speech

Customers -- The Forgotten Element In America's Fuels Policy

By David J. O'Reilly, President
Chevron U.S.A. Products Company

World Conference on Reformulated Fuels and Refinery Processing

Westin St. Francis Hotel, San Francisco, California

Every day, more than one-and-a-half million motorists pull into Chevron stations around the country to buy gasoline. And what they expect from us is value.

This means: convenience, prompt service, cleanliness and security, quality they can trust, a fair price and product performance.

All together, these things add up to something called "brand equity," something people in any retail business value very highly because it's an indication of something else we also value very highly -- customer confidence.

But today, I'm sorry to report that this confidence is being undermined. Some of this is due to the events which have followed the introduction of federal reformulated gasoline. And I'll come back to that. But most of the problem can be traced to recent history and the mix of laws, regulatory trends and political processes that created our present vehicle fuels policy.

The adoption of the Clean Air Act 25 years ago and the additions during the 1970s started us down the road of controlling the "obvious" causes of air pollution, such as smokestacks and other stationary sources. Generally speaking, these steps were cost-effective, yet mostly invisible to the public. These clean-ups were something that factories and power plants had to pay for -- not the average citizen.

The 1970s also began the "era" of environmental improvements in the automobile, such as catalytic converters. These showed up in the sticker price of cars -- but people adjusted fairly quickly. When we took the lead out of gasoline and made investments to reduce vapor pressure and more investments to recover vapors at the pump, again, people accepted these changes without any serious protest.

One big reason is that oil prices during the last 10 years have been both low and flat so gasoline is cheap by historic standards. Today's gasoline price easily carries the hidden burdens of environmental regulations and higher taxes at the pump.

However, the Clean Air Act Amendments of 1990 set standards which require much tougher and tighter controls on cars, on fuels and on driving habits. And there's been a lag-time -- the true impact of those changes didn't start showing up until five years later. And today, air quality regulations are both more expensive and more intrusive. And now people are really starting to notice.

The two obvious examples for us right now are the federal RFG program and the push for tougher inspection and maintenance. Both are meeting with a considerable amount of consumer suspicion, as well as sparking public resistance, anger and confusion. We should not be surprised by this.

Let's look at what happened with federal reformulated gasoline.

Consumers and government officials in a dozen states started complaining about the new fuel: New York, New Jersey, Pennsylvania, Maine, Virginia, Kentucky, Indiana, Connecticut and Ohio. Many are still complaining. We had the opt-outs, and that re-ignited the debate on opt-ins and opt-outs. And of course, we have the recent situation in Wisconsin. Two out of three Milwaukee residents don't like federal RFG and think it costs too much, according to a recent API poll. People are driving across county lines to avoid buying RFG. Service stations are losing business because they're forced to offer a product that customers don't want. Dealers are putting up signs to make sure motorists know they're not selling RFG. Others put up signs saying their gasoline contains a particular oxygenate, adding confusion to confusion. People don't like the fact that they have to use federal RFG when their neighbors don't. They want to know whether they really need this particular "special" gasoline to improve air quality. Part of their problem is price. Part is lower mileage. Part is concern about engine performance. Part is a health concern.

Some say this will all blow over. After all, plenty of areas are not getting a negative reaction to federal RFG. But I think the truth is we've got a customer-acceptance problem.

The federal RFG program today has a black eye. Instead of being perceived as a friend to the public, it's now a suspicious character and one more reason for Americans to mistrust their institutions.

And all of us -- Congress, the EPA, the environmental lobby, the oxygenate lobby and the oil industry -- must share responsibility for this state of affairs.

So why has all this happened?

I think it's time we all faced up to something. In creating America's fuels policy, we forgot about the driving public. And that means we forgot about the customers. Or to be more honest about it, we left them out. They had no seat at the table.

Our fuels policy should be a carefully crafted and well thought-out road map of improvements which we can all be proud of.

Instead, despite some good intentions, our policy is a tangle of compromises, special-interest agendas and misguided philosophies.

We've all been in on it: politicians, regulators, the oil industry, the auto industry, the environmental groups and the oxygenate lobby. We've all been preoccupied with our own particular interests. And the result is an arrogant fuels policy which simply proclaims what the customer will have, under what circumstances and at what cost. And if you think people are angry at us now, look at what we've got coming up: the CARB Phase II reformulated gasoline program, Phase II of the federal RFG program, a lot of programs requiring the purchase of alternative-fuel vehicles, the ULEV mandates and the ZEV mandate, which, as we all know, is essentially an electric car mandate, and so on.

I know some of you might argue that the real "customer" of our fuels policy is the "breathing public," not the driving public. But the two are the same for the most part. And I think it's pretty clear from recent events, no fuels policy can go forward without buy-in from the driving public.

Now, I don't think any of us here today are strangers to the "Quality" movement. Call it "QI" or "TQM" or "CQM," a lot of it boils down to one fundamental philosophy: customer focus.

All of us in industry have to understand customer focus. Without it, we'd go out of business. And maybe that's a standard that our environmental laws and regulations should be held to also. Or to look at it in a more positive way, when we emphasize customer focus, we deliver products that succeed, products that work, products that provide both results and value.

So, what can we do about our fuels policies? There is a way out of this situation if we have the courage to face up to it. We should refocus on our customers and take a hard, fresh look at our fuels policies at both the federal and state levels. And we should keep the parts that really provide value and get rid of the parts that don't.

What do I mean by "value"? It's very simple: A customer-focused fuels policy is one that delivers the most benefit for the least cost. People want cleaner air, but they also want a reasonable return on their environmental investments. And those investments are now starting to hit them in the pocketbook.

So let's look at what we're doing right:

Reformulated Gasoline

In concept this is a highly customer-focused product. When it's done right, RFG can out perform all the alternative fuels and vehicles by combining the benefits of superior performance, reasonable price, convenience and significant, cost-effective reductions in emissions. And it's very positive to see the regulatory sector supporting the essential role of reformulated gasoline in the areas that need the most help meeting air quality requirements.

Gasoline is the real "fuel of the future." So we're on the right track.

Low-RVP Gasoline

It's very simple. This reformulation method controls hydrocarbon emissions, which reduces ozone.

Chevron has encouraged cities to choose low-RVP gasoline instead of opting in to the federal RFG program. Low RVP is easy for the public to understand -- it hasn't made anybody complain, it adds very little cost at the pump, it doesn't hurt fuel economy and it's effective against ozone.

And for most areas with air quality concerns, it should be among the primary first choices over federal RFG.

Appropriate Use of Oxygenates

We know that these additives can play a very positive role in reformulated gasolines. They have proven themselves as octane enhancers. And they continue to be a valid remedy in areas with winter carbon monoxide problems.

Inspection and Maintenance (I&M)

We've all seen the numbers: A tenth of the cars produce over half of all the vehicle emissions.

This is very valuable information. It tells us where to focus a large part of our effort. With improved I&M, we have a great deal to gain in avoiding costs for other, more costly treatments for smog. And it targets the small percentage of drivers who set up the rest of us to spend more on air pollution programs.

In that sense, I&M can be viewed as customer focused, even though most people don't like smog inspections or repairs. Lately we've seen an outright revolt by motorists and state governments against more aggressive I&M programs: Maine, Texas and Virginia, to name but a few.

One major newspaper characterized the driving public as a bunch of whiners who should quit complaining and just get in line at the inspection centers. But I'd rather see us finding ways to make I&M easier for the public. That's the customer-focused path. I know that remote-sensing hasn't yet been perfected. But I sure like the idea of catching the polluters as they drive past -- especially if it means fewer smog checks for the rest of us.

Now let's look at what we're doing wrong.

Oxygenates

I'll tell you straight out: I've got a big problem with the federal RFG formula. Because oxygenates are making a lot of customers angry. And even worse, they're making people suspicious of reformulated gasoline in general. Gasoline, my most important product, is suffering a bad case of guilt by association. And at least one oxygenate -- MTBE -- is now a significant public health issue despite plenty of evidence that it's safe.

In some areas, MTBE could be banned based on public fear alone.

Now, I know that some people think ethanol is the solution. But the customer for America's fuels policy is the driving public, not the corn farmers and ethanol producers.

I know many of you are aware that Chevron uses ethanol in several locations as a winter oxygenate. The fact is, we market gasoline in areas where inexpensive ethanol is used by our competitors -- so we have no choice but to use it also. But we don't believe in the policies that hold the price of ethanol way below what it should be.

If ethanol is going to make a contribution as a fuel or an additive, it should do so on a competitive basis. So we should phase out the ethanol subsidies. Just as important, we should not mandate the use of ethanol -- or any other oxygenate -- based on flimsy claims of environmental benefit or energy security.

Year-Round Oxy Rule

I'm sure we could argue all day about which oxygenate is best. But the real issue is that oxygenates, in general, contribute almost nothing to the primary goal of the federal RFG program. That goal is reducing summertime ozone.

Some people justify federal RFG's year-round requirement for high oxygen content as a way to reduce tailpipe carbon monoxide (CO). Again, that's a proven strategy for winter. This is why the EPA has a winter oxy program. But year-round oxygenates do virtually nothing about summer ozone because CO isn't an ozone precursor.

Even more important, CO is not a problem in summer. Very few if any cities have unhealthful summer CO levels. So the plain fact is, year-round oxygenate -- in a fuel meant to control summer ozone -- is something of a scientific absurdity.

Now I want to take a moment here to respond to the rather desperate claim that oxygenates -- because they "dilute" gasoline -- are a good way to reduce toxics.

Refiners have to meet toxics requirements -- with or without oxygen. And we know oxygenates are not the only way to meet this part of the federal RFG rule. But the specific percentages locked into the year-round oxy mandate basically prevent refineries from finding a better and cheaper solution. And I think we all recognize that solution just might be no oxygenates at all. Unfortunately, some highly creative promotional efforts have convinced the public and a lot of government officials that oxygenate is the primary reason reformulated gasoline is cleaner.

I hope we can correct that misunderstanding because the real legacy of the year-round oxygenate rule is something else: wasted investments in oxy infrastructure, unproductive added costs at the pump, reduced fuel economy, reputation problems for all reformulated gasolines and dissatisfied customers.

As for those Americans who aren't complaining about federal RFG, we should feel even worse to think these customers trust that federal RFG is the best formula we can give them. They apparently don't realize they're paying for something which, for most of the year, contributes nothing to meeting clean air standards.

I don't know how any of us could be proud of that.

Alternative Fuels and Vehicles

I could go on all morning about this. But let me just make the point that from the environmental standpoint, what's really important about alternative vehicles is that they are not significantly cleaner than the newest and cleanest conventional cars. Their biggest claim to legitimacy is that they can somehow satisfy the public's demand for cleaner air. But even on a one-to-one basis, they really can't do that much better than a new car burning a properly reformulated gasoline.

Now, as I've said, most of the pollution controls in place until today have been virtually invisible to average consumers. But alternative-fueled vehicles are a whole different ball game.

The laws and regulations requiring them are sometimes referred to as "forcing technology." Honestly, I can't imagine a less customer-focused concept.

We're talking about products -- particularly electric cars -- that cost more and deliver less to the driving public.

This ignores one of the fundamentals of customer focus. It's something called value. Consumers and businesses understand value. Our fuels policies should respect this.

Instead, they're trying to sneak these new technologies onto the market by requiring both government and private fleet operators to buy alternative vehicles, by trying to hide subsidies in utility bills, by offering tax breaks, and by making Detroit build the excessive costs of electric vehicles into the sticker prices of new conventional cars.

Our fuels policy should not be trying to force technology. When the alternatives are ready, people will want them because they'll be the ones that are good enough to beat gasoline at its own game in a free-market test. Now let me turn to the issue of cost-benefit because this is at the core of what we need to emphasize to get our fuels policies back on track.

We're all aware that legislation is moving through Congress to emphasize both cost-benefit analysis and risk analysis in all regulations. And I applaud that. We need that. But regulators don't write laws -- and no regulator can make the wrong law work right.

So what we need is for the members of Congress to respect cost-benefit standards when they write the laws.

Now, I know a lot of people see cost-benefit as the "beginning of the end" for environmental protection. But "cost" isn't the only consideration. "Value" for today's consumer incorporates environmental benefits along with the basic market elements. Americans have made this clear in the voting booths and the opinion polls. And they say it every day in demanding high environmental and safety standards from both the products they buy and the companies who make them.

So we should feel confident that cost-effective and customer-focused fuels policies will give the driving public the most environmental benefit for the lowest cost.

I read an article the other day about a guy who asked how the EPA could push so hard all those years to make fuel economy go up and then turn around and require a new gasoline which makes it go down. He probably doesn't know that Congress -- not the EPA -- set the fuel economy standards and the year-round oxy mandate.

As we've seen with federal RFG, a lot can go wrong when Congress writes prescriptions rather than setting environmental performance goals. This brings us to the Clean Air Act. Now, I know a lot of people think that if we "reopen" the Act, we'll end up with an even more difficult law. Others worry that the new Congress will "gut" the Act. But I don't think we should be afraid to improve the established laws. And the time to start is right now.

Now let me talk briefly about CARB Phase II gasoline.

Chevron is committed to working with the state to make this fuel a success technically, commercially and environmentally. It's a severe reformulation to address severe air quality problems of special concern to our California customers. But by all accounts, this gasoline will be more costly than the federal formula.

Now, I have to say, California has done a pretty good job developing its Phase II gasoline formula. And we'll be working closely with the state to get this new product out to customers as planned.

So what we don't need -- especially now -- is the added cost of the over-lapping oxygenate requirement in federal RFG. Year-round oxy is an intrusion into the clean-gasoline process in our state. And this is one more reason why I believe we should have the courage to repair the Clean Air Act.

You know, the problems with federal RFG have set off a lot of quick-fix ideas, like labeling pumps, banning MTBE and ordering everyone to use ethanol. But this kind of knee-jerk solution is the last thing we need for our fuels policy.

So let me repeat: We should refocus on our customers, and take a hard, fresh look at our fuels policies at both the federal and state levels. And we should keep the parts that really provide value and get rid of the parts that don't.

That means emphasizing reformulated gasolines and taking advantage of the best options, such as low RVP. It means correcting the invalid emphasis on oxygenates. It means phasing-out the ethanol subsidies and saying NO to an ethanol mandate. It means finding the best ways to harvest the clean air benefits that we know inspection and maintenance can deliver.

And it means that we stop trying to "force" alternative vehicles onto the market before they're ready.

We need to make sure our fuel policies are clearly based in good science and cost-benefit standards. Let's learn from our recent problems with customer acceptance.

This time, let's take a page from the Quality textbooks to guide us. And whether we're regulators, gasoline suppliers, automakers or oxygenate makers, let's keep all the needs and expectations of the driving public -- our customers -- uppermost in our minds.

Updated: March 1995