U.S. Ethanol Industry Dealt Blow by Court : Gasoline: Ruling says federal government cannot mandate that the additive be used to help make fuel burn cleaner.

A federal appeals court in Washington ruled Friday that the U.S. Environmental Protection Agency cannot force oil companies to use an ethanol additive in their cleaner-burning gasoline, a decision that could cost the nation’s corn industry a potential bonanza of more than $900 million a year.

In a policy criticized by an unusual alliance of environmentalists and the petroleum industry, the EPA had required that part of its new reformulated gasoline--which since January has been required for use by almost a third of the nation’s drivers--contain a substance derived from a renewable energy source. Considering the available technology, this meant corn-based ethanol.

The American Petroleum Institute, the umbrella U.S. oil-industry trade group, went to court to thwart that requirement. API, whose members make a similar methanol-based additive, contended that the EPA had exceeded its authority by requiring use of a specific product to meet its clean-air standards.

Last September, the U.S. Circuit Court of Appeals in Washington issued a stay of the mandate pending its ruling Friday.

Environmentalists generally oppose the rule because they and the oil companies see no real environmental advantage to corn-based fuel, once the total energy requirements--from diesel for tractors to the ethanol manufacturing process--are factored in.

“The agency’s position was a stretch,” said David G. Hawkins, a senior attorney with the Natural Resources Defense Council, an environmental group that opposed the EPA’s rule. “The agency isn’t authorized to apply additional conditions in order to try to pursue other goals in addition to air-pollution goals.”

The EPA had justified its mandate as a way to encourage domestic renewable energy sources and to lessen the country’s dependence on foreign oil. The rule required that 30% of the gasoline additives--called oxygenates--be based on renewable sources. These oxygenates comprise roughly 2% by weight of the federal cleaner-burning gasoline.

Ethanol is now used as about 5% of the oxygenate in gasoline, mostly in Milwaukee and Chicago, according to the Renewable Fuels Assn. And the court ruling does not preclude wider use of ethanol if oil companies want to use it. If the EPA rule had gone into effect, it would have generated an estimated $920 million a year in added revenues for the nation’s farmers and ethanol producers, according to the American Farm Bureau Federation.

In fact, critics widely viewed the mandate as a political decision by President Clinton to make good on an election-year pledge to corn farmers, as well as a boon to Archer Daniels Midland Co., the giant agribusiness concern in Decatur, Ill., that manufactures 70% of the country’s ethanol.

ADM Chairman Dwayne O. Andreas is a big political donor who has given to both major parties over the years. A spokeswoman for Archer Daniels Midland Co. said Friday that the company “will not be commenting on the matter.”

EPA Administrator Carol M. Browner said Friday that she was “disappointed with the ruling,” and that the agency would consult with the Justice Department on whether to appeal the decision to the U.S. Supreme Court.

The farm bureau on Friday said that it expected farming interests to press for legislation in Congress to restore the mandate if the EPA doesn’t appeal.

Agriculture Secretary Dan Glickman also pledged Friday that the Clinton Administration would continue to support a role in the nation’s energy picture for ethanol.

At the same time, Mary Nichols, EPA assistant administrator for air and radiation, indicated that the agency might oppose any attempt to amend the Clean Air Act.

“We haven’t looked at the possibilities of any legislative attempts to fix the decision,” Nichols said. “But in general, we have had a policy of not favoring any amendments to the Clean Air Act. . . . Our intent (with the rule) was to further a commitment that had been a policy of this and previous administrations to support renewable fuels.”