Ethanol Plan Seeks Balance for California and Corn Belt

WASHINGTON — As Congress looks for ways to simplify a national patchwork of conflicting gasoline formulas, key interest groups are proposing a compromise that could reconcile the interests of California motorists and Corn Belt ethanol producers.

Under the deal they are advocating, Congress would pass legislation mandating the use of ethanol as a gasoline additive to improve air quality nationwide. But it would be up to the oil industry to decide where ethanol-enhanced fuel would be sold, and Congress would let governors use any kind of fuel so long as it meets anti-pollution standards.

The compromise would provide California the exemption it has been seeking from a Clean Air Act provision that could require refiners to add 580 million gallons a year of ethanol to gas sold in the state. State officials have warned that the requirement is likely to increase prices at the pump.

It also would serve the interests of influential farm-state lawmakers who successfully lobbied the Bush administration to reject California’s request for a waiver from the additive rule.

And it could derail a separate legislative proposal to reduce the number of gasoline formulas used across the country from more than a dozen to only three--a solution that would help ethanol producers but do little for California.

That measure, pushed by influential corn state lawmakers, including House Speaker J. Dennis Hastert (R-Ill.), could contribute to a future gas crisis in California and lead to greater balkanization of the national fuel market, critics say.

In a California-centric world, Congress would pass legislation allowing states to produce gas without using ethanol, so long as the fuel meets anti-pollution standards. Oil companies and environmentalists--they are unlikely allies in this dispute--contend they can make such fuel.

But in the real world of Washington politics, Californians have met their match in farm-state lawmakers, who have been highly successful in promoting the ethanol industry.

As a result, the state’s best hope now appears to be the compromise legislation, which is sponsored by Senate Majority Leader Tom Daschle (D-S.D.) and Richard G. Lugar (R-Ind.). Their measure would set a nationwide renewable fuel standard designed to triple the amount of ethanol used in the nation’s gas supply over the next decade, to 3.5%.

“There’s very strong support behind this bill,” said Jay Carson, a spokesman for Daschle.

Oil companies would be allowed to choose the regions where they would add ethanol to gas. Presumably, they would choose the Midwest over California, where it would cost more to transport.

Congressional aides working on the legislation are talking about including a credit-trading provision that would allow oil companies that exceed the standard to sell credits to companies that do not.

Northeast air pollution control officials and representatives of the Governors’ Ethanol Coalition endorsed such a possible compromise last year. A similar proposal cleared a Senate committee last year but never made it to the floor for consideration.

The Northeast is facing the same problem as California: It wants to find a substitute for methyl tertiary butyl ether, a gas additive that helps fuel burn cleaner but has polluted ground water. Gov. Gray Davis has ordered that MTBE be phased out in California by 2003. Ethanol is the only practical alternative to MTBE.

William L. Rukeyser, assistant secretary of the California Environmental Protection Agency, said the proposed compromise sounded “analogous to what FERC [the Federal Energy Regulatory Commission] did for us on electricity, which is a step in the right direction.”

Others expressed optimism that a compromise could be in the offing.

“Particularly now, given the high gas prices, the California waiver decision and the spotlight on energy policy generally, there is going to be a lot of pressure to give states the flexibility to get out of the [additive] requirement,” said a Senate Democratic leadership aide. “It’s very likely that a deal is going to get cut, and hopefully cut this year.”

Larry Pearce, a spokesman for the governors’ coalition, said the group is “very sympathetic to the problems confronting states with MTBE contamination and is willing to work with those states on a comprehensive national solution.”

Efforts to settle on a national standard for ethanol comes as the Bush administration and key Democrats and Republicans in Congress are moving to reduce the proliferation of “boutique” fuel formulas around the country. The variety of gasoline recipes, industry officials say, makes it difficult for oil companies to move gas from one location to another during supply shortages.

For example, St. Louis motorists can fill their gas tanks up in East St. Louis. But oil companies are barred from taking fuel made for East St. Louis and selling it on the other side of the Mississippi River, even if gas is in short supply in St. Louis.

The Bush administration’s recent decision to deny California’s request for an ethanol waiver could spur states to adopt even more specialized fuels, some experts say.

“Think of boutique fuels as deck chairs on the ethanol-mandate Titanic,” said Jason S. Grumet, executive director of Northeast States for Coordinated Air Use Management, an association of state air pollution control agencies. “The problem of boutique fuels is certain to get much worse unless EPA reconsiders its decision to deny states relief.”

A provision of the Clean Air Act requires a number of metropolitan areas, including much of California, to add MTBE or ethanol to their gas to reduce smog. Connecticut and New York have banned MTBE and are considering filing waiver requests similar to the one filed by California.

A number of other areas not subject to the Clean Air Act provision have voluntarily chosen to join the federal reformulated gas program. They are likely to drop out and develop their own fuel recipes if forced to use ethanol, Grumet contends. New Hampshire, for example, has petitioned the EPA to opt out of the federal reformulated program.

As one solution, Rep. Roy Blunt (R-Mo.) introduced legislation last week that would establish three fuel types nationwide: conventional gas (presumably the fuel of choice in regions without air pollution problems), reformulated gas (presumably containing ethanol) and California reformulated gas (a more expensive anti-pollution formulation unlikely to be used outside of California).

Grumet called the Blunt measure a “misery-loves-company bill” that would have the effect of expanding ethanol use throughout the country.

Rep. Henry A. Waxman (D-Los Angeles) agreed, saying the bill would be “good for ethanol special interests . . . but bad for clean air and consumers.”

Some in Congress worry that ethanol advocates, invigorated by their political victory in California, may be biting off more than their industry can chew.

Sen. Jeff Bingaman (D-N.M.), chairman of the Senate Energy Committee, asked Bush administration officials during a congressional hearing last week if there was a contingency plan in the event the industry was unable to produce enough ethanol to meet demand in California and elsewhere.

When no answer was forthcoming, he said, “I don’t hear any Plan B being discussed.”

The ethanol industry contends that it can satisfy prospective demand, adding that expanding its use will reduce U.S. dependence on foreign oil and reduce the need for farm subsidies.