BILL ANALYSIS 1
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SENATE ENERGY, UTILITIES AND COMMUNICATIONS COMMITTEE
DEBRA BOWEN, CHAIRWOMAN
SB 87XX - Costa Hearing
Date: August 29, 2001 S
As Amended: August 21, 2001 FISCAL B
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DESCRIPTION
Existing law requires the California Energy Commission (CEC) to
establish a grant program to provide a $0.40/gallon production
incentive for liquid fuels, including ethanol, fermented in this
state from biomass and biomass-derived resources produced in
this state. To be eligible, applicants must show that the
production techniques employed will lead to a net increase in
the amount of energy available for consumption. This program
has been in statute for 13 years, but has never been funded.
This bill would establish the Ethanol Production Incentive
Program (EPIP) to provide an incentive for in-state ethanol
production as follows:
1.Ethanol produced from starch feedstocks (e.g. corn, sorghum)
is eligible for up to $0.20/gallon.
2.Ethanol produced from cellulose feedstocks (e.g. rice straw,
forest waste) is eligible for up to $0.40/gallon.
3.At least 50 percent of the feedstock must originate in
California.
4.Production facilities must be new or "enhanced" and located in
California.
5.Production incentives are to be awarded to lowest bidders in a
competitive solicitation conducted by the CEC.
6.Producers may not receive incentive for more than eight years
or after 2010.
7.Only ethanol used as a gasoline additive, and not as fuel
itself, is eligible.
This bill creates the continuously appropriated Ethanol
Production Incentive Account and appropriates $25 million from
the General Fund to fund EPIP grants.
BACKGROUND
The Clean Air Act Amendments of 1990 require the use of
reformulated gasoline in California and require reformulated
gasoline to contain two percent by weight oxygen, which can only
be achieved through the use of an "oxygenate" additive, such as
methyl tertiary butyl ether (MTBE) or ethanol. About 1/17 of a
gallon of ethanol is necessary to achieve the required oxygen
content in gasoline. In March 1999, Governor Davis issued
Executive Order D-5-99, finding that MTBE use in reformulated
gasoline posed a significant risk to the environment and
requiring MTBE to be phased-out completely by January 1, 2003.
The projected increase in demand for ethanol in California is a
result of the Clean Air Act's oxygenate requirement, coupled
with the phase-out of MTBE. For several years, California has
persistently sought a waiver from the federal oxygenate
requirement. California representatives have introduced
legislation in Congress to exempt the state from the requirement
if it achieves equivalent emission reductions without the use of
an oxygenate. The state has also requested an administrative
waiver from the U.S. Environmental Protection Agency. Neither
effort has succeeded. California's waiver request was most
recently rejected in May by the U.S. EPA, which said it lacked
the authority to grant an exemption from the Clean Air Act's
oxygenate requirement. Unless the state succeeds in amending
the Clean Air Act, or prevails in a lawsuit against the federal
government, a waiver is unlikely.
Barring a waiver or the emergence of an acceptable alternative
method to oxygenate reformulated gasoline, California will need
approximately 600 million gallons of ethanol a year beginning in
2003 to completely replace MTBE. In 2000, total domestic
ethanol production was 1.63 billion gallons. California's share
of annual ethanol production amounts to between six and nine
million gallons, which is produced from food waste.
Brazil relies on ethanol as a primary transportation fuel and
has an annual production capacity of five billion gallons. In
the past, California and other states have imported ethanol from
Brazil. However, imported ethanol now faces a high tariff,
placing it at a significant economic disadvantage to subsidized
domestic ethanol.
Meeting California's needs would require securing 37 percent of
existing production, increasing domestic production by 37
percent, increasing imports, or some combination.
Under federal law, ethanol is eligible for an excise tax
exemption or production credit equivalent to $0.54/gallon. In
addition, small ethanol producers are eligible for a production
credit of $0.10/gallon.
Many ethanol-producing states provide additional production
credits or state fuel tax exemptions for ethanol, or mandate its
addition to gasoline or use in state fleets. The ethanol
incentives in these states typically range from $0.10 to
$0.20/gallon. Many of the incentives require or depend on the
fuel being consumed in-state, so ethanol exported to California
from these states may not qualify for any home state incentive.
COMMENTS
1.Subsidy should go where it's needed. This bill directs the
CEC to award production incentives according to an auction
process, much as the CEC has done in awarding incentives for
renewable electricity projects. This approach results in the
lowest bidders getting first priority for production
incentives.
Because starch-based ethanol is more established and has lower
production costs than cellulose-based ethanol, it can be
predicted that producers of starch-based ethanol will need a
smaller payment to match the market price. As such, they will
likely be able to consistently underbid producers of
cellulose-based ethanol.
While the bill directs the CEC to adopt a higher incentive for
cellulose producers, the auction process may effectively steer
the bulk of the funds toward starch producers, which are
offering a lesser public benefit in terms of waste reduction
and are less in need of a subsidy to compete with out of state
counterparts. The author and the committee may wish to
consider whether the CEC should be required to dedicate a
portion of the incentives to cellulose producers.
The author and the committee may also wish to consider
limiting payments for ethanol to no more than what is
necessary to make up difference between actual production cost
and prevailing market price, as well as whether the CEC should
be given the discretion to award loans, in lieu of grants,
according to its determination of which mechanism will produce
and sustain the greatest public benefit.
2.Should ethanol produced from out-of-state feedstocks be
subsidized? This bill would qualify ethanol produced with as
much as 50 percent out-of-state feedstock for the production
incentive. To the extent this bill is intended to simply
boost ethanol production regardless of its source, subsidizing
out-of-state feedstock may be appropriate. However, if this
bill is intended to also provide the waste reduction, air
quality and economic benefits associated with in-state
production of ethanol from biomass, subsidizing out-of-state
feedstock may not be appropriate. The author and the
committee may wish to consider whether ethanol produced with
as much as 50 percent out-of-state feedstock should be
eligible.
3.Should ethanol only qualify if it's used as a gasoline
additive? Several references in this bill suggest that only
ethanol produced for use as an additive is eligible for
production incentives and that ethanol used as a primary fuel
isn't eligible. If it is appropriate to subsidize ethanol
production, it is unclear why payments should be limited to
ethanol used as an additive. The effect of this would seem to
be to discourage the use of E85 (85 percent ethanol fuel) in
"flexible fuel" fleet vehicles, as well as to discourage
ethanol in fuel cell applications. The author and the
committee may wish to consider whether the limitation of
eligibility to additives should be removed from this bill.
4.Is an efficiency test still necessary? Since the inception of
modern ethanol production in the 1970's, there have been
questions about the "energy balance" of ethanol production,
that is whether the production process consumed more energy
than the end product contained. For this reason, when the
original ethanol production incentive was enacted in 1988, it
included a requirement that the CEC find that the production
would lead to a net increase in the amount of energy available
for consumption. Recent analyses of modern agricultural and
production techniques suggest that ethanol's energy output
exceeds energy input by 30-40 percent.
5.Are process exemptions warranted? This bill exempts the CEC's
adoption of guidelines governing the EPIP from the
Administrative Procedures Act (APA) and exempts production
incentives from certain provisions governing repayment of
grant funds when the co-funded work has become financially
rewarding for the recipient.
According to the CEC, the APA exemption is necessary to get
the program up and running as soon as possible and to retain
the ability to make adjustments in the programs as market
conditions dictate. The CEC suggests that its observation of
public process procedures alleviates the need for strict
adherence to the APA. The rationale for the exemption from
repayment provisions is unclear.
POSITIONS
Sponsor:
Author
Support:
Boreal Footprint Project
California Grain and Feed Association
California Poultry Federation
Kinergy Resources
Regional Council of Rural Counties
Sierra Grain Terminal, LLC
Oppose:
None on file
Lawrence Lingbloom
SB 87XX Analysis
Hearing Date: August 29, 2001