Gas Prices at Stake in State’s Ethanol Feud

The Bush administration, already at odds with California over electricity costs, is at the center of a fierce lobbying battle over a federal regulation that could add several cents a gallon to gasoline prices in the state.

State officials have asked the administration to waive a clean-air regulation that would force refiners to add ethanol to much of the gasoline sold in California.

But the agriculture lobby and lawmakers from corn states are pressing Bush to reject the request, and congressional and industry officials say it appears they will prevail. A decision on the issue is imminent.

Besides the potential effect on California motorists, the issue is forcing the Bush team to choose between two important political constituencies: agriculture and oil.

Midwestern corn farmers and processors see California as a lucrative new market that will need up to 580 million gallons of ethanol a year to substitute for the gasoline additive MTBE, which the state plans to phase out by the end of 2002.

But oil companies say they can make gasoline that satisfies clean-fuel standards without a federally mandated recipe. And California officials say the state’s standards for smoggy areas such as Los Angeles are more stringent than Washington’s.

Gas prices could rise 1 to 3 cents a gallon if refiners are forced to add ethanol to gasoline, according to state officials. The increase could be even greater if shortages of ethanol develop.

“You’re going to end up having supply shortages,” said Mike Kenny, executive officer of the California Air Resources Board. “You’ll have a commodity that is in high demand and in low supply, and that could send prices to extreme levels.”

Officials in California Gov. Gray Davis’ administration see a parallel with the electricity crisis.

Ethanol is a tradable commodity “just like electrons,” said William L. Rukeyser, assistant secretary of the California Environmental Protection Agency. “We have all seen what can happen if speculators affect the market for a necessary item.”

With the administration expected to decide the issue soon, both sides have launched vigorous lobbying campaigns.

J. Jon Doggett, senior director of government relations for the American Farm Bureau Federation, likes to show administration officials a map depicting farm states in red that Bush won in the presidential election. California, like other states that voted Democratic, is blue.

“You slide that across the desk,” Doggett said, “and ask, ‘How are you going to explain to people who put you in office that [you’re going] to help this blue area?’ ”

Red Cavaney, president of the American Petroleum Institute, has a different map. It depicts a “Balkanized” gasoline market with more than a dozen types of fuel produced to satisfy clean-air rules across the country.

California’s congressional delegation has come together to support the waiver request, proving anew that no issue unifies the state’s politicians quite like energy prices.

“California needs your help,” Sen. Dianne Feinstein (D-Calif.) said in a letter she sent to Bush this week. “Failure to grant this waiver, I fear, could lead to even higher gasoline prices and possible gas shortages.”

Rep. Henry A. Waxman (D-Los Angeles) accused the White House on Thursday of preparing to overrule Environmental Protection Agency Administrator Christie Whitman on the issue.

“Mr. President, California is part of the United States,” Waxman said in a letter to Bush.

Waxman declared that denying the state’s request would create “a second energy crisis” in California. “Although science warrants granting of the waiver, and Whitman wishes to grant the waiver, the White House has directed EPA to deny the request.”

But White House spokeswoman Claire Buchan said the president had not yet made a decision.

The Oxygenated Fuels Assn., which represents MTBE manufacturers, has weighed in as well. In a letter to Bush last month, the group said that granting the waiver would bring a “great deal of uncertainty to the marketplace at a time when the state is experiencing energy shortages.” The group noted that most of its member companies are from Texas.

Under a 1990 amendment to the Clean Air Act, gasoline sold in the nation’s smoggiest regions must contain an “oxygenate” that causes it to burn more cleanly. The requirement applies to 70% of the gas sold in California.

Refiners have generally complied with the requirement by adding MTBE, but Davis has ordered them to stop using the additive by Dec. 31, 2002, because it has been blamed for ground water contamination in some parts of the state.

If the waiver is denied, the only practical alternative to MTBE is ethanol, according to state and oil industry officials. The ethanol industry disputes that there would be any price increase.

Chevron Corp. officials say they already make gasoline that meets federal clean-air rules but can’t sell it in certain areas because of the federal regulation.

“If there is indeed a move to deny the California petition for a waiver, we’d be disappointed,” said Fred Gorell, a spokesman for San Francisco-based Chevron. “Chevron has made more than 2 billion gallons of California reformulated gas that meets or exceeds all of the emission requirements of federal reformulated gas, and we’ve done that without the use of MTBE or ethanol. But we’re prohibited from selling that gasoline in much of the state because of this federal mandate.”

Corn growers worry that if California receives a waiver, other states may eventually follow. MTBE is now added to about a third of the gas sold in the United States. Ethanol is primarily used as a gas additive in Midwestern states.

Senate Minority Leader Tom Daschle of ethanol-producing South Dakota was a co-sponsor of the 1990 amendment establishing the oxygenate requirement. Daschle, a Democrat, has told Bush that granting California a waiver would devastate the ethanol industry and contradict a commitment made by Bush to increase ethanol use.

The Governors’ Ethanol Coalition, headed by Nebraska Gov. Mike Johanns, has urged the administration to look for a national solution to MTBE contamination rather than dealing with the issue on a state-by-state basis.

Bush said during the campaign that he supports federal subsidies for ethanol production. Critics contend the assistance costs taxpayers $770 million a year.

Archer Daniels Midland Co., a major ethanol producer based in Illinois, is a big campaign contributor, donating more than $645,000 to the Republican and Democratic parties over the last two years, plus $100,000 for the Bush inauguration.

But Bush has also received campaign contributions from oil interests who favor the waiver, and he has argued that Washington should give states greater flexibility.

The ethanol lobby has been energized by a government projection that farm income would increase as much as $1 billion a year if ethanol replaced MTBE nationwide.

“Wouldn’t you like to see people in rural America make more money on their own without taxpayer assistance?” asked David J. Uchic, a spokesman for the 32,000-member National Corn Growers Assn. in Washington.

Ultimately, the issue could be decided by Congress.

Bipartisan legislation has been introduced by farm-state lawmakers to establish a national renewable fuels standard and triple ethanol use in gas over the next decade.