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July 5, 2007

The Honorable Vernon A. Williams

Secretary

Surface Transportation Board

395 E Street, S.W.

Washington, DC 20423-0001

Re: STB Ex Parte No. 672,

Rail Transportation of Resources Critical to the Nation's Energy Supply

Dear Secretary Williams:

> Pursuant to the order of the Board served on June 6, 2007, attached
> are the comments of Ethanex Energy,

Inc. for filing in the above proceeding.

Respectfully Submitted,

**[RANDALL RAHM]{.underline}**

Randall Rahm,

Chief Operating Officer

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**BEFORE THE**

**SURFACE TRANSPORTATION BOARD**

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**STB EX PARTE NO. 672**

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**RAIL TRANSPORTATION OF RESOURCES**

**CRITICAL TO THE NATION'S ENERGY SUPPLY**

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**WRITTEN COMMENTS**

**OF**

**RANDALL RAHM, CHIEF OPERATING OFFICER**

**ETHANEX ENERGY, INC**

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BEFORE THE

SURFACE TRANSPORTATION BOARD

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STB EX PARTE NO. 672

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RAIL TRANSPORTATION OF RESOURCES

CRITICAL TO THE NATION'S ENERGY SUPPLY

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My name is Randall Rahm and I am the Chief Operating Officer of Ethanex
Energy, Inc. Ethanex commends the Board for this Ex Parte proceeding and
is pleased to submit comments in response to the request for views
regarding the rail transportation of resources critical to the nation's
energy supply.

Ethanex is an ethanol producer that is bringing cutting edge technology
to ethanol production while maximizing the use of each sub-product of
the production process. As such our plants are hyper-efficient,
producing more from less. For example, Ethanex Energy plants consume
less energy and less water per gallon of ethanol. In addition, our
plants utilize a biomass energy center to provide power for the plant,
decreasing the cost of energy while removing reliance upon fossil fuel
and reducing our carbon footprint.

My statement is divided into two parts. The first part will cover, in
brief, ethanol, the industry, the multiplier effects, the production
process for the industry, and how Ethanex's production process differs.
The second part will cover the supply and demand factors for energy
(oil) and transportation of ethanol by three different modes.

**[Part 1]{.underline}**

*Ethanol*

Ethanol is a water-free liquid alcohol made from a fermentation process.
Feed stock for the production of ethanol can be corn, barley, sorghum,
and wheat. Some producers of ethanol can use inputs such as corn stalks,
trees, switch-grass, and sugarcane through the development of new
yeasts. About 60 percent of world ethanol production is from sugar-based
crops. The remaining 40 percent use grain-based crops. Of the current US
production, nearly 97 percent uses corn as the main feedstock.

Ethanol as an alternative fuel provides many benefits. Ethanol is a
eco-friendly and clean burning fuel. It is economical and renewable
thereby reducing our dependence on foreign oil. The use of ethanol
reduces the need for offshore drilling and reduces global warming.
Essentially, ethanol is the way forward to energy independence, a
cleaner environment, and a stronger self-sustaining economy.

*The Industry*

There are over 125 facilities currently producing ethanol in the US with
nearly 6.0 billion gallons total annual capacity. The industry is spread
out into more then twenty states with more facilities coming online
every year. In fact, nearly 80 facilities are currently under
construction. Chart 1 below shows the geographic distribution of
bio-refineries throughout the US.

**Chart 1 -- Geographic Distribution of Ethanol Refineries**

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According to the American Coalition for Ethanol and Energy Information
Agency ethanol production was nearly 4.89 billion gallons in 2006 up
from 3.4 billion in 2004. The industry is comprised of farmer and
locally owned plants which produce about 40 percent of total capacity,
while larger firms control the remaining 60 percent.

Ethanol is currently blended (E-10) with 46 percent of total gasoline
consumed in the US and comprises about 3.5 percent of total annual US
gasoline consumption. As the market for flex-fuel vehicles grows
(currently about 6 million cars), so will the demand for E-85 ethanol.
Currently, nearly 50 million gallons of E-85 is consumed and is
available at over 1,000 gas stations.

*The Multiplier Effect*

The explosive growth of the ethanol industry has many benefits to the
economy as a whole. As the study by Northwestern University's School of
Management[^1] found, 370 construction and support jobs are created
during the development of plant. Moreover, each new plant establishes
nearly 4,000 permanent local jobs. The study also found that plant
construction creates \$60 million to \$130 million in additional income
for the locale while operations create between 47 million to \$100
million in economic benefits. Also, the addition of large production
facilities, add to the tax base of the respective communities.

An increase in ethanol production benefits agricultural concerns.
Increases in demand for corn and wheat and other grains stir economic
activity and brings economic development to supplying areas. According
the USDA, renewable fuels could generate and additional \$2 billion to
\$4 billion in net farm income by 2012. Another indirect effect is the
increase in the demand for rail transportation and rail car assets.
These upstream and downstream effects are causing a real positive change
in the general economy. For this proceeding, I will forego enumerating
all of the non-pecuniary benefits to the environment and energy
security.

*The Production Process*

I will now cover the ethanol production process in short. The process
begins when a feedstock, such as corn, is delivered to the plant via
rail or truck. Like electric power generation plants stock coal, ethanol
plants store feedstock in a holding cell. Most plants stock enough
feedstock for 10 to 15 days operational consumption to ensure continuity
of operations. The next few steps are similar to producing any alcohol;
the grain is milled, mixed with water and enzymes into slurry, and then
held in tank to allow the starches to be converted into fermentable
sugar. After the creation of the sugar, yeast is added to the mash and
allowed to ferment for about 50 hours -- the resultant mixture is called
"beer" -- but not the kind to get excited about. The "beer" is then
distilled separating the alcohol from the solids. The solids are removed
for further processing into distiller grains processing. The alcohol is
further refined to yield a 200 proof anhydrous ethanol -- *sans* all
water. The ethanol is then denatured and stored for transportation.

*The Ethanex Fractionation Process*

Ethanex generally use the methodology described above. However, Ethanex
also employs a fractionation methodology. Fractionation is the key to
unlocking the full potential of corn based ethanol production and is the
core of our bio-refinery system. This process separates each kernel into
its primary components: bran, germ, and starch. With the three discrete
streams comes the ability to further refine and maximize the potential
value from whole corn. Diagram 1 below shows the Ethanex Fractionation
Process.

**[Diagram 1 -- Fractionation]{.underline}**

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Ethanex is revolutionizing the ethanol industry by using a green process
to produce a green product. In fact, Ethanex spends 25% less per gallon
to produce ethanol versus the most common production method. We consume
20% less energy, 15% less water, increase ethanol production by 20% and
generate a greater number of higher value co-products, including
food-grade corn oil. All of this is powered by green bio-mass energy
that costs 70% less than the traditionally employed fossil fuel.\
**[Part 2]{.underline}**

*Supply and Demand*

Oil prices have hovered over \$50 per barrel for quite sometime now.
This is caused by myriad reasons. For example, Nigeria has been hit with
civil unrest making production unreliable. Nearly four years into the
Iraq war, oil production has yet to return to pre-war levels. Saudi
Arabia is pumping oil at full capacity with new production years away.
There is uncertainty over the supplies of oil in Iran due to tensions
over Iran's nuclear program. And lastly, the regime in Venezuela is
increasingly hostile towards the US. Even if the given geopolitical
tensions did not exist, supply would still be tight because of refining
capacity. This is not a rosy supply side picture. On the other hand,
demand for oil is climbing precipitously. Demand for oil in China is at
record levels and the same is true for India. Concurrently, demand in
the US has yet to slow down, even with record oil prices. In this
economic environment, ethanol is perfectly positioned to provide the US
economy a viable renewable fuel option.

*Transportation -- Pipeline*

Pipelines are by far the most efficient way to transport large amounts
of liquids. Pipelines cost about one-third of what it cost to use rail
or barge transportation and transport nearly 70 percent of the
gasoline/petroleum used in the US.

For ethanol, however, pipelines are problematic. While petroleum
pipelines can "share" space with other petroleum products, ethanol
cannot. Ethanol has high solvent properties which "pick-up" deposits
left behind by petroleum products. Also pipelines are sometimes prone to
water contaminations. This is not a problem for gasoline as it does not
mix with water. Ethanol, however, is hydoscopic and would require any
amounts of water contamination to be re-refined out of the product. Even
blends of gasoline with ethanol are problematic for pipelines because if
a water contamination occurs, it "strips" out the ethanol from the blend
and then the product must be re-refined before use.

Assuming that water-proof dedicated pipelines could be developed for
ethanol, there would still be the problem of volume. There is
insufficient volume to justify an expenditure of \$1 million to \$2
million per mile for such a pipeline. Thus, pipelines are not a feasible
option for ethanol transportation.

*Transportation -- Barges*

Barges move nearly 15 percent of the nation's total freight shipments.
Barges can also move freight using intermodal service (any combination
of rail, truck, and barge) to expand access for shippers. However, each
trans-load increases costs significantly. Even disregarding the
trans-load costs and proximity to navigable water there are still other
hindrances to barge transportation. The locks on the upper Mississippi
are too small to move the volume of ethanol projected to be produced in
the coming years. The availability of barges is severely limited and the
freezing of waterways during the winter months on the Mississippi and
Missouri rivers is also problematic.

*Transportation -- Rail*

Railroads moved nearly 7.2 million tons of ethanol in 2006. Granted, in
the grand scheme for railroads, this in less then one percent of the
traffic that they carry, but at the rate at which ethanol production is
expanding -- cooperation and coordination is mandatory for everyone's
future success. With nearly a 50 percent predicted increase in ethanol
production capacity in the coming years, lack of planning has the
potential of hurting feedstock suppliers, ethanol producers, blending
terminal operators, and the railroads themselves. Everyone must gear up
for the challenge.

*Feedstock Suppliers* -- As the Board is well aware for years now, there
have been railroad car shortages and delays in providing rail service to
agriculture producers. Though this has changed, this problem is one of
great concern to ethanol producers. Not unlike electric utilities
require a stockpile of coal for continuous and smooth operations,
ethanol producers require corn or wheat or sorghum or whatever feedstock
the plant uses to be available when the production run is ready to
begin. Hence, the delivery of grain shipments must be predictable and
reliable, as should service to move the out-bound ethanol and
co-products. We recognize the changes that have occurred in the
agricultural sector with respect to rail transport, namely, the movement
to unit-train shipments at larger grain elevators and this has vastly
increased productivity of the hopper car fleets. However, our concern is
that as demand increases, locations that once functioned without
capacity constraints will become new bottlenecks. The time is now before
the aggregate demand for grains grows, for the agricultural sector to
begin planning hand-in-hand with the railroads and ethanol producers to
ensure an adequate supply of hopper cars and infrastructure for proper
movement of feedstock.

*Ethanol Producers* -- As new plants are being designed and aggregate
demand for ethanol grows, rail transportation is becoming vital. New
plants are being designed for unit-train service, not only to receive
unit-train shipments of corn and other grains, but to ship using
unit-trains. For example, turn around time for rail cars depends on the
type of shipment - unit-train or *less-than-trainload*. Single or
smaller groups of cars move less frequently and can take two to three
times the amount of time a unit-train takes. To this end, ethanol
producers that have smaller facilities may have to expand plant
infrastructure or partner with other plants to provide homogenous
unit-train shipments to promote a harmonized and cohesive industry-wide
function. This is being facilitated by some railroads, i.e. BNSF,
promotes unit-train shipments from smaller plants by gathering from
multiple plants to build unit trains. At the same time, larger producers
must make the requisite investments in industry track and loading
facilities.

*Railroads* -- Seventy-five percent of the total annual production of
ethanol is shipped by rail. The remaining 25 percent is moved via truck.
This is the case because of simple economics, a single gallon fuel can
move one ton of ethanol about 60 miles via truck, while that same gallon
of fuel can move the same ton of ethanol more then 385 miles via rail.
The railroads for their part are to be commended for the attention and
concern they have shown for ethanol transportation.

BNSF's Ethanol Express service was the industries first ethanol
unit-train service and began in late 2003. This service from BNSF uses
95-car unit-trains and has reduced cycle time by nearly 50 percent for
cars and lowered inventory costs. Union Pacific serves 43 ethanol plants
and operates 75 to 100 car unit-trains. Norfolk Southern has experienced
growth in the ethanol and ethanol related traffic. For example, NS
provides benefits to shippers through its Mercury Service, a 75-car
grain shuttle program and unit-train service to ethanol terminals in the
east. CSX's EthX express ethanol delivery service, serves destinations
east of the Mississippi. The EthX service provides unit-trains with
65-cars or more and is flexible in that it provides intermodal service
and storage for ethanol at its facilities.

Unit-train services at the Class I railroads have improved markedly.
Still, this efficiency will be further improved as new methods and
techniques are implemented. For example, unit-train coal shipments are
offloaded and turned around in four to six hours at electric power
generation plants, while unit-trains at ethanol plants can take 24 to 36
hours. The ethanol unit train market is evolving when compared the
highly efficient coal and grain unit train markets. As supporting
origination and destination infrastructure is developed, these metrics
should improve markedly and thereby reduce costs.

The probability of new bottlenecks developing on the rail system is a
real possibility, especially without a significant portion of traffic
moving in unit-train service. Potential bottlenecks could develop in
railroad yards and switch capacity and terminal space could be strained.
These problems are foreseeable and can be addressed if railroads plan
expansions of their systems proactively. I will add though, that the
railroad industry is making sizable capital investments expanding
capacity in key corridors to major consumptive areas, but I will leave
that for the railroads to address.

*Blending Terminal*s -- There is great concern in the ethanol industry
that the privately-owned blending/terminal facilities owned and operated
be refiners, producers, or 3^rd^ party operators are not up to par when
it comes to handling unit-train shipment. Most terminals are limited to
handling only three to five cars at a time and even a larger terminal
can only spot 15 to 20 cars. Thus, even with unit-train operation for
bringing in feedstock and moving out ethanol and co-products, the
destination terminals which use the ethanol are the factor limiting
productivity. This bottleneck will have to be addressed in the near
future, especially as the use of E-85 expands and the increase in
ethanol use due to the recent elimination of methyl tertiary-butyl ether
(MTBE) from gasoline. Because of these changes, the fuel additive
industry is growing and is expected to double the use of ethanol as an
additive in the next few years. This increase in use will cause and is
causing a strain on existing terminal facilities.

C*omplementary Industries* -- As the renewable fuels industry develops,
so are the complementary industries to ethanol production. Demand forces
are being felt by everything from car suppliers to rail line
construction.

Companies that build rail track are experiencing a great boom. This is
because each new 100 million gallon per year ethanol plant is planned
for unit-train capability corn, ethanol, and DDGS.[^2] This means that
each plant will require between 30,000 and 40,000 linear feet of track
to accommodate unit-train service. This growth in industry track
construction is causing pressure on material suppliers for rail, ties,
and labor throughout the railroad industry as everyone competes for
these excess-demand resources.

Another recent concern for the ethanol industries is the shortage of
ethanol tank cars. Most builders were experiencing one and one-half to
two years of backlog in building tank cars. This concern has subsided
for the near term as prospective producers have postponed their railcar
deliveries due to the longer and/or delayed ethanol plant construction
times due to material and labor shortages.

Demand has also surged for large hopper cars used to move Dried
Distillers Grains with Solubles (DDGS). DDGS is a co-product of ethanol
production and is used to produce live stock feeds for cattle, hogs, and
chickens. Another co-product of ethanol production is food grade corn
oil. These two co-products are moved via rail and some railroads are
providing unit train service for the DDGS but the corn oil is typically
transported in unit grocery trains (mix of products) shipped to a common
regional location or destination trans-load facility.

**[Closing]{.underline}**

Ethanex is pleased to submit these comments in this proceeding. Ethanex
sees the ethanol industry at a crossroad in the coming years - a
crossroad that is ultimately going to determine the success it
accomplishes as well as the success upstream and downstream linkage are
going experience. There must be a cooperative and collaborative spirit
between the feedstock providers to harmonize the service within the
industry. Ethanol producers must build facilities with unit-train
capabilities that are efficient and can respond to efficient railroad
transportation needs. Railroads must anticipate proactively the future
expansion of the ethanol industry and be ready provide fast and
efficient service. The blending and refining terminals must expand and
enhance their facilities to the realities of an expanding ethanol
presence. Lastly, railroads must be responsive to transporting
co-products such corn oil and DDGS in a timely and efficient manner and
the receiver of these co-products must also harmonize their shipping
system with ethanol producers. This symbiosis can only be created with
careful planning and foresight -- this proceeding is good step in that
direction.

[^1]: Evans, Michael K. "The Economic Impact of the Demand for Ethanol"
    Diane Publishing, Derby, PA, 1997.

[^2]: Rail car movers are also experiencing growth in developing systems
    for ethanol plants to unload cars efficiently.