for blending with an oxygenate to
produce.oxygenated fuels which comply with this regulation and applicable EPA
requirements, may constitute an illegal restraint of trade in violation of
Section 6-4-101, et. seq., Colorado Revised Statutes.
Authority for Regulation No. 13 can be found in the Colorado Air
Quality Control Act, Section 25-7-101 et seq., C.R.S. 1982 (1986 Supp.).
Specifically, Section 25-7-106(1 )fe) authorizes the Colorado Air Quality
Control Commission to develop "a control or prohibition respecting the use of
a fuel or fuel additives in a motor vehicle to the extent authorized by
Section 211(c) of the federal act". Specific authority can also be found in
Section 25-7-109(3)(d).
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V. FISCAL IMPACT STATEMENT
Proposed Regulation No. 13 would require the use of oxygenated fuels In
the AIR Prograa area starting January 1 1988 to March 1 of 1988, and for each
period of November 1 to March 1, thereafter. This regulation would require
the use of an oxygenate such as an alcohol or an ether to be blended Into
gasoline.
The Increase In the retail price of gasoline due to this regulation Is
being estimated at .051 to 3.51 per gallon. The affected AIR Prograa (Front
Range) area consumes an estimated 1.2 billion gallons of gasoline a year. For
the four month winter period oxygenates would be required each year, this
would affect an estimated 380 million gallons of gasoline annually. Using the
estimated high range of 3.51 per gallon increase, this would result in an
annual cost of $13.3 million.
Based on Division testing, a 2% fuel econoay penalty was seen for
closed loop vehicles operating on oxygenated fuels. This Is estimated to be
250,000 vehicles 1n the affected area. Assuming each vehicle Is driven 4,000
miles from November 1 to March 1, each vehicle averages 25 mpg, 160 total
gallons of gasoline would be consumed per vehicle. A 21 Increased fuel
consumption would Increase consumption an additional 3.2 gallons. This
results In a total Increase of 800,000 gallons. At one dollar per gallon,
this 1s an additional .$800,000. This brings the total program cost to $14.1
million annually.
With both ethanol and MTBE in use 1n the marketplace, this regulation
1s estimated to result 1n a 300 ton per day, or 141 reduction In ambient
carbon monoxide levels. This results In a cost of $128 per ton of carbon
monoxide reduced.
These figures estimate increases 1n the retail price of gasoline, and
encompass all associated costs to provide oxygenated fuels. Gasoline
refiners, blenders, distributors and marketers will all have costs as a result
of this regulation. Refiners may have a reduction In crude oil through-put
from their refinery operations, as oxygenates will be displacing gasoline.
Refiners or fuel blenders will need to purchase and blend an oxygenate Into
gasoline. This may require additional tankage and blending facilities In some
cases. Retail fuel marketers, and private fleets with fueling facilities will
need to ensure underground tanks are clean and water free before handling any
alcohol blended gasoline. Final filters at the fuel pump nozzles may need to
be added when dispensing alcohol blends. These costs are included 1n the
estimates made above regarding cost per gallon Increase.
It should be noted that these estimates are using the high end of
retail gasoline cost estimates, and are the costs applicable to the fully
implemented program, and would be less during the phase-in years. There was
conflicting testimony at the public hearing regarding costs. Representatives
of the petroleum industry estimated that costs of implementing the program
could range up to 8.3 cents per gallon and total $49 million. These cost
estimates vary so widely because an oxygenated fuel program In the AIR Program
area may encourage the use of such fuels in other areas and states with carbon
monoxide problems. Some owners of motor vehicles may also Incur repair costs,
5 CCA 1001*1Q
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