The Honorable Michael O. Leavitt
Administrator
U.S. Environmental Protection Agency
Washington, DC

Dear Mr. Leavitt,

I am heartened by the April 1, 2004, testimony of Energy Secretary Spencer Abraham before the House Energy and Commerce Committee, in which he stated that the Administration is seriously considering California's request for a waiver of the oxygen mandate in the federal reformulated gasoline (RFG) regulations. As you know, California has been seeking the waiver since 1999, and on February 2, 2004, the California Environmental Protection Agency sent you compelling additional analyses demonstrating the basis for an immediate waiver.

Under the Clean Air Act, California qualifies for a waiver because the state has demonstrated that the oxygen mandate prevents or interferes with the attainment of the national ambient air quality standards for particulate matter and ozone. Even beyond the air quality benefits, a waiver can play an important role in moderating the gasoline price spikes that have been experienced recently in California. The waiver will increase refiners' flexibility in producing gasoline, enabling them to change gasoline formulations as needed to respond to changes in supply and market conditions. This can be particularly important as we approach the summer driving season.

What is so important about the waiver is that it presents an all too rare win-win situation. It will improve California's air quality at the same time it moderates gasoline prices. The justification for a waiver is so strong that I believe the serious consideration your agency is now giving our request will necessarily lead to a grant of the waiver. I trust that it will come soon enough that it can have an impact on our current gasoline price situation.

Sincerely,

Arnold Schwarzenegger

In response to rapidly increasing fuel prices, the Assembly Transportation Committee, in conjunction with the Assembly Select Committee on Gasoline Competition, Marketing and Pricing, recently held a series of hearings to determine the cause and impact of these price spikes and to explore possible solutions. Much of the testimony at these hearings focussed on supply constraints caused by California being a "fuel island" due to its relatively unique blends of gasoline and diesel fuel. While California fuels cost perhaps $0.04 to $0.06 more per gallon to produce than do fuels used in most other states, under adverse market conditions, the price at the pump in this state can be as much as $0.40 higher than elsewhere.

In a free-flowing market, shortages in one geographic area can be addressed by shifting supplies from other areas. In the case of gasoline and diesel fuel, California's aggressive measures to improve its air quality have resulted in what some have termed as "boutique" fuels that are not typically produced in or for other American markets. Consequently, fuel shortages tend to be exacerbated in California, with an attendant propensity for localized price spikes.

The author [Assemblywoman Oropeza] contends that having uniform national fuel standards would help create more fluid markets and mitigate regional shortages and price spikes. Using California's formulations as the national standards would have the added benefit of improving air quality across the nation.