```

[Senate Hearing 110-169]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 110-169
 
                     RENEWABLE FUELS INFRASTRUCTURE

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON ENERGY

                                 of the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   TO

          RECEIVE TESTIMONY ON RENEWABLE FUELS INFRASTRUCTURE

                               __________

                             JULY 31, 2007

                       Printed for the use of the
               Committee on Energy and Natural Resources

                    U.S. GOVERNMENT PRINTING OFFICE
38-364                      WASHINGTON : 2007
_____________________________________________________________________________
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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           BOB CORKER, Tennessee
KEN SALAZAR, Colorado                JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel
                                 ------                                

                         Subcommittee on Energy

                BYRON L. DORGAN, North Dakota, Chairman

DANIEL K. AKAKA, Hawaii              LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    LARRY E. CRAIG, Idaho
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

   Jeff Bingaman  and Pete V. Domenici are Ex Officio Members of the 
                              Subcommittee

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Craig, Hon. Larry, U.S. Senator From Idaho.......................     4
Dorgan, Hon. Byron L., U.S Senator From North Dakota.............     1
Drevna, Charles T., Executive Vice-President, National 
  Petrochemical & Refiners Association...........................    38
Karsner, Alexander, Assistant Secretary, Energy Efficiency and 
  Renewable Energy, Department of Energy.........................     9
Klobuchar, Hon. Amy, U.S. Senator From Minnesota.................     6
Lampert, Phillip J., Executive Director, National Ethanol Vehicle 
  Coalition, Jefferson City, MO..................................    54
Lehman, Jonathan Advisor, VeraSun Energy.........................    47
Morrissett, Deborah L., Vice President of Regulatory Affairs, 
  DaimlerChrysler Corporation, Auburn Hills, MI..................    51
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     4
Terry, David, Representative, Governors' Ethanol Coalition.......    34
Tester, Hon. Jon., U.S. Senator From Montana.....................     5

                                APPENDIX

Responses to additional questions................................    67

                     RENEWABLE FUELS INFRASTRUCTURE

                              ----------                              

                         TUESDAY, JULY 31, 2007

                               U.S. Senate,
                            Subcommittee on Energy,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m. in 
room SD-366, Dirksen Senate Office Building, Hon. Byron L. 
Dorgan presiding.

 OPENING STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR FROM 
                          NORTH DAKOTA

    Senator Dorgan [presiding]. We'll call the hearing to 
order. This is the hearing of the Senate Energy Natural 
Resources Committee, the Subcommittee on Energy. Welcome all of 
you today.
    The hearing today is to address how to overcome the hurdles 
in order to achieve our objectives of reducing our dependence 
on foreign sources of oil. We do that by developing an 
infrastructure to use our expanding home grown renewable fuels 
to help meet our Nation's transportation needs.
    Our witnesses today will include Senator Klobuchar, 
representatives of the Administration, stakeholders dealing 
with the policy, the technical and the implementation of 
expanding renewable fuels infrastructure so that producers of 
renewable fuels can get their products to market and see those 
products used.
    Now we use about 140 plus billion gallons of fuel each 
year. Of that, 140 billion gallons about 60 percent comes from 
off our shores. From imported oil that comes from unstable 
regions of the country: Saudi Arabia, Kuwait, Nigeria, 
Venezuela and others.
    Our pathway to reducing that--excessive and I think, 
dangerous, dependence on foreign sources of oil is to use home 
grown, renewable fuels. However effective action on renewable 
fuels stands on a three legged stool. One is to produce the 
fuel. A second is to produce vehicles that can use the fuel, 
most notably E85. Third is to develop the pumps that can 
dispense the blends up to E85.
    The bill that we passed in 2005, in which I was one of the 
authors on the Energy Committee, included the Renewable Fuel 
Standard. At that point, we passed an eight billion gallon 
standard out of this committee, went to conference, and ended 
up with seven and a half billion gallons by 2012. Well, 
obviously times have moved on in a very aggressive and in a 
very favorable way for renewable fuels.
    This Energy Committee passed legislation this year to 
increase the existing renewable fuel standard to 36 billion 
gallons by the year 2022. This committee has done that which 
is--within just the last couple of months, and in June, it was 
passed by the full Senate.
    Now if we use 140 billion gallons of fuel a year and we 
blend ethanol, for example, 10 percent of every gallon is 
ethanol. That means we have a market of 14 billion gallons. 
That's the total market. Unless you're using blends of 20, 30, 
40, 50 percent or E85, in which you have 85 percent of the fuel 
represented from ethanol.
    The Senate CAFE provisions required an action plan by the 
Department of Transportation to ensure that by model year 2015, 
50 percent of the new vehicles produced would be alternative 
fueled vehicles. Further the CEOs of the Big Three automakers 
announced earlier this year a commitment to make 50 percent of 
their vehicle production either E85, flex fuel or capable of 
running on biodiesel by 2012. Well, in order to create new 
markets for ethanol, in my judgment, we need to pass similar 
aggressive policies dealing, not just with production or 
renewable fuel standard, but also with respect to the 
development of the infrastructure.
    How do you get this fuel to the vehicles and to the 
consumers who are driving these vehicles? We need a much 
greater commitment to renewable fuels and the infrastructure, 
not only from Congress, but also from the Federal agencies, 
from industry stakeholders, and from State and local 
governments as well. The recent GAO report released in 2007 
says DOE lacks a strategic approach to coordinate increasing 
production with infrastructure development in vehicle needs.
    That's obvious. I agree that is the case. I mean we have a 
circumstance where we're rushing headlong to produce a 
substantial amount of renewable fuels and a substantial 
renewable fuel standard, but you will not find circumstances 
with respect to the infrastructure that meets what we're 
aspiring to do. Now, my State is ten times the size of 
Massachusetts in land mass, but we have only about 16,000 flex 
fuel vehicles in a State ten times the State of Massachusetts. 
There are 23 places in my State where you can pull up to some 
fuel pumps and pump in E85. So you have 16,000 people driving 
flex fuel vehicles and 23 locations in all of that land mass to 
be able to find E85. Other States have similar circumstances 
that GAO found, in this report by the way, that California has 
250,000 flex fuel vehicles and one publicly accessible 
refueling station in San Diego. One.
    Is that a failure? It seems to me, it is. We have 170,000 
service stations in this country and roughly 1,200 of them have 
E85 pumps. That's less than 1 percent of the service stations. 
I have a chart that will show you that, shows that where the 
service stations exist in the middle part of the country, 
particularly in Minnesota and a number of other Midwestern 
States and Northern Plains States. That's not where the flex 
fuel vehicles are. The heaviest concentration of flex fuel 
vehicles have no relationship to where the infrastructure is.
    So, I mean, I think we have a very serious problem. 
Secretary Karsner testified previously before this committee--
before rather, Appropriations Subcommittee that I held. He said 
that we have not devised sufficient policies with respect to 
scale and rate that would be commensurate with the magnitude of 
the challenge. He was talking about this infrastructure issue. 
He went on to say that we went on to installed 450 E85 pumps 
nationwide last year.
    So if we do 450 pumps a year, that'll take about 100 years 
to install at a scale of pumps that would even matter. We don't 
have 100 years. We probably don't have 10 years because when 
you see all these plants being built to produce this fuel. If 
we don't find a way to move this fuel through an infrastructure 
to people who are going to use it, we're going to see a 
collapse in that market, and that's the last thing that we 
should want.
    One more point. The oil industry is not helping either. 
I've seen reports that the Big Oil companies have recently 
posted pretty substantial profits, record profits. All of you 
have seen them. Let me describe a few of the barriers that 
they're putting in place to discourage retail gas stations from 
offering E85.
    About 57 percent of the retail gas stations are owned or 
franchised by the major integrated oil companies. The Wall 
Street Journal in April had an article titled,``Fill 'er Up 
with Ethanol? One Big Obstacle is Oil.'' Exxon Mobil and 
British Petroleum require their franchised station to buy fuel 
exclusively from them, and neither company offers E85. If a 
station owner would wish to purchase E85, then they have to 
apply for an exception to purchase E85.
    Another example is Conoco-Phillips. A memo to their 
franchisees says that the company doesn't allow E85 sales on 
the primary island under the cover canopy where the gasoline is 
sold. Stations must find another spot.
    Chevron-Texaco and Conoco-Phillips station owners are not 
allowed to list E85 on their primary sign listing fuel prices 
and must pay to erect a separate sign if they wish to advertise 
E85. BP will not allow its franchised stations to offer payment 
by credit card at E85 pumps.
    Does this sound reasonable or thoughtful? It doesn't to me. 
It's the same old game. Build a fence. Protect your own turf.
    This is about national interest. This is about making this 
country less dependent on oil from troubled parts of the world, 
and if we don't do this as a team, if we don't do this together 
as a country, we're going to be in big trouble. We're going to 
build a lot of plants right now. We're on the road to building 
a lot of plants to produce this fuel. If we don't have the 
infrastructure to produce that fuel for the vehicles in this 
country, we're going to see a collapse with respect to these 
markets.
    I'm particularly unhappy to see what the major oil 
companies are doing. It is not new for them to buy quarter page 
ads in newspapers telling us that producing ethanol was a bad 
situation. They didn't like it. Well, I'm not surprised they 
didn't like it. But what does surprise me is that they make 
record profits, and they spend their time trying to figure out 
how they're going to keep E85 off their gasoline island when 
they control nearly 60 percent of the gasoline stations in this 
country. That has to change.
    So, the purpose of this hearing is to try to think through 
what are the policy changes that can give us a chance to build 
the infrastructure so that we have an opportunity to make this 
successful. To make successful the use of renewable fuels in 
significant quantity and make us less dependent on foreign 
sources of oil. We've got to get this right, and we don't have 
a lot of time to do it.
    I want to call on the ranking member for a brief comment 
and if others want to make comments just for a minute or so, 
I'd be happy to allow them to do that. Then I'll ask Senator 
Klobuchar to provide her testimony. At which point we will then 
have Secretary Karsner and then go on to the final panel.
    Senator Murkowski.

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman. I didn't catch 
all of the comments but walked in at the end. It is always 
interesting to catch the conversation halfway. I do appreciate 
the hearing this afternoon.
    We all understand the need to avoid unintended consequences 
in all areas. Certainly as we are trying to figure out how we 
build a domestic biofuels industry, we need to focus on the 
developing technology solutions to address the challenges that 
this burgeoning biofuels industry will face.
    The infrastructure we have today is built around the need 
of petroleum based fuels. Ethanol has different properties, 
more corrosive than gasoline, more easily adulterated by water 
during transport. We certainly hope that as the future unfolds 
research is going to help us address these challenges. Material 
science may devise ways to make automotive components that are 
compatible with higher blends of ethanol. New additives that 
make ethanol repel water molecules are under investigation.
    But I think in the first years of the RFS we can anticipate 
a great deal of ethanol will be needed to be transported by 
rail or by truck. We know that this volume of transport could 
strain our existing capacity. And of that 168,000 gasoline 
stations in the U.S. today, 1,251 have E85 pumps. Industry and 
all levels of government will need to coordinate closely to 
address these problems.
    Now, I want to note in particular, that the RFS in the 
Senate passed bill includes the 48 contiguous States but allows 
the State of Alaska and also Hawaii the option of joining 
voluntarily. I do believe that we need to continue research on 
biofuels that specifically addresses the unique challenges of 
using both ethanol and biodiesel in our colder environments.
    Mr. Chairman, I know that we've got a lot of folks on the 
panel today, and I look forward to hearing from those who are 
scheduled.
    Senator Dorgan. Thank you. Are there others who wish to 
make a brief opening statement?
    Senator Craig.

        STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR 
                           FROM IDAHO

    Senator Craig. Mr. Chairman, thank you for the hearing.
    Today oil is selling for 78 dollars a barrel, the highest 
in more than a year. In Idaho I have 72 alternative fuel 
stations which include--compressed gas, E85, propane, 
electricity, biodiesel, hydrogen and liquefied natural gas. Of 
those 72 stations only four are equipped with E85 pumps. 
According to the National Ethanol Vehicle Coalition, Idaho has 
only one E85 per 4,500 flex fuel vehicles.
    Earlier this year, of course, you and I introduced what I 
think and what you think is a fair and balanced approach in an 
energy compromise that we're working on. It doesn't work if the 
infrastructure doesn't come behind it. I think it's going to be 
extremely important for that to happen.
    We've debated in this committee, renewable energy 
standards, 30 billion gallons, 15 cellulosic, 15 corn based. 
We're talking about CAFE for automobiles, first time in 27 
years. We're talking about looking for some additional 
traditional fuel sources off shore. It really is about energy 
security. It really is about us doing everything we can 
possibly do for our consumers in a very diversified portfolio 
of energy needs.
    Delivery systems are everything. In my State of Idaho the 
two stations that I'm aware of with E85 are 160 miles apart. 
That doesn't make for a reasonable approach toward these 
alternatives.
    Now I would be the first to tell you, Mr. Chairman that the 
infrastructure that now serves our consuming public with a 
station on every corner didn't happen overnight. But now that 
it's there and hundreds of billons of dollars have been spent 
of the private sector putting it there. I would hope that the 
goal of that facility is to serve its consuming public and to 
do so in a way that offers all of these alternatives as a part 
of the energy supply for our transportation fleet in this 
country. So thank you for holding the hearing.
    Senator Dorgan. Senator Craig, thank you. Would others wish 
to make a brief comment?
    Senator Tester.

          STATEMENT OF HON. JON TESTER, U.S. SENATOR 
                          FROM MONTANA

    Senator Tester. Very quickly and very brief, Mr. Chairman--
I do want to thank you. I think my, the infrastructure that we 
have in my town is very similar to Idaho or maybe a little 
less. In fact I think the only one that I--
    Senator Craig. In fact Jon would appreciate it.
    Senator Tester. Yes.
    Senator Craig. One station in Sandpoint.
    Senator Tester. Yes.
    Senator Craig. The other one's in Port Elaine. So you can 
stop in Sandpoint and refuel. No, the other one's in Lewis.
    Senator Tester. Yes.
    Senator Craig. That's over 60 miles.
    Senator Tester. It's far too few. That's for sure. I just 
want to make a comparison.
    I'm a farmer. If I can't get my crops to the shelf, I go 
broke. If we can't get biofuels to the consumer, it will never 
work. So it needs to happen. No ifs, ands, or buts about it, if 
we're going to try to achieve some semblance of energy security 
here.
    Senator Dorgan. Anyone else?
    Senator Klobuchar, thank you for joining us. Minnesota has 
made some significant strides, although even that remains far 
short of where we need to be. But we appreciate your interest 
in coming, and we would ask you to proceed.
    We would ask all of the witnesses to limit their comments 
to 5 minutes, and we will include their entire testimony as a 
part of the permanent record.

         STATEMENT OF HON. AMY KLOBUCHAR, U.S. SENATOR 
                         FROM MINNESOTA

    Senator Klobuchar. Thank you so much, Chairman, for holding 
this important hearing and for inviting me to testify.
    As you know ethanol and biodiesel, corn based ethanol, soy 
bean based biodiesel and we move and hope to move to the next 
stage with cellulosic ethanol, are near and dear to Minnesota 
but my interest goes far beyond that. I believe that our 
ability to produce a reliable, low cost, domestic source of 
energy is also an issue of national security.
    The United States spends more than 400,000 dollars per 
minute on foreign oil. The money is shipped out of our economy 
adding to our enormous trade deficit and leaving us vulnerable 
to unstable parts of the world to meet our basic energy needs. 
There are those who would have us believe that our energy 
security is decades away. But you can ask any Minnesota farmer 
and there--they'll tell you we're ready to go today.
    In spite of the clear advantages of renewable fuels, our 
rural economy and our energy security, we really face a chicken 
and egg type problem when it comes to the challenge of making 
them available to more drivers. The automakers are reluctant to 
promote flex fuel vehicles in areas where there are no E85 
pumps, as Senator Craig has pointed out. Gas stations don't 
want to put any E85 pumps where there are no flex fuel 
vehicles. So we need to tackle both ends of the problems.
    On the issue of vehicles, Mr. Chairman, I appreciate the 
work that you and the rest of this committee have done in 
passing the energy bill that would require automakers to equip 
50 percent of their new vehicles with alternative fuel 
technology by the year 2015. I particularly remember Senator 
Craig's comments when we discussed the gas mileage standards. I 
appreciated the work of everyone on this committee.
    On the other end of the problem, the ability to find gas 
stations that sell E85 and biodiesel. It is crucial that 
Congress act to provide more American drivers with access to 
renewable fuels. As you know, Mr. Chairman, Minnesota ranks 
first in the Nation in E85 infrastructure. Of the 1,251 gas 
pumps that Senator Murkowski mentioned, 320 of them, but who's 
counting, are located in Minnesota.
    I know, Mr. Chairman that this is of particular interest to 
you, and that is how did Minnesota come to be a leader in this 
area? The answer I believe comes down to leadership. Leadership 
in State government in setting statewide ethanol standards and 
providing grants for E20 pumps, leadership of the Minnesota 
corn growers who formed a coalition with the American Lung 
Association of Minnesota, the National Ethanol Vehicle 
Coalition and others to promote E85 across the state. Finally 
leadership on the part of the ethanol producers who developed 
innovative marketing arrangements whereby they sell E85 
directly to gas stations and cut out the oil company owned 
middle men. In Minnesota about two-thirds of the gas stations 
that sell E85 purchase it directly from the ethanol producer. 
That's why they can afford to sell it at a price that's 
attractive to customers.
    So, what can we at the Federal level learn from Minnesota's 
example? First, wherever possible, we should encourage ethanol 
producers to sell directly to gas stations. Outside of 
Minnesota ethanol is generally sold under long-term contract to 
blending terminals which are part of the oil company owned pipe 
line system. The terminals then re-sell the ethanol to gas 
stations. In essence the price that the consumers pay for 
ethanol is usually set by ethanol's biggest competitor, the oil 
companies.
    When ethanol producers sell ethanol directly to gas 
stations without a middle man, drivers get the benefit of low 
cost fuel. The ethanol producers collect the 51 cents per 
gallon Federal blenders credit instead of the oil companies and 
America's energy dollars come right back to our rural 
communities.
    We've seen this model work in Minnesota pioneered by the 
Chippewa Valley Ethanol Company in Benson. They currently 
supply roughly 100 gas stations that sell E85 at 60 cents below 
the price of gas. That's why I've introduced a bill that would 
help other states follow Minnesota's lead. The Ethanol 
Education and Expansion Act which would provide tax credits for 
ethanol producers to install the type of equipment they need to 
sell directly to gas stations. I'd like to thank you, Mr. 
Chairman, for co-sponsoring this legislation.
    Second, we should not allow the oil companies to block 
their franchised gas station from selling renewable fuels. This 
is what you were referring to. I've heard from gas stations in 
Minnesota that their franchise contracts make it so difficult 
to sell ethanol and biodiesel that many of them just can't do 
it. They're not allowed to sell renewable fuels under the main 
canopy that bears the oil company's brand name. They can't 
convert the pumps and tanks they already have because of a 
requirement to sell all three grades of gasoline. They're not 
even allowed to put up signs to let customers know that they 
have renewable fuels for sale, where the pump is or how much it 
costs.
    I've offered a Right to Retail Renewable Fuel amendment to 
the energy bill that would prohibit oil companies from placing 
restrictions on where and how renewable fuels can be sold at 
gas stations.
    The third and final thing we can learn from Minnesota's 
example is that a modest investment of Federal dollars can 
yield big results on the ground. The coalition in Minnesota 
that raised nine million dollars for E85 pumps was started with 
a grant of just 250,000 dollars from the Department of Energy.
    In closing, I would simply state that the scarcity of pumps 
caused in part by the oil company's unwillingness to allow for 
competition is the single greatest factor limiting the positive 
impact the renewable fuels can and should have on our Nation's 
energy security. If we are serious about finding alternatives 
to foreign oil we should ensure that drivers in every State 
have access to E85 and biodiesel. Thank you, Mr. Chairman.
    [The prepared statement of Senator Klobuchar follows:]
 Prepared Statement of Hon. Amy Klobuchar, U.S. Senator From Minnesota
    Thank you, Mr. Chairman, for holding this timely hearing on the 
topic of renewable fuel infrastructure, and for inviting me to testify. 
As you know, ethanol and biodiesel are near and dear to Minnesota, but 
my interest in them goes far beyond that. Our ability to produce a 
reliable, low-cost, domestic source of energy has become a question of 
national security.
    The United States spends more than $400,000 per minute on foreign 
oil. That money is shipped out of our economy, adding to our enormous 
trade deficit, and leaving us vulnerable to unstable parts of the world 
to meet our basic energy needs.
    There are those who would have us believe that energy security is 
decades away, but any Minnesota farmer can tell you that renewable 
fuels are here and ready to use today. However, in spite of the clear 
advantages of renewable fuels to our rural economy and our energy 
security, we face a chicken-and-egg type of problem when it comes to 
the challenge of making them available to more drivers. The auto makers 
are reluctant to promote flex-fuel vehicles in areas where there are no 
E-85 pumps, and gas stations don't want to put in E-85 pumps where 
there are no flex-fuel vehicles.
    So we need to tackle both ends of the problem. On the issue of 
vehicles, Mr. Chairman, I was proud to work with you to include 
provisions in the Senate-passed energy bill that would require 
automakers to equip 50 percent of their new vehicles with alternative-
fuel technology by the year 2015.
    On the other end of the problem--the ability to find gas stations 
that sell E-85 and biodiesel--it is crucial that Congress act to 
provide more American drivers with access to renewable fuel pumps.
    As you know, Mr. Chairman, Minnesota ranks first in the Nation in 
E-85 infrastructure--we have 320 pumps out of 1250 in the Nation--far 
more than any other state. And I know, Mr. Chairman, that it's a 
question of particular interest to you--how did Minnesota come to be 
the leader in this area? The answer, I believe, comes down to 
leadership:

   Leadership in state government in setting statewide ethanol 
        standards and providing grants for E-85 pumps.
   Leadership of the Minnesota Corn Growers, who formed a 
        coalition with the American Lung Association of Minnesota, the 
        National Ethanol Vehicle Coalition, and others to promote E-85 
        across the state.
   Finally, leadership on the part of the ethanol producers, 
        who have developed innovative marketing arrangements, whereby 
        they sell E-85 directly to gas stations, and cut out the oil 
        company-owned middleman. In Minnesota, about \2/3\ of the gas 
        stations that sell E-85 purchase it directly from the ethanol 
        producer, and that's why they can afford to sell it at a price 
        that's attractive to consumers.

    So what can we, at the federal level, learn from Minnesota's 
example? First, wherever possible, we should encourage ethanol 
producers to sell directly to gas stations. Outside of Minnesota, 
ethanol is generally sold under long-term contract to blending 
terminals, which are part of the oil company-owned pipeline system. The 
terminals then re-sell the ethanol to gas stations. In essence, the 
price that consumers pay for ethanol is usually set by ethanol's 
biggest competitor, the oil companies. When ethanol producers sell 
ethanol directly to gas stations without a middleman:

   drivers get the benefit of a low-cost fuel,
   the ethanol producers collect the 51 cent-per-gallon federal 
        blender's credit instead of the oil companies,
   and America's energy dollars come right back to our rural 
        communities.

    We have seen this model work well in Minnesota, pioneered by the 
Chippewa Valley Ethanol Company in Benson. They currently supply 
roughly a hundred gas stations that sell E-85 at 60 cents below the 
price of gas. That's why I have introduced a bill that would help other 
states follow Minnesota's lead--the ``Ethanol Education and Expansion 
Act'' would provide tax credits for ethanol producers to install the 
kind of equipment they need to sell directly to gas stations, and I 
would like to thank you, Mr. Chairman, for cosponsoring this 
legislation.
    Second, we should not allow oil companies to block their franchised 
gas stations from selling renewable fuels. I have heard from gas 
stations in Minnesota that their franchise contracts make it so 
difficult to sell ethanol and biodiesel that many of them just can't do 
it. They have reported cases where:

   they're not allowed to sell renewable fuels under the main 
        canopy that bears the oil company's brand name,
   they can't convert the pumps and tanks they already have, 
        because of a requirement to sell all three grades of gasoline,
   and they're not even allowed to put up signs to let 
        customers know they have renewable fuel for sale, where the 
        pump is, or how much it costs.

    I offered a ``Right to Retail Renewable Fuel'' amendment to the 
Energy Bill that would prohibit oil companies from placing restrictions 
on where and how renewable fuels can be sold at gas stations. I'm 
pleased to report that similar language was passed by the House Energy 
and Commerce Committee, which will give us an opportunity to examine 
this issue in conference.
    The third and final thing we can learn from Minnesota's example is 
that a modest investment of federal dollars can yield big results on 
the ground. The coalition in Minnesota that raised $9 million for E-85 
pumps was started with a grant of just $250,000 from the Department of 
Energy.
    In closing, I would simply state that the scarcity of pumps, caused 
in part by the oil companies' unwillingness to allow for competition, 
is the single greatest factor limiting the positive impact that 
renewable fuels can and should have on our Nation's energy security. If 
we are serious about finding alternatives to foreign oil, we should 
ensure that drivers in every state have access to E-85 and biodiesel. 
Thank you, Mr. Chairman.

    Senator Dorgan. Senator Klobuchar, thank you very much for 
telling us about the Minnesota experience. I think most of us 
know there has been real leadership in Minnesota at the State 
legislative level and local governments and by others and by 
you. We appreciate that, and I'm going to let you go and call 
up the Assistant Secretary. Your testimony is a very important 
part of the discussion of what works, what doesn't and what we 
still need to do. Senator Klobuchar, thank you very much.
    Senator Klobuchar. Thank you very much.
    Senator Dorgan. Next we will hear from the Assistant 
Secretary of Energy, Mr. Alexander Karsner. He won't mind if we 
call him Andy. I believe everybody does.
    Andy Karsner, the Assistant Secretary for Energy Efficiency 
and Renewable Energy. I'm just--
    Senator Craig. This could be a waste of energy.
    [Laughter.]
    Senator Dorgan. My preference is open curtains and open 
windows.
    Mr. Karsner, Secretary Karsner, thank you very much. You've 
testified previously, and we appreciate your being here again 
today. As I indicated your entire statement will be made part 
of the permanent record, and you may summarize.

  STATEMENT OF ALEXANDER KARSNER, ASSISTANT SECRETARY, ENERGY 
     EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY

    Mr. Karsner. Thank you, Mr. Chairman, and thank you and 
members of the committee for your leadership on this issue of 
addressing our gasoline dependency, and for the opportunity to 
provide comments on improving the Nation's renewable fuels 
infrastructure.
    As we intensify our national effort to develop renewable 
energy options for transportation, it's vital that we focus on 
ensuring the retail infrastructure necessary to support our 
national vision of a domestic clean fuels industry. The large 
scale introduction of biofuels into consumer markets poses 
significant challenges throughout the whole supply chain, 
including of course, retail distribution. These challenges must 
be effectively addressed to support the successful achievement 
of the President's Advanced Energy Initiative launched in 2006 
and the 20 in 10 goal for confronting our addiction to oil.
    The 20 in 10 goal aims to reduce our gasoline use by 20 
percent within the decade. To help achieve this, the President 
has called for an unprecedented alternative fuel standard 
requiring the equivalent of 35 billion gallons of renewable and 
alternative technologies by 2017. Creating certainty by 
establishing a durable, predictable, alternative fuel standard 
for the Nation is an important first step necessary to 
stimulate more investment in retail infrastructure.
    To this end, the Department is sharpening its focus on 
infrastructure issues, which were recently highlighted in a GAO 
audit and in the national Petroleum Council's report. We are 
targeting barriers to biofuels growth by forging strategic 
partnerships with industry, collaborating with other agencies 
and working with different regions of our country to bring the 
promise of large scale biofuels distribution to fruition.
    For example, we have developed in the Office of Energy 
Efficiency and Renewable Energy for the first time a biofuels 
infrastructure team. The team connects the Vehicle Technologies 
Program and the Biomass Program to promote a comprehensive and 
coherent approach to the biofuels industry.
    The Department is coordinating its fuel delivery work with 
the Department of Transportation, which has principle 
responsibility for setting standards in developing policy for 
pipeline transportation infrastructure and ensuring that these 
products can be safely handled. We are working with the EPA, 
which has primary responsibility for testing emissions and 
certifying fuels to examine the compatibility of intermediate 
blends such as E15, E20 and other lesser blends than E85 for 
use in our existing vehicle fleet.
    Finally, we have significantly elevated the level of 
participation, activity and engagement across the Federal 
Government with our Interagency Biomass R and D Board to ensure 
a comprehensive Federal approach to addressing key 
infrastructure barriers. These efforts are focused on reducing 
duplication, maximizing our efficiency and ensuring an 
accelerated approach to domestic biofuels deployment in a 
timeframe that is consequential.
    As I have testified many times before, Mr. Chairman, 
government funding alone will not be sufficient to meet the 
substantial challenges of changing our Nation's energy 
portfolio. The deployment of pumps, vehicles and other 
infrastructure must increase rapidly over the next decade so 
that consumers have readily available options and access to 
domestic renewable fuel sources.
    As you noted, Mr. Chairman, the latest data indicates there 
are approximately 170,000 fueling stations in the United States 
of which only 1,183 presently offer E85. Assuming E85 is the 
primary preferred pathway, the Department estimates that 
approximately 50,000 to 60,000 stations must exist and operate 
simultaneously to fully implement an E85 infrastructure. On 
average, retrofitting a fueling station to offer E85 is 
estimated to cost 60,000 dollars. The 2005 Energy Policy Act 
provided tax incentives that can defray up to 30,000 dollars of 
the total cost per pump.
    In 2006, the Department through its Clean Cities Program 
announced a selection of alternative fuel infrastructure 
projects that will result in 182 pumps installed by the end of 
2008. In the last 12 months there were a record number of E85 
pumps installed nationwide, 440. At this rate, as you 
indicated, it would take at least a century to reach critical 
mass in E85 infrastructure.
    The current rate of infrastructure deployment is therefore 
insufficient to support the national vision of domestic 
biofuels production, deployment, and use that is consequential 
within the decade. The Department believes that an E85 delivery 
system is an important goal of an alternative fuels 
infrastructure, but should not necessarily be the exclusive 
goal upon which our national strategy is built. Intermediate 
blends may offer an alternative approach to balance fuel 
production and use in parallel in order to enable continuous, 
uninterrupted growth in domestic fuels production and allow 
more outlets into the marketplace.
    Turning to vehicles, there are currently more than six 
million flexible fuel vehicles FFVs on the road in this 
country, still a relatively insignificant number representing a 
small percentage of the approximately 225 million light duty 
vehicles in the United States. Domestic auto manufacturers have 
pledged to the President to make half of their products flex 
fuel capable by 2012, and we are hopeful that this pledge will 
be maintained and even accelerated. It is important to note 
however, that this voluntary pledge is entirely contingent on 
the potential availability of the physical presence of E85 
infrastructure. It excludes foreign manufacturers, who 
constitute approximately half of the U.S. vehicles market.
    During my first week on the job, I traveled with Secretary 
Bodman to Detroit where he addressed the leaders in the 
automotive industry with a direct challenge, calling for more 
flex fuel vehicles on the market of all vehicle types and all 
vehicle classes from all manufacturers that service the U.S. 
market. We see no technical reason whatsoever why flex fuel 
vehicles cannot be more uniformly ubiquitous across all markets 
nor do we see any technical reason that at least the option of 
flex fuel could not be offered to all consumers at a relatively 
low price in the near term.
    The President's 20 in 10 goal holds the promise of 
accelerating penetration of cellulosic ethanol and other 
alternative fuels into the marketplace and bringing the 
benefits of clean renewable and alternative energy sources more 
quickly to our Nation. Providing the necessary infrastructure 
is a critical part of reaching that goal and we are mindful 
throughout our programs of the national security, economic and 
environmental imperatives.
    In order to meet the target of 20 percent gasoline 
reduction within a 10-year span, it requires a change in the 
status quo and an agile capacity to adopt fuel delivery 
systems, codes and standards and our national vehicle fleet. To 
the extent that they remain voluntary, market decisions must 
take place at a rate and a scale that is consequential within 
this timeframe so that it matters.
    This concludes my prepared statement. I'd be happy to 
answer any questions the committee members may have.
    [The prepared statement of Mr. Karsner follows:]

 Prepared Statement of Alexander Karsner, Assistant Secretary, Energy 
         Efficiency and Renewable Energy, Department of Energy

    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to provide comments on improving our Nation's renewable 
fuels infrastructure to accommodate the increasing volumes of renewable 
fuels in the transportation sector. As we continue to intensify our 
national effort to develop renewable energy options for transportation, 
it is vital that we focus on ensuring the infrastructure necessary to 
support our national vision of a domestic clean fuels industry.
    The large-scale introduction of biofuels into consumer markets 
poses significant challenges throughout the production, supply, 
transport, distribution, and utilization cycle. These challenges must 
be effectively addressed to support the successful achievement of the 
President's Advanced Energy Initiative and the ``Twenty in Ten'' goal 
for reducing our dependence on oil. The ``Twenty in Ten'' goal aims to 
reduce our gasoline use by 20 percent within the decade. To help 
achieve this, the President has called for a robust Alternative Fuel 
Standard (AFS), requiring the equivalent of 35 billion gallons of 
renewable and alternative technologies in 2017. Encouraging the 
broadest range of alternative fuel technologies is critical to the type 
of transformational change necessary to improve our Nation's energy 
security. Creating certainty by establishing a durable, predictable AFS 
for the Nation will be an important first step necessary to stimulate 
more investment in infrastructure.
    Recent developments have strongly accelerated the growth of 
biofuels in this country, and we recently have been adding more than a 
billion gallons capacity of ethanol each year (source: Renewable Fuels 
Association, http://www.ethanolrfa.org). Our strong investments into 
cellulosic ethanol research, development, and demonstration activities 
will further increase the biofuels growth rate. In the last year, the 
Department has announced the availability of nearly $1 billion for 
biofuels R&D, subject to appropriation, over the next three to five 
years, including:

   Up to $385 million for the construction of six cellulosic 
        ethanol biorefineries over the next four years. Once up and 
        running, the facilities--located in California, Florida, 
        Georgia, Idaho, Iowa, and Kansas--are expected to produce more 
        than 130 million gallons per year (mgy) of cellulosic ethanol;
   $375 million awarded to three new Bioenergy Centers to 
        advance understanding of how to reengineer biological processes 
        to develop new, more efficient methods for converting the 
        cellulose in plant material into ethanol or other biofuels 
        serve as a substitute for gasoline;
   Up to $200 million to support the development of cellulosic 
        biorefineries at ten percent of commercial scale that produce 
        liquid transportation fuels such as ethanol, as well as 
        biobased chemicals and bioproducts used in industrial 
        applications;
   Up to $23 million in Federal funding for five projects 
        focused on developing highly efficient fermentative organisms 
        to convert biomass material to ethanol.

    The Department's investments into cellulosic ethanol research, 
development, and deployment are focused on achieving the goal of cost-
competitiveness by 2012. This projected increase in ethanol use will 
challenge our existing liquid fuels infrastructure. We expect the 
market's ability to absorb gasoline blended with up to 10 percent 
ethanol, which can be distributed through existing infrastructure, to 
reach its limits in the near future, possibly even the next 5 years. 
This reality will require multiple pathways to continue growing our 
domestic renewable fuels industry. These pathways need to be 
immediately addressed in parallel.
    While much of the national debate has focused on the production of 
renewable fuels, much less public attention has been directed to the 
challenges of infrastructure. To address the important link between 
biofuels production and biofuels distribution and consumption, a recent 
report by the Government Accountability Office called on the Department 
of Energy to develop a strategic approach that coordinates the 
expansion of biofuels production with distribution infrastructure and 
vehicle needs. The National Petroleum Council's July 18 draft report, 
``Facing the Hard Truths about Energy,'' similarly highlights 
transportation infrastructure as a concern for biofuels--constrained 
capacity on our roads, rail, pipelines, and waterways pose a 
substantial barrier to encouraging alternative fuels.
    The Department is sharpening its focus on the issues highlighted by 
GAO and the National Petroleum Council and is targeting infrastructure 
barriers to biofuels growth by forging strategic cost-shared 
partnerships with private industry, collaborating with other agencies, 
and working with the different regions of our country to bring the 
promise of large-scale biofuels distribution to fruition.
    Mr. Chairman, I am pleased to report to you that the Department's 
focus on enabling the development of a domestic biofuels industry is 
already showing results. We have developed, in the Office of Energy 
Efficiency and Renewable Energy (EERE), a biofuels infrastructure team. 
This team connects, for the first time, the Vehicle Technologies 
Program and the Biomass Programs to promote a comprehensive and 
coherent approach to the biofuels industry. DOE recently completed 
testing on the BioPower sedan produced by SAAB (a subsidiary of GM) to 
validate E85 engine optimization technology, confirming the ability to 
meet EPA emissions standards and increased performance.
    The Department is coordinating pipeline work with DOT, which has 
responsibility for setting standards for pipeline transportation and 
ensuring that these products can be safely handled, and working to 
examine the compatibility of intermediate blends (such as E15, E20, and 
other lesser blends than E85) on the existing vehicle fleet with the 
EPA, which has responsibility for testing the emissions impacts of 
fuels and vehicles, and registering and certifying fuels and fuel 
additives before they can be used in the transportation system. 
Finally, we have elevated the level of activity and engagement of the 
Interagency Biomass R&D Board, an interagency coordinating group, to 
ensure a comprehensive approach to addressing key infrastructure 
barriers, such as feedstock availability and infrastructure 
development. These efforts, both internal to the Department and 
externally throughout the Executive Branch, are focused on reducing 
duplication, accelerating research, development, and commercialization 
activities, and ensuring a comprehensive approach to domestic biofuels 
deployment in a timeframe that is consequential.
    As I have testified many times before, Government funding alone 
will not be sufficient to meet the substantial challenges of changing 
our Nation's energy portfolio. The deployment of pumps, vehicles, and 
other infrastructure must increase rapidly over the next decade, so 
that consumers have access to domestic renewable fuel sources.
    There are approximately 170,000 fueling stations in the U.S., of 
which only 1,183 offer E85. In order to make E85 readily available, the 
Department estimates that approximately 50,000-60,000 stations must 
exist and operate simultaneously to fully implement an E85 
infrastructure (similar to the current number of diesel stations). On 
average, retrofitting an existing fueling station to offer E85 is 
estimated to cost $60,000. The 2005 Energy Policy Act provided tax 
incentives that can defray up to $30,000 of the total cost. While it is 
not the Department's role to pay for the installation of biofuels 
infrastructure, the Department can provide technical assistance, 
training, and small grants that can be leveraged by State, local, and 
private sector funds. In 2006, the Department, through its Clean Cities 
program, announced selection of alternative fuel infrastructure 
projects that will result in 182 pumps installed by the end of 2008. In 
the last 12 months, there were a record number of E85 pumps installed 
nationwide: 440. At this rate, it will take 110 years to reach critical 
mass in E85 infrastructure. The current rate of deployment is 
insufficient to support our national vision of domestic biofuels 
production, deployment and use.
    The Department believes that an E85 delivery system is an important 
goal of an alternative fuels infrastructure, but that intermediate 
blends (e.g., E15, E20) may offer an alternative approach to balance 
fuel production and use in parallel in order to enable continuous 
uninterrupted growth in production. In fact, intermediate blends may 
provide for more rapid absorption of renewable fuels into consumer 
markets in the near-term.
    Flexible fuel vehicles can readily and easily accommodate any 
biofuel blend up to and including E85. Currently, there are more than 
six million flexible-fuel vehicles (FFVs) on the road in this country, 
but still a relatively insignificant number representing a small 
percentage of the approximately 225 million light duty vehicles in the 
U.S. Domestic auto manufacturers have pledged to the President to make 
half of their products flex-fuel capable by 2012, and we are hopeful 
that this trend will be maintained and even be accelerated. It is 
important to note that this commitment is contingent of the 
availability of the physical presence of E85 infrastructure.
    During my first week on the job, I traveled with Secretary Bodman 
to Detroit, where he addressed the leaders in the automotive industry 
with a direct challenge, calling for more flex-fuel vehicles on the 
market for all vehicle types and classes, available from all 
manufacturers who serve the U.S. market. We see no technical reason why 
flex-fuel vehicles can not be more uniformly ubiquitous across all 
markets. Nor do we see any technical reason that at least the option of 
flex-fuel could not be offered to all consumers at a relatively low 
price.

                          CODES AND STANDARDS

    The widespread deployment and use of biofuels will depend in large 
part on the harmonization of existing codes, standards, and 
regulations, and the development and promulgation of new codes and 
standards where they are deemed necessary. This will ensure consumer 
confidence, safety, environmental protection, and the integrity of our 
Nation's fuel supply, distribution, and utilization infrastructure. 
EERE has initiated an effort to engage international collaborations to 
address fuel standards, data sharing, and other common interests. 
Establishing harmonized codes and standards is critical and time 
sensitive since the market is expanding rapidly. For example, a 
standard that addresses fuel quality would directly affect production 
plant design and cost.
    The Department has been working with industry to sponsor work in 
codes and standards development for many years. These efforts have 
helped to accelerate the development of codes and standards for 
alternative fuels and establish mechanisms to distribute information to 
relevant stakeholders. Similar efforts are now underway to work with 
industry stakeholders and other Federal agencies to promote biofuels 
codes and standards.
    The Department is working with automotive manufacturers and E85 
dispenser manufactures to establish Underwriters Laboratory (UL) safety 
certification procedures for E85 fueling equipment on an accelerated 
schedule. DOE provides technical guidance and coordinates with 
standards organizations such as the American Society of Testing and 
Materials (ASTM), the National Fire Protection Association (NFPA), the 
American Petroleum Institute (API), the American Society of Mechanical 
Engineers (ASME), and the Society of Automotive Engineers (SAE). We 
also work with the National Institute of Standards and Technology 
(NIST) and the Internal Revenue Service (IRS) on metering issues. It is 
worth noting that all pumps are tested and certified to accommodate up 
to E15. Variable pumps that allow consumers to select the most 
appropriate blends will soon be available to allow more choices and a 
more rapid absorption of biofuels in the marketplace.

                                OUTREACH

    Our vehicle technology deployment efforts, including Clean Cities' 
activities, facilitate training of state and local public safety 
officials (e.g., local fire departments, construction and permitting 
officials, fire marshals, and first responders) which is critical to 
assuring the smooth and continuous expansion of biofuels markets. 
Though ethanol, either as E85 or as a blendstock in gasoline, garners 
most of the publicity these days, DOE also works on infrastructure 
issues which are associated with other current biofuels, such as 
biodiesel, and monitors the development of other biofuels which may be 
important in the future.
    In the biodiesel arena, DOE is engaged, along with our partners in 
the National Biodiesel Board, in important revisions to that fuel's 
ASTM standard. This work has enabled broader application of biodiesel 
and increased the confidence of Original Equipment Manufacturers (OEMs) 
and vehicle owners that the use of biodiesel blends are compatible with 
existing engines.

                               CONCLUSION

    The President's ``Twenty in Ten'' goal holds the promise of 
accelerating penetration of cellulosic ethanol and other alternative 
fuels into the marketplace and bringing the benefits of a clean 
renewable and alternative energy source more quickly to our Nation. 
Providing the necessary infrastructure is a critical part of reaching 
that goal, and we are mindful throughout our programs of that 
imperative. A comprehensive effort is underway to meet the challenges 
of a growing renewable fuels industry in transportation.
    In order to meet the target of 20 percent gasoline reduction in a 
ten-year span, it will require change in the status quo and agile 
capacity to adopt fuel delivery systems, codes and standards, and the 
national vehicle fleet. The President's ``Twenty in Ten'' initiative 
outlines how this would be achieved through pursuit of technology 
advancements and policy incentives. In addition, voluntary market 
decisions must take place at a rate and scale that is consequential 
within a timeframe that matters. The Department appreciates the 
interest and support of the Committee in this critical area. This 
concludes my prepared statement, and I would be happy to answer any 
questions the Committee members may have.

    Senator Dorgan. Secretary Karsner, thank you very much. Let 
me ask. Do you think the marketplace will solve this problem?
    Mr. Karsner. Provided with the correct policy stimulus the 
marketplace is the delivery mechanism that will ultimately 
solve the problem. I suppose the question is do we have the 
appropriate policy stimulus to enable that outcome?
    Senator Dorgan. You've heard me describe what the major 
integrated oil companies are doing to prevent this from being 
solved. Will that prevention or will those prevention 
activities interrupt it if you think the marketplace is to 
solve the problem potentially?
    Mr. Karsner. I certainly think that those impediments need 
to be addressed with respect to E85 delivery.
    Interestingly I just had lunch with Governor Pataki last 
week who had introduced legislation in New York to address 
those issues very specifically. So, on a State-by-State basis 
those issues are being addressed with regard to E85 under the 
canopy and exclusions on the gas stations. With regard to E85, 
I think we have a need to address it more comprehensively.
    Senator Dorgan. Should we address them on a national basis? 
For example, Chevron-Texaco and Conoco-Phillips station owners 
are not allowed to list E85 on their primary sign listing fuel 
prices and must pay to erect a separate sign. Is that something 
that restrains E85 in your judgment?
    Mr. Karsner. I can't speak for the position of the 
franchise owner itself. But I would say that the New York 
model, if it is not overly disruptive to the marketplace and 
handles the liabilities appropriately, may be something that we 
need to examine with regards to those impediments to E85.
    I would further add though, that the other pathways, E15 
for example, where the pumps are already certified and exist 
may provide for more immediate penetration across all of these 
stations.
    Senator Dorgan. I'm going to ask you about that in a 
moment. But at the moment I'm asking you about the actions of 
the major oil companies to thwart the ability to have the 
infrastructure. Conoco-Phillips memo to franchisee says that it 
will not allow E85 sales on the primary island under the 
covered canopy. Should we do something about that or should we 
just wait for the states to try to do something about that?
    Mr. Karsner. It's a little bit of a challenge, Senator, for 
me to address it because it's really a contractual law issue 
between the parties of the franchisee and the franchisor. The 
reason I brought up the New York example is because I think 
it's an example that has been tested that if it bears out could 
be an example to that. But I'm not an expert in the contract 
law.
    Does it represent an impediment to the distribution in and 
of itself? I think the answer to that is obviously, yes.
    Senator Dorgan. BP will not allow its franchised stations 
to offer payment by credit card at E85 pump. Is that an 
impediment, do you think to the sale of E85?
    Mr. Karsner. If I were a station owner who wanted to sell 
E85, I would think that.
    Senator Dorgan. So, the reason I'm asking these questions--
Do you think there's something for us to do here when we see 
this kind of restraint on the sale of E85 or should we say, you 
know that's happening in the marketplace. If the Big Oil 
companies want to decide to thwart the marketing of E85, so be 
it. We'll just wait. Do nothing. What's your impression?
    Mr. Karsner. The first part of your question, do I think 
something needs to be done. The answer to that is yes.
    Senator Dorgan. By whom.
    Mr. Karsner. I think policy stimulus is clearly necessary 
for the market to deliver that outcome. I don't start with the 
premise that the oil companies are necessarily an adversary to 
the outcome. I think the policy stimulus needs to ultimately 
guide them to that outcome and hopefully guide them there 
profitably.
    Senator Dorgan. You don't think this--these actions are 
detrimental to the right outcome?
    Mr. Karsner. No, no.
    Senator Dorgan. It seems to me that the oil companies are 
doing exactly what you would expect them to do, if they have 
the power to make it stick.
    Mr. Karsner. I mean to say they're not necessarily 
adversarial to the solution. It may be that their 
interpretation of their contractual engagement with their 
franchisees at the present represents an impediment. I'm not 
sure that that impediment couldn't be overcome and overcome 
profitably for them.
    Senator Dorgan. It appears to me their actions are 
adversarial to the sale of E85.
    Mr. Karsner. In the present context I can see where you 
might interpret it that way.
    Senator Dorgan. Would you interpret it that way?
    Mr. Karsner. Were I a franchisee and wanting to distribute 
E85 and being denied to do so under my canopy for sale and for 
profit, I likely would.
    Senator Dorgan. How about as opposed to a policy maker. In 
terms of a franchisee, I understand. As a policy maker, would 
you look at these and believe that. Let me tell you why I'm 
asking the question.
    I don't think that we have a ghost of a chance of solving 
this problem if we have those who control 60 percent of the 
service stations in this country deciding they're going to do 
everything they can to try to prevent people from having free 
access, or I should say reasonable access to E85. This could be 
by keeping it off the island where you have the other pumps, 
not allowing credit cards, not allowing advertisement on the 
price, and so on.
    I don't think we can solve this. I just don't. Unless both 
as franchisees and as policy makers we say, wait a second. You 
can't do this. So, I'm sorry--
    Mr. Karsner. I understand your meaning. I mean, 
fundamentally, there is a misalignment of the national 
objectives with the current laws and profitability in between 
the relationship for the franchisor and the franchisee. The 
complexity as a policy maker is this does involve a private 
contractual relationship to which both parties have consented.
    So, that is why I've said, again, going back to the New 
York model, they seemed to have threaded that needle in a way 
that bears examination.
    Senator Dorgan. My point of this hearing is that we have to 
change that relationship. In fact, we're trying to change the 
relationship by which 60 percent of our oil comes from off our 
shore.
    One other question, others here need to be able to ask 
questions. You say on page four, you seem to suggest to me 
that, and you alluded to it a moment ago, the intermediate 
blends may provide for more rapid absorption of renewable 
fuels. I assume there you're talking about blend pumps at 20, 
30, 40, 50 percent blend, and I believe we really need to get 
to that point as well.
    But I--and while I think that that's something that we 
should move toward, I think still hanging on to the notion of 
substantial widespread marketing of E85 is essential to making 
successful our goal of 36 billion gallons of renewable fuel. 
Would you agree with that?
    Mr. Karsner. I would, but I would say that intermediate 
blends as low as anything above E10. As all pumps in this 
country are presently certified ready and enabled to use E15, 
in theory you could aggressively pursue E85 and at the same 
time pursue an intermediate blend of E15 and substantially 
accelerate your probability of meeting those goals in a shorter 
timeframe.
    Senator Dorgan. Mr. Karsner, you're a good Assistant 
Secretary. You and I have traveled together.
    Mr. Karsner. Yes, sir.
    Senator Dorgan. I like your work. This is one of those 
cases, on this issue where we as a country have pledged that we 
are moving in this direction. We're going to head toward 36 
billion gallons. We have to find a way to market it, or we're 
going to fail. This will collapse. On some policies we can sit 
around somewhere between daydreaming and thumb sucking and 
nothing much will come of it. Nobody cares much because we just 
don't do this or that or the other thing.
    In this case, if we don't solve this infrastructure 
problem, this whole issue of producing renewable fuels and 
being less dependent on foreign sources of energy will not 
matter. We will fail as a country. So that's why this is so 
unbelievably important. We have to get the infrastructure 
right. It's not even a very sexy subject, having a hearing on 
infrastructure on E85. But it has profound consequences for 
this country. I'm going to send you this list of questions, and 
I hope we can work together.
    Again, I appreciate your work. I don't mean to badger you 
about this. But I just feel so strongly that the policy issues 
here are just too important. We've just got to deal with them. 
They're just of paramount importance.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman. Mr. Karsner, 
appreciate your being here, your testimony. I guess I'm 
listening to your comments, listening to what the chairman of 
the committee here has indicated and it just strikes me as 
we're having this committee meeting after the horse has already 
left the barn or whatever the expression is.
    Senator Klobuchar mentioned the kind of the chicken and the 
egg situation that you can't make this happen unless you've got 
the infrastructure in place where you know you can fuel up and 
you're not going to buy the car unless you--we need to know 
that the infrastructure is there. We have signed on to a 
policy. The Administration has endorsed it very rigorously. 
Here we are. Now we're trying to figure out how we make it 
work.
    It seems to me that many of these questions should have 
been asked before we committed to the policy. If we couldn't 
make the policy work, perhaps we shouldn't have gone down this 
road. We're out the barn door so we're making it happen.
    You have mentioned in the wording that you have used a 
couple of different times the current rate being insufficient 
here in terms of the number of filling station pumps that are 
out there, the rate that we are on and just the reality that 
we're not going to be able to achieve our goal unless we 
improve the rate and scale in terms that are consequential, to 
use your terms. What does that really mean? What are we going 
to have to do in order for it to be consequential in order for 
us to meet the goal that we here in Congress have set?
    Mr. Karsner. Ok. First let me say that I do believe we can 
do those things. So it is a reality that we can design and 
include the appropriate policy stimulus. If you're talking 
about some of what the core elements are to get to a rate that 
is consequential, we have already done and addressed the most 
important core element, which is can we enable the conversion 
technologies to produce domestic clean fuels supply? Can we do 
that economically in a timeframe that's consequential? The 
answer to that is, yes, from the technology point of view, the 
capital formation point of view, and the growth rates that are 
currently existing in the market.
    The question that we're discussing today is then what do we 
do with all of this fuel? Where does it go? We know that where 
we know it needs to go is in our vehicle fleet. The amount of 
our vehicle fleet that can handle both intermediate blends in 
cars that are warranted or E85 is much too small.
    So at a cost of 45 to 200 dollars to modify our vehicle 
fleet and make it flex fuel ready, we need to get to that state 
where we uniformly have traffic predictably in terms of the 
cars that we have. On a comparable basis this is like having 
the option to buy mats or even maybe mud flaps, but with a 
larger more significant national security implication. That's 
the car side of it. Those cars need someplace to go and a fuel 
to get.
    E85 is an important strategy, one that we will continue to 
pursue and to maximize, but it is constrained by locality and 
by distribution of the fuels. So we are looking into other, 
lower intermediate blends that have already accessed 
infrastructure such as E15. That will require a certification 
process by EPA and other blends like E20 that the state of 
Minnesota is petitioning for.
    So the very things that we're talking about today, retail 
delivery structure, the pumps and retail availability of the 
modification of the vehicles, really are the enabling and 
negating factors for the piece, the most difficult piece that 
we've already covered, which is the production.
    Senator Murkowski. Mr. Chairman, my time's up. Thank you.
    Senator Dorgan. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Mr. Secretary, 
there are 129,000 flex fuel vehicles in New Jersey, absolutely 
no E85 ethanol pumps in the State. So, I look at that and I 
look at our national strategy and I say to myself that this may 
be ethanol, a success story for rural development in the 
Midwest. But if we don't create the infrastructure necessary to 
transport these fuels nationwide there's a real threat that 
biofuels can be viewed as a regional issue rather than the 
national one that we expect it to be.
    I have been supportive of the pursuit of ethanol, but that 
support can't be just for regional purposes at the end of the 
day. It's about a national strategy. So it runs a risk of 
losing support if it only can be confined to a part of the 
country.
    One solution to this problem has been discussed has been to 
transport ethanol to the coast via pipelines. But I also 
understand that ethanol has a tendency to corrode and crack 
traditional fuel pipelines. Earlier this year, on April 12, you 
were before the committee. That's about three and a half months 
ago. I asked you then, specifically, about ethanol 
infrastructure and whether the Department was working in 
conjunction with the DOT, the Department of Transportation to 
solve the problem of transporting ethanol via the pipeline. I 
think you told me at the time that you were just having 
meetings. So my question is has the work begun? What progress 
has been made? Let's start there.
    Mr. Karsner. Yes, the work has begun.
    Senator Menendez. When did it start?
    Mr. Karsner. I think shortly after that hearing to be 
honest with you or immediately before it, so maybe three or 4 
months ago. I don't recall when our hearing took place.
    Senator Menendez. What type of progress has been made?
    Mr. Karsner. I'm less comfortable speaking for the progress 
and the milestones because it is the Department of 
Transportation that does the work. We play a supporting and 
facilitating role. So, we meet not less than monthly at the 
highest levels with the Department of Transportation to discuss 
that issue.
    But I would add again, that you're in a dynamic developing 
environment. So some things relative to pipelines are really 
based on corn based ethanol, which is conventional ethanol, 
which we have no investments in through the Department of 
Energy because it is already commercial at market. We 
anticipate for New Jersey, for the Northeast, for the 
Southeast, for other regions of the country to break out of the 
regionalism of the conventional ethanol and that we will see 
cellulosic ethanol on line and at commercial scale by 2012. So 
it is as likely in our mind that you would get a long distance 
transportation corridor from the Midwest for pipeline as it is 
that local producers would begin within the same timeframe.
    Senator Menendez. Why is this such a technical challenge 
that the Brazilians have been pipelining ethanol for years?
    Mr. Karsner. I'm not sure that it is a technical challenge. 
You know the Brazilians have a monopoly on their pipeline 
system. Petrobas has had that mandated for three decades, as 
you indicate. I think it is a question of our private pipeline 
companies getting comfortable with the proposition.
    I understand that many of them are, and that many of them 
are pursuing it and others of them are quite skeptical. What 
they would like the Federal Government to do, and what we are 
pursuing, is that material science based on the corrosion and 
the cracking that you mentioned as a current impediment.
    Senator Menendez. Let me ask you this. I also understand 
that you are all working with the EPA to test whether 
traditional gasoline cars can use ethanol concentrations as 
high as E25, similar to what cars use in Brazil. In your 
testimony you referenced the testing was completed for one 
model of car, but when will the Department and the EPA finally 
have done the work necessary to put blends above E10 in regular 
gasoline cars?
    Mr. Karsner. To my knowledge sir, not having gone through 
the process before, I am told that with the present statutory 
process, public comment periods etc, about the fastest that we 
could expect that to be completed would be 36 months, with the 
majority of time focused on the studies and technology 
validation that would precede fuel certification.
    Senator Menendez. Thirty-six months. You know, GM and Ford 
together account for over 30 percent of the vehicles sold in 
Brazil and many of those cars are not flex fuel, yet they run 
on E25. Why can't those same cars run on E25 here in the 
States?
    Mr. Karsner. I think this is a great question for the 
automakers. That's precisely what the Federal Government means 
to use our testing processes to validate. I mean some of--now 
most of those cars, I think, what you've been told are 
different models and different engine blocks than are sold in 
this country. That is, in fact, true. There are some common 
models that are sold in Brazil and sold in the United States 
which begs that precise question. But that is why we are 
embarking on studying that in a very methodical way, so that we 
can validate that answer.
    Senator Menendez. I will certainly ask the questions. I 
hope the Department's asking questions too. You're ultimately 
in charge with promoting the energy security of the country at 
the end of the day.
    I'm going to ask you to submit for the record the timelines 
on some of this work that I've been asking you about.
    Mr. Karsner. Sure.
    Senator Menendez. When it began? What steps need to be 
completed and when this work will bridge the technical hurdles 
to allow for some of this to take place? I look forward to your 
responses in writing.
    Senator Dorgan. Thank you very much.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. Thank you again 
for testifying before our committee. I want to say if we come 
from a State--or I come from a State in Tennessee that is 
working on a continuum, if you will, as it relates to 
especially cellulosic ethanol but other ethanols. I have 
actually spent a good deal of time talking with people about 
E85 pumps.
    While there may be certain marketing constraints that our 
chairman referred to, there is also just the issue of the 
chicken and egg. That is I know of one particular facility that 
put in an E85 pump and it's more of a novelty, if you will. 
There just aren't that many vehicles out there to utilize it 
and they want to be part of solving our problem.
    I do think that what you have said about the blend piece is 
the way for us to maximize if you will the use of alternatives 
in this way. At the same time hear from people who market 
petroleum around the country that the various state standards 
that exist is one of the most complicating issues they deal 
with. I wonder if you could speak to that for just one moment? 
Apparently every State has a different formula and that too, if 
you will, creates additional issues, if you will, for people 
who won't actually use ethanol as part of their mix.
    Mr. Karsner. Thank you, Senator.
    I think that really refers to this idea of this balkanized 
boutique fuel market that we have across this country and the 
need for simplification for greater efficiency. So, while 
that's not unique to the question of ethanol, it certainly 
affects it when you start talking about different states with 
different blends and different certifications. For example, 
Minnesota is putting forward its own petition and sees a need 
to get to a higher intermediate blend to augment its E85 
outlets which lead the Nation right now. That should serve as a 
bellweather we think we need this solution nationwide.
    So what we are seeking, together with EPA, is to understand 
and examine and determine whether or not these intermediate 
blends can be proactively certified so that we have nationwide 
standards.
    Senator Corker. As we look at the limited resources and I 
know that at some point we're going to be looking more fully I 
guess at the infrastructure needs both at the retailer but 
certainly at the pipelines. A few have mentioned that. What 
sort of sequence of priorities is most important for us to look 
at from the standpoint of the actual capital deployed and maybe 
the Federal Government's role in that? What sequence?
    Mr. Karsner. This is a great question in terms of whether 
it is the chicken or the egg. To the extent that you separate 
them and say what could come first, I suppose this is more of a 
personal than a professional assessment. But I would always say 
go with the least costly, least pain, first.
    In other words, if modification of the flex fuel vehicles 
creates the market or the repository where all the fuels 
ultimately go, one would say why are we not coming up with a 
policy where the automakers could do that profitably and not 
linking it to their CAFE obligations. So once we understand, 
once anybody understands, including the majors, that vehicular 
traffic is more predictable in terms of consumers who can 
choose, then you immediately lift the incentive for this to get 
beyond independent, downstream retailers and to get it into the 
majors.
    So you need both, but in terms of least cost, modifying the 
fleet for flex fuel capability across the Nation, I think is 
quite important. It is important that we remove it from a 
selective exercise and not knowing where the cars in New Jersey 
or in California match up with the stations because it's going 
to take 17 years to turn the fleet. So it's something we need 
to get on with in a hurry.
    Senator Corker. Thank you, Mr. Chairman. I know my time is 
up.
    Senator Dorgan. Senator Corker, thank you very much.
    Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman. Thank you for 
being here. The E10 can be burnt basically as gasoline right 
now without any modification in any vehicle, right?
    Mr. Karsner. Correct.
    Senator Tester. Do you have any idea how many pumps are 
pumping E10 or E15 right now?
    Mr. Karsner. I couldn't give you a number. But I would say 
it's probably on the order of about half the Nation's pumps 
right now doing E10. I think if you said an ethanol blend, any 
blend up to E10, it would probably be on the order of 80 
percent of the pumps in the Nation.
    Senator Tester. Ok.
    Mr. Karsner. That's a rough guess. I'd like to report back 
for the record.
    Senator Tester. That would be good. That would be fine. If 
you would, I would appreciate that.
    E10, if it goes above E10 than there is some question as to 
whether it can be burnt? Where's the line at? Senator Menendez 
talked about 25. Is that the 25?
    Mr. Karsner. The question above E10 is what the vehicle 
manufacturers will warrant their performance in this country 
for. So it really is not a technical question in its entirety. 
It's really a question of voiding the engines warranties.
    Senator Tester. I'll save that for the car manufacturers 
then. The Chairman talked pretty extensively in his questions. 
I'm just curious. Do you think, I mean you listed--the Chairman 
listed a lot of major oil companies there, many. Do you think 
that they are maybe obstructing the usage of ethanol?
    Mr. Karsner. I think the oil companies have a fiduciary 
responsibility to maximize profitability for their 
shareholders. The idea of eroding that profitability with 
something that doesn't belong in their market of fuels is 
probably against their interests.
    Senator Tester. Does that trump national security?
    Mr. Karsner. From whose perspective? From their 
shareholders? From our perspective clearly, we need 20 percent 
displacement of gasoline and ethanol has to be a priority for 
national security.
    Senator Tester. Do you agree that if it never makes it to 
the pump, never makes it to the marketplace its chance for 
survival is slim to none?
    Mr. Karsner. I agree that the ethanol must have outlets to 
the marketplace. Not only do we need it to achieve our goals, 
we need it to avoid the industry falling off a cliff relative 
to the growth rates that we have induced in industry. So we can 
keep it growing continuously or we can find an abrupt stop.
    Senator Tester. Is it a position of the Department of 
Energy or do they have a position that our reliance on foreign 
oil is a problem?
    Mr. Karsner. We do have a position that our reliance on 
foreign oil is a severe problem and it is a priority of our 
mission to address it.
    Senator Tester. Do you see any conflict there at all? Do 
you see any conflict over the priority and ethanol not being 
able to be pumped at the pumps because they have agreements, I 
think, and from my perspective, they have agreements 
intentionally so that it makes a consumer depend upon foreign 
oil production.
    Mr. Karsner. Who has agreements intentionally set up?
    Senator Tester. The major oil companies.
    Mr. Karsner. I see.
    Senator Tester. With their franchises.
    Mr. Karsner. Yes. It may be the case that their incentives 
are not aligned with the national security imperative.
    Senator Tester. Ok, that's fine. Information. Do you think 
that there's adequate information going out to the consumer 
about ethanol, E85 or even the lesser percentage blends?
    Mr. Karsner. No.
    Senator Tester. Does the Department of Energy have a plan 
for that?
    Mr. Karsner. We do have a plan. In fact we have 
institutional programming to get communication out.
    Senator Tester. How will you do that?
    Mr. Karsner. We have a Clean Cities Program by one example, 
which has offices in 85 different cities across the country to 
disseminate information, education, website access. But you 
asked me was it adequate or is it sufficient and relative to 
the amount of disinformation--
    Senator Tester. Yes.
    Mr. Karsner. No, it is not sufficient relative to the rise 
in disinformation on ethanol.
    Senator Tester. So you've just brought up a conflict. 
You've just brought up a problem. Is there some action 
proactivity planned to solve that problem from the Department 
of Energy standpoint?
    Mr. Karsner. As with any communication campaign, 
persistence and refining your message and getting out in the 
outlets is your best available tool. But it's not a one sided 
story.
    Senator Tester. You know sometimes I wished I was an 
attorney, but oftentimes I'm glad I'm not too.
    So, I just find it interesting. I think that there is an 
information drought out there. I don't know if there's a lot of 
misinformation about ethanol. I know there's not a lot of 
information about it, about its advantages, about national 
security, about energy security. My take is that maybe we ought 
to be more proactive on that.
    As far as the blends and as far as the taking 36 months to 
figure out what percentage will work in a vehicle. I think 
that's unacceptable to be quite honest with you. Government 
tends to run slow, but there's plenty of studies out there that 
deal with this issue.
    Mr. Karsner. With all due respect, Senator, it's not 
something we can do by just adopting a study. It's not whether 
we understand whether the engine can perform that way. We could 
do that tomorrow.
    Senator Tester. Yes.
    Mr. Karsner. Whether we can certify it, whether the EPA can 
issue its certification according to statutory processes that 
it has is the issue. So we are dealing with the process that 
was given as a matter of the law and 36 months would be a 
record pace.
    Senator Tester. Could you present some things that we could 
do to the statute to make that process more simple?
    Mr. Karsner. We'd be happy to go to the EPA and report back 
to the record or work with your office.
    [The information follows:]

    Statutory changes are likely not necessary. Based on our most 
recent experience, the majority of the time consumed in the current 
process for certifying new fuels is focused on the studies and analysis 
that are the basis for certification. The Department has been working 
with national laboratories and private contractors to conduct an 
extensive data collection effort and analyze performance, 
environmental, materials, and other issues associated with intermediate 
blends. EPA has been very helpful in reviewing DOE's test design and 
methodology to ensure that our data collection and analyses will 
satisfy their requirements for determination of fuel certification. DOE 
has put this testing on a fast track and plans to share data with EPA 
throughout the process in order to inform their regulatory activities.

    Senator Tester. That would be great. Thank you very much. 
Thank you, Mr. Chairman.
    Senator Dorgan. Senator Tester, thank you very much.
    Senator Martinez.
    Senator Martinez. Thank you, Mr. Chairman. Secretary, thank 
you for being here. I represent the State of Florida. We have 
over 17 million people. The third largest consumer of petroleum 
products in the country and currently we have only 359,000 
vehicles that are E85. But to compound the problem even more we 
only have one commercially available E85 pump available for 
that whole State of Florida. We are also way downstream from 
where most of the ethanol is produced.
    So, a couple of questions arising from that. We're not 
producing ethanol in Florida that we can utilize and it would 
be likely not to be done for some period of time. Although I'm 
very hopeful that in the future Florida will play a very big 
role in that. But in the meantime do you think it would advance 
the national security interest of our country if we were to 
lift the tariff on Brazilian or on ethanol from any foreign 
source, but more specifically from Brazil and import ethanol to 
a place like Florida where we can then utilize it readily by 
bringing it in from off shore as opposed to importing oil from 
a country like Venezuela?
    Mr. Karsner. It's a great question, Senator. I'm not an 
expert in trade law or in the matter of the tariffs. Let me 
give a little bit of context. First of all, Florida is one of 
our six winners for cellulosic ethanol bio- refinery grants 
that we've invested up to a billion dollar in cost shares this 
year. So, we're very hopeful about the future of citrus waste 
for cellulosic ethanol and some of the good work of Dr. Lonnie 
Ingram at the University of Florida has been instrumental.
    We see the southeast as a key area for ethanol growth on 
cellulosic that will be affected if other cheap ethanol were to 
flood into the market from Brazil. But even if it were that 
cheap, given its tropical advantages and growth rate of sugar, 
it's questionable whether the Brazilians would have sufficient 
output even if there were a tariff lifted. Because of their own 
requirements, the Brazilians are actually short in meeting 
their own requirements and are having to scale back the amount 
of ethanol blends they have in their own systems.
    So I think that there is an extraordinary amount of excess 
optimism about what a tariff change would do relative to 
Brazilian outputs. We are heavily engaged with the Brazilians, 
in terms of the partnership, signed and agreed to by Presidents 
Lula and Bush on technical R and D collaboration and policy 
development. So, there might be, 1 day, when we see a greater 
globally commoditized ethanol market. At present that is a 
lower priority than getting to a more universally commoditized 
domestic market on the back of scaling infrastructure through 
the new R and D and cellulosic pathways.
    Senator Martinez. I'm excited about the future research as 
well and I think there is a lot of hope coming out of the 
University of Florida's research. But more specifically to what 
we can do in the meantime if the Brazilian option might not 
be--it certainly isn't practical because even though we profess 
that we want ethanol there's not the wherewithal here to do 
away with the tariff.
    So let me move away from that. The business of the 
infrastructure being there and the pipelines being utilized 
could also be a way in which Florida could benefit. I'm not 
sure I understood earlier, when you were asked about this 
existing infrastructure, whether it could be utilized or not. 
But I believe Senator Menendez had asked you something along 
these lines and I wonder if you might address it for me as to 
how can we get the existing pipeline infrastructure to be 
available to be utilized for ethanol so that we might be able 
to transport it to places like Florida.
    Mr. Karsner. Again I think the Department of Transportation 
is working with pipeline operators who are interested in the 
subject. I understand there is a great deal of interest in new 
dedicated pipeline infrastructure. Actually retrofitting the 
use of a pipeline I understand to be slightly more complicated 
in terms of being able to flush that system and ensure that you 
minimize the corrosive nature of the oxygenates.
    So, those things are under the auspices of the Department 
of Transportation. We are conducting the technical tests to 
them for the private sector participants that are interested. 
But again, something much more in our portfolio is developing 
regionalized feed stock solutions and regionalized cellulosic 
future. So if you look at the same timeframe for planning, it's 
a question of which happens first.
    Senator Martinez. So for Florida's future we're more likely 
to find the solutions to our own problems closer in the 
neighborhood than we would be shipping it in pipelines across 
the country.
    Mr. Karsner. We're working to make that at least as likely, 
if not more likely.
    Senator Martinez. My time is up, but let me just, as a 
comment, tell you that I know you don't mean to sound like your 
protecting the oil industry from their failure to provide 
outlets for ethanol. So I would just add to the other comments 
that you heard that I think it's vital that they be pressured, 
that they be pushed or they be bypassed, as we try to get 
ethanol to the consumer in an equally, fair playing field 
regardless of the current contractual obligations because those 
contractual obligations can also be changed by the mutual 
consent of the parties.
    I think the other relation of government is to push in that 
direction for the sake of our national security, for the sake 
of our energy security and also to help consumers find lower 
prices.
    Mr. Karsner. Sure.
    Senator Martinez. Thank you.
    Senator Dorgan. Thank you, Senator Martinez. Senator 
Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman. Secretary 
Karsner, is biodiesel still an R and D priority for the agency?
    Mr. Karsner. Biodiesel is still something the agency works 
on. It is, relatively speaking, volumetrically far less 
available than the alcohol-based alternatives that we look at. 
So it is prioritized accordingly.
    Senator Cantwell. So are we still spending resources there? 
I mean I have information--
    Mr. Karsner. We are, predominately on codes and standards 
and acceptability. I believe you're going to have a witness 
from Chrysler Corporation, for example, and so when they talk 
about the reintroduction of the diesel engines we're moving 
with them to certify higher levels of biodiesel blends. B5 is 
already certified and upward to B20.
    So, there's less of a technological challenge and the 
technical work that we do for biodiesel is really about using 
other and better future feed stocks for it.
    Senator Cantwell. But don't we have to keep driving down 
costs? Isn't that part of R and D is to technology 
breakthroughs that will help us drive down the costs 
particularly by using the by products of--I mean I think we 
know a lot already about crushing seed. That's not the 
challenge. The challenge is figuring out what you can do to add 
value to that byproduct that's produced and are we doing work 
on that?
    Mr. Karsner. I can report back to you for the record on 
precisely what the biodiesel program--
    Senator Cantwell. I think we're moving away from it. My 
point is that I don't think we should be. So, but happy to 
hear--
    Mr. Karsner. Happy to work with your office and brief on 
that.
    [The information follows:]

    The Biomass Program does Products R&D to make high-value chemicals 
and materials in biorefineries, including biodiesel facilities. 
Specifically, for glycerol, a byproduct of biodiesel production derived 
from plant and seed oils, the Program is working with the Pacific 
Northwest National Laboratory to develop enabling technologies that 
will lead to an integrated process for the production of propylene 
glycol (PG) from glycerol. PG is currently fossil-based and is used in 
a wide variety of applications including detergents, food, paints, 
functional fluids (antifreeze, deicers), and polymers. The goals of 
this project are to expand the market for glycerol from biodiesel 
production, displace fossil-based PG production, and increase the 
profitability of biodiesel production. This project expands the focus 
of the Biomass Program's portfolio beyond cellulosic ethanol to 
accelerate the Program's efforts toward reaching the President's 
``Twenty in Ten'' goals.

    Senator Cantwell. Happy to hear that the Administration may 
be changing its mind on that.
    On this issue I think my colleagues are obviously trying to 
get your comments and thoughts obviously because your title is 
the Assistant Secretary for Energy Efficiency and Renewable 
Energy. We have set, at least out of the Senate a goal; I mean 
a mandate, as you mentioned, of reducing by 20 percent at least 
even the Federal fleet efficiency and a 10 percent mandate by 
2015 every year of use of alternative fuels. So, if that ends 
up becoming law the Federal Government in and of itself will 
have a challenge.
    But let me ask you specifically, do you think that--would 
you support legislation that says that the oil companies can't, 
in contract nature, prohibit franchisees from making 
alternative plans for alternative fuel on their sites?
    Mr. Karsner. Senator, we just have to review the 
legislation that you're contemplating.
    Senator Cantwell. My colleague, Senator Klobuchar talked 
about it. I'm saying do you think that the franchisees should 
be able to, just because they buy gasoline from Chevron or 
Shell, do you think they also should be prohibited from 
purchasing a product from an alternative fuel source? I'm just 
asking your opinion on whether you think they should be 
prohibited?
    Mr. Karsner. You know, you're asking me about a 
relationship, a specific legal relationship, between franchisor 
and franchisee. I'm just not nearly knowledgeable enough. I've 
never owned a gas station. I've never owned an oil company. In 
terms of the end outcome you seek, accessibility and 
penetration beyond independent downstream retailers amongst our 
majors clearly that is something the Administration would like 
to work to occur. Asking a very specific detailed question on 
how we would affect the franchise contract is just something we 
would have to see in detail.
    Senator Cantwell. I think because you point out in your 
testimony in order to meet the 20 percent gasoline reduction in 
a 10 year span will require a change in the status quo, an 
agile capacity to adopt fuel delivery systems, codes, standards 
and the national fleet. So, I think you're pointing it out.
    Mr. Karsner. But not to exclusively toward E85. We're 
pointing it out in the context of E15 and E20 by way of 
example, were they certified, would go further and faster and 
would likely be acceptable to--
    Senator Cantwell. I love that you can go over to the 
Pentagon and get gasoline there and you have your traditional 
sources. But right next to it are E85, biodiesel and even the 
use of natural gas. Now it's at a separate island, separate 
station, everything.
    The question though is does the Administration--if we're 
going to meet this goal than obviously the Administration has 
to have a plan. That's what everybody is dancing around here 
trying to get an answer from you as to what does the 
Administration want to do on that infrastructure issue. I get 
that it's not all your portfolio, some of this area is probably 
some other committees.
    But you mention delivery systems and codes and standards 
and so I'm assuming by that you believe that we should actually 
pass legislation about codes and standards. Is that correct?
    Mr. Karsner. I'm not at all sure that legislation is what's 
required.
    Senator Cantwell. But who would adopt, in your testimony, 
you say codes and standards. Who would adopt that then?
    Mr. Karsner. I think that there are many means already in 
statute to develop the necessary codes and standards. For 
example, the B5 and B20 that I just referred to doesn't require 
new legislation; it requires the appropriate testing and 
certification. With regard to the infrastructure that we're 
dancing around in terms of a plan, let me say, that we're being 
clear. We do not believe a plan, exclusively based on E85 
penetration is a plan that can be consequential within the 
timeframe being discussed.
    Therefore alternative intermediate blends must be part of 
the conversation. There is infrastructure in place now without 
any modifications, without any need to address codes and 
standards for E15 that would go a very long way toward that 
objective.
    Senator Cantwell. I think you're answering the question in 
a different way. I'm glad to hear that you're thinking beyond 
E85 because frankly the northwest was over 70,000 flex fuel 
cars and in most alternative fuel stations we have, 50 are 
biodiesel. So we have next, in less than 10 days the largest 
biodiesel facility in the United States opening with 100 
million gallons of biodiesel hadn't even been produced in all 
of the United States. So we're definitely on a different path.
    But my point is this, does the Department of Energy, 
particularly your job on renewable fuels, believe that we need 
to adopt further codes and standards as it relates to 
infrastructure? Yes, no?
    Mr. Karsner. I think I prefer to report back to the record 
comprehensively because it could be a very wide range of lists.
    Senator Cantwell. In general do you think that the Federal 
Government needs to--
    Mr. Karsner. With regard to biodiesel I would say yes. With 
regard to the other alcohol blends I would say I need to give 
you a more extensive answer on whether or not the codes are 
necessary.
    [The information follows:]

    The Department of Energy has been collaborating with the American 
National Standards Institute (ANSI), the recognized administrator and 
coordinator of private sector voluntary standardization in the U.S., to 
identify barriers to large scale market entry of biofuels. This 
collaboration includes other Federal Agencies, such as the Department 
of Transportation, National Institute of Standards and Technology 
(NIST) and the Environmental Protection Agency, to determine how the 
Federal Government can facilitate and accelerate the development and 
adoption of voluntary standards that are necessary for the emerging 
biofuels infrastructure. The Department has also been collaborating 
with the manufacturers of dispensing equipment, automotive 
manufacturers, and Underwriters Laboratory to complete the 
certification of E85 dispensers and other fueling equipment on an 
accelerated schedule. The Department provides technical guidance and 
coordinates with standards organizations such as the American Society 
of Testing and Materials (ASTM), the National Fire Protection 
Association (NFPA), the American Petroleum Institute (API), the 
American Society of Mechanical Engineers (ASME), and the Society of 
Automotive Engineers (SAE). DOE also hosts public/private sector 
workshops to discuss relevant issues. The Biomass Program will continue 
to work with its partners toward the development of a biofuels 
infrastructure that will ensure consumer confidence, environmental 
protection, and the integrity of our Nation's fuel supply, 
distribution, and utilization infrastructure.

    Senator Cantwell. Thank you, Mr. Chairman.
    Senator Dorgan. Senator Bunning.
    Senator Bunning. Thank you very much, Mr. Chair and I 
apologize for being here a little late because I was on the 
floor offering an amendment on SCHIP.
    Mr. Karsner, ethanol has grown rapidly in recent years and 
has been praised for decreasing our dependency on oil, 
improving our trade deficit, cleaning up our environment and 
providing investment for American communities rather than the 
Middle East. As you may know I have been a leading proponent to 
the effort to develop coal to liquid fuels. I believe that coal 
to liquid fuels have all the benefits of biofuels but can be 
used in existing infrastructure and blended in current fuels. 
If we hold them to the same environmental standards do you see 
any reason the United States should not use corn cellulose and 
coal to make secure domestic fuels?
    Mr. Karsner. If all of them are held to precisely the same 
environmental standards?
    Senator Bunning. That's correct.
    Mr. Karsner. So I would assume you would include emission 
standards, tailpipe emissions and that?
    Senator Bunning. Exactly what I said.
    Mr. Karsner. Ok. If it includes the same emissions 
standards, which one would assume includes carbon capture and 
storage, I would say the answer to that is yes.
    Senator Bunning. I don't think we have carbon capture and 
storage on regular gasoline, do we?
    Mr. Karsner. No, but you would need that to get to the same 
emissions standards for coal to liquids. The coal to liquids 
cannot meet the same emissions standards as the other fuels you 
mentioned without carbon capture and storage.
    Senator Bunning. That's a matter of opinion, sir.
    Mr. Karsner. Ok.
    Senator Bunning. If you do some scientific research you 
might find it differently.
    Mr. Karsner. Yes, sir.
    Senator Bunning. You mentioned several of the 2005 energy 
programs that DOE is working on. Could you tell us if there are 
any programs that have not gone as you hoped and could be 
refined by Congress, specifically could you also provide an 
update about the loan guarantee program?
    Mr. Karsner. I would be happy to do that and report back 
for the record, sir.
    Senator Bunning. You don't have that on hand?
    Mr. Karsner. Our office has no auspices or oversight on the 
loan guarantee program. But I'd be happy to get that from DOE 
and report back to your office on it.
    [The information follows:]

    EERE does not have management responsibility for the DOE Title XVII 
loan guarantee program. However, I am pleased to provide the following 
update on the program's status. On August 14, 2006, the Department 
published a set of Guidelines (Guidelines) and an initial solicitation 
for Pre-Applications for the first round of loan guarantees authorized 
by Title XVII of the Energy Policy Act of 2005 (Title XVII or the Act) 
(42 U.S.C. 16511-16514). (71 FR 46451). The deadline for submission of 
Pre-Applications in response to the first solicitation was December 31, 
2006, and DOE received 143 Pre-Applications which are currently being 
reviewed.
    On February 15, 2007, President Bush signed into law Public Law 
110-5, the Revised Continuing Appropriations Resolution, 2007 (CR or 
Public Law 110-5) which authorizes DOE to issue guarantees under the 
Title XVII program for loans in the ``total principal amount, any part 
of which is to be guaranteed, of $4,000,000,000.'' Section 20320(b) of 
the CR further provides that no loan guarantees may be issued under the 
Title XVII program until DOE promulgates final regulations that include 
``programmatic, technical, and financial factors the Secretary [of 
Energy] will use to select projects for loan guarantees, policies and 
procedures for selecting and monitoring lenders and loan performance, 
and any other policies, procedures, or information necessary to 
implement Title XVII of the Energy Policy Act of 2005.''
    On May 16, 2007, DOE published a Notice of Proposed Rulemaking 
(NOPR) and opportunity for comment (72 FR 27471) to establish permanent 
regulations for the implementation of the loan guarantee program. DOE 
held a public meeting concerning the NOPR on June 15, 2007, in 
Washington, D.C. The Department is currently developing its final 
regulations for the loan guarantee program.
    The Administration's 2008 Budget proposes that DOE may guarantee up 
to $4 billion in loans for central power generation facilities (for 
example, nuclear facilities or carbon sequestration optimized coal 
power plants); $4 billion in loans for projects that promote biofuels 
and clean transportation fuels; and $1 billion in loans for projects 
using new technologies for electric transmission facilities or 
renewable power generation systems.
    Regarding particular provisions in the Energy Policy Act of 2005 
that concern EERE programs and that have been problematic from our 
perspective, I would call the Committee's attention to section 942, the 
reverse auction for cellulosic biofuels production incentives. Industry 
has expressed limited interest in this provision, and implementation 
has been hampered by ambiguities in the legislation. The Department 
believes this section could be beneficial to industry, if some 
technical and clarifying changes were made. I would be happy to work 
with Committee staff to address these concerns.
    Additionally, under Title III of the Energy Policy Act of 1992, 
Federal agencies continue to strive to achieve alternative fuel vehicle 
requirements, while still reducing petroleum consumption. It is 
difficult, however, to meet those goals, because automakers do not make 
sufficient quantities of alternative fuel vehicles in the models needed 
by the Federal agencies. In many cases, Federal agencies are purchasing 
alternative fuel vehicles to meet statutory EPACT requirements, 
specifically flexible-fuel E85 vehicles (FFVs), that are larger, less 
efficient, and more expensive than the vehicles needed to meet the 
Federal mission requirements.
    For example, agencies would prefer to purchase four-cylinder, 
efficient, compact sedans for many applications. FFVs are not offered 
in that size, and agencies have to purchase six-cylinder, less 
efficient, mid-size sedans or even light-duty trucks in order to comply 
with EPACT. Automakers are incentivized to make FFVs in larger vehicles 
in order to maximize their ability to receive credits towards CAFE 
compliance. It is troubling that Federal agencies striving to achieve 
the goals of EPACT and increase the use of alternative fuels are 
stymied in that effort due to lack of availability of FFVs from the 
automakers, when the technology to make every vehicle flex-fueled is 
proven, widely available, and low-cost.

    Senator Bunning. You mentioned that we will need harmonized 
existing codes and procedures. This has been brought up for 
ethanol. You know before biodiesel our diesel fuel became used 
across the country we had a devil of a time in finding a 
station in Kentucky that delivered diesel fuel. Until all of a 
sudden the major oil companies and others and some major 
independents for that matter started to put diesel pumps in 
their delivery system.
    Do you see, other than the other fuels that you mentioned, 
any ability other than E85 which has a corridor now from 
Chicago to St. Louis and to Kansas City which has quite a few 
E85 pumps, the expansion of that into other areas? For the 
simple reason we are developing ethanol plants, biodiesel 
plants and as my good friend from Florida said, they would like 
to see the same type of availability in Florida and many other 
States feel the same way. Do you see that happening?
    Mr. Karsner. I see it happening but not at a rate that will 
bear fruit relative to the end State.
    Senator Bunning. How about by 2015?
    Mr. Karsner. By 2015 at the present rate we will not have 
had sufficient--
    Senator Bunning. It won't impact us.
    Mr. Karsner. On E85. Again E15 we already have 100 percent 
penetration of the infrastructure we just have to only use it 
up to E10.
    Senator Bunning. Yes, I know. I use it in my car.
    Mr. Karsner. Right. But your example about the diesel is a 
very good one in the sense that about half of our stations have 
diesel access now. It's a useful analog, in terms of work on 
promulgating the ultra low sulfur diesel standard that we have 
just adopted and the oil companies are now distributing through 
those pumps.
    Senator Bunning. The Secretary--or the Senator from 
Washington talked about the availability and use of diesel fuel 
in the far west. In Owensboro, Kentucky, I'm going to cut the 
ribbon for a plant that will make a million barrels of 
biodiesel a year. Now, they've got to distribute that 
somewhere. This is an independent expenditure.
    My time has expired. But this is an independent company 
that is not connected with any major oil companies so they have 
to have the distribution capability of getting it to places 
that will sell it. If we don't have that capability or the 
Department of Energy doesn't care about that capability than we 
are not going to have any impact on reducing our dependency on 
Middle Eastern oil.
    So, is the Department of Energy interested or aren't they?
    Mr. Karsner. With regard to that specific Owensboro plant 
I'd be happy to get in touch with your office and in touch with 
the people who are behind that plant and discuss with them 
their capacity to get to market. So we are interested and we do 
care.
    Senator Bunning. A million barrels is not a drop in the 
bucket. It's a pretty big outfit.
    Mr. Karsner. I'd be happy to follow up with your office, 
sir.
    Senator Bunning. Please do. Thank you very much. I'm over 
my time.
    Senator Dorgan. Thank you. Senator Sessions.
    Senator Sessions. Thank you. Just briefly, Mr. Secretary. 
My thoughts about E15, E85 and ethanol sort of run to a common 
sense approach, I think. I definitely support ethanol. I think 
it provides tremendous potential for our agricultural 
community. It keeps wealth at home. When we purchase a gallon 
of fuel from abroad that's a transfer of American wealth which 
I would prefer it stay in our own economy. So I favor that and 
have supported the ethanol requirements.
    But it seems to me that when we draw and if we draw 
regulations, should not those regulations common sensically say 
that if the ethanol is produced in a certain area of the 
country that we ought to emphasize that E85 pumps in that area 
of the country and not 2,000 miles away where it's got to be 
hauled to there. If we're trying to achieve the lowest possible 
cost for our consumers and have you given much thought to 
precisely how the most economical way to handle the 
distribution of ethanol is and what kind of mandates might be 
required?
    Mr. Karsner. Yes, sir. I think you've framed a very good 
question. Of course, our current programming through Clean 
Cities, for example, is nationwide and we would like to see E85 
be a nationwide fueling option. But logically it is at lower 
cost where it is co-located with the conventional industry 
today. That is why the State of Minnesota has about half the 
Nation's pumps. Then you can take a handful of other states 
again co-located with the conventional corn based ethanol 
economy.
    Senator Sessions. Now what do you mean by that? Meaning 
Minnesota produces a lot of ethanol so that's why they have the 
most ethanol pumps?
    Mr. Karsner. We think there's a relationship there.
    Senator Sessions. Alright. Do you know how much it costs to 
move it to Oregon?
    Mr. Karsner. It costs much more than if you got it in 
Minnesota.
    Senator Sessions. Now wouldn't it be better to emphasize 
greater encouragement to the Midwest where most of our ethanol 
is being produced than to do it nationwide in one fell swoop?
    Mr. Karsner. I think your final phrase is the right one. Do 
you do it in one fell swoop or is this evolutionary through 
time? It certainly makes more sense to have more economical co-
location earlier with production when the challenges are with 
delivery, teminalling and transport.
    But, your State, for example has amongst the most promising 
futures in cellulosic ethanol, and as you know, many of the 
leading scientists that have been contributing to our efforts. 
So, when and if we scale cellulosic ethanol and if co-located 
in other areas then we would anticipate and we would be 
hopeful, that we have a regime that enables E85 pumps without 
impediments nationwide.
    Senator Sessions. Do we have--my time is up. What kind of 
rules do we have now nationwide that applies to gasoline pumps 
and ethanol?
    Mr. Karsner. I think that's the dilemma we're here 
discussing is that really these are State-by-State rules 
presently and so, for example, some of the issues that have 
been addressed here today have been addressed in New York with 
legal and regulatory action. Other States haven't addressed 
them at all. But I'm not sure that we have a nationwide 
approach as of yet.
    Senator Sessions. Thank you.
    Senator Dorgan. Mr. Secretary Karsner, let me go through 
something with you quickly. The President in his State of the 
Union address said he wants to get to 35 billion gallons of 
ethanol by the year 2017. That's 10 years from now. You 
indicated that one half of the gasoline we use in this country 
is blended with 10 percent ethanol. We use about 140 billion 
gallons of gas, means 70 billion gallons are blended with 10 
percent ethanol. That's a seven billion gallon market for 
ethanol at the moment.
    Ten years from now we want to be at 35 billion according to 
the President's State of the Union speech and you're talking 
now about going to 15 percent blend because you can do that 
without dealing with the other issues. My great concern about 
what I heard here today is that if we're not running full speed 
to try to figure out how do you market through vehicle 
carburetors and fuel injectors this new fuel that we're going 
to create. If we don't find a way to market that in significant 
quantities, and I'm not talking about 10 percent or 15 percent, 
then we're headed toward failure. We're headed toward a cliff 
with respect to ethanol markets.
    I understand why you would say let's try to go from 10 to 
15 because you don't need modifications and so on. But if we're 
not running full speed to try to figure out how you get E85 
pumps on those islands on gas stations all across this country. 
If we don't do that, we can't succeed. So that's my concern at 
the moment from what I've heard here today because you've 
mentioned on several occasions well, we can go to 15. We can go 
to 15.
    This hearing is about blend pumps. When I'm talking about 
blend pumps, I'm talking about 20, 30, 40, 50 percent blend 
pumps, and I'm especially talking about E85 pumps.
    Mr. Karsner. I want to be clear, because it sounds like I 
haven't been clear through the hearing. I don't believe any of 
these are mutually exclusive or sequential. I think that you 
can maximize the possibilities at E15 and maximize the greater 
penetration of E85 and that we should be looking at blend pumps 
for everything in between.
    So the question is multiple pathways versus an exclusive 
pathway. I think we should be preserving multiple pathways. So 
that's what we're doing is testing E15, E20, higher blends 
where possible and trying to maximize routes for E85.
    Senator Dorgan. One final question. The June GAO report 
titles the conclusion page, ``DOE Lacks a Strategic Approach to 
Coordinate Increasing Production with Infrastructure 
Development and Vehicle Needs,'' Speaking of biofuels, is it 
fair or unfair?
    Mr. Karsner. We responded to that as generally a fair 
criticism of the Department's past and it's characteristic of 
the rate of evolution in the Department's thinking. So we are 
approaching that report with the need for action.
    Senator Dorgan. If a year from now the GAO is asked to do a 
similar report you think that is--
    Mr. Karsner. That will not be their finding.
    Senator Dorgan. There will not be the lack of a strategic 
approach.
    Mr. Karsner. I would agree. They will not find a lack of a 
strategic approach if they did a year from now or a month from 
now.
    Senator Dorgan. Mr. Karsner, as I indicated you know a lot 
about these subjects. I appreciate that you come to government 
and are lending us your thoughts and your abilities. The fact 
is that I want you to succeed, but as I started by talking 
about the major oil companies, I don't suggest that there are 
villains with respect to these issues. I think there are some 
interest who have their own self interest that is at odds with 
the national interest, and I will talk a little bit about that 
I guess with a couple on the next panel.
    But when that is the case, when self interest is big enough 
to have a significant national impact and that self interest is 
at odds with the national interest then public policy must 
prevail in my judgment. So, I appreciate very much your coming 
here today.
    Senator Corker, did you have another comment?
    Senator Corker. Mr. Chairman, I noticed that I had about 30 
seconds left on my time before. I would, I do think that this 
testimony has been most helpful and I think there are a number 
of things that we can do incrementally to make a huge 
difference and I really appreciate you having this hearing.
    I'm wondering if based on all the questions that have been 
asked today and certainly your testimony if you might send back 
to us some legislative proposals.
    Mr. Karsner. If they're cleared by OMB, I'd be happy to do 
that, sir.
    Senator Corker. Forget OMB. I found them to be the hicky in 
all these things. I hope that OMB is present. But could you 
send back to us some policy changes that you think the 
Balkanization issue, some of the other things we talked about 
that we might consider and very near legislation to really 
address a number of these issues. All of which are incremental, 
but added up together might make a huge difference.
    Mr. Karsner. Yes, sir, per the Secretary's advice we are 
working on a bipartisan basis for technical drafting assistance 
for any legislation that the President might have the capacity 
to sign to address this problem.
    Senator Dorgan. Secretary Karsner, if you do and I expect 
you do have to run all of these things through the Office of 
Management and Budget, would you send us a copy of what you 
send to the Office of Management and Budget?
    Mr. Karsner. I'll endeavor to do whatever the process 
requires.
    Senator Dorgan. Thank you very much.
    [Laughter.]
    Senator Dorgan. You will not do that. I understand.
    [Laughter.]
    Senator Dorgan. Secretary Karsner, thank you very much for 
being with us.
    Mr. Karsner. Thank you, sir.
    Senator Dorgan. The third panel today, and I will ask them 
to come up as Secretary Karsner takes his leave, is going to be 
Mr. David Terry, Project Coordinator of the Governors' Ethanol 
Coalition; Mr. Charles Drevna, the Executive Vice President of 
the national Petrochemical and Refiners Association; Mr. 
Jonathon Lehman, Advisor of VeraSun Corporation; Ms. Deborah 
Morrissett, Vice President of Regulatory Affairs Product 
Development at the Chrysler Technology Center in Auburn Hills, 
Michigan; and Mr. Phillip Lampert, Executive Director of the 
national Ethanol Vehicle Coalition in Jefferson City, Missouri.
    We appreciate all of you coming today. Some of you have 
traveled some ways to be with us, and you are aware from the 
questions and the testimony that you've heard previously that 
this is of great interest to us. We're trying to understand 
what is happening and what should happen in order to advance 
good public policy.
    Mr. David Terry, you are testifying on behalf of the 
Governors' Ethanol Coalition. As I indicated all of your 
complete statements will be made part of the record. We ask 
that you summarize.
    Mr. Terry, you may proceed.

 STATEMENT OF DAVID TERRY, REPRESENTATIVE, GOVERNORS' ETHANOL 
                           COALITION

    Mr. Terry. Thank you, Mr. Chairman and distinguished 
members of the subcommittee. I, representing the Governors' 
Coalition today and on behalf of Nebraska Governor, Dave 
Heineman, and Illinois Governor, Rod Blagojevich, Chairman and 
Vice Chairman of the Governors' Ethanol Coalition, we 
appreciate the opportunity to present our views today.
    The Governors' Ethanol Coalition includes 36 of the 
Nation's Governors focused on the use of ethanol based fuels to 
decrease the Nation's dependence on imported energy, improve 
the environment and stimulate the national economy. The 
Coalition was formed in 1991 by then Senator Ben Nelson when he 
invited other Governors interested in promoting the increased 
use of ethanol.
    Two years ago the Coalition delivered to Congress and the 
President a set of national policy recommendations that were 
adopted as a part of the energy policy after 2005. These 
policies and others resulted in the dramatic expansion of 
ethanol use and production and accelerating the delivery of a 
new generation of advanced biofuels such as cellulosic ethanol.
    Because of the rapid pace of growth in the biofuels market 
and the opportunity to do more to address the serious energy 
challenge facing the Nation, the Governors prepared a new set 
of recommendations this year. These recommendations were 
focused on a combination of robust research and demonstration 
coordinated with the States, expanded renewable fuel standards 
and a strategic approach to increases ethanol infrastructure. 
Collectively these recommendations are an essential part of the 
solution to our energy crisis.
    In the infrastructure area the Coalition recommends 
encouraging the Department of Energy and other relevant Federal 
agencies to partner with states and industry to work through 
transitional infrastructure issues such as storage sighting, 
rail access, pipeline potential and other logistical issues. 
But our greatest concern in infrastructure remains in building 
a higher--a larger market for higher blend ethanol such as E85 
and other 20 to 85 percent blends in order to offer consumers a 
choice in the fuels they use.
    To address this issue we recommend continued support of 
ongoing national program efforts such as those of the National 
Ethanol Vehicle Coalition, represented by Phil Lampert here 
today. Also the Clean Cities Program at the Department of 
Energy. While we think these infrastructure programs are 
extremely important and should be expanded, we think other more 
aggressive and creative solutions are needed as well.
    In that regard, we think we need to view infrastructure in 
a new way to reflect the fundamental changes that have occurred 
in the biofuels market in the last couple of years. In 
particular to keep pace with the historic commitment offered by 
the domestic auto manufacturers to produce 50 percent of their 
vehicles as flex fuel capable provided the infrastructure 
commitment also rises to that occasion. We think this is too 
historic of a commitment to miss as a way to break the long 
standing stalemate of too few vehicles and too few pumps.
    We think the vehicle side of this equation is changing, and 
we think we need to change our approach as well and be more 
strategic, more aggressive in that regard. Nine months ago the 
Coalition convened. A group of experts led by Senators Daschle 
and Dole to examine an approach to infrastructure that would 
complement these ongoing national efforts.
    The result was determination that it was a very complex 
issue, would be very difficult to transform markets on a 
national basis without concentrating on such a strategic manner 
first on major metropolitan areas. We think of major 
metropolitan areas as being modest sized cities as well as 
larger cities. We dubbed this approach city to region 
initiative. The Coalition recommended that initiative to 
Congress and the President earlier this year and to the 
Department of Energy.
    The idea would be for--to concentrate the efforts of 
vehicle manufacturers, distributors, fuel retailers, producers, 
States and cities to transform the transportation and fuel 
markets of at least three major metropolitan cities. The 
initiative would propose cost shared competitive Federal 
funding for three State led teams to bring higher blend ethanol 
fueling pumps, vehicles, incentives, education and marketing to 
those areas. The result, we hope, of the program would be to 
bring higher blend ethanol pumps to at least 25 percent of the 
stations in those metropolitan areas. The Coalition believes 
that the Department of Energy should be encouraged to undertake 
the city to region initiative as well as other creative 
approaches that can move higher blend ethanol forward more 
quickly.
    Today's focus on ethanol infrastructure is in part a result 
of the success we are witnessing in greater ethanol production 
and the advances in cellulosic and other biofuels technologies. 
The Governors' Ethanol Coalition believes that we must act now 
to expand infrastructure in a manner that prepares the way for 
this important domestic fuel to become part of the mainstream 
choice for American consumers.
    Thank you, Mr. Chairman and members of the subcommittee for 
the opportunity to present our views.
    [The prepared statement of Mr. Terry follows:]

     Prepared Statement of David Terry, Representative, Governors' 
                           Ethanol Coalition

    Chairman Dorgan and distinguished members of the Energy 
Subcommittee, my name is David Terry and I serve as representative of 
the Governors' Ethanol Coalition. On behalf of Nebraska Governor Dave 
Heineman and Illinois Go vernor Rod R. Blagojevich, Chairman and Vice 
Chairman of the Governors' Ethanol Coalition (http://www.ethanol-
gec.org), I thank you for the opportunity to appear before you today 
and greatly appreciate your effor ts to bring attention to the need to 
improve our nation's renewable fuels infrastructure.
    The Governors' Ethanol Coalition includes thirty-six of the 
nation's governors and is focused on the use of ethanol-based fuels, to 
decrease the nation's dependence on imported energy resources, improve 
the environment, and stimulate the national economy. The Coalition was 
formed in 1991 when Nebraska Governor Ben Nelson invited other 
governors interested in promoting the increased use of ethanol to work 
together. Since then, the Coalition has grown to 36 governors plus 
international representatives from Brazil, Canada, Mexico, Australia, 
Sweden, and Thailand, all working to expand the opportunities brought 
by the production and use of clean, renewable, domestic biofuels.
    Two years ago, the Coalition delivered to Congress and the 
President sweeping national policy recommendations that were adopted by 
Congress in the Energy Policy Act of 2005. The result of these policies 
was the dramatic expansion of the production and use of ethanol and the 
accelerated delivery of a new generation of advanced biofuels. These 
recommendations were driven by the governors' concern for the threat 
presented by our dependence on oil, which has diminished the Nation's 
leverage in foreign affairs and resulted in an enormous and continual 
transfer of the Nation's wealth to other countries.
    Because of the rapid pace of growth in the biofuels market and the 
opportunity to do more to address the serious energy challenge facing 
our Nation, the governors prepared a new set of recommendations this 
year. These new policies stress a combination of robust federal 
research and demonstration coordinated with the states, an expanded 
Renewable Fuels Standard (RFS), and a strategic approach to increased 
ethanol infrastructure. Collectively these recommendations are an 
essential part of the solution to our energy crisis. We are pleased 
with the Subcommittee's focus on the longstanding infrastructure 
challenge and as Congress considers energy legislation we urge an 
approach that is consistent with the Coalition's recommendations, 
Ethanol from Biomass: How to Get to a Biofuels Future (http://
www.ethanol-gec.org/information/biomasstoethanol2006.htm).
    The Coalition recommends a set of infrastructure policies that 
encourage the U.S. Department of Energy and other relevant federal 
agencies to partner with the states and industry to work through 
transitional infrastructure issues such as storage siting, rail access, 
pipeline potential, and other logistical issues. However, the 
governors' greatest concern is building a market for higher blend 
ethanol (i.e., E30 - E85) in order to offer consumers a choice in the 
fuels they purchase and to diminish the use of imported oil. To address 
this issue, we recommend continued support for the Clean Cities 
program's ethanol efforts, and strongly urge support for the work of 
the National Ethanol Vehicle Coalition--a unique organization that 
employs a practical, market-oriented approach that is producing results 
across the Nation.
    While the above core ethanol infrastructure development efforts are 
essential, the governors believe infrastructure must be viewed in a new 
light to reflect the f undamental changes that have occurred in the 
marketplace over the past two years. A range of creative solutions are 
needed to keep pace with the rapidly growing supply of ethanol and the 
historic commitment from our domestic auto manufacturers to produce 50 
percent of their vehicles as flex fuel capable by 2012. There are even 
signs that foreign automakers are taking similar steps. We must use 
this commitment from the automakers since it is the most dramatic 
opportunity in years to break the longstanding stalemate of too few 
vehicles and too few pumps. The vehicle side of this equation is 
changing and is poised to change in far more dramatic ways over the 
next five years. We must change our approach as well.
    The Coalition recommends overcoming the vexing infrastructure 
challenge by calling on states, cities and industry to bring innovation 
through a City-to-Region approach. The Coalition recommended City-to-
Region initiative would focus the efforts of vehicle manufacturers and 
distributors, fuel retaile rs and producers, states, and cities to 
transform the transportation fuel markets of three or more major 
metropolitan areas. The model offers consumers a new biofuel choice in 
the vehicles they purchase and the fuels they buy. The initiative would 
provide cost-shared, competitive federal funding for three state-led 
teams that aim to provide a significant number of higher-blend ethanol 
fueling pumps, flex-fuel vehicles, incentives, education, and 
marketing. The result would be an offering of higher-blend ethanol at 
25 percent of refueling stations in three major metropolitan areas--a 
market transforming level that could spread throughout a region. The 
Coalition is convinced that the cost-shared resources to implement this 
initiative are available within the Department of Energy's available 
funding. They should be encouraged to work with the governors to launch 
this $8 million initiative immediately, and to provide $2 million for 
ongoing national ethanol infrastructure development efforts.

                        BACKGROUND AND ANALYSIS

    The Nation's farmers, ethanol producers, and others have worked for 
years to achieve the recent increases in ethanol production. Moreover, 
in the next two years the industry will likely double production to as 
much as 12 billion gallons a year, presenting both an opportunity to 
fuel more vehicles and a need to find long-term markets. Data suggests 
that the ethanol industry is moving quickly toward a saturation point 
of the 10 percent blend market for ethanol (its highest value use as an 
octane enhancing additive), leaving additional production capacity as 
it comes on line with an unclear market and an uncertain future. This 
is a concern of the governors and federal policy makers as we attempt 
to move the Nation away from unsustainable imports of oil and refined 
petroleum products and toward a more secure, efficient, and clean 
energy future.
    The Governors' Ethanol Coalition recognized this challenge in late 
2006 and sought advice on the deployment of higher blend ethanol fuels 
from an expert gr oup assembled by former Senate Majority Leaders Bob 
Dole and Tom Daschle. The group included senior officials representing 
domestic auto manufacturers, fuel retailers and producers, and 
environmental advocates. The sense among these experts was a need to 
focus resources--human, financial, marketing, product, policy--in key 
markets that offer the best economic and environmental advantage for 
sustained growth in the use of the fuel. They concluded that absent 
coordinated state, federal, and private efforts to provide a 
``demonstration effect'' boost, the existing market would not change in 
ways that would offer consumers fuel choice in the foreseeable future.
    The Coalition found that the complexity of market transformation 
and commercialization would be too difficult if initially approached on 
too large a scale, such as an entire region. Rather, success in a 
single concentrated market--an approach that mirrors and supports 
typical retail market introduction of products--would be most efficient 
and expedient. The approach allows the local interests to determine if 
they have the potential to transform their own market and provides a 
modest and sustained support system for that to occur.
    One market analysis reviewed by the Coalition in developing this 
appr oach suggested that growing ethanol production in the western, 
southern, and eastern United States could, over time, satisfy a portion 
of the blend market in those areas, leaving a large portion of Midwest 
production for local consumption. The logistical efficiencies suggested 
in the analysis pointed to an opportunity for local market players to 
build on this advantage and sell much of their product in local high 
blend markets rather than shipping it long distances. Similarly, 
emerging local production in the south, northeast, and west may also 
present opportunities to move directly to higher blends in key markets.

     DETAILS OF THE GOVERNORS' RECOMMENDED CITY-TO-REGION STRATEGY

    The extremely limited availability of higher-blend ethanol (i.e., 
E30 - E85) at retail gasoline outlets in most states and cities and the 
limited availability of flex-fuel capable vehicles in any one area are 
the most challenging barriers to transforming the transportation fuel 
marketplace in the United States. However, rapidly evolv ing policies 
at the state and federal levels, increased manufacture of flex fuel 
vehicles, and dramatic increases in ethanol production present the 
Nation with a new opportunity to break this stalemate through a 
strategic ethanol market transformation effort--The City-to-Region 
Initiative.
    The recommended $8 million, three-year City-to-Region initiative, 
should be implemented by the Department of Energy in partnership with 
the governors, and would focus the efforts of vehicle manufacturers and 
distributors, fuel retailers and producers, states, and cities to 
transform the transportation fuel markets of three or more major 
metropolitan areas and offer consumers a new biofuel choice in the 
vehicles they purchase and the fuels they buy. The initiative would 
provide cost-shared, competitive federal funding for three state-led 
teams that aim to provide a significant number of higher blend ethanol 
fueling pumps, flex-fuel vehicles, incentives, education, and 
marketing. The result would be an offering of higher-blend ethanol at 
25 percent of refueling stations in three major metropolitan areas--a 
market transforming level that could spread throughout a region.
    The City-to-Region Initiative would begin with the creation of a 
plan that includes specific goals, schedules, and measures for success. 
The Department of Energy would develop the plan in partnership with the 
governors, and in coordination with other stakeholders and implement 
the program on an expedited basis moving from plan development to 
issuing the solicitation within six months. The initiative should 
include a significant outreach effort aimed at engaging state and local 
leaders, private sector interests, and other interests (e.g., 
environmental, agricultural) and motivating them to assemble proposal 
teams, devise complementary fuel and/or vehicle incentives, conduct 
market research, and gain commitments.
    In addition, the Department of Energy must provide for stakeholder 
input on the development of the solicitation to ensure that barriers 
are addre ssed and important ``on the ground'' ideas are included in 
the initiative. The solicitation should require proposing teams to 
demonstrate substantive involvement and commitments from the following: 
both state and local governments vehicle manufacturers and sellers, 
fuel producers and distributors, relevant local non-governmental 
organizations, and interested environmental community stakeholders. 
Additional important requirements of the solicitation include: 1) teams 
being led by, and proposals to be submitted by, state government 
entities; 2) teams include a senior city government official from the 
target metropolitan area; 3) teams commit to achieving a market 
transformation goal for their defined metropolitan area of at least one 
higher-blend fueling pump at 25 percent of retail fueling outlets 
within three years.
    Finally, the Department of Energy should dedicate adequate 
resources to disseminate the results and lessons learned from the 
selected projects as they are implemented. This is an important step 
that will inform other biofuel infrastructure development efforts and 
spur states and cities to replicate the approach of the initiative.

                               CONCLUSION

    Our focus on ethanol infrastructure at today's hearing is in part 
the result of the increasing success we are witnessing in increased 
ethanol production and advances in cellulosic and other biofuel 
technologies that will produce ethanol from a range of feedstocks in 
every region of the Nation. The Governors' Ethanol Coalition believes 
that we must act now to expand the ethanol retail infrastructure in a 
manner that prepares the way for this important domestic fuel to become 
a mainstream choice for American consumers. We respectfully urge you to 
consider our recommendations as you deliberate this important energy 
legislation in the coming weeks.

    Senator Dorgan. Mr. Terry, thank you very much for being 
with us. Next we will hear from Mr. Charles Drevna the 
Executive Vice President of the National Petrochemical and 
Refiners Association. Mr. Drevna, welcome.

   STATEMENT OF CHARLES T. DREVNA, EXECUTIVE VICE-PRESIDENT, 
         NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION

    Mr. Drevna. Thank you, Chairman Dorgan, Senator Murkowski 
and members of the subcommittee. My name is Charlie Drevna and 
I am EVP of NPRA, the National Petrochemical and Refiners 
Association.
    Let me start out by saying that the domestic refining 
industry is one of the most competitive and heavily regulated 
industries in the Nation. Perhaps the only industry where both 
the facility and the product are heavily regulated. Today's 
refinery is really a highly sophisticated, complex facility 
that in essence produces high purity chemicals.
    These requirements add to the complexity of the facility 
and require more barrels of crude to produce an equivalent 
amount of product. The industry has accomplished this task 
while at the same time increasing capacity. As a matter of fact 
if you look at the capacity gains over the last 14 years it's 
equivalent to the addition of one new oil class refinery per 
year. We always talk about no new refineries being built. But 
in essence over the last 14 years on equivalent volume basis, 
we've built 14 new ones.
    This year despite unplanned and planned outages that have 
made--that made headlines across the country and in this 
Congress, we produced record amounts of gasoline. More than 
we've ever produced. Again, given the fact that we still have 
to make the product specifications very stringent with ultra 
low sulfur diesel, with ultra low sulfur gasoline and all the 
other specifications come with it.
    Our concern, one of our concerns, Senator, is the mixed 
signals we continually get from policy makers. Market forces do 
indeed imply a need for expansion of domestic refinery capacity 
while policy often times discourages it. For example, let's 
talk about the Administration's desire to reduce gasoline usage 
in 2017 by 20 percent. What does that mean in real terms?
    That means that we will be using and producing less 
gasoline in 2017 than we are today. Now if that's the goal, 
fine. However, what does that--again what does that really 
mean. While diesel demand is going to go up, we can't make 
diesel without making gasoline. So, if we're going to meet the 
needs of the American truckers and others we're going to have 
to keep producing gasoline. That gasoline will end up being 
exported.
    Now exporting domestically produced gasoline, I question 
whether that is in the national security interest. The other 
thing that's going to happen is that it will limit imports. If 
we would have had this policy in position two summers ago, when 
the awful events in the Gulf occurred. The marketplace wouldn't 
have been able to send a signal to the importers to bring in 
fuel to supply our needs.
    So these are all the kinds of things that we just say, 
let's sit down and question. There are a lot of dependent 
variables in this equation and again they're dependent 
variables. We have to know and understand each of them. You 
know--let me state clearly. We do, NPRA and its members support 
the use of biofuels but we need to know the volumes that 
Congress has asked--required or may require are actually going 
to be there on the dates that they're supposed to be.
    We can say that by 2012 there will be cellulosic ethanol 
available because the technology will be there. Unfortunately, 
we can't make capital commitments on a hope. We have to know 
that it's going to be there. After the fact labors which are 
usually used for temporary waivers, which are usually used for 
upsets in the systems, whether it's a pipeline outage or 
refinery problem. Those are temporary things. If we make the 
investment that says we expect x millions of gallons of 
cellulosic ethanol by such and such a date we hope it will be 
there. Temporary waivers won't solve the problem.
    I guess I'd be remiss if I didn't talk a little bit about 
the E85 that we--that has been talked so much about so far in 
the hearing. It is a chicken and an egg thing. With the limited 
amount of vehicles out there, right now it doesn't make 
economic sense to put more in for each individual station. The 
Petroleum Marketing Practices Act dictates what can and can't 
be done in contractual obligations. So while states can do 
their own thing. There is national law.
    The last thing, Senator is E85; it may be a good product. 
It is a good product, but it's not our product. We can't vouch 
for it. That's why our--some gasoline producers are hesitant to 
allow it under their canopies because of potential liability 
issues. Once those things are solved and they can be solved 
over time. But we can't expect something that is not our 
product and we can't vouch for to be placed under our canopies.
    Thank you and I look forward to answering your questions. 
That's a lot. Let me explain. We're dedicated to working 
cooperatively with everyone to ensure a stable and effective 
fuels policy. Again, we need to know and understand all the 
variables so we're all pushing in the same directions, Senator. 
Thank you very much.
    [The prepared statement of Mr. Drevna follows:]

  Prepared Statement of Charles T. Drevna, Executive Vice-President, 
     National Petrochemical & Refiners Association, Washington, DC

    Chairman Dorgan, Ranking Member Murkowski, and members of the 
Subcommittee, I am Charles T. Drevna, Executive Vice President of NPRA, 
the National Petrochemical & Refiners Association. Thank you for the 
opportunity today to provide our perspective on biofuels and 
infrastructure needs relative to the proposed increases in the federal 
biofuels mandate. NPRA is a national trade association with more than 
450 companies, including virtually all U.S. refiners and petrochemical 
manufacturers. Our members supply Americans with more than 90% of the 
nation's gasoline. They also provide them with a wide variety of 
products used in their homes and businesses. These products include 
gasoline, diesel fuel, home heating oil, jet fuel, lubricants and the 
chemicals that serve as ``building blocks'' for everything from 
plastics to clothing to medicine to computers.

 A. INADEQUATE RENEWABLE AND ALTERNATIVE FUELS INFRASTRUCTURE CREATES 
          SIGNIFICANT PRODUCTION AND ENVIRONMENTAL CHALLENGES

    NPRA supports U.S. energy policies that improve the security of our 
nation, assist our consumers, and protect our environment. There is 
universal agreement that alternative fuels will continue to be a strong 
and growing component of the nation's transportation fuel mix. NPRA 
supports the sensible and workable integration of renewable and 
alternative fuels into the marketplace based on market principles and 
demands. As we have stated in the past, we do not support the mandated 
use of renewable and alternative transportation fuels. However, 
existing fuels mandates require refiners, blenders and importers to 
blend significant quantities of renewable fuel with petroleum to create 
America's gasoline supply. The lack of adequate renewable and 
alternative transportation fuel infrastructure creates significant 
production and environmental challenges. This situation, coupled with 
the uncertainty of a guaranteed supply of affordable renewable fuels--
especially when considering the massive amounts being discussed--will 
only lead to more market instability and consumer impacts.
    Congress passed the Energy Policy Act of 2005 (EPACT) that includes 
a Renewable Fuel Standard (RFS) which increases to 7.5 billion gallons 
in 2012. Domestic refiners are already among the largest users of 
ethanol and the marketplace has signaled the blending of more ethanol 
than required by this new mandate. Besides extending the fuel supply, 
ethanol increases octane, has dilution benefits that help meet 
reformulated gasoline (RFG) specifications, and limits carbon monoxide 
emissions. Today, ethanol is used in all RFG year-round even though 
oxygenates are no longer required, and in approximately 25 percent of 
all other gasoline produced in the U.S. (``conventional'' gasoline). As 
a result, ethanol is in about 50 percent of all U.S. gasoline. Clearly, 
even without the original RFS mandate, refiners will continue to rely 
on ethanol as a vital gasoline blendstock.
    Ethanol, however, has a lower energy content than gasoline and may 
create ozone emission problems, especially in warm weather. Creating 
artificial demand for biofuels places unwarranted strain on other 
industries that compete for the same feedstocks. Recent reports 
indicate that ethanol demand has raised corn prices, thus impacting 
food and other commodity prices. Projected ethanol demand is likely to 
further exacerbate the problem and create food price increases across 
the economic spectrum. Just as importantly, the use of ethanol raises 
significant transportation and logistical issues, as this hearing 
intends to explore.
    Unlike gasoline or diesel, renewable fuels such as ethanol cannot 
be distributed through pipelines because of problems with water 
contamination or corrosion. Due to its water solubility, for example, 
ethanol separates from fuel during shipment through pipelines and 
results in noncompliant or substandard fuel. In addition, due to 
ethanol's corrosive properties, it degrades the strength of pipeline 
valves and joints. Consequently, ethanol must be blended with gasoline 
or the appropriate blendstock as near to the consumer as possible, 
usually at the delivery terminal. Ethanol delivery and distribution, 
therefore, must be done through more expensive means such as truck, 
rail car, barge or ship before it is blended at the terminal. Terminals 
must either invest in new ethanol storage tank and blending equipment 
or dedicate existing storage tanks. This reduces the quantity and 
diversity of on-hand inventory. Clearly, any significant increase in 
the production of ethanol will only result in more stress to the 
distribution system, creating additional impacts on supply and market 
stability.
    A recent GAO study evaluated the biofuels distribution 
infrastructure and found:

          The biofuel distribution infrastructure has limited capacity 
        to transport the fuels and deliver them to consumers, and 
        significant growth in the distribution system faces a variety 
        of impediments. Biofuels are primarily transported by rail, but 
        also by truck and barge, and limited capacity in this 
        distribution system has led to supply disruptions and concerns 
        about the system's ability to effectively transport greater 
        amounts of biofuels if production significantly increases. The 
        key challenges to meeting biofuel transport needs are potential 
        capacity limitations in the freight rail system and the cost of 
        developing a dedicated ethanol pipeline system if one is 
        needed. . . . The current biofuel transport system is also more 
        costly than for petroleum fuels. According to NREL, the overall 
        cost of transporting ethanol from production plants to fueling 
        stations is estimated to range from 13 cents per gallon to 18 
        cents per gallon, depending on the distance traveled and the 
        mode of transportation. In contrast, the overall cost of 
        transporting petroleum fuels from refineries to fueling 
        stations is estimated on a nationwide basis to be about 3 to 5 
        cents per gallon.\1\
---------------------------------------------------------------------------
    \1\ U.S. Government Accountability Office, ``Biofuels: DOE Lacks a 
Strategic Approach to Coordinate Increasing Production with 
Infrastructure Development and Vehicle Needs,'' GAO-07-713, June 2007, 
pp. 6 and 23.

    The July 18th National Petroleum Council report entitled ``Facing 
the Hard Truths About Energy'' also provides an instructive 
---------------------------------------------------------------------------
perspective:

          As with any large-scale energy source, technical, logistical 
        and marketing requirements will need to be met for biofuels to 
        achieve their potential. Milestones along this development path 
        will include: investments in rail, waterway and pipeline 
        transportation; scale-up of ethanol distribution; and 
        technology deployment for cellulosic ethanol conversion. The 
        timeframes required in many cases to move technology from 
        concept to full-scale application may make such sources 
        available only later in the outlook period.\2\ . . . Much of 
        the infrastructure needed to increase biomass use does not 
        exist today, limiting the growth rate of biomass, much as with 
        any new energy source.\3\ . . . 
---------------------------------------------------------------------------
    \2\ NPC, Facing the Hard Truths about Energy, July 18, 2007, 
Chapter Two: Energy Supply, Section II. Prospects for Energy Supply, E. 
Biomass, page 16.
    \3\ Ibid., Chapter Two: Energy Supply, Section III. Analysis of 
Energy Outlooks, D. Biomass, 4. Infrastructure, page 1.

   Energy forecasts generally do not explicitly account for 
        specific energy infrastructure requirements, such as capital 
        requirements, return expectations, construction schedules, 
        resources, and perm itting processes.
   Uncertainty relating to energy demand outlooks may restrict 
        or delay infrastructure investment.
   Data collection and analysis of energy transportation 
        infrastructure is inadequate for evaluating infrastructure 
        capacity, throughput and future needs. . . . 
   Infrastructure requirements of many alternative energy 
        sources at scale are not well understood and may be 
        significant.\4\
---------------------------------------------------------------------------
    \4\ Ibid., Chapter Two: Energy Supply, Section III. Analysis of 
Energy Outlooks, F. Energy Conversion and Delivery Infrastructure, 1. 
Key Observations--Energy Infrastructure, page 1.
---------------------------------------------------------------------------
    (emphasis in the original).

          The increasing integration of biofuels into the refined 
        products distribution system can complicate distribution 
        logistics, increase transportation costs, and reduce supply 
        reliability. The requirements for transporting biofuels have 
        led to large shipments by rail and truck from bio-refineries to 
        product distribution terminals. This represents a shift in the 
        fuels transportation system from large, cost efficient, bulk 
        shipments by reliable and dedicated pipelines, barges, and 
        ships to small, less cost efficient shipments by non-dedicated 
        railroads. The shift may reduce supply reliability while 
        increasing transportation costs. Efforts to incorporate 
        biofuels into existing pipelines or construct new, dedicated 
        pipelines for biofuels at significant cost are directed at 
        overcoming such hurdles.\5\
---------------------------------------------------------------------------
    \5\ Ibid., Chapter Two: Energy Supply, Section III. Analysis of 
Energy Outlooks, F. Energy Conversion and Delivery Infrastructure, 3. 
Analysis of Refining Forecasts, page 6.

    GAO also believes that the Department of Energy, the Agency 
responsible for implementing energy policy, does not currently have ``a 
comprehensive strategic approach to coordinate the expansion of biofuel 
production with biofuel distribution infrastructure development and 
vehicle production, and has not evaluated the effectiveness of biofuel 
tax credits.'' Further, GAO also found ``DOE has not yet developed a 
comprehensive strategic approach to coordinate the significantly larger 
volume of biofuel production that could result from the Biomass Program 
with distribution infrastructure development and vehicle production. 
DOE officials told us [GAO] they recognize the importance of developing 
a strategic approach and have taken an initial step in that 
direction.''

                     B. TRANSPORTATION OF BIOFUELS

    The most notable economic challenge to the development of a viable, 
stand-alone biofuels transportation industry is the seemingly constant 
push for an ever-increasing mandate of these fuels. As the 
transportation biofuels sector grows, its expansion will have a direct 
impact on those industries that use and transport its products and 
those industries that compete with it for the same resources. A 
significant increase in biofuels consumption complicates the entire 
transportation fuel production, supply and distribution network. As 
previously mentioned, ethanol production occurs primarily in the 
Midwest and relies on truck, rail and barge infrastructure. The strain 
biofuels place on the nation's rail infrastructure and tank-car 
capacity is of particular concern. During the spring of 2006, some 
federal RFG areas that required ethanol for blending faced real product 
shortages due to the inability of the rail infrastructure to handle the 
increased volume of ethanol. It remains to be seen whether 
transportation capacity growth will keep pace with biofuels production, 
particularly after factoring the significant increases in the 
government mandate that are being proposed. As the biofuels industry 
expands, it will monopolize increasing amounts of truck, rail and barge 
traffic. All industries reliant on these modes to distribute products 
will face increased competition for limited resources.
    A free market-based fuel transportation system is the best 
mechanism to ensure development of the requisite infrastructure to 
support increased use of biofuels. The appropriate signals to producers 
and the investment community that infrastructure development is 
warranted will be sent by that market, not by mandates. There is 
universal agreement, and the marketplace has indeed proved, that 
biofuels will continue to be a strong and growing component of the 
nation's transportation fuel mix.
    As relatively new biofuels enter the market, increased 
transportation and logistical issues are likely to arise. The market 
should be given ample opportunity to resolve these infrastructure and 
logistical complications.

                  C. ECONOMICS OF E-85 INFRASTRUCTURE

    E-85 is an alcohol fuel mixture typically containing up to 85 
percent ethanol with the remaining volume being gasoline or another 
hydrocarbon. E-85 is not currently compatible with fuel dispensing 
equipment at most retail gasoline stations. Furthermore, due to 
ethanol's corrosive nature, Underwriters Laboratories (UL), in October 
2006, suspended authorization to use UL Markings on components for fuel 
dispensing devices that will dispense any alcohol blended fuels 
containing over 15 percent alcohol (such as E-85).
    E-85 also has a substantially lower energy content per gallon than 
gasoline (only about 70 percent of gasoline's energy content) that 
results in a significant fuel economy penalty for E-85. In order for 
retail consumers to cover the same distance they would using gasoline 
at the same cost, the retail price of E-85 must be 25-30 percent lower 
than the price of gasoline. The use of E-85 is limited to flexible-fuel 
vehicles (FFVs), which currently represent a very small percent of 
today's vehicle fleet. Therefore, E-85 is incompatible with most 
vehicles and the near-term potential market for E-85 is constrained.
    GAO examined the infrastructure costs for using ethanol:

          The key challenge to increasing biofuel production is making 
        biofuels cost-competitive with petroleum-based transportation 
        fuels . . . the average wholesale price of ethanol per gallon 
        in 2006 was about 33 percent higher than the average wholesale 
        price of gasoline. Since ethanol contains one-third less energy 
        than gasoline, the price differential is even more significant 
        than this comparison indicates . . . For example, because 
        ethanol is corrosive, E85 requires separate storage tanks, 
        pumps, and dispensers at fueling stations. It can cost a 
        fueling station operator around $3,300 to minimally modify 
        existing equipment or about $60,000 to install new equipment--
        which may be a significant impediment for many potential 
        retailers.\6\
---------------------------------------------------------------------------
    \6\ GAO, Op.Cit., pp. 5 and 6.

---------------------------------------------------------------------------
    Additionally, GAO also examined the economics of E-85:

          High demand for ethanol in low blends as an oxygenate and 
        fuel extender has contributed to wholesale ethanol prices that 
        are significantly higher than the wholesale price of gasoline. 
        An additional incentive to selling ethanol in blends of 10 
        percent or lower, according to one major fuel blender with whom 
        we spoke, is that the fuel economy reduction at that level is 
        too small for consumers to notice; hence, the fuel can be sold 
        at the same price as conventional gasoline at fueling stations. 
        On the other hand, to attract customers, fueling stations must 
        generally sell E85 at a discount to conventional gasoline to 
        offset the noticeably lower miles per gallon that drivers 
        experience when using the fuel. For example, in 2006, according 
        to DOE's Alternative Fuel Price Reports, E85 sold for 11 
        percent less on average than regular gasoline at a sample of 
        fueling stations nationwide. However, few producers are willing 
        to discount ethanol so that fueling stations can price E85 
        lower than gasoline. Consequently, EIA projects that use of 
        ethanol for E85 will continue to be limited until the market 
        for blends of 10 percent and under is nearly saturated.\7\
---------------------------------------------------------------------------
    \7\ GAO, Op.Cit., p. 28.

    Given these perceptions of the economics, will a rational, orderly, 
and market-driven E-85 infrastructure be developed? I believe so only 
when the economics warrant this investment.

                D. REFINERY CAPACITY EXPANSION PROJECTS

    Leadership on this Committee and elsewhere in Congress has stressed 
the need to maximize refining capacity in the United States, and our 
members have risen to the challenge, principally by adding hundreds of 
thousands of barrels of capacity at existing refineries. In fact, on 
the aggregate over the last 14 years, our companies have essentially 
built the equivalent of one new world-class refinery each year. But 
continued success in this area requires legislative and regulatory 
certainty that attracts capital investment to refining. We know that 
the Committee recognizes the need for such certainty.
    It should be clearly understood that requirements to substantially 
increase the volume of ethanol and other renewables could essentially 
supplant a significant portion of the need and desire for additional 
domestic refining capacity. I must note that U.S. refiners are 
generating record amounts of refined product. According to EIA, 
production was at an all-time weekly high from June 22--June 29, 
averaging about 9.4 million barrels a day. Despite the unplanned 
refinery outages and regularly scheduled maintenance, production for 
the first half of the year is at an all-time high (9 million barrels a 
day), about 700,000 barrels a day higher than the same period four 
years ago (8.3 million barrels a day).
    But refiners must make their independent re-investment decisions 
today on what they believe to be the longer-term (10-15 years or more) 
outlook. The domestic refining industry is likely to look upon rapidly 
rising ethanol and other biofuels requirements in the coming years as 
adding significantly more risk to investments in capacity expansions. 
As recently as 2006, the Department of Energy forecast that domestic 
refiners were likely to add 1.5 million barrels per day of capacity 
between 2006 and 2010. These decisions are being re-visited in 
boardrooms across the refining sector as the anticipated surge in 
ethanol requirements and mandates in the near future will pressure 
domestic, and undoubtedly some foreign refiners currently supplying the 
U.S. market to postpone or cancel new investments in petroleum refining 
capability.
    To illustrate the point further, the President's proposal, which 
calls for the use of 35 billion gallons per year of renewable and 
alternative transportation fuels by 2017, primarily ethanol, also 
aspires to a 20-percent reduction in the use of gasoline by the same 
time. EIA projects that U.S. gasoline demand in 2017 will be 161 
billion gallons. A 20-percent reduction of this figure would result in 
129 billion gallons of gasoline. In 2006, U.S. production of gasoline 
was 136 billion gallons and net imports of finished gasoline equaled 7 
billion gallons. Therefore, the Administration's target for gasoline 
use in 2017 is below today's U.S. production levels, sending a signal 
to the refining industry to reconsider expanding domestic refining 
capacity. The U.S., currently a net importer of gasoline, could become 
a net exporter of gasoline.
    The U.S. is also currently a net importer of diesel, jet fuel and 
other petroleum products. In the next 10 years, demand for diesel, jet 
fuel and other non-gasoline petroleum products will grow. The demand 
for diesel may grow faster than biodiesel production. Current diesel 
demand is about 3.5 million barrels/day and biodiesel production last 
year was only about 15,000 barrels/day. If U.S. refining capacity is 
not expanded, the U.S. could require a significant increase in imports 
of diesel, jet fuel and other non-gasoline petroleum products to meet 
growing demand.
    NPRA questions if this unbalanced future is the better alternative 
in terms of U.S. energy security. We believe that U.S. refining 
capacity expansions should be encouraged, not discouraged, to ensure 
the nation's our energy security.

             E. STATE BIOFUELS MANDATES SHOULD BE PREEMPTED

    The present enthusiasm for renewable fuels has resulted in several 
states and even municipalities adopting local mandates. Local mandates 
will impose additional strain on the transportation fuels distribution 
system and increase costs for shipping and storage. While it still 
creates many problems, the existing federal Renewable Fuels Standard 
mandate with its credit-trading provisions contains a degree of freedom 
that allows the distribution system to operate at a low-cost optimum by 
avoiding infrastructure bottlenecks (such as lack of storage or rail 
capacity). Mandating ethanol or biodiesel usage in specific areas 
forces a distribution pattern that is less flexible, and therefore has 
less capability to minimize costs. These additional costs will be borne 
by consumers.
    Public policy should focus on preventing the proliferation of state 
biofuels mandates that will have negative consequences for the motor 
fuel supply and will interfere with the smooth implementation of the 
federal RFS. EPACT includes a renewable content requirement for motor 
vehicle fuels, the RFS provision (see Section 1501). The RFS is 
administered by EPA and requires the increased use of ethanol or 
biodiesel in motor fuels. Although this is a federal mandate for 
biofuels consumption, it does not currently preempt similar state 
mandates. There are several recent state biofuels mandates since EPACT 
was enacted, including those in Louisiana, Missouri, Oregon, and 
Washington. It is difficult for regulated parties to reconcile 
different state and federal biofuels mandates (e.g., credit trading, 
averaging, banking credits, identifying liable or obligated parties). 
Inconsistencies will lead to instability in the marketplace. Further, 
these mandates create boutique markets requiring special fuel 
formulations and transportation logistics, thereby balkanizing the 
national fuel market.
    If Congress wishes to allow for as diverse a supply of alternative 
fuels as possible, and to promote as much flexibility in the system as 
possible, state and local biofuels mandates should be preempted.

                F. SEVERAL STUDIES WILL INFORM CONGRESS

    Biofuels should be developed with complete analysis and full 
realization of economic and environmental impacts. This would include 
energy security, public health and the environment, infrastructure, job 
impacts, and economic development.
    One known environmental impact of increased ethanol use is related 
to ozone emissions. When blended into gasoline, ethanol increases the 
Reid Vapor Pressure (RVP) of the fuel, resulting in higher volatile 
organic compound (VOC) emissions, an ozone precursor, in the summer 
months. These higher VOC emissions come from the combustion exhaust in 
the tailpipe as well as permeation from the gasoline tank of a vehicle 
sitting in the sun on a hot day. Although many areas of the country 
allow gasoline blended with ethanol to have a higher summer RVP than 
unblended gasoline, some do not (i.e., California, federal RFG covered 
areas, El Paso, TX and Pittsburgh, PA). Others areas may also restrict 
higher RVP in the future in response to a potential new ozone NAAQS.
    The Fuel Harmonization Study (``the Study'') required under Section 
1509 of EPACT requires EPA and DOE to jointly study the effect of 
federal, state, and local motor vehicle fuel requirements on the 
supply, quality, and price of fuels available to the consumer. In 
addition, the Study will examine the effects of the various 
requirements on the achievement of air quality goals, the impact on 
refiners and the fuel distribution system. Plans for this analysis, due 
June 1, 2008, are discussed in the EPA/DOE boutique fuels report 
released on January 5, 2007.\8\ According to the Section 1541(c) 
Boutique Fuels Report, the Study will cover gasoline volatility (RVP), 
oxygenated gasoline, vehicle emissions and the effects on air quality 
of the RFS established under Section 1501 of EPACT. Furthermore, EPA 
and DOE suggest that in order to ``ultimately assess the air quality 
and associated fuel supply and price impacts of future strategies, new 
vehicle and engine emission factors that represent the current fleet 
must first be established.'' As there is uncertainty over the 
relationship between motor fuel specifications and vehicle emissions 
for the current fleet, the full realization of the air quality impacts 
of biofuels is not understood.
---------------------------------------------------------------------------
    \8\ ``EPACT Section 1541(c) Boutique Fuels Report To Congress,'' 
DOE and EPA, EPA 420-R-06-901, December 2006.
---------------------------------------------------------------------------
    Section 1505 of EPACT requires EPA to study the effects on public 
health, air quality, and water resources of increased use of 
substitutes for MTBE in gasoline. This is to be completed by next 
month, August 2007. This report to Congress will include ethanol.
    Section 1506 of EPACT requires EPA to analyze changes in air 
emissions and air quality due to the use of motor vehicle fuel and fuel 
additives resulting from the energy bill; a draft report is due by 
August 2009 and a final report by August 2010.
    The California Air Resources Board (CARB) is conducting three areas 
of research on biodiesel: an emissions study, a NOX 
formation and emissions study, and a multi-media evaluation of the 
impact of biodiesel on the environment and human health. The 
environmental benefits of biodiesel are of concern because biodiesel 
may increase NOX emissions.
    It is encouraging that several studies are underway, but others are 
also necessary, and they certainly must be conducted and their results 
known and fully understood before Congress enacts any additional fuel 
mandates.

                           G. RECOMMENDATIONS

1. The Congressional Budget Office should conduct a comprehensive 
        environmental impact analysis
    Senate legislation passed last month mandates an expanded RFS of 36 
billion gallons by 2022. Congress should consider energy security, 
public health and environment, transportation, infrastructure, job 
impacts, and rural economic development impacts. Legislation should not 
promote an extensive expansion of renewables without giving any 
consideration to the environmental or economic consequences to the U.S. 
We should only promote large changes in the mix of energy types with 
our eyes open and a full understanding of all consequences.
    As previously stated, E-85 has a significantly lower energy content 
than gasoline. Therefore, consumers will need more frequent trips to E-
85 pumps, and the fuel distribution industry must schedule more 
frequent delivery trips to retail stations with E-85 pumps. This will 
result in more delivery trips per week from terminals to retail 
stations with an increase in diesel fuel demand. Further, the overall 
environmental consequences of such a large increase in E-85 production 
and delivery need to be understood. Ethanol production depends on large 
volumes of water; each gallon of ethanol requires the consumption of 
three gallons of water. Also, associated environmental and other 
impacts of a large increase in corn ethanol manufacturing plant 
capacity on water supplies and quality must be quantified. Given that 
the scope of the environmental studies listed in section F. above is 
not based on 35-36 billion gallons per year, they will be informative 
when completed, but insufficient. NPRA recommends a comprehensive 
environmental impact analysis conducted by the Congressional Budget 
Office.

2. Congress should consider preempting state and local biofuels 
        mandates
    New state biofuels mandates are not currently subject to the 
requirement that they be examined by EPA or DOE for their impact on air 
quality, fuel production, and the fuel distribution system. NPRA 
believes that they should be. If there is no mechanism to assess the 
impact of these state mandates on air quality, fuel supply and 
distribution, the result will undoubtedly be a proliferation of state 
biofuels mandates with negative consequences on motor fuel supply and 
considerable interference with implementation of the federal RFS. 
Congress, therefore, should strongly consider amending the Clean Air 
Act to include an explicit provision that preempts state and local 
biofuels mandates.

3. We strongly encourage Congress to further review and consider the 
        five core strategies recommended in the recent National 
        Petroleum Council report requested by Energy Secretary Bodman
    NPC recommends the following five core strategies:

   Moderate the growing demand for energy by increasing 
        efficiency of transportation, residential, commercial, and 
        industrial uses.
   Expand and diversify production from clean coal, nuclear, 
        biomass, other renewables, and unconventional oil and natural 
        gas; moderate the decline of conventional domestic oil and gas 
        production; and increase access for development of new 
        resources.
   Integrate energy policy into trade, economic, environmental, 
        security, and foreign policies; strengthen global energy trade 
        and investment; and broaden dialogue with both producing and 
        consuming nations to improve global security.
   Enhance science and engineering capabilities and create 
        long-term opportunities for research and development in all 
        phases of the energy supply and demand system (including 
        studying energy infrastructure needs).
   Develop the legal and regulatory framework to enable carbon 
        capture and sequestration (CCS). In addition, as policymakers 
        consider options to reduce CO2 emissions, provide an effective, 
        global framework for carbon management, including establishment 
        of a transparent, economy-wide cost for CO2 emissions (market-
        based, visible, applicable to all fuels, predictable over the 
        long term for a stable investment climate; to allow the 
        marketplace to find the lowest cost combination of steps to 
        achieve a carbon reduction).

    Congress can and should take appropriate action to help refiners 
meet the transportation fuel needs of the American public. The simple 
fact remains that supply and demand for refined products are in an 
extremely tight balance. Necessary and prudent actions include the 
following:

4. Make increasing the nation's supply of oil, oil products and natural 
        gas a number one public policy priority
    Now, and for many years in the past, increasing oil and gas supply 
has often been only a secondary concern of policymakers. Oil and gas 
supply concerns have rarely been factored into policy goals focused on 
environmental or other concerns. Refineries and other important onshore 
facilities have been welcome in limited areas throughout the country, 
including the Gulf Coast. However, policymakers have restricted access 
to much-needed offshore oil and natural gas supplies in the eastern 
Gulf and off the shores of California and the East Coast. These areas 
must follow the example of Louisiana and many other states in sharing 
their energy resources with the rest of the nation. This additional 
supply is sorely needed. Policymakers should pay special attention to 
the timing and sequencing of any changes in product specifications. 
Failing such action, adverse fuel supply ramifications may result.

5. Resist tinkering with market forces, including imposition of 
        ``windfall profits'' taxes, LIFO repeal, elimination of foreign 
        tax provisions or ``price gouging'' legislation
    Market interference that may initially be politically popular leads 
to market inefficiencies and unnecessary costs. Policymakers must 
resist turning the clock backwards to the failed policies of the past. 
Experience with price constraints and allocation controls in the 1970s 
demonstrates the failure of price regulation, which adversely impacted 
both fuel supply and consumer cost. The state of Hawaii cancelled its 
less than one-year old gasoline price regulation because it led to 
higher prices and supply uncertainty. A windfall profits tax would 
discourage investment in refineries, which is needed to expand domestic 
production capacity and produce cleaner fuels.

                             H. CONCLUSION

    NPRA members are dedicated to working cooperatively with government 
at all levels to ensure an adequate supply of clean, reliable and 
affordable transportation fuels. We stand ready to work with you to 
ensure a stable and effective fuels policy that utilizes a diversity of 
resources to improve our national security, assist our consumers and 
protect our environment. I appreciate this opportunity to testify today 
and welcome your questions.

    Senator Dorgan. Thank you very much. Mr. Jonathon Lehman 
who is here representing VeraSun Corporation.
    Mr. Lehman.

  STATEMENT OF JONATHON LEHMAN, REPRESENTATIVE, VERASUN ENERGY

    Mr. Lehman. Good afternoon, Mr. Chairman and members of the 
subcommittee. My name is Jonathon Lehman and I'm testifying 
today on behalf of VeraSun Energy. VeraSun is one of the 
Nation's leading producers of renewable fuels. By the end of 
2008, VeraSun will have an annual production capacity of 
approximately 1 billion gallons at nine plants in six States. 
Additionally VeraSun markets E85 for use in flexible fuel 
vehicles directly to fuel retailers under the brand VE85.
    I want to thank members of the committee for your continued 
efforts to promote increasing usage of renewable fuels. VeraSun 
appreciates the committee's leadership in developing the Senate 
passed Renewable Fuels Consumer Protection and Energy 
Efficiency Act of 2007 which calls for the expansion of the 
renewable fuel standard to 36 billion gallons by 2022 including 
a significant call for ethanol production from cellulosic 
sources. We believe that this is a very achievable goal but one 
that will require widespread E85 usage if higher blends of 15 
to 20 percent are not adopted quickly.
    When all the ethanol plants currently under construction 
are completed the United States will produce nearly 13 billion 
gallons per year, up from five billion gallons per year last 
year. Their market will need to see a path for E85 in order for 
cellulosic ethanol to evolve. Without additional demand the 
market may not support the early stages of development that is 
necessary to unlock the potential that cellulosic ethanol 
holds. Simply put, the Federal Government must now focus 
efforts on growing ethanol demand beyond the 10-percent blend 
market.
    As one of the largest biofuel producers we assume a large 
responsibility to ensure that the market development occurs. 
VeraSun has pursued an aggressive strategy in cooperation with 
GM and Ford to increase the availability of E85. In early 2005, 
VeraSun launched the Nation's first brand of E85, VE85. We 
began the program in May 2005 with the conversion of 35 pumps 
at seven stations in Sioux Falls, South Dakota. At the same 
time we launched a marketing program to raise awareness of the 
benefits of FFV ownership and E85 use and elicited the support 
of GM to assist with the rollout of the program. As a result 
local E85 awareness increased, E85 sales rose and the demand 
for FFVs increased in the local market.
    In early 2006, we replicated this effort in conjunction 
with GM to bring VE85 to Chicago and Minneapolis. In mid 2006 
we worked with Ford to create an E85 corridor from Chicago to 
St. Louis and with GM to announce the first retail availability 
of E85 in Pittsburgh at the Major League All Star baseball 
game. Just last month we announced with GM the first public E85 
refueling station in the District of Columbia. All totaled 
VeraSun's branded E85 is available at more than 90 retail 
locations across eight states and in DC and we have more on the 
way. We plan to continue to work to expand the number of 
fueling stations from coast to coast.
    From this experience we have gained significant insight on 
what is necessary to develop E85 in the United States. In order 
to see a robust E85 market, VeraSun believes the Federal 
Government must improve E85 economics in the creation of an E85 
blender's credit, create an auto incentive for the production 
of advanced FFVs and address terminal infrastructure issues.
    As VeraSun works to expand a number of fueling stations 
offering VE85, one of the most significant issues we face is 
blender economics. Allow me to explain. FFVs are currently not 
designed to take advantage of E85's high octane. As a result 
FFV owners see fewer miles per gallon running on E85 than on 
conventional gasoline. This direct impact on--with consumers 
requires that E85 be sold at a discount to gasoline for it to 
be competitive. This has led to fewer gallons of E85 being 
produced. For fuel retail owners to install E85 infrastructure 
they must have confidence that E85 will be priced appropriately 
and that there will be sufficient consumer demand.
    To improve E85 economics and spur rapid expansion of E85 
pumps. Congress should create a blenders credit for ethanol 
blended into E85 within the existing VEETC system. This credit 
would compensate for the discount resulting from the loss in 
the miles per gallon. Establishing this incentive will lead to 
additional E85 production. It will help ensure that E85 is 
priced properly at the pump for consumers. As well as make fuel 
retailers decisions to offer E85 much easier.
    In addition to increasing the supply of E85 we must also 
increase the number of FFVs on the road. Today, less than 3 
percent of vehicles on the road are E85 compatible. Without a 
significant ramp up in the production E85 will remain 
relatively small.
    To this point we very much appreciate GM and Ford Daimler 
Chrysler's increasing in production to 50 percent by 2012. But 
this commitment by the automakers is conditional on having 
sufficient E85 refueling infrastructure to meet this demand. 
Therefore it is paramount that we act now to rapidly build our 
E85 refueling capabilities.
    We also believe the automakers must work to approve FFV 
technologies to better take advantage of E85's high octane. To 
spur the production of more fuel efficient FFVs, Congress 
should provide incentives for automakers that produce FFVs with 
E85 fuel economy comparable to conventional vehicles. 
Additionally our experience over the last 2 years with our VE85 
initiative indicates that more must be done to help retailers 
offer E85.
    Beyond addressing E85 blending economics there are several 
achievable hurdles that must be addressed including 
retrofitting terminal infrastructure, UL pump certification and 
ASTM fuel specifications for E85. Clearly the ethanol industry 
is a success story. Given all this it is critical that we take 
the steps necessary to create nationwide demand for E85. E85 
infrastructure is the lynch pin to this effort. Thank you.
    [The prepared statement of Mr. Lehman follows:]

 Prepared Statement of Jonathon Lehman, Representative, VeraSun Energy

    Good afternoon, Mr. Chairman and Members of the Subcommittee. My 
name is Jonathon Lehman, and I am testifying today on behalf of VeraSun 
Energy.
    VeraSun Energy is one of the nation's leading producers of 
renewable fuels. The company has three operating ethanol production 
facilities located in Aurora, SD, Fort Dodge, IA, and Charles City, IA. 
Two facilities are currently under construction in Hartley, IA, and 
Welcome, MN, and an additional plant is under development in Reynolds, 
IN. VeraSun is in the process of acquiring another three biorefineries 
currently under construction in Albion, NE, Bloomingburg, OH and 
Linden, IN. Upon completion of the new facilities and those being 
acquired, VeraSun will have an annual production capacity of 
approximately one billion gallons by the end of 2008. The Company also 
has plans to extract oil from dried distillers grains, a co-product of 
the ethanol process, for use in biodiesel production.
    Additionally, the Company markets E85, a blend of 85 percent 
ethanol and 15 percent gasoline for use in Flexible Fuel Vehicles 
(FFVs), directly to fuel retailers under the brand VE85(TM). VeraSun's 
branded E85 is now available at more than 90 retail locations including 
the first E85 fueling location in the District of Columbia.

      DEMAND FROM E85 NEEDED TO FOSTER DRIVE TO CELLULOSIC ETHANOL

    I want to thank members of the Committee for your continued efforts 
to promote increasing usage of renewable fuels. VeraSun appreciates the 
committee's leadership in developing the Senate passed Renewable Fuels, 
Consumer Protection, and Energy Efficiency Act of 2007, which calls for 
the expansion of the Renewable Fuels Standard to 36 billion gallons by 
2022 including a significant call for ethanol production from 
cellulosic sources.
    We believe that this is a very achievable goal, but one that will 
require widespread adoption of E85 usage. Because of the successful 
growth of the ethanol industry, some reports indicate that we will meet 
the demand of the current 10 percent blend market with corn-based 
ethanol within the next three to four years. When all of the ethanol 
plants currently under construction are completed, the U.S. will 
produce nearly 13 billion gallons per year, up from five billion 
gallons per year last year.
    We believe the market must see a path toward E85 in order for 
cellulous ethanol to evolve. Without E85 demand, the market may not 
support the early stage development that is necessary to unlock the 
potential that cellulosic ethanol holds.
    Simply put, the Federal Government must now focus efforts on 
growing ethanol demand beyond the 10% blend market. A strong commitment 
to E85 will ensure a market for cellulosic ethanol production in the 
United States.

                      BUILDING AN E85 MARKETPLACE

    As one of the largest biofuels producers, we assume a large 
responsibility to insure that market development occurs. VeraSun has 
pursued an aggressive strategy in cooperation with GM and Ford to 
increase the availability of E85. Today only 1,251 of the nearly 
180,000 (or \6/10\ of 1%) retail gasoline stations in the United States 
offer E85. We must do better.
    In early 2005, VeraSun launched the nation's first branded E85, 
VeraSun E85 or VE85 for short. We began the program in May 2005 with 
the conversion of 35 pumps at seven stations in Sioux Falls, South 
Dakota. At the same time, we launched a marketing program to raise 
awareness to the benefits of flexible fuel vehicle (FFV) ownership and 
E85 use, and enlisted the support of General Motors to assist with the 
rollout of the program. As a result of the program, local E85 awareness 
increased, E85 fuel sales rose, and the demand for flexible fuel 
vehicles increased in the local market.
    In early 2006, we replicated this effort in conjunction with GM to 
bring VE85 to Chicago and Minneapolis. In June 2006, we worked with 
Ford to create an E85 corridor from Chicago to St. Louis. In July 2006, 
we announced with GM at the Major League Baseball All-star Game the 
first retail availability of VE85TM in Pittsburgh. Just last month, we 
announced with GM the first public E85 refueling station in the 
District of Columbia. All told, VeraSun's branded E85 is available at 
more than 90 retail locations across eight states and the District of 
Columbia and we have more on the way. We plan to continue to work to 
expand the number of fueling stations offering VE85 from coast to 
coast.
    From this experience, we have gained significant insight on what is 
necessary to develop E85 in the United States. In order to see a robust 
E85 market in the United States, VeraSun believes the Federal 
Government must address the following items:

          1. Improve E85 economics through the creation of an E85 
        Blenders Credit;
          2. Create an auto incentive for the production of advanced 
        FFVs; and
          3. Address terminal infrastructure issues.

    As VeraSun works to expand the number of fueling stations offering 
VE85, one of the most significant issues we face is blender economics. 
Allow me to explain; FFV's are currently not designed to take advantage 
of E85's high octane. As a result, FFV owners receive fewer miles per 
gallon running on E85 than on conventional gasoline. This direct impact 
on consumers requires that E85 be sold at a discount to gasoline for it 
to be competitive in the marketplace. This has led to fewer gallons of 
E85 being produced.
    For fuel retail owners to install E85 infrastructure, they must 
have confidence that E85 will be priced appropriately and that there 
will be sufficient consumer demand.
    To improve E85 economics and spur rapid expansion of E85 pumps, 
Congress should create a blenders credit for ethanol blended into E85 
within the existing VEETC system. This credit would compensate for the 
discount resulting from the loss in miles per gallon efficiency. 
Establishing this incentive will lead to additional E85 production and 
will help ensure that E85 is priced properly at the pump for consumers. 
This will help make a fuel retailers decision to offer E85 much easier.
    In addition to increasing the supply of E85, we must also increase 
the number of FFVs on the road. Today, less than three percent of the 
vehicles on the road are E85 compatible. Without a significant ramp up 
in the production of FFVs, E85 use will remain relatively small. To 
this point, we very much appreciate GM, Ford, and DaimlerChrysler's 
commitment to increasing production of E85 and biodiesel capable 
vehicles to 50% by 2012. This is a significant step forward. But this 
commitment by the automakers is conditional on having sufficient E85 
refueling infrastructure to meet this demand. Therefore, it is 
paramount that we act now to rapidly build out E85 refueling 
capabilities.
    We also believe the automakers must work to improve FFV 
technologies to better take advantage of E85's high octane. To spur the 
production of more fuel-efficient FFVs, Congress should provide 
incentives for automakers that produce FFVs with E85 fuel economy 
comparable to conventional vehicles. Additionally, Congress should 
provide a consumer tax credit for the purchase of these more fuel 
efficient FFVs.
    Further, our experience over the last two years with our VE85 
initiative indicates that more must be done to help retailers offer 
E85. Beyond addressing E85 blending economics, there are several 
achievable hurdles that must be addressed including retrofitting 
terminal infrastructure to better handle E85, UL pump certification, 
and ASTM fuel specifications for E85.
    Currently, many terminals are not set up to quickly dispense E85. 
These terminals were designed to quickly fill trucks with E10, not E85. 
As a result, what is a twenty-minute fill time for E10 turns in to a 
two-hour fill time for E85 because of the plumbing configuration of the 
terminal. Terminals won't allow this as it backs up their entire 
operation, which is already busy. We are currently trucking in E85 from 
Ohio to our Washington D.C. station because the Manassas terminal needs 
to be retrofitted. In many cases, this can be done for a cost of fifty 
to one hundred thousand dollars. The federal government should provide 
these terminal owners with assistance in converting terminals to offer 
E85. This could be achieved by making terminal owners eligible for the 
E85 infrastructure tax incentive.
    Additionally, it is critical that UL certify both E85 conversion 
kits and new pumps quickly. The fire marshals we have dealt with 
support E85, but they must make sure of the safety of the equipment. 
The lack of proper UL certification required us to spend 30 days 
working with a very supportive D.C. Fire Marshal to get approval for 
the first pump in the District of Columbia. UL certification will 
significantly streamline that process.
    Finally, if we want to have an immediate impact on air quality and 
open up major markets for renewable fuels we need to have ASTM create a 
separate E85 fuel specification for conventional markets; which have 
conventional unleaded available for blending E85; and reformulated 
gasoline markets, which have RBOB available for blending with ethanol 
to make E85. Without it our nation's cities that endure the poorest air 
quality will have a hard time developing a meaningful E85 footprint.

                               CONCLUSION

    Clearly, the ethanol industry is a success story. We're exceeding 
the levels of the current Renewable Fuels Standard, we're shipping 
ethanol to major U.S. markets in Unit Trains, and we're ready to help 
our nation start to turn off the valve of foreign oil. Further, 
cellulosic ethanol holds great promise to expand ethanol production 
from coast to coast. Given all of this, it is critical that we take the 
steps necessary to create nationwide demand for E85. E85 infrastructure 
is the linchpin to this effort.
    For the first time in the last 100 years we are ready to decrease 
our dependence on foreign oil, reduce greenhouse gases, and create 
economic development in America. We look forward to working with you to 
chart the course for years to come. Thank you.

    Senator Dorgan. Mr. Lehman, thank you very much. Finally, I 
shouldn't say finally, we have two additional witnesses. Ms. 
Deborah Morrissett will testify next.She is Vice President of 
Regulatory Affairs of Product Development, Chrysler Technology 
Center in Auburn Hills, Michigan.
    Ms. Morrissett, thank you very much for being with us. You 
may proceed.

STATEMENT OF DEBORAH L. MORRISSETT, VICE PRESIDENT, REGULATORY 
     AFFAIRS, DAIMLERCHRYSLER CORPORATION, AUBURN HILLS, MI

    Ms. Morrissett. Mr. Chairman and members of the 
subcommittee thank you for inviting me to testify before you 
today on the subject of alternative fuels.
    Automakers are committed to developing new, advanced 
technology vehicles capable of efficiently using energy and 
running on alternative fuels. Doing so will help America reduce 
petroleum consumption, greenhouse gases and our dependence on 
foreign oil. We believe that the extraordinary task now before 
the transportation sector is to reduce the use of petroleum 
based fuels. To do that requires maximizing the energy 
efficiency of all vehicles, substantial production of 
alternative fuel vehicles and a market that has sufficient 
amount of alternative fuels and a demand for that fuel.
    To make this happen will require unprecedented efforts from 
all stakeholders. Broad based policies addressing the 
production, distribution and consumer use of alternatives to 
petroleum need to be explored. To be successful the goal of 
reducing petroleum consumption must be viewed as a shared 
responsibility. We're committed to maximizing the efficient use 
of energy in our vehicles.
    Efforts such as the development of new power trains and 
reducing vehicle weight, aerodynamic drag and various loads and 
losses have led to an average improvement of vehicle efficiency 
of one and a half percent year over year during the past 30 
years and must continue at an accelerated rate. In the past 
consumers have demanded that we allocate those gains to 
inefficiency to improve vehicle utility, performance and 
safety. The market has changed and consumers are now calling 
for the efficiency gains to be applied to improving fuel 
economy.
    As we discuss the challenge of reducing petroleum use in 
the transportation with the Congress and the Administration. 
The target of a 20 percent reduction in petroleum use is 
relatively common. Using government projections to fuel use in 
2017, the target in petroleum reduction turns equals about 35 
billion gallons per year. Chrysler, General Motors and Ford 
have promised that 50 percent of our respective vehicle fleets 
will be capable of using alternative fuels such as ethanol and 
biodiesel by 2012. This is critical. Our calculations show that 
the vehicles resulting from our commitment would use all and 
more of the alternative fuel if it were available and 
affordable.
    The evidence that automakers are doing the part is already 
on the road. There are currently more than five million 
flexible fuel vehicles on U.S. roads. Daimler Chrysler has 
produced more than a million and a half vehicles capable of 
running on E85, more than 10 percent of our total production 
over the last 9 years.
    While getting to the goal of significant reductions in 
petroleum consumptions is inherently complex. The message is 
more direct. If all gasoline was blended with E10 all diesel 
fuel replaced with a B20 blend and all flexible fuel vehicles 
capable of running on E85 did so, petroleum use would drop by 
about 35 billion gallons per year. While achieving all of these 
goals may not be easy, they illustrate the importance of 
alternative fuels and the resulting reduction in petroleum use.
    But the question remains where's the alternative fuel? We 
believe that consumers want to use and will embrace alternative 
fuels if the impediments to their use is eliminated. Today 
those impediments are primarily price and availability. Simply 
stated, the price at the pump for renewable fuels must be less 
than conventional gasoline or diesel on an energy equivalent 
basis or consumers will not buy it.
    Consider the internet, cell phones and iPods. These 
products rapidly overcame cost and distribution issues because 
of unprecedented consumer demand for products that do more and 
cost less. All stakeholders must commit to accomplishing this 
task. In the short term we all need to rely on incentives to 
prime the pump for alternative fuel producers and distributors. 
In the long term as technology, such as cellulosic ethanol and 
biomass to liquid become viable, we believe that the market 
will resolve how to make alternative fuel prices competitive on 
an energy equivalent basis. If alternative fuels are priced 
competitively or better, the retail distribution system will 
rush to answer consumer demand.
    In conclusion, auto manufacturers commit to the continued 
development and commercialization of vehicle technologies that 
maximize the efficient use of energy and give consumers the 
option of using alternative fuels. Fuel providers and 
government need to focus on alternative fuel technology 
development, availability and price at the pump. Short term 
incentives coupled with free market forces will result in a 
long term success of alternative fuels and the successful 
achievement of the government's and the Nation's energy goals. 
Thank you.
    [The prepared statement of Ms. Morrissett follows:]

Prepared Statement of Deborah L. Morrissett, Vice President, Regulatory 
         Affairs, DaimlerChrysler Corporation, Auburn Hills, MI

    Mr. Chairman and members of the subcommittee, thank you for 
inviting me to testify before you today on the subject of alternative 
fuels. Automakers are committed to developing new, advanced technology 
vehicles capable of efficiently using energy and running on alternative 
fuels. Doing so will help America reduce petroleum consumption, 
greenhouse gases and our dependence on foreign oil.
    We believe that the extraordinary task now before the 
transportation sector is to reduce the use of petroleum-based fuels. To 
do that requires maximizing the energy efficiency of vehicles, 
substantial production of alternative fuel vehicles and a market that 
has a sufficient amount of alternative fuels.
    To make this happen will require unprecedented efforts from all 
stakeholders. Broad based policies addressing the production, 
distribution and consumer use of alternatives to petroleum need to be 
explored. To be successful, the goal of reducing petroleum consumption 
must be viewed as a shared responsibility.
    We are committed to maximizing the efficient use of energy in our 
vehicles. Efforts such as the development of new powertrains and 
reducing vehicle weight, aerodynamic drag and various loads and losses, 
have led to an average improvement in vehicle fuel efficiency of 1-1.5 
percent year-over-year during the past 30 years.
    In the past, consumers have demanded that we allocate these gains 
in efficiency to improve vehicle performance and safety. The market has 
changed, and customers are now calling for the efficiency gains to be 
applied to improving fuel economy. Work currently under way in the 
Senate, House and Administration will result in a program that will 
ensure our technical performance. We estimate that this work will 
result in offsetting more than 5 billion gallons of petroleum per year 
within about 10 years.
    As we discuss the challenge of reducing petroleum use in 
transportation with the Congress and the Administration, the target of 
a 20-30 percent reduction in petroleum use is relatively common. Using 
government projections of fuel use by 2017, the target in petroleum 
terms calculates to about 35-45 billion gallons. Chrysler, General 
Motors and Ford have promised that 50 percent of our respective vehicle 
fleets will be capable of using alternative fuels such as ethanol and 
biodiesel by 2012. This is critical. Our calculations show that the 
vehicles resulting from our commitment would use all and more of that 
alternative fuel, if it were available and affordable.
    The evidence that automakers are doing their part is already on the 
road. There are currently more than 5 million flex fuel vehicles on 
U.S. roads. DaimlerChrysler has produced more than 1.5 million vehicles 
capable of running on E85--more than 10 percent of our total production 
over the past nine years.
    While getting to the goal of significant reductions in petroleum 
consumption is inherently complex, the message is more direct: If all 
gasoline was blended with E10 (10 percent ethanol), all diesel fuel 
replaced with a B20 blend (20 percent biodiesel) and all flex-fuel 
vehicles capable of using E85 did so, petroleum use would drop by about 
30-35 billion gallons. While achieving all of these goals may not be 
easy, they illustrate the importance of alternative fuels, and the 
resulting reductions in petroleum use in the transportation sector.
    But the question remains . . . where is the alternative fuel? We 
believe that customers want to use and will embrace alternative fuels 
if the impediments to their use are eliminated. Today, those 
impediments are primarily price and availability. Simply stated, the 
price at the pump for renewable fuels must be less than conventional 
gasoline or diesel, on an energy equivalent basis, or consumers will 
not buy it.
    Consider the internet, cell phones and iPods. These products 
rapidly overcame cost and distribution issues because of unprecedented 
consumer demand for products that do more and cost less.
    All stakeholders must commit to accomplishing this task. In the 
short term, we will need to rely on incentives to ``prime the pump'' 
for alternative fuel producers and distributors. In the long term, as 
technologies such as cellulosic ethanol and biomass-to-liquid become 
viable, we believe that the market will resolve how to make alternative 
fuels price competitive on an energy equivalent basis. If alternative 
fuels are priced competitively or better, the retail distribution 
system will rush to answer consumer demand.
    Automakers, specifically Chrysler, will continue to do our part to 
maximize the energy efficiency of our products and produce large 
volumes of vehicles capable of using alternative fuels. Congress could 
assist by assuring that adequate research is properly funded; which 
would result in properly priced fuel at the pump.
    In conclusion, automobile manufacturers commit to the continued 
development and commercialization of vehicle technologies that maximize 
the efficient use of energy and give consumers the option of using 
alternative fuels. All of us need to focus on alternative fuel 
technology development, availability and price at the pump. Short term 
incentives, coupled with free market forces, will result in the long-
term success of alternative fuels and the successful achievement of the 
nation's energy goals.
    Thank you.

    Senator Dorgan. Ms. Morrissett, thank you very much. 
Finally we will hear from Mr. Phillip Lampert, who is the 
Executive Director of the National Ethanol Vehicle Coalition, 
Jefferson City, Missouri.
    Mr. Lampert, thank you for being here. You may proceed.

 STATEMENT OF PHILLIP J. LAMPERT, EXECUTIVE DIRECTOR, NATIONAL 
         ETHANOL VEHICLE COALITION, JEFFERSON CITY, MO

    Mr. Lampert. Thank you very much, Mr. Chairman. My name is 
Phil Lampert. Distinguished members of the committee we're 
pleased to be here today on behalf of the NEVC. We'd like to 
thank you for the opportunity.
    I have three of my members here today: Daimler Chrysler, 
Governors' Ethanol Coalition and VeraSun. Including in our 
membership is General Motors, Ford and the Nissan Corporation. 
We're a group that is composed of automakers, farmer 
cooperatives, others. Mr. Chairman, with all due respect, I'd 
like to add that we've been doing E85 long before E85 was cool. 
We've been doing E85 since 1993 and we've done a lot of it up 
in Minnesota. We've done a lot in the front range of Colorado. 
We've done a lot in Illinois in the Chicago area. Many comments 
Senator Klobuchar, my dear friend commented on in the 
leadership in Minnesota here today.
    It's no accident that Minnesota is a leader in E85. That 
has been planned for a long time. It's no accident there's over 
150 stations in Illinois or close to 40 now in the front range 
of Colorado. We set those, our goals, our members, with Daimler 
Chrysler, with the Governors' Ethanol Coalition, with the 
Department of Energy's input to learn from those models. To 
learn from the failures and the successes and we think we have. 
I would like just to respond to a couple questions that have 
been made here today.
    Our organization is under no--I've been characterized as 
being delusional many times, but we're under no illusion that 
every vehicle is ever going to run on E85. But if every vehicle 
could be manufactured as a flexible vehicle, than we could run 
on the E12 or the E20 or the E40. We might use E10 in New 
Jersey or we might use zero in Alaska because of cold weather 
or we might use E30 in North Dakota.
    I think that we're past, Mr. Chairman, the chicken and the 
egg routine. I believe that we're into the ham and egg routine. 
Where the chicken is involved but the pig has commitment. I 
think what we need now from this Congress and others and from 
the Department of Energy is commitment to take the project to 
the next step.
    We believe that the next step includes the following five 
items:
    First, Federal support should continue for the next several 
years in the form of small grants to continue to assist with 
infrastructure. I don't believe and our organization, sir, 
doesn't believe that it takes 75,000 to 100,000 dollars to open 
an E85 fueling station. I've opened a number of them in 
Bismarck and Fargo for less than 5,000 dollars. We can modify 
that pump. We can do the clean up on the underground storage 
tank. We can provide the technical support and that we can have 
E85 in there in a matter of 2 weeks.
    Second, included with that is our need to have a basic 
program of education of the industry, technical assistance, 
marketing support and supply coordination. Second, we want to 
indicate our complete support for what my colleague, Mr. Lehman 
indicated that the Congress should consider adoption of new 
short term Federal income tax credits that would reduce the 
price of E85 to ensure the consumers are able to purchase fuel 
at a gasoline gallon equivalent basis. That is going to be the 
key.
    Third, the Congress should consider expanding and extending 
the existing Federal income tax credit that provides 30 
percent, up to 30,000 dollars to support the establishment of 
alternative fuel infrastructure.
    Fourth, we agree 100 percent that we should end arbitrary 
restrictions that some petroleum companies enforce which 
prohibit a franchise operator from installing and operating 
renewable fuel dispensing system. We assisted Governor Pataki 
and his administration with writing that law that is actually 
based on the State of Iowa, who is the only other State in the 
country that has such legislation.
    Last then we believe that the Congress should continue to 
provide incentives to all of the automakers to continue to 
build flexible fuel vehicles. So with that, Mr. Chairman, 
again, I'd like to thank you for your leadership and the 
committee for the hearing and look forward to answering any 
questions.
    [The prepared statement of Mr. Lampert follows:]

Prepared Statement of Phillip J. Lampert, Executive Director, National 
             Ethanol Vehicle Coalition, Jefferson City, MO

    Good morning, Chairman Dorgan and distinguished members of the 
Energy Subcommittee, my name is Phillip Lampert and I serve as the 
Executive Director of the National Ethanol Vehicle Coalition (NEVC). On 
behalf of the NEVC, I would like to thank you for the opportunity to 
appear before you this afternoon.
    The NEVC is the nation's primary advocate of the use of 85% ethanol 
as a form of alternative transportation fuel. Our membership includes 
four of the globes top five automakers; state and national corn grower 
associations; ethanol producers; equipment manufacturers and suppliers; 
ethanol marketers; the 37 states that comprise the Governors' Ethanol 
Coalition; farmer cooperatives; chemical and seed companies; petroleum 
marketers; and individuals. The objective of our organization from its 
inception in 1995 has been to promote the use of high level blends of 
ethanol in flexible fuel vehicles (FFVs). The following testimony deals 
solely with the infrastructure issue as it relates to the sale of E85 
at the retail level and does not address transportation infrastructure 
issues such as rail terminals, pipeline issues, etc.
    All motor vehicles sold in the nation today have been designed, 
engineered and produced to allow the use of up to 10% ethanol. However, 
the use of blends of ethanol exceeding 10% are now limited to FFVs. 
FFVs can operate on any amount of ethanol up to 85%. These vehicles are 
designed, engineered, and produced by the original equipment 
manufacturers and made available to consumers at no extra cost. As the 
Congress considers an expansion of the renewable fuels standard, it is 
important to note that with today's conventional vehicles, the maximum 
amount of ethanol that can legally be consumed approaches 14 billion 
gallons nationally in a 10% blend. While the potential use of E12 and 
E15 in existing vehicles is being debated, we know that a flexible fuel 
vehicle can operate on E15, E30, or E85, absent adjustments or 
modifications. Thus, the automotive technology exists to use these 
higher level blends of ethanol and that is in the form of FFVs.
    In 1995, the nation had less than 5,000 such flexible fuel vehicles 
on its highways. The NEVC anticipates that by the end of 2007, more 
than 6 million FFVs will be operating in the United States. On March 
27, 2007, the CEOs of General Motors, DaimlerChrylser, and Ford jointly 
appeared with the President and Transportation Secretary Peters and 
publicly stated their company's commitment to, (a) double production of 
FFVs from 2007 to 2010, and (b) produce 50% of their entire fleet as 
FFVs by model year 2012. Such production would exceed 4 million 
vehicles annually. The caveat to that pledge was that ``adequate E85 
fueling infrastructure be available to service the potential demand of 
those vehicles.''
    At the present time, the NEVC data base lists a total of 1,251 E85 
fueling sites in the United States. This compares with approximately 
168,000 gasoline fueling stations serving the 241,000,000 registered 
vehicles in the United States. Thus, there is one public gasoline 
station for each 1,435 vehicles. In comparison, currently there is one 
E85 fueling station for each 4,820 flexible fuel vehicles. While this 
number is striking, it is further unbalanced when you consider the 
following statistics:

   Alabama has 106,000 FFVs and one E85 fueling site.
   California, the largest user of motor fuels in the nation, 
        has 328,000 FFVs and only one E85 fueling site. Statistics of 
        other states and the numbers of FFVs and E85 fueling stations 
        follow:

----------------------------------------------------------------------------------------------------------------
                                                                                    # of E85        # of FFVS/
                            State                                 # of FFVs         Stations         Stations
----------------------------------------------------------------------------------------------------------------
New Jersey...................................................      129,000                0
Oregon.......................................................       50,500                6            8,400
North Dakota.................................................       16,190               23              740
South Dakota.................................................       21,000               62
Louisiana....................................................      112,000                0
Washington...................................................       71,400                6           11,900
Vermont......................................................        9,100                0
Montana......................................................       18,000                1           18,000
New Mexico...................................................       37,000                5            7,400
Alaska.......................................................        9,900                0
Idaho........................................................       18,073                4            4,500
North Carolina...............................................      146,000               14           10,400
South Carolina...............................................       77,000               42            1,800
Florida......................................................      359,000                1          359,000
Kentucky.....................................................       61,000                3           20,000
Minnesota....................................................      124,000              320              390
Tennessee....................................................      108,000                9           12,000
----------------------------------------------------------------------------------------------------------------

    Only 18 months ago, there were less than 500 E85 stations 
nationally. During 2006, the NEVC, in partnership with a broad range of 
groups, added 569 new sites. While this growth has been interrupted to 
an extent by our lack of financial resources and the rescission by 
Underwriters Laboratory of previously approved equipment standards, we 
do expect to have added 1,000 new E85 sites from January of 2006 to 
January of 2008. These small successes have been a collaborative effort 
of the NEVC and our partners. Particularly, these efforts have centered 
on programs coordinated with state commodity organizations such as the 
Minnesota, Illinois, Missouri, Kansas, and other corn grower groups. 
Several Clean Cities Coalitions have also been active including those 
in North and South Carolina, Indiana, and Ohio. Ford and General Motors 
have each also been active in expanding E85 fueling infrastructure.
    That said, the 1,251 E85 fueling stations operating today in 41 
states across the nation pale in comparison to the number of sites 
needed to satisfy the demands of the motoring public and the nation's 
automakers.
    In order to advance the establishment of additional public E85 
fueling locations, the NEVC has adopted the following public policy 
statements:

    1. Federal financial support should continue for the next several 
years in the form of small grants to assist with infrastructure 
development. As important as such a basic grant program may be, it is 
our belief that the need to educate the industry, provide technical 
assistance, marketing support, supply coordination, and promotional 
support to vendors is even more important. Federal funds should be made 
available to non-profit entities with demonstrated experience in 
supporting new E85 fueling location development in order to provide 
vendors the necessary E85 technical, marketing, and promotional 
support.
    An example of such program is S. 1491 that would provide $20 
million to farmer-owned ethanol producers to install E85 fueling 
stations and $5 million for an E85 education program. This bill has 
been introduced by Senator Klobuchar as part of the Energy Title of the 
Farm Bill. Chairman Dorgan is a co-sponsor.
    While clearly appropriate and necessary, it is simply not enough to 
provide outright grants to vendors to assist with offsetting the costs 
of new E85 equipment. More than 90% of the 1,251 existing E85 fueling 
stations are the result of conversions of exiting gasoline equipment. 
Such conversions can be undertaken for less than $5,000. Of significant 
importance to sites that wish to convert, is the provision of technical 
assistance to ensure that proper fuel handling and dispensing is 
practiced. Such technical support is also a key element in maintaining 
an E85 site once it is opened. The establishment of a ``retail 
technical and marketing assistance'' effort as a companion to any 
equipment grant program would be key to ensuring that new vendors are 
able to market and offer E85 at a gasoline equivalent basis to regular 
unleaded, that equipment standards are being maintained, that 
promotional materials are available, and that a central clearinghouse 
is available to respond to questions from consumers. The addition of 
such a sub-program to the basic DOE grant effort is critical and we 
encourage the Committee to consider adoption of such an effort.
    2. The Congress should consider expanding and extending the 
existing federal income tax credit that provides 30% up to $30,000 to 
support the establishment of alternative fueling systems. The NEVC 
suggests that the credit should be extended to the end of 2012 and 
increased to 50% or $50,000.
    This federal income tax credit was established as part of the 2005 
Energy Bill and has been very helpful in offsetting the costs of 
installation of E85 fueling systems. As a new form of transportation 
fuel, many entrepreneurs are hesitant to make the needed investments in 
infrastructure while they wait on the automakers to produce FFVs. 
Increasing the incentive to 50% up to $50,000 would serve to assuage 
much of this reluctance and assist in breaking the so called ``chicken 
and egg'' syndrome.
    3. The Congress should consider the adoption of new short-term 
federal income tax credits that would reduce the price of 85% ethanol 
to ensure that consumers are able to purchase the fuel at a cost 20% 
less than that of regular unleaded gasoline.
    The chemistry of ethanol is that as a fuel it contains less latent 
heat content than motor gasoline. On an arithmetic basis, E85 contains 
27% less BTUs than unleaded. Mileage loss in FFVs operating on E85 
ranges from 5% to 25%. Thus, E85 must be priced at least 20% less than 
that of regular unleaded. Consumers will not tolerate a loss in mileage 
absent an equivalent reduction in fuel price. E85 must be priced on a 
gasoline gallon equivalent basis per mile driven. Unfortunately, in 
many of our 1,251 existing stations, this pricing standard is not being 
adopted and these locations are moving very little fuel. Clearly our 
mutual goal is to advance the use of renewable fuels and not just build 
infrastructure. If the fuel is not properly priced, no fuel will be 
consumed.
    4. End the arbitrary restrictions that some petroleum companies 
enforce which prohibit a franchise operator from installing and 
operating a renewable fuel dispensing system.
    Over the past several weeks, testimony has been provided by 
representatives of the petroleum industry to the Senate Judiciary 
Committee and in response to direct questions from Senator Grassley, 
Senator Obama and others, stating that there are no restrictions on the 
sale of alternative fuels by so called ``branded'' operations. While 
not wishing to debate that matter, it is the recommendation of the NEVC 
that the Congress consider adopting language that will serve to clarify 
the previous statements made by those representatives and address this 
issue. An owner/operator of a fueling station should have the right to 
sell any form of transportation fuel on his or her property without 
recrimination or objection from the franchise management. 
Unfortunately, in our experience, some owners of fueling stations have 
been denied the option to install E85 fueling equipment.
    The NEVC urges the Congress to consider adoption of language that 
would clarify the right of fueling station proprietors to store and 
dispense any form of transportation fuel own property they own 
regardless of the nature of the ``branded product''.
    5. The Congress should continue to provide incentives to the 
nation's automakers to encourage the production of flexible fuel 
vehicles.
    The impetus for today's production of alternative fuel vehicle was 
provided by the 2nd Session of the 100th Congress via passage of the 
Alternative Motor Fuels Act (AMFA) of 1988, extended by the 2005 Energy 
Bill. The ``CAFE Credit'' incentives have encouraged the production of 
motor vehicles capable of operating on any form of alternative fuel. 
These credits allow the automakers to offset the additional equipment, 
research, certification, and warranty costs associated with the 
production of an FFV. This incentive has been tremendously valuable and 
successful in that prior to 1988 there were zero alternative fuel 
vehicles on the nation's highways. As a result of AMFA, today, there 
are more than 6 million E85 vehicles and a number of electric, CNG, and 
LPG cars and trucks across the nation. The NEVC recommends that the 
Congress consider other incentive based mechanisms that would continue 
production of FFVs by the domestic automakers and broaden the program 
so that foreign automakers find financial benefit in the manufacture of 
FFVs.

                   MANDATORY INFRASTRUCTURE PROGRAMS

    The development and promulgation of incentives to further advance 
alternative fuel infrastructure may sound burdensome, time consuming, 
and costly in terms of federal investments. An option that might 
immediately address the lack of E85 and other alternative fueling 
stations would be to simply ``mandate'' that the major oil companies 
install and sell such fuel by a certain date. For example, on July 26, 
2007, ExxonMobil reported quarterly profits exceeding $10 billion. It 
would seem reasonable to assume that ExxonMobil could easily absorb the 
costs of installing 10,000 new E85 fueling stations across the nation.
    It is the position of the NEVC that there is little benefit in the 
promulgation of federal law which mandates the installation of 
alternative fueling infrastructure. In our 14 years of experience in 
advocating the introduction of renewable fuels, the key to successfully 
selling E85 and any other form of alternative fuel is proper pricing, 
marketing, and the provision of educational resources. While 
consideration of the establishment of federal mandates requiring the 
establishment of E85 fueling stations is admirable, we continue to 
believe that the marketplace is the mechanism most appropriate to 
ensure such E85 fueling sites are installed during this critical 
development stage.
    It is our observation that mandating E85 fueling facilities may 
result in placement of the sites in poor locations, arbitrarily high 
prices for E85, and lack of customer outreach and marketing. While 
unlikely, it would be possible that opponents of alternative fuels 
could use high pricing of fuel at sites they were forced to establish 
to confirm a lack of demand and establish an ``I told you so'' prophecy 
of failure of the site. See the following photograph (The following 
photographs illustrate the potential impact of the mandate of E85 
infrastructure in the market).*
---------------------------------------------------------------------------
    * Graphics retained in committee files.
---------------------------------------------------------------------------
    The photographs above were each taken on September 14, 2006. The 
station in the photograph on the right is selling E85 for 20% more than 
the price of unleaded. The station in the photo on the left is selling 
E85 for 20% less than the price of unleaded. While there is a 14 cent 
difference in the base price of unleaded in these two photos, there is 
a difference of $1.20 in the price of E85. Both of these sites are 
Midwest locations and situated in states with existing ethanol 
production facilities.
    The station on the right, selling E85 for 20% more than unleaded, 
averaged less than 600 gallons per month of E85 sold. Du to small 
volume sales, the station permanently terminated all E85 sales shortly 
after this photo was taken.
    The station on the left in the photo above, selling E85 for 20% 
less than unleaded, averages more than 20,000 gallons per month of E85 
sold. This operator has expanded to more than 45 stations selling E85 
at the 20% less than unleaded price margin and is extremely pleased 
with sales and margins. It is also important to note that the total 
federal investment in these profitable facilities is less than $2,500 
each.
    It is also important to note that the 20,000 gallons per month of 
E85 dispensed from the two nozzles at the Break Time station represents 
the equivalent of 170,000 gallons of E10. Very few fueling stations are 
able to claim that type of volume.
    Without question, mandating the establishment of E85 fueling 
stations would be simple. Mandating the sale of fuel at certain price 
points in order to offset the lower latent energy content would be 
extremely difficult.
    Another point that should be considered in a discussion regarding 
mandatory E85 fueling systems is that of the 168,000 fueling locations 
across the nation, that less than 11,000 of these sites or 
approximately 6.5% of the total fueling stations, are actually owned by 
the ``branded'' integrated petroleum companies. (Source: National 
Petroleum News, Market Facts 2006). While some 56% of all stations are 
``branded'' in the sense that they may handle ExxonMobil, BP, Shell, 
Valero, Sinclair, and other products; these companies only own a small 
percentage of the sites. Mandates would simply place another layer of 
financial burden on the small businessmen and women that own the 93.5% 
of all fueling stations.
    In the future, vendors choosing not to sell E85 will be facing the 
loss of a significant new revenue stream and potential profit center. 
As in the sale of other commodities, vendors who do not rapidly respond 
to market demands are those that rapidly exit the marketplace. We 
believe this will also be true in the sale of alternative fuel. The 
NEVC supports the market in this endeavor and continues to resist 
embracing such mandatory programs. It may be necessary to re-evaluate 
this position in the future, but presently we oppose such mandates.
    In summary, in order to advance the establishment of renewable fuel 
infrastructure for the purpose of dispensing E85 as a form of 
alternative transportation fuel, we believe the following actions are 
needed:

   Continue the provision of federal financial incentives to 
        assist with offsetting the cost of new or converted 
        infrastructure. Such financial support may be provided in the 
        form of grants or as an increase in the existing federal income 
        tax credit.
   The Congress and the Department of Energy should place a 
        much stronger emphasis on the provision of technical support, 
        marketing support, and promotional assistance to new and 
        existing E85 vendors.
   Maintain and enhance incentives that assist automakers in 
        offsetting the costs of FFV equipment so that they may proceed 
        with the massive introduction of FFVs into the nation's auto 
        and light duty truck markets.
   Elimination of any and all franchise restrictions on owners 
        of fueling sites to allow them the choice to dispense any form 
        of transportation fuel, and finally,
   A short-term increase in the existing incentive that is 
        available for ethanol to offset the lower BTU value of the 
        product and ensure that it is available to consumers on a 
        gasoline gallon equivalent basis.

    Mr. Chairman and Members of the Committee, we appreciate the work 
that you are doing on behalf of the American people to address our 
nation's growing dependence on imported petroleum. The NEVC thanks you 
for the opportunity to provide these comments and we are available to 
respond to questions at your convenience.
            Attachment.--National Ethanol Vehicle Coalition

                               BACKGROUND

    The National Ethanol Vehicle Coalition is the nation's primary 
advocacy group promoting the use of 85% ethanol as a form of 
alternative transportation fuel. The NEVC supports the production of 
ethanol from corn based technology available today and also supports 
the production of ethanol from new technology using perennial crops, 
biomass, and waste materials.

                     FUNCTIONS OF THE ORGANIZATION

   Advocate the use of E85 as a form of alternative 
        transportation.
   Educate consumers, organizations, public policy officials 
        and the media as to benefits of the use E85.
   Serve as a technical consultant to transportation fuel 
        providers, ethanol producers, policy makers.
   Promote the use of E85 in the political arena.
   Provide information regarding tax incentives available to 
        reduce price of E85.
   Sometimes--provide financial assistance to build fueling 
        systems.
   Support all forms of alternative fuels.

                               GOVERNANCE

    Governed by a 10-20 member Board of Director's, the NEVC employees 
five full time staff in an office located in Jefferson City, MO. The 
NEVC also maintains contract staff in New York, Michigan, Illinois, 
Iowa, Tennessee, Montana, and Minnesota. Legislative functions are 
carried out by two firms engaged via retainer located in Washington, 
D.C.
    Operational functions are overseen by the Executive Committee which 
is comprised of the Chairman, Vice-Chairman, Secretary-Treasurer, 
Immediate Past Chairman, and the Executive Director. The NEVC holds two 
meetings annually of the Board of Director's and one general membership 
meeting.

                               MEMBERSHIP

    The groups, organizations, companies, and individuals that comprise 
the membership of the NEVC represent an exceptionally broad range of 
interests and objectives from across the nation. Some of the members 
include:

   37 Governors comprising the Governors' Ethanol Coalition
   General Motors Corporation
   Ford Motor Company
   DaimlerChrysler
   Nissan North America
   18 Clean Cities Coalition Across the Nation
   National Agricultural Organizations
    --National Corn Growers Association
    --National Sorghum Producers Association
   State Agricultural Organizations
    --Colorado Corn Growers Association
    --Corn Marketing Program of Michigan
    --Kansas Corn Commission
    --Kentucky Corn Growers Association
    --Missouri Corn Growers Association
    --Minnesota Corn Growers Association
    --New York Corn Growers Association
    --North Dakota Corn Growers Association
    --Ohio Corn Growers Association
    --Texas Corn Producers Board
   Petroleum Marketers
   Ethanol Producers/Marketers
   Consumer Groups
   Individuals

                      SIGNIFICANT ACCOMPLISHMENTS

   Have been engaged with the establishment of every single E85 
        fueling station in the United States.
    --Have provided grants to most and a standard ``imaging package'' 
            to all. This imaging package contains consistent 
            information to allow a motorist identify an E85 station in 
            California or Florida.
   Printed and distributed more than 250,000 copies of the E85 
        Purchasing Guide, fielded more than 4,000 average calls per 
        month to our toll free line, maintained a website that average 
        more than 30 million hits per month, and opened more than 800 
        E85 fueling stations in 38 states.
   Have received appropriations from the U.S. Congress to 
        support the establishment of public and private E85 fueling 
        systems.
   Have established the ``Handbook for Handling, Storing, and 
        Dispensing E85'' to maintain high fuel quality.
   Have been successful in establishing a federal income tax 
        credit to assist with offsetting 30% of the total cost, up to 
        $30,000, of an E85 fueling facility.
   Established relations with the Steel Tank Institute, 
        Petroleum Equipment Institute, Petroleum Marketers Association 
        of America, National Association of Convenience Stores, and 
        other industry groups and organizations in an effort to promote 
        E85 use.
   Have been successful in extending the CAFE credits that were 
        originally established in 1988 so that automakers are provided 
        incentives to continue to produce FFVs through model year 2014.
   Have been successful in encouraging the automakers to build 
        FFVs in their most popular line of vehicles such as the 
        Silverado, F150, Taurus, Town and Country minivan, Ranger, 
        Explorer, Tahoe, Yukon, Sebring, Grand Cherokee and others.

    Senator Dorgan. Mr. Lampert, thank you very much. I think a 
number of witnesses have talked about the chicken and the egg 
and which comes first. It's a fair question. I don't think we 
know the answer, but I think we have to do things concurrently 
in order to be successful.
    Ms. Morrissett, I notice--I went to the internet to 
Chrysler's site, and it says build my own options. You have the 
capability quite easily actually to build your own options. But 
it doesn't have an option for a flex fuel vehicle. Why is that 
the case and is that usual?
    Ms. Morrissett. When Chrysler decides to build a flex fuel 
vehicle we do it across the whole engine. So if you pick an 
engine, it's not as easy as I would like a flex fuel option. 
It's every vehicle with that particular engine. When you pick 
the engine, you get the alternative fuel.
    A lot of folks think that it's--when we start talking about 
alternative fuel vehicles it's simply changing some tubes and 
changing a pipe, but it really--a pump, but it really is inside 
the engine. We have different valves and valve seats so it's 
not easy to simply pick an option.
    Senator Dorgan. You know, obviously one of the goals here 
is to have more flex fuel vehicles on the streets and the 
roads. We want consumers to have easy access to order a flex 
fuel vehicle if they wish. My hope is the industry will be 
aggressively moving in that direction. I know that your 
testimony suggests that that's what you want to do.
    Mr. Drevna, you indicated in your testimony that with oil, 
I believe my colleague said at 70--is it 78 dollars a barrel 
today? That seemed high to me. Seventy-eight dollars a barrel. 
You indicated that decisions are being revisited in board rooms 
with respect to the investment in refineries because if we're 
going to use less gasoline in the future, you want to build--
you have less refinery capacity perhaps.
    But it is the case that profits are at a record high at the 
moment and part of the bottleneck is refining capability. I--
you talked about the President's goal of 35 billion gallons by 
2017, which would aspire to a 20 percent reduction in the use 
of gasoline which would get you to 129 billion gallons of 
gasoline. It seems to me that would be a laudable goal for this 
country if we could possibly achieve. One I fully support. One 
I fully sign up to have happen. I recognize that some in your 
industry probably would say that's not in our interest. But you 
heard me suggest earlier that what might be in your self 
interest is not in the national interest.
    Do you believe it is in the national interest to reduce our 
reliance on foreign sources of oil?
    Mr. Drevna. Absolutely Senator. I think we're all in this 
game together, but, I think the rules have to be firmly 
established and the play book understood. What we're looking at 
is, again, I'll go back. If this policy were in place in the 
summer of 2005 after Katrina and Rita ran through the Gulf, 
there would not have been a market signal for importers to help 
bail us out of our production problems. That is what a 20 
percent reduction in gasoline use will do.
    We are already at a capacity level in the United States, 
domestic refiners that surpass that 20 percent reduction. What 
would we do with that extra, extraneous capacity if we continue 
to expand capacity today? These are the concerns we have as far 
as the mixed messages.
    We believe, as an industry that and I think it must--maybe 
it was Senator Craig that mentioned it. We're going to need a 
vast array, a vast menu of fuels, transportation fuels, fuels 
that generate electricity, fuels that drive this Nation. You 
can't just pick or choose one or the other. I know you're not 
trying to do that but when you talk about a 35 billion gallon 
over a very short timeframe. When you talk about limiting 
gasoline production below to what we're making today. Any 
fiscally minded refinery executive will have to take a long, 
hard pause and see where he or she will put that capital.
    Senator Dorgan. Mr. Drevna, that will be true if we are 
successful in trying to reduce the quantity of gasoline that we 
use and replace it with renewable fuel, that's an inevitable 
consequence. That puts your testimony with respect to the self 
interest of those you represent at odds with the national 
interest. Does it not?
    Mr. Drevna. No, sir. I don't think it's at odds. I think, 
again, we--I think we all have to figure out on a going forward 
basis where we want to be.
    Senator Dorgan. What about 129 billion gallons of gasoline? 
What if that's where we want to be?
    Mr. Drevna. Ok. Then we have to understand--
    Senator Dorgan. Then we're at odds.
    Mr. Drevna. What we have to understand as a Nation what the 
consequences, the unintended consequences of that may be. As I 
said, you know, we are going to be expected as an industry to 
produce ever increasing amounts of diesel. While making diesel 
we have to make gasoline. That's the nature of the beast.
    Senator Dorgan. We are always going to use fossil fuels. I 
support the use the production of gasoline. I support the 
exploration of oil. I'm one of the few on my side that want to 
open up more in the Gulf of Mexico which is substantial when 
you evaluate Alaska, the West Coast and the Gulf. The Gulf of 
Mexico has the greatest potential. So I understand we're always 
going to do that.
    The key national interest question here is our over 
reliance on foreign sources of oil from very troubled parts of 
the world. So, that's why we're trying to develop a renewable 
fuels infrastructure and renewable fuels capability. Frankly, I 
chafe when I see in the paper the oil industry say well, you 
start moving in this direction we'll start messing with you 
with respect to refinery investment and so on. It seems to me 
like, we're obviously all not on the same page. We need to 
figure out where the self interest is, where the national 
interest is and try to find out how we move through that.
    This hearing is not about whether we're going to move in 
this direction. We are. We've already decided that as a matter 
of public policy. The President and the Congress in various 
iterations have said we're moving toward much more development 
of fossil fuels. No one can say that this country hasn't been 
very hospitable to the petroleum industry. I mean, they are 
making record amounts of money in this country. Thanks to 
people driving up to the gas pump and almost getting a second 
mortgage to fill up.
    So, it's been a wonderful time for that industry. But it 
seems to me that as we try to evaluate with this President and 
this Congress and I think the country wanting to do this. How 
do we become less dependent on foreign oil? The proposition of 
producing more renewable fuels and creating an infrastructure 
by which we distribute that is just incredibly important for 
us. We're going to have to work through all these issues.
    You heard at the front end of this discussion, my angst 
about how the gasoline islands are managed by the majors and so 
on. I think all of you on this panel have added to the various 
chapters to this book that we're trying to write about 
renewable fuels and the development of this new industry. I 
appreciate that a lot. I don't know what the exact answer is 
yet or the exact construct, but it's going to require policy 
change. It's going to require leadership. It's going to require 
cooperation by the private sector. It's going to require public 
sector initiatives and incentives in my judgment.
    So, it's going to require a lot of things. We've got to do 
it right. We can't wait for 10 or 15, or 20 years. We need to 
run, not walk. But you've all made a point in similar ways that 
there has to be a consistent policy that most of our country 
understands that we're aspiring to achieve. I fully agree with 
that.
    I'm supposed to be offering an amendment over on the floor 
at 4:30. So, I'm not going to ask additional questions. I would 
like to be able to send additional questions to the witnesses 
if I might because you represent five disciplines. All of which 
we wanted to hear from on this subject. Let me recognize my 
colleague, Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman. As I listen to 
not only the panelists, but those of us up here at the dias 
talking about the way to--national energy security and how we 
reduce our dependence on foreign sources of oil. I just have 
one word and it's ANWR. I know that's not today's hearing, but 
I just can't help myself. It is about renewables today and I 
will stick to the subject.
    I want to ask a little bit of a parochial question. Coming 
from Alaska and recognizing that Alaska is now exempt from the 
ethanol requirements. But I want to understand how ethanol is 
working in the colder regions. Senator Klobuchar is from 
Minnesota, they've got some cold weather. Mr. Chairman from 
North Dakota, you certainly have some cold weather up there.
    Senator Dorgan. That is simply not the case.
    Senator Murkowski. No, not cold there?
    Senator Dorgan. We have no cold weather in North Dakota.
    [Laughter.]
    Senator Murkowski. That's good. I'd be delighted to come up 
and visit you then.
    Senator Dorgan. Don't do it in January then.
    Senator Murkowski. Yes, yes. But let me ask recognizing 
that you have a tendency for the ethanol fuels to attract the 
moisture and the problems that are inherent with the moisture 
in the fuel lines when you have very cold temperatures. Can any 
of you, Mr. Lampert, or perhaps, Mr. Drevna speak about the 
properties of ethanol in cold temperatures and how that it is 
actually working out?
    Mr. Lampert. Thank you, Senator. The flexible fuel vehicles 
that are manufactured by the automakers are designed to operate 
on E85 in a manner similar to which they would operate on 
unleaded gasoline. That is if it's 40 below in Anchorage and 
your car won't start on gasoline. It's not going to start on 
E85. That said, if your car is operating on regular gasoline 
your car should start at whatever temperature at E85.
    We have a testing facility in International Falls. I think 
if you see the weather maps in the winter that's the coldest in 
the country. I believe we have two E85 fueling stations there. 
U.S. post office operates about 80 delivery vehicles that 
operate on E85. They have great success with them. So, we do 
modify our fuel like gasoline from winter to summer. When we 
follow those regulations--
    Mr. Drevna [continuing]. Powered by biodiesel. There are 
some ASTM standards, but there also being some extra standards 
being investigated. We're not quite there yet. Again I go back 
to the fact that, you know, before we--I don't think it's any 
secret that NPRA does not support mandates.
    Senator Murkowski. Let me ask you.
    Mr. Drevna. We're not going to put that on the official 
record though, but when you mandate something that doesn't pass 
the test yet. That doesn't exist yet. We have a problem.
    Senator Murkowski. Let me ask you, Mr. Drevna. Do you have 
any estimate on what fuel mandates have cost the industry and 
what the impact of the mandates potentially are on the 
consumer?
    Mr. Drevna. Senator, you have to separate environmental 
mandates from production mandates. If you're talking about what 
the industry has capital expenditures to meet, all forms of 
fuel specifications, including reformulating gasoline one and 
two in the nineties, MSATs, mobile source air toxics, ultra low 
sulfur diesel, the tier two diesel for automobiles. You're 
talking of almost 50 billion dollars of requirements.
    Now, just last--two years ago to get the MTBE and the 
ethanol in over that short timeframe. That was a two to three 
billion dollar effort. So, what it costs the industry depends 
upon what the mandate is. If it's an E10 nationwide mandate 
then you have to retool the refinery to make a blend stock that 
will take the E10 without harming air quality. If you have 
individual states doing their own thing, one state's an E10, 
one state's an E15, one state's an E20. My friends in the 
pipeline industry will not--will have a difficult time handling 
the different blend stocks that have to be shipped to various 
locations for that--for those specific products to make.
    That's why we are calling for a congressional legislation 
that would pre-empt State mandates. Because if it indeed is 
supposed to be a national program of whatever billion gallons 
is ultimately decided. It should be indeed a national program 
that individual states and one of the--I guess it was Mr. 
Karsner was talking about boutique fuels. Well, if you start 
adding various every state and sometimes even locals have their 
own biofuels or ethanol mandate. It would be a nightmare for us 
to make the various blend stocks needed to blend and it would 
be a nightmare for the pipelines to try to deliver that blend 
stock to the terminals.
    Senator Murkowski. Let me just ask you, Mr. Lampert, very 
quickly and wrap up. In your written testimony you state that 
the Federal Government should engage non-profit entities for 
promotion of E85. Can you elaborate a little bit more in terms 
of how non-profits could be participants in this effort?
    Mr. Lampert. Senator, I refer to the national Ethanol 
Vehicle Coalition, the Governors' Ethanol Coalition, others.
    Senator Murkowski. These that are represented here.
    Mr. Lampert. Not the two in the middle. Although, I think 
they've had some issues with that.
    The NEVC, we have the technical capabilities. We don't 
charge overhead. Oakridge national Laboratory or national 
Renewable Energy Laboratory has a tremendous overheard. I'm not 
saying that they don't do great work. They do. They're super 
people. They're my friends. We think that when you take that 
technical support out of the bureaucracy for one, that the--
we're dealing with gas station owners and operators. The 
statement, hi, I'm here from the Federal Government. I'm here 
to help, doesn't always set real well with those people.
    So, I think when we send people out from the central part 
of the United States and we employ folks for New York and in 
the south that they're a little more well received. So that's 
why we suggest that that particular statement is made, Ma'am.
    Senator Murkowski. Thank you. I appreciate that. Thank you, 
Mr. Chairman. That's all I have for right now.
    Senator Dorgan. Senator Murkowski, thank you very much.
    Let me thank all five of the witnesses in this panel. We 
appreciate your attendance and your statements today. We think 
this is an important issue. We intend to continue to work with 
Secretary Karsner and all of you and others to see if we can 
find policy initiatives that will address these issues in a 
satisfactory way.
    This hearing is adjourned.
    [Whereupon, at 4:38 p.m. the hearing was adjourned.]

                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

    Response of Charles T. Drevna to Question From Senator Menendez
    Question 1. Mr. Drevna, I want to ask you about the economics of 
the refining industry. While consumers are being forced to pay more 
than $3.00 a gallon for gasoline, oil companies continue to reap record 
profits. In 2005, refineries increased their prices 255 percent. And 
whenever there is a spike in gasoline prices experts seems to lay the 
short term blame at the feet of the refineries.
    In your testimony you say that we should let the market decide the 
price of gasoline, but apparently the market is not working. Earlier 
this year many of the oil companies who are members of your 
organization blamed the expansion of biofuels for the high price of 
gasoline.
    How can this possibly make sense? Biofuels represent the first real 
competitor to petroleum in nearly a century. Why would this competition 
cause prices to rise?
    Isn't the real answer that since the late 1990's--mergers between 
the giant oil companies, like Exxon and Mobil, Chevron and Texaco and 
Conoco and Phillips--have left us with only 10 major oil companies 
controlling 80 percent of our domestic refining capacity?
    Isn't it the exercise of that market power that is one of the real 
causes of high gas prices and not the expansion of biofuels such as 
ethanol? Why else wouldn't these companies invest their record profits 
into new refineries or properly maintain existing refineries that are 
constantly breaking down?
    Answer. The primary reasons for changes in the price of gasoline 
are the price of crude oil, the feedstock for the production of 
gasoline, and the demand for gasoline both in the United States and 
abroad. As in any commodity business, such as this one, demand affects 
supply and, therefore, affects price.
    The Energy Information Administration (EIA) collects and reports 
average gasoline prices, both refiner and retail. The July 2007 issue 
of EIA's ``Monthly Energy Review'' includes average gasoline prices, 
none of which reflect the alleged ``255 percent increase'' that you 
cite.\1\ I would be happy to sit down with you or your staff to discuss 
these statistics and am very interested in understanding the source of 
your statistics that you reference in your question.
---------------------------------------------------------------------------
    \1\ To view the latest EIA ``Monthly Energy Review'' please 
reference http://www.eia.doe.gov/emeu/mer/prices.html.
---------------------------------------------------------------------------
    NPRA believes that the U.S. refining industry is diverse and 
competitive; 54 refining companies, hundreds of wholesale and marketing 
companies, and more than 165,000 retail outlets compete in the U.S. 
market. The largest U.S. refiner accounts for just 13 percent of the 
nation's total capacity, and large integrated companies own and operate 
only approximately 10 percent of retail outlets.
    By way of background, beginning in the late 1990's several large 
mergers occurred in the domestic petroleum industry. The Federal Trade 
Commission (FTC) reviewed mergers and acquisitions. In testimony 
presented before the Judiciary Committee on February 1, 2006 the FTC 
reiterated its long standing position regarding the oil industry and 
merger enforcement saying, ``No other industry is so carefully 
scrutinized by the FTC'' and ``concentration for most levels of the 
United States petroleum industry has remained low to moderate.''
    In 2004, the FTC published an FTC Staff Study ``The Petroleum 
Industry: Mergers, Structural Change, and Antitrust Enforcement.'' In 
this study the FTC concluded:  . . . mergers have contributed to the 
restructuring of the petroleum industry in the past two decades but 
have had only a limited impact on industry concentration. The FTC has 
investigated all major petroleum mergers and required relief when it 
had reason to believe that a merger was likely to lead to competitive 
harm . . .'' Furthermore, over the past ten years, the FTC intervened 
in thirteen proposed mergers or acquisitions requiring significant 
divestitures to maintain competitive markets.
    I would also like to highlight a 2005 Federal Trade Commission 
(FTC) report entitled Gasoline Price Changes: The Dynamic of Supply, 
Demand and Competition which states that ``the vast majority of the 
FTC's investigations [into the petroleum industry] have revealed marked 
factors to be the primary drivers of both price increases and price 
spikes.'' The same report states at least nine studies concluded, 
``retail [gasoline] prices tend to be lower if one company owns both 
refining and retailing operations than if they are owned separately.''
    Mergers and acquisitions in the refining industry have actually 
maintained and even increased refining capacity; without such 
consolidation some of the individual refineries involved might not have 
been economically viable. One such example is Sunoco's refinery complex 
in the metropolitan Philadelphia area which now has over 550,000 
barrels/day of capacity. If Sunoco were unable to operate these 
facilities as a unit, this production might not be available for 
consumers. Phillips Petroleum's (now ConocoPhillips) acquisition of the 
Tosco refinery system increased capacity and maintained refinery 
viability on a nation-wide basis. Additionally, Valero Energy 
Corporation has increased the productive capacity of the refineries it 
has acquired by an aggregate of nearly 400,000 barrels per day over the 
past several years and plans more expansion in the future. Examinations 
of other mergers and acquisitions tell the same story: refineries are 
kept operating and oftentimes are expanded.
    Ethanol prices are available. See
    http://www.energy.ca.gov/gasoline/graphs/ethanol_10-year.html.
    http://www.energy.ca.gov/gasoline/graphs/ethanol_18-month.html.
    http://www.mda.state.mn.us/news/publications/renewable/ethanol/
marketnews
    report.pdf
    These sources document that ethanol prices are volatile and ethanol 
is not uniformly a very low-cost gasoline additive. Because ethanol is 
in half of all U.S. gasoline, ethanol price volatility can contribute 
to changes in gasoline prices.
    Refiners have made significant investments in expansions of 
refining capacity. The fact is that we have added hundreds of thousands 
of barrels/day of capacity at existing refineries, the equivalent of a 
new refinery each year for the last 14 years. That is a remarkable 
investment in the U.S. refining industry.
   Responses of Charles T. Drevna to Questions From Senator Cantwell
    Most of the hearing discussion focused on ethanol, somewhat 
overlooking the second most significant biofuel in the U.S., biodiesel. 
Our experience in Washington state is the biodiesel is a particularly 
promising alternative fuel, both because we are able to grow oilseed 
feedstocks like canola in Eastern Washington, and we have strong demand 
in our population centers around Puget Sound.
    Biodiesel is also a key tool in tackling vehicle emissions, which 
in our state blessed with abundant hydropower is our greatest source of 
air pollution. And since many public and private fleet vehicles use 
diesel fuel, biodiesel is also a good way for municipalities to meet 
their climate change and air quality reduction goals. Biodiesel also 
has about the same energy density as petroleum diesel, so there is not 
the miles per gallon reduction we have been discussing when it comes to 
ethanol.
    Question 2. Could you comment on ways that we can help ensure more 
biodiesel production and its associated infrastructure? How does the 
infrastructure need for biodiesel distribution differ from those for 
ethanol?
    Answer. The Environmental Protection Agency (EPA) has concluded 
that biodiesel increases NOX emissions and reduces fuel 
economy because of its lower energy content. See http://www.epa.gov/
otaq/models/analysis/biodsl/p02001.pdf. In addition, certain quantities 
of biodiesel have a tendency to gel in cold weather.
    The most notable economic challenge to the development of a viable, 
stand-alone biofuels transportation industry is the seemingly constant 
push to an ever-increasing mandate of these fuels. So long as sound, 
open and free marketplace dynamics and discipline are ignored through 
imposition of artificial and inefficient mandates, distortion of basic 
economic realities will continue. The goal of the biofuels industry 
should be economic parity, or better, with that of refined petroleum 
products. This situation will never be realized so long as the 
imposition of mandates over-rides basic economic fundamentals. Energy 
policy based on mandates is not a recipe for success. We believe the 
best possible future for the biofuels industry rests on allowing the 
market to operate freely because open markets permit supply and demand 
to be balanced in an equitable fashion benefiting both producers and 
consumers.
    Question 3. Section 130(c) of the Senate passed energy bill 
contains legislation I authored that would create a national biodiesel 
fuel quality standard. While maintaining biomass feedstock and process 
neutrality, this provision is intended to provide certainty for 
interested parties like truckers who want to use biodiesel but cannot 
risk using substandard biodiesel that could harm their engines. Do you 
support this language as written and a national biodiesel fuel quality 
standard more generally?
    Answer. Section 130(c) of the Senate energy bill passed last June 
would require the Administration to ``ensure that each diesel-
equivalent fuel derived from renewable biomass and introduced into 
commerce is tested and certified to comply with applicable standards of 
the American Society for Testing and Materials.'' NPRA supports 
enforcement of motor fuel quality standards and Section 130(c) as 
written.
    NPRA supports the development of motor fuel quality standards at 
the American Society for Testing and Materials. Many states currently 
enforce these standards.
    Question 4. Are there measures that Congress should take focused 
specifically on biodiesel, as opposed to the more general legislation 
we have been discussing here today?
    Answer. Congress should amend the Clean Air Act to preempt state 
and local biofuels (including biodiesel and ethanol) mandates. Local 
mandates will impose additional strain on the transportation fuels 
distribution system and increase costs for shipping and storage. While 
it still creates many problems, the existing federal Renewable Fuels 
Standard (RFS) mandate with its credit-trading provisions contains a 
degree of freedom that allows the distribution system to operate at a 
low-cost optimum by avoiding infrastructure bottlenecks (such as lack 
of storage or rail capacity). Mandating ethanol or biodiesel usage in 
specific areas forces a distribution pattern that is less flexible, and 
therefore has less capability to minimize costs. These additional costs 
will be borne by consumers.
    Although the federal RFS is a federal mandate for biofuels 
consumption, it does not currently preempt similar state mandates. 
There are several recent state biofuels mandates since the Energy 
Policy Act of 2005 was enacted, including those in Louisiana, Missouri, 
Oregon, and Washington. It is difficult for regulated parties to 
reconcile different state and federal biofuels mandates (e.g., credit 
trading, averaging, banking credits, identifying liable or obligated 
parties). Inconsistencies will lead to instability in the marketplace. 
Further, these mandates create boutique markets requiring special fuel 
formulations and transportation logistics, thereby balkanizing the 
national fuel market.
    Public policy should focus on preventing the proliferation of state 
biofuels mandates that will have negative consequences for the motor 
fuel supply. If Congress wishes to allow for as diverse a supply of 
alternative fuels as possible, and to promote as much flexibility in 
the system as possible, state and local biofuels mandates should be 
preempted.
    Question 5. According to the Agriculture Department, U.S. ethanol 
from corn costs about $1.05 per gallon to produce. While I understand 
that ethanol distribution costs are about 10 cents higher per gallon 
then regular gasoline, why is E-85 selling at about three times its 
production cost?
    Answer. A member of the National Association of Convenience Stores 
(NACS) and the Society of Independent Gasoline Marketers of America 
(SIGMA) testified on June 7, 2007 before the Subcommittee on Energy and 
Air Quality of the House Committee on Energy and Commerce. I want to 
reiterate the following statements from this testimony:

          The primary impediment to retailers converting a dispenser to 
        E-85 is equipment compatibility. Because E-85 is more corrosive 
        than regular gasoline or E-10, it requires equipment that is 
        certified compatible with the fuel. In preparation for this 
        hearing, I inquired of my equipment supplier to determine what 
        would be required to convert one of my newer stations to sell 
        E-85. These stations have the newest equipment and, therefore, 
        hold the best chance for existing equipment compatibility. I 
        learned that my new steel tanks and my fiberglass tanks were 
        certified compatible with E-85. Our automatic tank gauges were 
        listed compatible as were our fiberglass piping systems. 
        However, we would have to replace several of the ancillary 
        fittings, including the submersible turbine pump, the overfill 
        drop tube and others like flexible hoses, spill buckets, ball 
        valves, etc. In addition, our hanging hardware, which includes 
        conventional nozzles, swivels, breakaways and curb hoses would 
        have to be replaced with nickel plated units at an increased 
        cost. For all of these conversions, including tank cleaning, we 
        estimated the cost to be between $6,000 and $7,000. However, 
        this does not include the dispenser itself. The two dispenser 
        manufacturers each charge an additional fee for a new E-85 
        compatible dispenser--$8,000 for Dresser-Wayne and $7,300 for 
        Gilbarco. Thus, a typical E-85 dispenser can cost upwards of 
        $17,000 per unit. And this cost is for equipment that has not 
        yet been certified compatible with E-85 by Underwriters 
        Laboratories. . . . We have spoken with several retailers who 
        lament their decision to install E-85 equipment because they 
        have been unable to generate sufficient sales from these 
        fueling positions to support their overall business model.

    Additionally, GAO also examined the economics of E-85:

          High demand for ethanol in low blends as an oxygenate and 
        fuel extender has contributed to wholesale ethanol prices that 
        are significantly higher than the wholesale price of gasoline. 
        An additional incentive to selling ethanol in blends of 10 
        percent or lower, according to one major fuel blender with whom 
        we spoke, is that the fuel economy reduction at that level is 
        too small for consumers to notice; hence, the fuel can be sold 
        at the same price as conventional gasoline at fueling stations. 
        On the other hand, to attract customers, fueling stations must 
        generally sell E85 at a discount to conventional gasoline to 
        offset the noticeably lower miles per gallon that drivers 
        experience when using the fuel. For example, in 2006, according 
        to DOE's Alternative Fuel Price Reports, E85 sold for 11 
        percent less on average than regular gasoline at a sample of 
        fueling stations nationwide. However, few producers are willing 
        to discount ethanol so that fueling stations can price E85 
        lower than gasoline. Consequently, EIA projects that use of 
        ethanol for E85 will continue to be limited until the market 
        for blends of 10 percent and under is nearly saturated.\2\
---------------------------------------------------------------------------
    \2\ U.S. General Accountability Office, ``Biofuels: DOE Lacks a 
Strategic Approach to Coordinate Increasing Production with 
Infrastructure Development and Vehicle Needs,'' GAO-07-713, June 2007, 
p. 28.

    Question 6. Congress has decided to provide an incentive of 51 
cents per gallon for ethanol, do you believe that consumers are seeing 
a commensurate value for this subsidies? What does this incentive 
translate to if the metric was $/barrel of oil?
    Answer. The corn ethanol industry has received significant 
government support. In examining the continued feasibility of the 51 
cents per gallon ethanol subsidy, Congress should consider the maturity 
of the ethanol industry, ethanol's cost competitiveness with other 
additives and fuels and potential price implications of changing the 
subsidy.
    As the question states, the current subsidy is 51 cents per gallon. 
51 cents/gallon times 42 gallons/barrel of oil = $21.42/barrel. 
However, the energy content of ethanol is 30% lower than the energy 
content of gasoline, therefore 21.42/0.7 = $30.60 (note: 0.7 is used in 
the calculation, because ethanol has only 70 percent of the energy 
content of gasoline).
    Question 7. Given that producing corn ethanol is a mature industry 
and cost competitive, while producing other advanced biofuels is not, 
do you believe limited government tax dollars be better spent on 
incentives and policies that focus more on advanced biofuels and 
biodiesel than corn?
    Answer. NPRA believes in the free market. NPRA supports the 
sensible and workable integration of renewable and alternative fuels 
into the marketplace based on market principles and demands. NPRA does 
not advocate financial incentives for advanced biofuels and biodiesel.
    The most notable economic challenge to the development of a viable, 
stand-alone biofuels transportation industry is the seemingly constant 
push to an ever-increasing mandate of these fuels. So long as sound, 
open and free marketplace dynamics and discipline are ignored through 
imposition of artificial and inefficient mandates, distortion of basic 
economic realities will continue. The goal of the biofuels industry 
should be economic parity, or better, with that of refined petroleum 
products. This situation will never be realized so long as the 
imposition of mandates over-rides basic economic fundamentals. Energy 
policy based on mandates is not a recipe for success. We believe the 
best possible future for the biofuels industry rests on allowing the 
market to operate freely because open markets permit supply and demand 
to be balanced in an equitable fashion benefiting both producers and 
consumers.
    Question 8. The current renewable fuels standard created in the 
2005 Energy Bill has proven largely irrelevant because market forces 
have lead to production rates exceeding the RFS. However, the Senate 
passed energy bill contains a substantial increase in the RFS. What 
value to you estimate a creditable RFS compliance credit will have in 
2012, 2015, 2020, and 2022?
    Answer. NPRA does not have a projection on the value of future RFS 
compliance credits.
    Question 9. As Senator Klobuchar mentioned, one of the pieces of 
legislation we have been working on would prevent oil companies from 
blocking installation of biofuel infrastructure at their franchised 
stations. Could you comment on this problem and whether the measures 
Congress is currently considering will help overcome this barrier?
    Answer. This issue was discussed extensively at a hearing on May 8, 
2007 before the Subcommittee on Energy and Air Quality of the House 
Committee on Energy and Commerce. During the question and answer 
period, Paul Reid (witness for the Society of Independent Gasoline 
Marketers of America and the National Association of Convenience 
Stores) explained several times that new legislation was not necessary 
because of the current provisions of the Petroleum Marketing Practices 
Act.
    The Petroleum Marketing Practices Act (PMPA) was established to 
ensure stability and reasonable expectations in the franchise 
relationship. Therefore, PMPA does not invalidate existing contracts. 
Under existing contract law, franchisors and franchisees are free to 
negotiate for the sale of a range of products, including conventional, 
reformulated, and renewable fuels. Should the Congress adopt a policy 
that disrupts this relationship by forcing the sale of certain products 
outside of existing contractual relationships, then we believe Congress 
must hold refiners harmless for any of the adverse consequences related 
to these products.
    Question 10. Section 511 of the Senate passed energy bill is 
derived from an amendment I offered and would increase consumer 
awareness of flex fuel vehicle capabilities by including a badge on the 
outside of the car, information in a car owner's manual, and a clearly 
labeled fuel cap. Do you support this language as written and consumer 
awareness programs for biofuels more generally?
    Answer. The retail price of E85 must be 25-30 percent lower than 
the retail price of gasoline in order for consumers to travel the same 
distance. Given this situation, I think it is wise to educate consumers 
about the diminished energy content of E-85 compared to gasoline and 
what price differentials between the two products economically 
justifies the use of E-85. Such information is crucial for avoiding a 
public backlash against E-85.
    Brazil has reduced their use of oil by approximately 200,000 
barrels per day by using a mix of ethanol and gasoline at their gas 
pumps. They now mandate that at least 10% ethanol be mixed with their 
gasoline, although most places contain around 40%, which is possible 
due to the amount of flex fuel vehicles they produce. The use of 
ethanol has saved Brazil over $120 billion in imported oil over the 
last 22 years, decreased air pollution in the big cities, and created a 
stronger economy along with an increase in jobs.
    Question 11. Brazilian ethanol from sugar cane costs 81 cents per 
gallon to produce (compared to $1.05 for U.S. ethanol from corn), and 
Brazilian ethanol production from sugarcane, yields about 590 gallons 
per acre. Given this potential value for American drivers, especially 
compared to record high gasoline prices, does it make sense to continue 
to impose a tariff on importing Brazilian ethanol?
    Answer. NPRA supports the elimination of the tariff on imported 
ethanol. See NPRA's testimony before the Senate Commerce, Science and 
Transportation Committee on May 23, 2006: http://commerce.senate.gov/
public/_files/slaughter052306
.pdf
                                 ______
                                 
     Response of Jonathon Lehman to Question From Senator Menendez

    Question 1. What steps can we take to create better access to 
ethanol in the Northeast and specifically my home state of New Jersey? 
I noticed that an E85 pump was recently installed in Georgetown here in 
Washington DC, but the citizens of New Jersey are anxious to help 
reduce our dependence on oil and reduce our greenhouse gas emissions by 
using biofuels. Right now there are 129,000 cars in New jersey that can 
run on E85, but people do not have access to pumps. I was pleased to 
support a provision in the Energy Bill we just passed here in the 
Senate to incentivize further market penetration of E85 pumps by 
establishing a pilot grant program to create renewable fuel corridors. 
But will this program be enough?
    Answer. VeraSun has pursued an aggressive strategy to increase the 
availability of E85 across the country and were extremely pleased to be 
the first to offer E85 to our Nation's capitol. VeraSun is committed to 
helping develop a robust E85 market across the United States.
    From our experiences, the most critical thing needed to quickly 
build a robust E85 market in the United States is to improve E85 
economics through the creation of an E85 Blenders Credit. Fuel retail 
owners must know that E85 will be priced appropriately and that there 
will be sufficient consumer demand to install E85 infrastructure. 
Because Flexible Fuel Vehicles (FFVs) are currently not designed to 
take advantage of E85's high octane, FFV owners receive fewer miles per 
gallon running on E85 than on conventional gasoline. This direct impact 
on consumers requires that E85 be sold at a discount to gasoline for it 
to be competitive in the marketplace.
    To address this economic disincentive to install E85 pumps, 
Congress should create a blenders credit for ethanol blended into E85 
within the existing VEETC system. This credit would compensate for the 
discount resulting from the loss in miles per gallon efficiency. We 
believe that establishing this incentive will lead to additional E85 
production and will help ensure that E85 is priced properly at the pump 
for consumers. This will help make a fuel retailers decision to offer 
E85 much easier and lead to much quicker expansion of E85 across the 
United States.

    Responses of Jonathon Lehman to Questions From Senator Cantwell

    Question 2. According to the Agriculture Department, U.S. ethanol 
from corn costs about $1.05 per gallon to produce. While I understand 
that ethanol distribution costs are about 10 cents higher per gallon 
then regular gasoline, why is E-85 selling at about three times its 
production cost?
    Answer. Wholesale ethanol prices tend to follow petroleum prices 
because ethanol is most commonly used as a gasoline additive in the E10 
market and is bought and sold through the nation's petroleum 
distribution system through long-term contracts (six to 12 months) 
between ethanol producers and marketers and petroleum companies. 
Because the lion's share of ethanol is sold into the E10 market, the 
price that petroleum companies are willing to pay for ethanol as an 
additive sets the price for ethanol purchased at the wholesale level 
for use in E85. Until E85 usage increases significantly in the United 
States, wholesale ethanol price will continue to be driven by what 
petroleum companies are willing to pay for the product.
    That being said, VeraSun believes that E85 must be priced fairly at 
the pump for consumers to choose to adopt it. As part of its E85 
initiative, VeraSun sells E85 directly to willing retail stations at a 
discount to gasoline. On a public policy level, VeraSun believes that 
the creation of an E85 blenders credit will create market conditions 
that will lead to additional E85 production and will help ensure that 
E85 is priced properly at the pump for consumers
    Question 3. Congress has decided to provide an incentive of 51 
cents per gallon for ethanol; do you believe that consumers are seeing 
a commensurate value for these subsidies? What does this incentive 
translate to if the metric was $/barrel of oil?
    Answer. The 51-cent Blenders Tax Credit is an incentive to the 
petroleum industry to blend ethanol into their gasoline and is an 
effective policy tool to ensure that this occurs. This incentive 
translates to 5.1 cents per gallon of E10 sold to consumers, and is 
typically passed on to motorists in the form of lower prices at the 
pump for higher octane, ethanol-enriched fuel.
    Question 4. Given that producing corn ethanol is a mature industry 
and cost competitive, while producing other advanced biofuels is not, 
do you believe limited government tax dollars be better spent on 
incentives and policies that focus more on advanced biofuels and 
biodiesel than corn?
    Answer. In the near term, Government policies should focus on 
expanding demand for ethanol--regardless of its feedstock origins. 
Because ethanol made from corn will saturate the 10% ethanol market in 
the coming years, it is critical that we create new ethanol demand 
through E85 and higher blends in order for cellulosic ethanol to be 
successful. This is the most significant means by which to foster the 
development of advanced biofuels.
    Question 5. The current renewable fuels standard created in the 
2005 Energy Bill has proven largely irrelevant because market forces 
have lead to production rates exceeding the RFS. However, the Senate 
passed energy bill contains a substantial increase in the RFS. What 
value do you estimate a creditable RFS compliance credit will have in 
2012, 2015, 2020, and 2022?
    Answer. The Renewable Fuels Standard, passed as part of the Energy 
Policy Act of 2005, was one of the most important factors in the rapid 
expansion of the ethanol industry. Ethanol production will double from 
2005 levels in the next 24 to 48 months because the RFS provided 
certainty to investors that ethanol demand will grow.
    Importantly, the Senate passed increase in the RFS schedule will 
create additional demand that will further expansion of renewable fuel 
usage across the country. The ethanol industry will produce enough 
ethanol meet the new RFS targets of 13.2 billion gallons by 2012 and 15 
billion gallons by 2015 with corn-based ethanol, and it is our hope and 
expectation that we will be able to meet the 2020 and 2022 targets with 
a combination of corn and cellulosic ethanol. The value of any RFS 
credit will depend on who quickly cellulosic ethanol technologies 
become cost competitive and widespread cellulosic ethanol production 
comes on line.
    Question 6. As Senator Klobuchar mentioned, one of the pieces of 
legislation we have been working on would prevent oil companies from 
blocking installation of biofuel infrastructure at their franchised 
stations. Could you comment on this problem and whether the measures 
Congress is currently considering will help overcome this barrier?
    Answer. We believe that fuel retailers should be free of artificial 
encumbrances to sellE85 and that the legislative efforts being 
discussed would help to do so.
    Question 7. Section 511 of the Senate passed energy bill is derived 
from an amendment I offered and would increase consumer awareness of 
flex fuel vehicle capabilities by including a badge on the outside of 
the car, information in a car owner's manual, and a clearly labeled 
fuel cap. Do you support this language as written and consumer 
awareness programs for biofuels more generally?
    Answer. VeraSun supports efforts like this to increase consumer 
awareness. When VeraSun launched its E85 initiative in 2005, one of the 
fundamental premises of the program was that an aggressive marketing 
program to raise awareness to the benefits of FFV ownership and E85 use 
would be critical to its success. At that time, research indicated that 
a significant number of FFV owners were unaware that their vehicles 
could run on E85. As part of our efforts, we worked with GM and Ford to 
help raise FFV awareness.
    Progress is being made. In announcing its Live Green, Go Yellow 
campaign, GM has equipped all new FFVs with a yellow gas cap indicating 
that it is E85 compatible. Additionally, Ford and Chrysler have also 
started to include more badging of FFV vehicles. We appreciate these 
efforts.
    Question 8. Brazil has reduced their use of oil by approximately 
200,000 barrels per day by using a mix of ethanol and gasoline at their 
gas pumps. They now mandate that at least 10% ethanol be mixed with 
their gasoline, although most places contain around 40%, which is 
possible due to the amount of flex fuel vehicles they produce. The use 
of ethanol has saved Brazil over $120 billion in imported oil over the 
last 22 years, decreased air pollution in the big cities, and created a 
stronger economy along with an increase in jobs.
    Brazilian ethanol from sugar cane costs 81 cents per gallon to 
produce (compared to $1.05 for U.S. ethanol from corn), and Brazilian 
ethanol production from sugarcane, yields about 590 gallons per acre. 
Given this potential value for American drivers, especially compared to 
record high gasoline prices, does it make sense to continue to impose a 
tariff on importing Brazilian ethanol?
    Answer. The secondary ethanol tariff is critical to U.S. energy and 
national security policy goals of energy independence. In order to spur 
the development and growth of the domestic ethanol industry, the 
Federal government has provided important tax incentives such as the 
Blender's tax credit to spur use of ethanol in our nation's fuel 
supply. The secondary tariff was imposed in 1980 after the Internal 
Revenue Service ruled that all ethanol, regardless of country of 
origin, is eligible for the tax incentives. Because of this ruling, all 
ethanol blended by petroleum companies in the United States receives a 
tax credit of 51 cents per gallon. The secondary tariff ensures that 
U.S. taxpayer funds are not used to subsidize foreign ethanol 
production that is already subsidized. For example, Brazil has provided 
billions in tax and loan incentives to build their domestic ethanol 
production facilities while imposing a 20% tariff on ethanol imported 
into Brazil.
    That being said, the secondary ethanol tariff does not prevent 
foreign ethanol from being imported into the United States. In 2006, 
the U.S. imported 653.3 million gallons of ethanol. Of that total, 
433.7 million gallons was imported from Brazil. The tariff simply 
ensures that the tax incentives put in place to spur the development of 
the domestic ethanol industry do not subsidize foreign production.
                                 ______
                                 
    [Responses to the following questions were not received at 
the time the hearing went to press:]

         Questions for Alexander Karsner From Senator Cantwell

    I understand that today there are about 6 million flex fuel 
vehicles on the road today. However, that is only about 3% of the 
vehicles in the United States and only about 1% of that number ever 
ends up using flex fuels during its lifetime.
    Most of the hearing discussion focused on ethanol, somewhat 
overlooking the second most significant biofuel in the U.S., biodiesel. 
Our experience in Washington state is the biodiesel is a particularly 
promising alternative fuel, both because we are able to grow oilseed 
feedstocks like canola in Eastern Washington, and we have strong demand 
in our population centers around Puget Sound.
    Biodiesel is also a key tool in tackling vehicle emissions, which 
in our state blessed with abundant hydropower is our greatest source of 
air pollution. And since many public and private fleet vehicles use 
diesel fuel, biodiesel is also a good way for municipalities to meet 
their climate change and air quality reduction goals. Biodiesel also 
has about the same energy density as petroleum diesel, so there is not 
the miles per gallon reduction we have been discussing when it comes to 
ethanol.
    Brazil has reduced their use of oil by approximately 200,000 
barrels per day by using a mix of ethanol and gasoline at their gas 
pumps. They now mandate that at least 10% ethanol be mixed with their 
gasoline, although most places contain around 40%, which is possible 
due to the amount of flex fuel vehicles they produce. The use of 
ethanol has saved Brazil over $120 billion in imported oil over the 
last 22 years, decreased air pollution in the big cities, and created a 
stronger economy along with an increase in jobs.
    Question 1. You testified that DOE sees ``no technical reason why 
flex-fuel vehicles can not be more uniformly ubiquitous across all 
markets, or that flex fuel vehicles could not be offered to all 
consumers at a relatively low price.'' What is your technical basis for 
that assessment? What is the Administration's estimate of the cost of 
the making a vehicle flex fuel capable? Why do think there has been so 
few flex fuel cars produced to date in the U.S.?
    Question 2. I understand that unlike other biofuels, biodiesel R&D 
is no longer a priority for the Energy Department. Can you explain your 
reasoning for this decision and when was it made?
    Question 3. With the large budget increases Congress has 
appropriated for your office for continued biofuels R&D, will biodiesel 
work be revived?
    Question 4. Would more R&D into uses for biodiesel production by-
products help drive down the cost of biodiesel?
    Question 5. What is DOE currently doing to research the potential 
for diesel equivalent fuel derived from wood waste using such processes 
such as gasification?
                                 ______
                                 
         Questions for Deborah Morrissett From Senator Cantwell

    Question 1. You testified that producing a flex fuel vehicle is 
considerably more complicated then most people realize. Please describe 
in detail the actual technical changes needed to the component parts of 
a typical car that enable it capable of using any mix of biofuel. Are 
the necessary component changes different for a gasoline versus a 
diesel powered engine?
    Question 2. What is the marginal cost of producing a flex fuel 
vehicle, I have heard estimates range from $30 to $150?
    Question 3. Do domestic automakers have more expertise in producing 
flexible fuel vehicles than some of their international counterparts? 
If this is true, how long do you think it would take for international 
automakers to catch up?
    Question 4. I understand that every car on the road today can 
utilize up to 10% ethanol, and many are doing so right now probably 
without their customers knowing it. Did automakers need to do anything 
special to their vehicles to allow this E10 capability? If yes, do 
these changes allow blends of up to 12 or 15% ethanol?
    Question 5. What warranties do automakers provide for flexible fuel 
vehicles and how do they compare to warranties for non-flex fuel 
vehicles sold in the U.S.?
    Question 6. How many of the 6 million vehicles on the road today 
received the duel fuel CAFE credit? How many flex fuel vehicles do you 
think would have been manufactured without the duel fuel CAFE credit?
    Question 7. I understand there are ways to make up for ethanol's 
lower energy density to take advantage of ethanol's inherently higher 
octane level? In fact, GM's Saab introduced last year a Saab 9-5 that 
produced 14% more maximum power and 11% more torque, while cutting 
fossil COXemissions by up to 70% when running on E85 than on 
gasoline. What lessons can we learn from this vehicle in terms of 
increased E85 use?
    Question 8. I understand that a majority of vehicles in Brazil sold 
in Brazil are now flexible fuel vehicles. Many of these cars are 
manufactured by American automakers. What changes did you need to make 
to the vehicles you are selling in Brazil to make them flex fuel 
capable as compared to vehicles sold here in the U.S. What is the 
marginal production cost, if any, to those flex fuel vehicles sold in 
Brazil? Do automakers provide warranties for biofuel use for flex fuel 
cars in Brazil?
                                 ______
                                 
Questions for David Terry, Charles Drevna, Jonathan Lehman, and Phillip 
                     Lampert From Senator Cantwell

    Question 1. Could you comment on ways that we can help ensure more 
biodiesel production and its associated infrastructure? How does the 
infrastructure need for biodiesel distribution differ from those for 
ethanol?
    Question 2. Section 130(c) of the Senate passed energy bill 
contains legislation I authored that would create a national biodiesel 
fuel quality standard. While maintaining biomass feedstock and process 
neutrality, this provision is intended to provide certainty for 
interested parties like truckers who want to use biodiesel but cannot 
risk using substandard biodiesel that could harm their engines. Do you 
support this language as written and a national biodiesel fuel quality 
standard more generally?
    Question 3. Are their measures that Congress should take focused 
specifically on biodiesel, as opposed to the more general legislation 
we have been discussing here today?
    Question 4. According to the Agriculture Department, U.S. ethanol 
from corn costs about $1.05 per gallon to produce. While I understand 
that ethanol distribution costs are about 10 cents higher per gallon 
then regular gasoline, why is E-85 selling at about three times its 
production cost?
    Question 5. Congress has decided to provide an incentive of 51 
cents per gallon for ethanol, do you believe that consumers are seeing 
a commensurate value for this subsidies? What does this incentive 
translate to if the metric was $/barrel of oil?
    Question 6. Given that producing corn ethanol is a mature industry 
and cost competitive, while producing other advanced biofuels is not, 
do you believe limited government tax dollars be better spent on 
incentives and policies that focus more on advanced biofuels and 
biodiesel than corn?
    Question 7. The current renewable fuels standard created in the 
2005 Energy Bill has proven largely irrelevant because market forces 
have lead to production rates exceeding the RFS. However, the Senate 
passed energy bill contains a substantial increase in the RFS. What 
value to you estimate a creditable RFS compliance credit will have in 
2012, 2015, 2020, and 2022?
    Question 8. As Senator Klobuchar mentioned, one of the pieces of 
legislation we have been working on would prevent oil companies from 
blocking installation of biofuel infrastructure at their franchised 
stations. Could you comment on this problem and whether the measures 
Congress is currently considering will help overcome this barrier?
    Question 9. Section 511 of the Senate passed energy bill is derived 
from an amendment I offered and would increase consumer awareness of 
flex fuel vehicle capabilities by including a badge on the outside of 
the car, information in a car owner's manual, and a clearly labeled 
fuel cap. Do you support this language as written and consumer 
awareness programs for biofuels more generally?
    Question 10. Brazilian ethanol from sugar cane costs 81 cents per 
gallon to produce (compared to $1.05 for U.S. ethanol from corn), and 
Brazilian ethanol production from sugarcane, yields about 590 gallons 
per acre. Given this potential value for American drivers, especially 
compared to record high gasoline prices, does it make sense to continue 
to impose a tariff on importing Brazilian ethanol?
                                 ______
                                 
          Questions for Alexander Karsner From Senator Dorgan

    The Senate Energy bill will increase the renewable fuels standard 
to 36 billion gallons of renewable fuels by 2022. Most expect we are on 
pace to produce about 14-15 billion gallons of ethanol in the next 8-10 
years. If our country uses about 140 billion gallons of gasoline per 
year and the current market for ethanol is primarily used as a 10 
percent blend with gasoline, that market will be saturated in the next 
8-10 years. I believe we need a much more aggressive policy approach to 
install biofuels infrastructure at more than the current 1% of the 
nation's retail gas stations. We also need to dramatically expand the 
number of flex fuel vehicles on our roads.
    Question 1. Earlier this year, you testified in front of my Energy 
& Water Appropriations Subcommittee that we are not developing 
infrastructure at ``rate'' and ``scale'' significant enough to be 
consistent with the amount ethanol we are on track to produce. Can you 
talk more about this? Is the current rate of investment in 
infrastructure sufficient to support a domestic biofuels industry? If 
not, what needs to change?
    Question 2. What is your best estimate of when the production of 
ethanol will surpass the amount needed for octane enhancement in 
gasoline (E-10)? How do we prevent the market from collapsing so there 
is not a revolt against these production requirements?
    Question 3. Your testimony mentions that the Department and other 
federal agencies are examining intermediate fuel blends. Can you 
describe in greater detail what activities the Department of Energy is 
pursuing with other agencies to make intermediate blends more widely 
available to consumers, and what the potential role of intermediate 
blends might be?
    Question 4. How do we make sure that we get the renewable fuels 
pumps in the right locations near heavy concentrations of vehicles so 
that they will be utilized? We want to make sure that we get them in 
the right locations. Does the Administration have an implementation 
plan for this? What can we, as policymakers, do to better help you 
expand renewable fuels infrastructure?
                                 ______
                                 
           Questions for Jonanthan Lehman From Senator Dorgan

    Question 1. EPACT 2005 made available a 30% investment tax credit 
for installing E-85 pumps. Also, we have put in place various grant and 
public education programs for E-85. However, at this point, the U.S. 
has less than 1% renewable fuels infrastructure installed nationwide. 
Given the pace of infrastructure implementation at this point, and the 
dramatic expansion of ethanol production do you believe it's necessary 
for the federal government to send a stronger signal to the market as 
we anticipate more fuels and vehicles being produced?  What other 
market signals would be beneficial?
    Question 2. Earlier this year, I introduced the SAFE Energy Bill 
(S. 875) with Senator Craig. Title II of that bill called for 
increasing the alternative fuel vehicle refueling property credit from 
30% to 35% for E-85 pumps and 40% for blender pumps. It also called for 
a study to determine the market penetration of renewable fuels 
infrastructure by 2013. If 10% market penetration had not been achieved 
by 2013, the Sec. of Energy would do a rulemaking to achieve 10% market 
penetration by 2020. Do you see this as reasonable yet aggressive 
approach? Do you have any other legislative ideas that might help this 
along?
                                 ______
                                 
             Questions for David Terry From Senator Dorgan

    Question 1. You heard Senator Klobuchar earlier speak about some of 
the visionary programs Minnesota has utilized to install hundreds of E-
85 pumps in their state. My home state of North Dakota has 16,000 FFVs 
and only 23 E-85 pumps. Can you give further examples of some of the 
more aggressive state programs to develop E-85 infrastructure? Would 
any of those programs accelerate development if implemented on a 
national scale?
    Question 2. Earlier this year, I introduced the SAFE Energy Bill 
(S. 875) with Senator Craig. Title II of that bill called for 
increasing the alternative fuel vehicle refueling property credit from 
30% to 35% for E-85 pumps and 40% for blender pumps. It also called for 
a study to determine the market penetration of renewable fuels 
infrastructure by 2013. If 10% market penetration had not been achieved 
by 2013, the Sec. of Energy would do a rulemaking to achieve 10% market 
penetration by 2020. Do you see this as reasonable yet aggressive 
approach? Do you have any other legislative ideas that might help this 
along?
                                 ______
                                 
           Questions for Phillip Lampert From Senator Dorgan

    Question 1. The NEVC works with station owners around the country 
to install E-85 pumps. Roughly 57% of retail gas stations around the 
country are franchisees of a major integrated oil company. Earlier this 
year, the Wall Street Journal (4-2-07) reported about hurdles and 
barriers that oil companies like ChevronTexaco, BP and ExonMobil have 
put in place to make it more difficult for their franchisees to sell E-
85 to consumers. In terms of working with station owners to install E-
85 pumps, what kind of resistance have you experienced from the oil 
companies? Would a national policy to remove many of these barriers 
significantly impact the widespread installation of renewable fuels 
infrastructure?
    Question 2. Could you rank the barriers to entry in the marketplace 
for expanded infrastructure needed to deliver more and more biofuels to 
the market?
                                 ______
                                 
            Questions for Charles Drevna From Senator Dorgan

    The oil industry has become incredibly consolidated and vertically 
integrated over the years. From exploration, production, refining and 
even owning a couple thousand retail gas stations around the country. 
And once again, this week major integrated oil companies are reporting 
some of the largest corporate profits in U.S. history. It's no secret 
that the oil industry has not been ethanol's biggest cheerleader. 
However, many refiners currently work well with several ethanol 
producers around the country to blend E-10.
    Question 1. Can you further describe how maximizing profit for 
shareholders at oil companies are not at odds with the increased 
development of renewable fuels and ultimately the national goal of 
reducing our dependence on imported petroleum?
    Question 2. The Wall Street Journal (4-2-07) documented instances 
of major oil companies putting up barriers for their franchisees to 
sell E-85. Why not allow the franchise gas station owners the right to 
sell E-85 as they please at their own stations?
    Question 3. WalMart, one of the nation's largest retailers, 
announced last year that they are interested in selling E-85. While I 
understand they have not yet begun selling E-85 at their roughly 380 
gas stations nationwide. Regardless, if a company such as WalMart, 
CostCo, etc. were to seek a fuel agreement with some major integrated 
Oil Company, would that oil company put up these same barriers for a 
retailer like WalMart to sell E-85?
                                 ______
                                 
          Questions for Deborah Morrissett From Senator Dorgan

    The Big Three, including Chrysler, Ford and GM, made a pledge 
earlier this year that by 2012, 50% of each of your vehicle fleets 
would be flex-fuel capable. This was welcome news. I hope we can push 
to make 100% of our vehicles flex fuel capable in the years to come.
    Question 1. In terms of the extra costs from converting a regular 
engine to a flex fuel engine in a vehicle, I have heard a wide range of 
estimates from $45 to $400. Can you put an industry wide average on the 
cost of differential between manufacturing a regular engine versus a 
flex fuel engine capable of running at E-85?
    Question 2. Currently, an automaker can receive 1.2 credits toward 
their CAFE requirements if they produce a flex fuel vehicle. How much 
of a driver is the push by the Big Three, or Chrysler, to produce more 
FFVs on the road related to the auto industry's desire to get CAFE 
credits in their fleets rather than focus on other efficiency 
increases?
                                 ______
                                 
         Questions for Alexander Karsner From Senator Menendez

    Question 1. Mr. Karsner, we discussed the technical difficulties of 
transporting ethanol via pipeline at a hearing before our committee on 
April 12th of this year. I appreciate your hard work in coordinating 
with the Department of Transportation to solve the technical problems 
of transporting ethanol via pipeline. Please provide me a timeline of 
when this work began, the progress that has been made thus far and when 
you anticipate these technical issues being overcome for potential 
commercial application. Please also provide details on how many people 
comprise the team looking into these problems and who they are 
partnering with in the private sector. I would also appreciate you 
detailing any efforts of Department of Energy to work with Brazil 
(either directly or through the State Department) to license 
technologies used in Brazil to pipeline ethanol. As you know the United 
States and Brazil have agreed to work jointly to share technology on 
biofuels.
    Similarly, could you provide me a timeline detailing Department of 
Energy's work with the EPA to test whether traditional gasoline engines 
can use ethanol concentrations as high as E25--similar to what cars use 
in Brazil? During your testimony you said this testing would take 36 
months. Please explain why this will take so long and why the work was 
not started before now. Please also provide details on how many people 
comprise the team looking into this issue and who Department of Energy 
and EPA are partnering with in the private sector. I would also 
appreciate you detailing any efforts of Department of Energy to work 
with Brazil (either directly or through the State Department) to secure 
any testing for ethanol use in Brazil.
    Question 2. You indicated that the problems were not technical in 
nature but had more to do with automobile manufacturers not willing to 
warranty their engines for ethanol use above E10. What efforts has the 
Department of Energy made to work with auto manufacturers to address 
these concerns? Will these concerns be addressed by the planned testing 
by the EPA?
                                 ______
                                 
         Questions for Deborah Morrissett From Senator Menendez

    Question 1. Ms. Morrissett, I noticed in your testimony that 
Chrysler has committed, by 2012, to have 50% of the cars it 
manufactures be flex-fuel cars, and I commend you on that. But I'm 
wondering, how many flex-fuel cars would you be producing if there was 
no CAFE credit provided? As you know, from 1993 through 2004, every 
flex fuel vehicle produced by a manufacturer provided a 1.2 mpg credit 
towards meeting CAFE standards. From 2005 through 2008, the credit is 
0.9 mpg. Would Chrysler oppose efforts to eliminate that credit or is 
Chrysler just using the manufacture of these cars as a way to meet your 
CAFE obligations?
    Question 2. Ms. Morrissett, Assistant Secretary Karsner just 
testified and he said that running E25 in gasoline burning cars (as 
they do in Brazil) is not really a technical hurdle, but is instead a 
question of whether car companies will allow customers to use higher 
ethanol blends without violating their engine warranty. So I ask you, 
what needs to be done for Chrysler to allow E20 or E25 to be used in 
its vehicles without breaking the engine warranty? Is Chrysler doing 
any of its own testing? Is Chrysler working with the Environmental 
Protection Agency and the Department of Energy to test these higher 
blends?
                                 ______
                                 
           Questions for Charles Drevna From Senator Menendez

    Question 1. Mr. Drevna, I want to ask you about the economics of 
the refining industry. While consumers are being forced to pay more 
than $3.00 a gallon for gasoline, oil companies continue to reap record 
profits. In 2005, refineries increased their prices 255 percent. And 
whenever there is a spike in gasoline prices experts seems to lay the 
short term blame at the feet of the refineries.
    In your testimony you say that we should let the market decide the 
price of gasoline, but apparently the market is not working. Earlier 
this year many of the oil companies who are members of your 
organization blamed the expansion of biofuels for the high price of 
gasoline. How can this possibly make sense? Biofuels represent the 
first real competitor to petroleum in nearly a century. Why would this 
competition cause prices to rise?
    Question 2. Isn't the real answer that since the late 1990's--
mergers between the giant oil companies, like Exxon and Mobil, Chevron 
and Texaco and Conoco and Phillips--have left us with only 10 major oil 
companies controlling 80 percent of our domestic refining capacity?
    Question 3. Isn't it the exercise of that market power that is one 
of the real causes of high gas prices and not the expansion of biofuels 
such as ethanol? Why else wouldn't these companies invest their record 
profits into new refineries or properly maintain existing refineries 
that are constantly breaking down?
                                 ______
                                 
 Question for Phillip Lampert and Jonathon Lehman From Senator Menendez

    Question 1. Mr. Lambert, Mr. Lehman--This question is for both of 
you. What steps can we take to create better access to ethanol in the 
Northeast and specifically my home state of New Jersey? I noticed that 
an E85 pump was recently installed in Georgetown here in Washington DC, 
but the citizens of New Jersey are anxious to help reduce our 
dependence on oil and reduce our greenhouse gas emissions by using 
biofuels. Right now there are 129,000 cars in New Jersey that can run 
on E85, but people do not have access to pumps. I was pleased to 
support a provision in the Energy Bill we just passed here in the 
Senate to incentivize further market penetration of E85 pumps by 
establishing a pilot grant program to create renewable fuels corridors. 
But will this program be enough?

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