- The Washington Times - Friday, July 14, 2000

An internal Energy Department memo reveals that the Clinton administration knew its own environmental regulations were a major reason gas prices jumped to record highs in the Midwest last month, even as officials publicly laid blame on "big oil" companies.

The June 5 memo, obtained by The Washington Times, was written for Energy Secretary Bill Richardson by the department's acting policy director, Melanie Kenderdine, just as a public outcry was rising over gas prices as high as $2.50 a gallon for the reformulated gasoline that the Environmental Protection Agency is requiring in the Chicago and Milwaukee areas this summer.

The memo came to light as oil prices surged again Thursday and federal energy experts repeated warnings that more gas-price spikes are possible this summer, particularly on the East and West coasts, because of tight supplies. Still, the Senate declined for a second time this year to temporarily ease the burden on consumers by suspending the 18.4-cent federal gasoline tax until fall.

The Energy Department memo echoes the conclusions of private analysts and even oil company representatives in stating that "high consumer demand and low inventories have caused higher prices for all gasoline types" at a time when crude-oil prices are hovering near record highs.

"The Milwaukee (and Chicago area) supply situation," the memo says, "is further affected by, among other things, an RFG formulation specific to the area that is more difficult to produce, lower gasoline inventories relative to the rest of the country, high regional demand, and limited transportation links."

Despite the ample reasons laid out in the memo for the price spike in the Midwest, where prices have since dropped back to the national average, President Clinton, Vice President Al Gore, Mr. Richardson and EPA Administrator Carol M. Browner all contended that the price spikes could not be explained and were suspicious.

By mid-June, three federal agencies had initiated investigations into collusion and price-fixing by oil companies. By the end of the month, the administration had enlisted the Federal Trade Commission in its investigative war against the industry.

Mrs. Browner told more than 30 members of Congress 10 days after the memo was written, at a June 15 meeting in House Speaker J. Dennis Hastert's office, that the EPA regulations were not behind the Midwest price increase. Despite the tight supply situation outlined in the memo, she asserted that it was "not a supply issue."

But the memo makes it clear that the EPA rules that went into effect June 1 were a central factor in the Midwest blowup, which was magnified by short supplies.

It states that refineries had been going full blast to produce the EPA-mandated reformulated gasoline, shippers and distributors were straining to deliver enough gas supplies to thirsty drivers, and disruptions of key pipelines had made the supply situation precarious.

The Chicago-area refineries do not have the capacity to ramp up production when shortages occur, the memo notes, and the specially formulated gasoline mixed with ethanol in the region could not be imported from other areas because few others make the unique blend of fuel.

While the memo concludes that supplies were sufficient to meet "overall demand" at the time, some independent gas stations might have a hard time getting supplies on the spot market, it said. And the market was "sufficiently tight that any disruption in the distribution system could contribute to Phase II RFG shortages" throughout the summer.

Drew Malcomb, spokesman for the Energy Department, said the memo was written to help Mrs. Browner decide whether to grant Chicago and Milwaukee waivers they had requested from the clean-fuel regulations. She turned the cities down repeatedly before and after the June 1 deadline.

Mr. Malcomb said the memo focuses on "supply and demand" rather than "prices," though at one point it states that the new regulations had raised the cost of reformulated gasoline by 3 cents to 7 cents over conventional gasoline and added that "cost … is not necessarily an indication of price."

Mr. Hastert, Illinois Republican, cited the memo Thursday in accusing Mrs. Browner of misleading members of Congress, the media and the public. He demanded immediate action to ease the regulatory pressures on the region.

"It is clear from the June 5th memo that the DOE, whose primary responsibility is oversight of our nation's energy supply, believed that a lack of gasoline inventories in the Midwest, as well as EPA regulations, were not only 'factors' which led to higher gasoline prices, but in fact the primary causes," he said in a letter to the EPA administrator.

"Nowhere does this document indicate, or imply, that price gouging was a factor; nor has any other federal study or investigation," the speaker said. "Yet, you continued to point the finger" in what appears to be a "coordinated strategy" with the White House to deflect blame, he said.

On the other side of Capitol Hill Thursday, the Senate handily defeated an attempt to roll back the federal gasoline tax for 150 days during the peak summer driving season. Sen. Spencer Abraham, Michigan Republican, offered the measure as an amendment to a bill cutting estate taxes.

The 59-40 rejection drives "a stake through the heart of consumers," he said.

But opponents including many Republicans on the budget and appropriations committees said the tax cut would undermine the highway spending program, which is financed with the gas-tax revenues, and throw as many as 50,000 highway construction workers out of jobs.

"This tax is more acceptable to the public than any other tax," said Sen. John W. Warner, Virginia Republican. "They see their dollar go directly from the gas pump to the project and employment in the state."