Ethanol fans hope plant sets off boom

By Dale Kasler, The Sacramento Bee , April 2, 2005

From left, plant manager Lanny Simpson, boiler supplier Nate Moehlman and project leader Rick Eastman discuss the progress on the plant's construction.
GOSHEN -- At a dusty animal-feed plant in the heart of the San Joaquin Valley, Rick Eastman and Kevin Kruse are nearing completion of a dream: a large-scale factory, the state's first, that will convert boxcars full of Nebraska corn into the gasoline additive ethanol.

"Every fuel tank needs some," Kruse said with a smile.

After years of struggle, ethanol advocates in California believe their time has come. Ushered in by a controversial U.S. government environmental mandate, ethanol use in California has mushroomed. The additive is now being blended into the gas sold in 95 percent of the state, says the California Energy Commission.

Backers say the $20 million Goshen plant, two months from completion, could be the opening shot in an ethanol-production boom that will bring investment, employment and economic development to rural California. Developers are close to obtaining financing for big plants in Madera and Pixley, and more could follow.

"Ethanol itself has become a mainstream fuel in California," said former California Secretary of State Bill Jones, an investor in the Madera plant. "It clears the air; it provides jobs when plants are built."

California officials, however, have mixed feelings about ethanol.

They like the idea of a new California industry and acknowledge how prevalent ethanol has become. But though its backers tout ethanol as a cheap and clean fuel additive, state officials say it sometimes can make gas more expensive -- and not always cleaner.

With gas prices in California averaging $2.37 a gallon and climbing, state officials are pressing the federal government to waive the mandate that requires use of ethanol in most California cars.

"We don't think it's needed," said spokesman Jerry Martin of the California Air Resources Board, the state agency that regulates fuel recipes.

Dale Dimer, left, and Travis Arnett complete some welding work for the ethanol plant being built in Goshen.
Without the federal mandate, "the bulk of refiners would sharply curtail their use of ethanol," he said.

Ethanol advocates say a sharp cutback is unlikely. In fact, they think ethanol usage will grow. But the state's stance adds to an air of uncertainty that hovers over the fledgling industry.

"It's a question that comes up in every investor meeting," said Jones' business partner, Neil Koehler.

Indeed, some say California could lose the ethanol race to the Midwest, where plants are springing up so rapidly, analysts warn a glut may be coming.

"I'd like to see California get behind this a little more," Kruse said. "The Midwest is building like they're going out of style. California's going to miss its opportunity."

Still, ethanol backers say their pro-duct is gaining acceptance in California with refiners and policy-makers alike. That's giving investors greater comfort, they say.

"The fundamentals of the marketplace require ethanol in California," said Russ Miller, developer of the $80 million plant in Pixley.

Miller and other advocates say it's a no-brainer: The state will use up to 1 billion gallons of ethanol this year, more than one-fourth of U.S. supplies, but produces only 10 million gallons, at tiny plants in Corona and Rancho Cucamonga.

Meanwhile, California's petroleum refineries can't keep up with gas demand, and ethanol will help them stretch supplies, advocates say. They're lobbying state regulators to nearly double the amount of ethanol permitted in a gallon of gas, to 10 percent -- a move they say would reduce pollution and prices.

The plants in Goshen, Pixley and Madera would be fueled by corn. Ethanol from rice straw and other "biomass" materials, seen by farmers as a gold mine, is another matter. Plants have been proposed, but experts say the technology is still five years away from being commercially viable.

Ethanol has long been controversial, due partly to a tax subsidy pushed through Congress by Midwestern agribusiness lobbyists. But investors are warming up to it. Last week, ethanol futures started trading on the Chicago Board of Trade, and Jones and Koehler's company, a publicly traded firm called Pacific Ethanol Inc., obtained $21 million in a private stock sale to help finance the Madera plant.

California's ethanol odyssey began when Congress amended the Clean Air Act in 1990. It said gas sold in highly polluted areas, including nearly 80 percent of California, must include an additive from the family of chemicals known as oxygenates.

Initially scorned by state

The fermenting towers go up at the plant.
California chose MTBE. But in 1999 then-Gov. Davis banned MTBE because it was contaminating groundwater.

That left ethanol. The state scorned it, saying shortages would mean big gas price hikes. It also said chemical properties of ethanol actually made it erode air quality in certain circumstances, especially in summer.

Davis delayed the MTBE ban a year, to December 2003, while asking the U.S. government to waive the oxygenate mandate.

Gov. Schwarzenegger has lobbied, too. His letter last spring to the U.S. Environmental Protection Agency said the mandate "prevents or interferes with the attainment of the national ambient air quality standards for particulate matter and ozone."

Refiners say they don't mind using ethanol, but the mandate puts them in a straitjacket that sometimes makes blending gasoline more difficult -- and more expensive. David Hackett, a petroleum consultant, said the mandate increases gas prices up to 10 cents a gallon.

But ethanol advocates think resistance is softening, in part because ethanol is about 30 cents a gallon cheaper than gasoline. Refiners are even using ethanol in parts of California where it isn't required, said Pat Perez, manager of transportation fuels at the Energy Commission. The commission says, assuming the mandate stays in place, ethanol use could jump 25 percent by 2012.

And despite its request for the waiver, the Schwarzenegger administration has good things to say about ethanol. California views ethanol "as a very important component" and is "trying to create an ethanol industry," state EPA Secretary Alan Lloyd said at a recent press event.

Eastman, who's leading the Goshen project, has been nibbling around the edges of the ethanol business since he was farming in Winters in the 1970s. The 54-year-old once developed a small plant that could make ethanol from fermented watermelon juice. He made enough fuel to run a tractor, but "the economics of that one didn't work out," he said.

Later, he formed a company called Phoenix Bio Industries, and hooked up with Kruse, president of a Goshen feed-grain manufacturer, Western Milling, which serves the dairy industry.

A lot is riding on the ethanol plant. The two men raised about $10 million from "friends and family," Kruse said, and borrowed another $10 million. Kruse and Eastman invested more than $1 million each, they said.

"This is a passionate personal endeavor," Eastman said. "We're excited -- we're excited about the future of ethanol."