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[Senate Hearing 112-36]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 112-36
 
                                BIOFUELS

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   TO

  REVIEW THE U.S. DEPARTMENT OF ENERGY'S BIOFUEL PROGRAMS AND BIOFUEL 
  INFRASTRUCTURE ISSUES, AND TO CONSIDER S. 187, THE BIOFUELS MARKET 
                         EXPANSION ACT OF 2011

                               __________

                             APRIL 7, 2011

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

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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JOHN BARRASSO, Wyoming
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
BERNARD SANDERS, Vermont             MIKE LEE, Utah
DEBBIE STABENOW, Michigan            RAND PAUL, Kentucky
MARK UDALL, Colorado                 DANIEL COATS, Indiana
JEANNE SHAHEEN, New Hampshire        ROB PORTMAN, Ohio
AL FRANKEN, Minnesota                JOHN HOEVEN, North Dakota
JOE MANCHIN, III, West Virginia      BOB CORKER, Tennessee
CHRISTOPHER A. COONS, Delaware

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Brady, Bill, CEO, Mascoma Corporation, Lebanon, NH...............    11
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Dinneen, Bob, President and CEO, Renewable Fuels Association.....    19
Eichberger, John, Vice President, Government Relations, National 
  Association of Convenience Stores, Alexandria, VA..............    24
Harkin, Hon. Tom, U.S. Senator From Iowa.........................     4
Karr, Shane, Vice President for Federal Affairs, Alliance of 
  Automobile Manufacturers.......................................    15
Kelly, Henry, Acting Assistant Secretary, Office of Energy 
  Efficiency and Renewable Energy, Department of Energy..........    49
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     3

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    57

                              Appendix II

Additional material submitted for the record.....................    77

                                BIOFUELS

                              ----------                              

                        THURSDAY, APRIL 7, 2011

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:32 a.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. OK. Why don't we get started?
    Today's hearing will discuss biofuels and the biofuel 
infrastructure issues. It's important that we consider those 
issues for two main reasons.
    First, the unrest in the Middle East and associated high 
oil prices are a reminder of the cost of our reliance on 
foreign oil. Libya's oil production is shut in for the 
indefinite future. Oil prices might well remain high for some 
period here. These high oil prices and the resulting high 
gasoline prices endanger our national and global economic 
recovery. So it makes sense to be sure we're doing all we can 
to make our economy less vulnerable to dramatic changes in oil.
    In my view the key to making our economy less vulnerable to 
oil price increases is to use less oil. Renewable biofuels are 
the best near term option for replacing oil in the 
transportation sector. Increased use of biofuels combined with 
fuel efficiency gains and increased domestic oil production 
have together reversed years of increasing dependence on 
imported oil and have actually lowered our petroleum imports.
    We can go into those statistics. But that's a very good 
trend which I think we all need to acknowledge.
    Second, the second reason why this is an appropriate time 
for this hearing is that even as we have a renewed sense of 
urgency to shift away from reliance on oil, renewable fuels are 
facing financing and infrastructure constraints that could 
prevent them from reaching their full production potential. The 
financing constraints are shared by many clean energy 
technologies and are not limited to renewable fuels.
    Senator Murkowski and I authored a piece of legislation in 
the last Congress to address those policy challenges through 
the creation of a Clean Energy Deployment Administration. I 
hope the committee can focus again on that policy in the near 
future.
    The infrastructure issues, however, are specific to the 
renewable fuels industry. We have maxxed out our capacity to 
absorb ethanol into our gasoline pool. This is true of 
traditional corn based ethanol, but also true of emerging 
cellulosic ethanol which is the advanced biofuel that is 
expected to be the first to enter the marketplace.
    Cellulosic ethanol is made from woody biomass, from waste 
materials and grasses and the inedible parts of agricultural 
crops. Cellulosic ethanol does not compete with the food 
supply.
    We have three broad options for continuing to replace oil 
consumption with renewable fuel consumption and staying on 
track to satisfy the requirements that we put in the 2007 
Renewable Fuel Standard.
    The first of those broad options is to increase the market 
for high level ethanol blends of 85 percent ethanol and 15 
percent gasoline. That's E-85.
    The second broad option would be to use ethanol in mid 
level blends higher than the current 10 or 15 percent ethanol, 
but still significantly less than 85 percent ethanol.
    The third would be to move forward with renewable fuels 
other than ethanol.
    Senator Harkin, who is here today to give us his views 
along with Senators Johnson and Franken and Klobuchar have 
helped to initiate the discussions on this topic with the 
introduction of S. 187, the Biofuels Market Expansion Act of 
2007. 2011 it must be, right? S. 187 chooses the first of these 
options. That is maximizing the market penetration of E-85 
through a mandate for cars and pumps that are compatible with 
E-85.
    I'm concerned somewhat about the danger of over shooting 
the mark on maximizing E-85 infrastructure because I'm hoping 
that infrastructure compatible drop in fuels such as algae 
based biocrude and biobutanol would emerge to fill much of the 
renewable fuels requirement in the future. I know Senator Coons 
is very focused on this set of issues too and will be actively 
involved in the questions as we get into the hearing.
    I'm not suggesting we can simply put our renewable fuels 
policy on hold while we wait for drop in fuels to come to 
market. As best we can tell right now ethanol from cellulose is 
likely to be the next renewable fuel to enter the marketplace. 
I note that the overwhelming majority of the grants and loan 
guarantees made by the Department of Energy and the Department 
of Agriculture have been for cellulosic ethanol. It seems to 
make sense that we would be working to ensure that there is a 
market for this cellulosic ethanol.
    It's appropriate to explore a middle ground approach on 
this infrastructure issue. If ethanol can fuel more than 10 
percent of our transportation needs in the near term than we 
should explore a path toward enabling it to do so. However, we 
should not go so far in locking our infrastructure into ethanol 
as the renewable fuel choice that we prevent different and 
perhaps even better renewable fuels from coming to market in 
the future.
    There's obviously a balancing act here. These are complex 
issues which are going to require us to get the very best 
information we can before we take any action.
    Senator Murkowski.

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

    Senator Murkowski. Thank you, Mr. Chairman and welcome to 
Senator Harkin to the committee today.
    I think that this hearing marks the first time that our 
committee has actually focused specifically on biofuels 
policies since some time mid of 2008 when we looked at the 
relationship between renewable fuels and food prices. Looking 
back I think it was probably a pretty optimistic time. It was a 
time when many policymakers thought that we had found both 
technologies and policies that would substantially reduce our 
Nation's oil consumption over a relatively brief period of 
time. But roughly 3 years later I think it's probably fair to 
say that some of the optimism surrounding biofuels has begun to 
ebb.
    First generation biofuels have entered the market in 
significant quantities and at considerable cost to taxpayers. 
There's less agreement on the use of certain feed stocks. A 
coalition of some 90 groups, an unlikely alliance that includes 
members of the agriculture, environmental and business 
communities has emerged to oppose most, if not all Federal 
support for corn based ethanol. The optimism surrounding 
advanced biofuels, meanwhile, has both dimmed and shifted.
    Congress' mandate for cellulosic biofuel required 100 
million gallons last year but we saw very little production. 
This year the cellulosic standard ramps up to 250 million 
gallons. But again, barely any of that fuel will reach market. 
With time and technological developments many have begun to 
tout the drop in replacement fuels, as you know, Mr. Chairman, 
which promise to be more compatible with the existing 
infrastructure as the wave of the future.
    We've reached a crossroads, I think, for our biofuel 
policies well before most of us expected to reach one. Nothing 
characterizes that crossroads better than the so called blend 
wall where ethanol production rises over 10 percent of our fuel 
supply. This could limit the overall use of ethanol. It could 
leave cellulosic production, one that begins in earnest, with 
no market at all. As we've seen with the recent A15 waiver 
there are no easy way out of this situation, only processes 
that we should seek to avoid in the future.
    Now I hope that my comments this morning are not construed 
as anti-ethanol or anti-biofuel because that's clearly not my 
intention. I believe most certainly that biofuels have a 
definite and an ongoing place in our fuel supply. I make these 
observations simply to point out that our work in this area is 
just not finished.
    We face a range of problems related to infrastructure, 
related to liability, other issues that could ultimately 
require legislation to address. Other committees are planning 
to revisit the RFS to make sure that it's working in Congress 
as intended. Given how the past few years have unfolded we 
should also recognize that it's possible that we may just be 
too aggressive.
    I'm hopeful that today will mark the start of a larger 
conversation between all of the stakeholders that are affected 
by the biofuels policy. We should determine if there are ideas 
and if there are consensus on these ideas to help resolve the 
blend well problem, avoid retroactive fuel waivers and 
generally improve our biofuels policies. As part of that effort 
we'll need to pay close attention to the costs that would 
result from any new policy that's put forward.
    We need to do our best to anticipate some of the unintended 
consequences that could arise. We will need to focus on all of 
the issues that are facing biofuels, not just some. We should 
be ready to admit that perhaps our previous policies have not 
always worked out as well as expected.
    I look forward to the testimony that we will receive here 
this morning. Again, thank Senator Harkin, Senator Franken, so 
many, that are involved in this issue, for their input.
    The Chairman. Thank you very much.
    Our first witness today is Senator Harkin, who's been a 
leader on this set of issues for all the years that I've been 
here in the Senate. We very much welcome him and look forward 
to hearing your views on what we ought to do.
    Go right ahead.

      STATEMENT OF HON. TOM HARKIN, U.S. SENATOR FROM IOWA

    Senator Harkin. Thank you very much, Mr. Chairman and 
Senator Murkowski, members of the Energy and Natural Resources 
Committee. I appreciate the opportunity to provide my 
perspective on this issue of biofuels which I understand this 
is what this hearing is about.
    You know, we constantly hear the refrain that we've got to 
reduce our oil imports. We've got to get off of imported oil. 
It's just a constant refrain all the time. To the extent where 
I think most people actually believe we have done nothing. We 
have just banging our heads against a wall. We've done nothing 
to reduce our oil imports.
    I'm here today with a different message. We have made 
substantial progress in reducing oil imports. We can easily do 
more. I want to reemphasize, easily do more.
    The greatest success in reducing our dependence on imported 
oil has come about through the advancement of biofuels, now 
totaling about 13 billion gallons per year or about 10 percent 
of our gasoline use in this country is now based in biofuels. 
Quite frankly that's happened in the last 10 years or put in 
another way the amount of ethanol or biofuels that we are using 
in America today is more than all of the gasoline used in Great 
Britain and France combined. More than all of the gasoline used 
in Great Britain and France combined, that's how much we're 
using right now in term of biofuels.
    As I said, this has happened in 10 years. Think about that. 
We've reduced our dependence on imported oil by 10 percent in 
less than 10 years.
    But most of this remarkable achievement has come about 
through actions of Congress, mostly from this committee, 
through the Renewable Fuels Standard of 2005 and what we called 
RFS-2 in 2007. So my message is not one of doom and gloom nor 
is it of idle hope. I think we can have optimism and confidence 
based not upon a will of a whisp or some ephemeral kinds of 
ghosts that we're chasing but based upon facts and 
accomplishments.
    What have we done? what are the facts?
    Well, OK, here we go.
    This committee passed and the Congress passed the Renewable 
Fuels Standard saying that we're going to have 36 billion 
gallons of renewable fuels by 2022. Now we can achieve this and 
easily achieve this. I said we're at 13 right now. We've done 
that in literally 10 years.
    But we need Federal policies to support biofuels expansion. 
Now one of those you mentioned the blend wall, the E10. We've 
been using 10 percent or gasohol as I've said, since the 60s, 
70s.
    Finally EPA, last year, and we met with them, a number of 
us. Senators met with them last fall. As you know they have now 
increased it to E15 that any car manufactured after 2001 can 
use 15 percent of ethanol blend without any problems 
whatsoever.
    The problem before 2001 is they don't really have enough 
cars to test because most of those cars before 2001 already 
have 100,000 miles. So we don't know what's causing the 
problems. But, they've already proved E15. Quite frankly in our 
talks with them there's a belief that we can go to E20 without 
really any problems whatsoever, E20.
    But the biggest challenge that we face in biofuels is what 
I call marketplace expansion. Senator Murkowski, you mentioned 
briefly about putting things in place that prohibit the 
development of other kinds of fuels. We kind of have that 
situation right now in the way that we have our cars 
manufactured and the way that we have our gasoline stations set 
up that really work against biofuels expansion.
    So our bill, S. 187, does basically three things.
    It provides a mandate on flex fuel cars. It has a phase in 
that all cars made in America, sold in America, have to be 
flexible fuel by a certain year. Again, we know that that costs 
less than $100 a car, much less, if you do it on a mass 
production basis.
    Or think of it this way, all of the cars, almost all the 
cars sold in the Brazil for the last dozen years have all been 
flex fuel. Ford, every car they make in Brazil does flexible 
fuel. General Motors, every car they make in Brazil is flexible 
fuel. Honda, Toyota, they're all flexible fuel. So there's no 
reason why we can't do that here.
    So S. 187 basically phases in a requirement that cars sold 
in America have to be flexible fuel. When I mean flexible fuel 
that means they can burn at anything from gasoline to 85 
percent ethanol. Brazil it's anything from gasoline to 100 
percent ethanol.
    The second requirement of S. 187 is to require blender 
pumps. That over a 6-year period of time that major oil 
companies, major gasoline stations would have to have at least 
one blender pump at a certain number of gas stations to the 
point where by 2020, 50 percent of all gasoline stations, one 
half of all gasoline stations would have at least one blender 
pump at that gasoline station.
    I will relate to you a meeting that Senator Lugar and I had 
just a few years ago. We had called in the automobile 
companies. We had Chrysler there, Ford, General Motors. I think 
a representative of Honda was there. I forget who else.
    We sat across the table from them and were asking them 
about why they aren't producing more flexible fuel cars. They 
said, well, there's a lot of reasons. But the basic reason was 
why produce a flexible fuel car when there's no flex fuel out 
there. There are no stations out there. Why build them?
    Literally, literally within a month after that we had, I 
remember we had, Texaco, Exxon, Shell, Mobil. We had a bunch of 
the major gasoline stations, companies, gas--oil companies in, 
Senator Lugar and I and there were some others there. We asked 
them why don't you put more blender pumps at your gasoline 
stations and their response was, you guessed it. Because there 
are no cars out there that can use this fuel.
    So we have the chicken and egg situation. So the way to 
break that down is to have a phase in of both flexible fuel 
cars and blender pumps at the same time. So that as you make 
more flexible fuel cars, there are more blender pumps at the 
station. So those are two of the items in the bill.
    It also, in our bill, provides grants. Obviously there are 
some small gasoline stations that people own just a few, maybe 
two or three or four, five, gasoline stations. We provide 
grants there for them to put in the tanks and the blender 
pumps.
    The third part of the bill which is also vitally important 
is a loan guarantee for pipelines. A pipeline from places where 
they produce biofuels to the places where there are the most 
cars, like the east coast, for example. Already there are a 
couple of companies that have right of way and are prepared 
basically, to move ahead with a dedicated biofuels pipeline 
from the Midwest to basically New Jersey/New York City/
Pennsylvania area.
    But because of markets and because of the recession they 
haven't moved ahead. A loan guarantee, I think, would jump 
start that and get that pipeline built so that you could ship 
the biofuels to where most of the people are.
    So those are basically the three things that are in S. 187. 
I might just add a couple of, three things, other.
    We need to develop more cellulosic ethanol. That was 
mentioned, I think, by both Senator Bingaman and Senator 
Murkowski on cellulosic ethanol.
    A few years ago we started on this. It showed great 
promise. Then the recession hit. A lot of the investments went 
down. But we've had some setbacks in that.
    But I think we need to restart that effort and move ahead 
again on cellulosic ethanol. For the main reason is that--and 
we've had a number of experiments that I've been involved in 
for my role on the Agriculture Committee of using grasslands, 
using places of where you can go. Things like switch grass and 
things like that where you can harvest it annually. There's no 
erosion problems, either switch grass, miscanthus, things like 
that.
    We've had experiments. We know we can grow that in areas 
where you're not really growing crops or anything else. But you 
can grow a lot of grass. You can harvest that every year for 
biofuels production. So we need to get that back on track.
    One other issue that comes up is the issue of energy 
payback. A lot of critics say, well it takes more energy to 
make ethanol than you get out of it. I hope that's been put to 
rest.
    We've had studies done by the Argon National Laboratory, 
the Department of Agriculture. That shows that that simply is 
not true. That we basically can get up to just short, maybe 
twice the amount of energy out of a unit of ethanol than the 
energy that goes into it.
    Which is reasonable when you think about it because most 
biofuels, ethanol, it takes sunshine and rain and soil. Those 
are renewable. So it doesn't take a lot of energy to produce 
the ethanol. I hope that's been put to bed.
    It was mentioned about the drop in fuels, the biobutanols 
and the green gasolines. Again I think they have a lot of 
promise. But that's again, 20 years down the pike. We need to 
have continued research in it. But don't think that somehow we 
shouldn't do biofuels. We shouldn't do ethanol because we're 
going to have these drop in fuels.
    Drop in fuels are not there. We can be researching that for 
the next 10, 20 years. I think we should. But it's not anywhere 
near being available like ethanol is right now.
    Last, there was an article that came out this morning in 
the New York Times. I just saw it. It says, ``Rush to use crops 
as fuel raises food prices and hunger fears.''
    Again, this is one of those--I don't know what you'd call 
it that just keeps coming up all the time in which there's just 
no basis in fact. We use mostly corn now to make ethanol in 
this country. Our corn exports are as much as they've ever 
been. The amount of corn we feed to chickens, hogs, and cattle 
and livestock is basically the same as it's ever been.
    What's happened is we've increased the productivity. So the 
increased productivity, a lot of that has gone into ethanol and 
corn production. So it hasn't been that we're taking anything 
out of the food chain. We simply have increased the productive 
capacity of corn.
    A lot of people don't know that the distiller's grain that 
is left over after you make ethanol is a good feed source for 
livestock. So you can still feed the cattle and still get the 
meat out of it. A lot of people think well that corn is the 
corn we eat. That's not the corn we eat. That's the corn you 
feed the chickens and cattle and hogs to produce meat that we 
consume.
    So this, again, this story again, is just one of those 
things that keep coming up all the time that by using ethanol 
or biofuels we're going to have a lot of hungry people. That's 
just simply not so. But it just keeps coming up all the time.
    I thank you for having me here this morning. I'll just 
close by saying that biofuels is and will continue to be our 
most important strategy to reduce dependence on imported oil 
if, I believe, we do the things that are outlined in S. 187, 
blender pumps, flex fuel cars and pipelines that can move this. 
With that, I think we can really, really move from a 10 percent 
to 20, to 30 percent reduction in our gasoline supplies in a 
very short period of time.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Harkin follows:]

     Prepared Statement of Hon. Tom Harkin, U.S. Senator From Iowa

    Chairman Bingaman and Ranking Member Murkowski, thank you for 
holding this hearing and for inviting me to offer my views on the 
status and future of biofuels. I have supported the production and use 
of biofuels as a key strategy for America for decades, so I welcome 
this opportunity to provide my current perspectives and 
recommendations.
    We're all familiar with America's addiction to oil and our 
dangerous dependence on foreign oil. That message has been delivered 
countless times for decades, with powerful amplification every time oil 
prices rise. When those prices rise, we repeatedly decry the fact that 
we haven't solved this problem. Many think it's as though we're banging 
our heads against the wall, with no progress made nor any policy 
solutions in sight.
    I'm here to offer a different perspective that recognizes our 
continuing challenges with respect to our addition to oil, but which 
also applauds some noteworthy successes. My message is that we've taken 
real steps to reduce our dependency on oil, and we have made 
substantial progress, but that there are also further steps within our 
reach.
    The first thing we've done is to increase vehicle efficiency, and 
that has dramatically reduced our need for oil.
    Even more remarkable, our biofuel production now totals about 13 
billion gallons per year, and equals nearly 10 percent of our gasoline 
supply. While 10 percent might not sound too impressive, that is more 
than all the gasoline that Great Britain and France combined use in a 
year. Please think about that. For the first three decades that we 
bemoaned our oil dependency dilemma, no alternative fuels played any 
significant role in powering our cars and trucks. But over this past 
decade, contributions from ethanol and biodiesel have risen to nearly 
10 percent of demand.
    Given the size of our liquid fuels market, this is a remarkable 
accomplishment. Biofuels truly are working for us. Congress played a 
key role in this. In addition to the biofuels tax credits that we 
established in the 1970's, we also adopted the Renewable Fuel Standard 
in the 2005 energy bill, and we adopted a revised, more aggressive RFS2 
in 2007 to put us on this trajectory.
    So my message to your committee, Senator Bingaman, to the Congress, 
and to the American people, is not a message of doom and gloom about 
our continuing dependence on oil. Nor is it a message of idle hope. My 
message is one of optimism--optimism grounded in what we have done, and 
confidence that we can do much more. Our Renewable Fuel Standard calls 
for 36 billion gallons of biofuel by 2022. We can do that. We will do 
that. We must do that, and we must make sure that our federal biofuels 
policies' support this pace of biofuels expansion.
    Success isn't a slam dunk. We have some major challenges. The 
biggest challenge is that our marketplace for transportation fuels is 
not yet equipped to absorb the increasing volumes of biofuels required 
by the Renewable Fuel Standard. This issue is especially acute for 
ethanol, which is the leading biofuel today, and which, despite real 
promise in other biofuels, will almost certainly remain the dominant 
biofuel for at least 2 more decades. Our problem is that nearly all of 
our ethanol is used in the form of E10, which is a 10 percent blend of 
ethanol with gasoline and which can be sold for use in all gasoline-
powered vehicles. We use very little ethanol at higher blend levels, 
both because very few vehicles can legally use higher blends, and 
because such higher blends are available at very few refueling 
stations. With ethanol nearing 10 percent of our total gasoline 
supplies, we're facing what's called the ``blend wall.'' This is a very 
serious limitation to expanding the use of ethanol. While the 
Environmental Protection Agency has announced that E15 will be approved 
for use in vehicles that are model year 2001 or newer, this only offers 
limited and temporary ethanol expansion potential.
    I want to point out that even this marketplace limitation, from a 
longer-term perspective, is a clear sign of our success. Hitting this 
10 percent blend wall is a result of that success! Ten years ago, when 
gasoline was essentially the only fuel, almost no one would have 
predicted this problem, that by 2011 we would be struggling with how to 
help an alternative to gasoline climb over a 10 percent barrier. 
However, with leadership in Congress, these challenges can be 
addressed. Thank you for including Senate bill S.187, the Biofuels 
Market Expansion Act of 2011, among the discussion topics for this 
hearing. I introduced this bill, along with Senators Johnson, 
Klobuchar, and Franken, on the very first legislative day of this 
Congress to highlight its importance. This measure consists of three 
main components.

          1) The first is a requirement that a large majority of 
        automobiles manufactured for sale in the United States be 
        ``flex-fuel'' vehicles, meaning that they can utilize a wide 
        range of ethanol blends, all the way from E0, straight 
        gasoline, to E85. This is easy to do, and I've been told that 
        it only costs about $100 per vehicle, and possibly less. Almost 
        all cars sold in Brazil have been flex-fuel vehicles for 
        several years now.
          2) The next provision expands the number of blender pumps 
        that can provide higher blends of ethanol across the country. 
        It does that by requiring that major fuel distributors, those 
        distributing the fuels sold at more than 50 refueling stations, 
        install blender pumps at increasing numbers of their stations 
        over a six-year period. It also authorizes grants for owners of 
        smaller numbers of filling stations to install blender pumps 
        that will dispense fuels with higher ethanol contents.
          3) This bill also authorizes loan guarantees for the 
        development of biofuel pipelines to move ethanol from its major 
        production regions to other areas of the nation. There is 
        already serious interest in building a pipeline from the 
        Midwest to the New York harbor. But, investment commitments for 
        such a large project require a loan guarantee because of the 
        associated uncertainties and risks.

    This Biofuels Market Expansion bill that you are looking at today 
is one way to address the marketplace and infrastructure challenges 
associated with supporting the further roll out of biofuels. There may 
well be better ways, different provisions that are more broadly 
acceptable while accomplishing the same purpose, and I look forward to 
working with your committee and our colleagues across the Senate in 
formulating and passing a bill. Indeed, many think we should revisit 
our whole federal policy framework for biofuels, including 
consideration of financial provisions such as the ethanol tax credits, 
and I agree with that. I understand that the ethanol industry intends 
to propose biofuels policy reform, including possible reductions in tax 
credits for ethanol coupled with provisions to support market 
expansion. I think that is commendable. I only wish that other 
industries would do the same--including the oil industry, which is 
getting very lucrative and unnecessary subsidies.
    In addition to addressing the marketplace and infrastructure 
challenges that biofuels currently face, I'd also like to note the 
importance of accelerating the development and commercialization of 
cellulosic ethanol and other advanced biofuels. Frankly, about 3 or 4 
years ago, advanced biofuel technology seemed to be poised to take off. 
Unfortunately, the fact that technologies were not quite ready, along 
with the financial meltdown that froze investments for new 
technologies, has cost us about 3 or 4 years. We now need to make sure 
that advanced biofuels' development and commercialization gets the 
federal support it needs in order to get back on a fast track.
    I also want to take this opportunity to address the environmental 
charges that some have raised relative to ethanol. One question that 
continues to be raised has to do with the energy payback of ethanol. 
Authoritative analysis released last summer by the Department of 
Agriculture concludes that ethanol delivers about twice as much energy 
as is used in its production. That analysis takes into account the 
lower energy content of ethanol as well as the energy contents 
remaining in the main byproduct, the distillers grains that are used 
for livestock feed. We should also consider petroleum payback since a 
key benefit of biofuels is displacement of imported oil. Ethanol from 
corn actually delivers the equivalent of about 12 times as much energy 
as is contained in the petroleum used in its production.
    As we consider alternative fuels, I agree that we should be 
examining their environmental impacts. In this regard, I would point 
out that we are using increasing amounts of fuels from tar sands, and 
surely we can all agree that the energy and water requirements for 
ethanol are far less than for those fuels.
    There are also some who assert that corn ethanol is a mistake and 
that we should focus on ``drop-in'' fuels such as biobutanol or green 
gasoline. I agree that there is real promise and potential to drop-in 
fuels, and I wholeheartedly support their further development, but 
their widespread use and application is realistically decades away. I 
think it will be 20 years before they contribute 10 percent of our 
fuels, so that would be a 2-decade mistake. In the meantime, we are 
likely to see very substantial commercialization of cellulosic ethanol. 
By all means, we should continue apace with the development of drop-in 
fuels, but this is not an either-or proposition. Until drop-in fuels 
are commercially viable, we should continue to support ethanol.
    Finally, some have expressed serious concerns about the impact of 
biofuels production on deforestation in developing countries. I 
understand that deforestation is a major contributor to increases in 
atmospheric greenhouse gases, and I fully support the need for 
controlling such land use changes. However, I believe the most 
effective way to limit environmentally destructive land-use change 
elsewhere is through land use policies. Limiting the development of 
biofuels in the United States seems to me a very uncertain and likely 
ineffective approach to reducing deforestation in Indonesia.
    As one who has a strong environmental record and has authored or 
supported numerous conservation programs, I hope that our environmental 
groups revisit their prioritization of alternative, environmentally 
responsible strategies for America to reduce our dependence on oil. In 
this real world of energy policy, a stance against ethanol may well be 
a stance in favor of tar sands oil.
    Let me close by repeating my belief that biofuels have been--and 
will continue to be--our most important supply-side strategy for 
reducing dependence on imported oil. Those biofuels lower 
transportation fuel costs by increasing fuel supplies, and that saves 
us money at the pump, as well as reducing our dependence on foreign 
oil. Biofuels also are cleaner today than gasoline, by any measure, and 
their environmental impacts are steadily declining as we improve 
efficiencies and reduce emissions in our biorefineries. We should be 
pleased with our record with ethanol and biofuels. We definitely should 
enable their expanding contributions to resolving our most critical 
energy problem.
    Senator Bingaman and Senator Murkowski, I congratulate you and your 
committee members for your leadership on charting strategies for 
addressing our oil problem. Thank you for this very timely 
consideration of our national biofuels policy issues. You led the 
formulation and passage of the renewable fuel standards that set the 
trajectory for biofuel contributions. We should all celebrate that 
success, and we must stay on that course. Thank you for inviting me to 
testify today on a subject that I consider to be so vital to our future 
energy economy, and I look forward to working with you and our 
colleagues across the Senate on reforming federal biofuels policy to 
assure their continuing and expanding contributions to our 
transportation fuel supplies.

    The Chairman. Thank you very much. I appreciate your 
testimony. I'm sure we will have a great opportunity to discuss 
this with you more as the weeks go on here through the session.
    Why don't we go ahead with our first panel of witnesses? I 
know that I was informed Senator Shaheen wanted to introduce 
Mr. Brady. So why don't you go ahead with that at this time if 
you want. I'll introduce the other three.
    Senator Shaheen. Thank you very much, Mr. Chairman. Welcome 
to all of our panelists this morning. I'm really delighted. I 
should probably share this introduction a little bit with 
Senator Stabenow.
    But we have Bill Brady here, who is the CEO of Mascoma 
Corporation which is a New Hampshire based corporation that is 
about to build a facility in Michigan. We would rather have it 
in New Hampshire. But we're delighted we're expanding. You're 
expanding. We hope that goes forward as planned.
    Mascoma and the effort that Bill is leading is a facility 
that has developed cellulosic ethanol from research that was 
done at Dartmouth. It's, I think cutting edge research, really 
on the cutting edge globally for the research that they're 
doing on cellulosic ethanol. I've had the opportunity to visit 
the facility up in Lebanon and Hanover, New Hampshire. It's 
very impressive to see the growth that you have benefited from 
and to see the research that's going on there.
    So we're delighted to have you here and to be able to 
question you about some of the challenges that you face. 
Hopefully we can put in place some policies to continue to 
benefit the work that you're doing.
    Thank you very much for being here, Mr. Brady.
    The Chairman. Alright. Let me before we hear from you, Mr. 
Brady, let me introduce our other three panel members.
    Mr. Shane Karr, who is the Vice President for Federal 
Affairs with the alliance of Automobile Manufacturers. We 
appreciate you being here.
    Bob Dinneen, who is President and CEO of the Renewable 
Fuels Association. We're glad to have you back before the 
committee.
    Mr. John Eichberger, who is the Vice President of 
Government Relations with the National Association of 
Convenience Stores. Thank you for being here.
    Why don't we just have each of you take five or 6 minutes 
and give us the main points that you think we should 
understand. We will include your full statements in the record 
as if read.
    Mr. Brady, why don't you go ahead?

 STATEMENT OF BILL BRADY, CEO, MASCOMA CORPORATION, LEBANON, NH

    Mr. Brady. Thank you. Thank you very much, Senator Shaheen. 
Thank you, Mr. Chairman, Senator Murkowski and members of the 
committee. It's my honor to be here today.
    Senator Shaheen did a terrific job introducing the company. 
We do have our headquarters in the great State of New 
Hampshire. We have a pilot facility, a 300,000 gallon pilot 
facility in/near Syracuse, New York. We are indeed planning a 
40 million gallon commercial scale production facility in 
Kinross, Michigan, in the upper peninsula of Michigan.
    The $350 million Kinross project which we call Frontier 
Renewable Resources is being developed in conjunction with a 
Michigan based timber company called, J.M. Longyear, 120 year 
old timber company. We will make 40 million gallons of 
cellulosic ethanol. The construction will employ 150 people. 
Once operational there will be 70 skilled jobs in the facility 
and the State of Michigan estimates spin off jobs on the order 
of 700.
    In the past year we've made significant progress.
    On the technology front, ethanol produced at that plant 
will be competitive with oil at $75 per barrel and will be 
competitive on a cash cost basis with corn ethanol today.
    On the financial and supply chain front Valero Energy 
Corporation has invested in Mascoma and will be partnering with 
us both on taking the off take from the facility and providing 
equity.
    We also have a pending loan guarantee application under 
consideration at the Department of Energy.
    So we've made considerable progress. We do need the 
government's help to get the project moving. I'll outline that 
in a second. But before I do I want to make it clear. Our job 
and our commitment is to continue to drive down the costs, 
advance the technology and make this technology competitive. 
We're committed to doing that.
    On the government front. The companies like mine have made 
good progress because we have been backed by venture companies 
and strategic investors. What's needed now is a significant 
capital investment to build the production facilities.
    Venture capital firms don't provide that type of capital. 
Most private equity firms want to see it working before they'll 
put considerable money to work and debt providers simply won't 
take that risk or the cost will be much too high. This is the 
so called Valley of Death that I think you hear about with new 
companies between where we are now and building the first 
facilities.
    So here's how the government can help.
    First, Congress must maintain the DOE's authority and 
funding to provide renewable energy loan guarantees. Concepts 
like Chairman Bingaman's CEDA proposal holds great promise for 
the future. But today the DOE Loan Guarantee Program is the 
best choice and the best bet for companies like ours. 
Eliminating the program will delay projects and make it very, 
very difficult for us to raise funds.
    Second, the market signals for cellulosic ethanol provided 
by the RFS-2 and by the PTC or Production Tax Credit are 
critical. Efforts to weaken the RFS 16 billion gallons must be 
avoided. The existing PTC or Production Tax Credit is scheduled 
to expire in 2012. This is vital to our first plant financials. 
Ideally our industry would like to see long term, 10 year, 
production tax incentives. But engaging in this yearly 
extenders game does not give investors confidence that it will 
be there for them.
    Then third, the U.S. needs to make significant progress in 
breaking through the blend wall. I think Senator Harkin spoke 
about this. We need to create some space for cellulosic fuels.
    The investors are very aware of this blend wall and its 
limitations and what they basically want to see, what we all 
want to see, is infrastructure policy on FFVs and on blender 
pumps that equal the RFS-2 gallons or that support the RFS-2 
gallons. So a robust commitment to FFVs is necessary and 
critical. We know this technology is here and is relatively 
inexpensive.
    Efforts also need to focus on blender pumps. I think we 
need Federal mechanisms to significantly increase the speed of 
installation of blender pumps. I commend Senator Harkin's 
efforts to address these issues in S. 187.
    So my final message is the time is now. The technologies 
are ready. Unfortunately the Valley is before us. The market 
signals are less than clear.
    We spend as a country, $560 billion per year on imported 
oil. I think a long weekend of that spending would go a long 
way to moving this industry forward quickly. It will help this 
country in what we so badly need in our energy independence and 
economic security.
    So I thank you for holding this hearing. I thank you very 
much for having me here today.
    [The prepared statement of Mr. Brady follows:]

       Prepared Statement of Bill Brady, CEO, Mascoma Corporation

    Good morning, Mr. Chairman and members of the committee. My name is 
Bill Brady, CEO of Mascoma Corporation and Chairman of the Advanced 
Ethanol Council, a group of companies leading the development and 
commercialization of advanced ethanol technologies.
    Mascoma is an innovative biofuels company committed to developing 
environmentally sustainable, low cost, low carbon biofuels from 
cellulosic biomass. The company's corporate office and R&D laboratories 
are based in Lebanon, New Hampshire. Mascoma is producing cellulosic 
ethanol at a 300,000 gallon demonstration scale at its facility in 
Rome, New York. We are also developing a 40 million gallon per year 
commercial scale project in Kinross, Michigan. Our hope is to begin 
construction on this facility this fall pending achievement of several 
milestones, some of which I will discuss today.

   BACKGROUND ON MASCOMA'S TECHNOLOGY AND RESEARCH AND DEMONSTRATION 
                               FACILITIES

    Mascoma's Consolidated BioProcessing method converts non-food 
biomass feedstocks into cellulosic ethanol through a patented process 
that eliminates the need for costly enzymes and additives. This 
transformative technology enables ethanol competitively priced with 
gasoline to be derived from cellulose in a manner not previously 
possible. The processing steps involve:

          1. Selective harvesting of pulpwood.
          2. Chipping of excess pulpwood (the feedstock we are using in 
        our first plant).
          3. Pretreating the feedstock by cooking and processing the 
        wood chips into a softened material similar to peat moss.
          4. Combining the pretreated material with proprietary 
        microorganisms in a fermenter, and fermenting the cellulose 
        into ethanol.
          5. Recovering ethanol and lignin from the process. Cellulosic 
        ethanol is blended with gasoline as a low carbon motor fuel. 
        The unconverted fiber, called lignin, is used as a low carbon 
        boiler fuel or converted into other non-ethanol fuels.

    Mascoma's aim is to develop the lowest cost technology to convert 
cellulose materials into ethanol that we will, in turn, use in 
commercial scale ethanol facilities in rural America that will create 
new economic opportunities for local feedstock providers, create jobs, 
and lessen our dependence on foreign oil.
    At our labs in Lebanon, New Hampshire our team of 60 scientists are 
continuing to make significant advances in our CBP process by improving 
upon our advanced biocatalysts for the cost effective conversion of 
cellulosic biomass into ethanol.
    Our demonstration facility in Rome, New York has been in operation 
since the fall of 2008. It is here that our integrated team of 
scientists, engineers, and experience plant operators validate the 
organisms we have developed in Lebanon at large scale. It is also where 
new process technologies are implemented before being included in our 
designs for our commercial facility.
    Mascoma has been fortunate to have received grant funding from the 
Department of Energy to augment private equity in our research and 
demonstration activities in Lebanon and Rome. I thank the Committee for 
its leadership in providing DOE with this important authority.

         EFFORTS UNDERWAY TO DEVELOP FIRST COMMERCIAL FACILITY

    Mascoma, in conjunction with J.M, Longyear, a Michigan-based 
natural resource management company that is certified under the Forest 
Stewardship Council, is actively developing the first commercial scale 
production facility through its affiliate Frontier Renewable Resources 
in Kinross, Michigan. The facility will use sustainable, lower-value 
wood products such as pulpwood to produce 40 million gallons of 
cellulosic ethanol per year.
    The $350 million Kinross biorefinery will be located in a rural 
area in the Upper Peninsula of Michigan. The plant will be constructed 
on a site near a decommissioned U.S. Air Force base. The facility is 
strategically located in close proximity to approximately 8.3 million 
acres of timberlands. Annual growth in these forests exceeds harvest by 
1.8 million tons annually and the Kinross facility could double its 
expected production levels and the area would still have an annual 
surplus of growth. Beyond this, a recent analysis by Michigan 
Technological University found that the Kinross facility will reduce 
greenhouse gas emissions by 108% compared to gasoline.
    The construction and operation of a cellulosic ethanol plant in 
this area will create jobs and develop demand for underutilized 
regional hardwood timber resources, providing support for the local 
economy. It will employ 150 people during construction. Once 
operational, the plant will employ 70 highly skilled people, and create 
700 spin off jobs in the region according to estimates by the state of 
Michigan.
    In the past year, we have made substantial strides in developing 
the Kinross site in regards to technology development, supply chain 
development and securing additional financing. On the technology front, 
cellulosic ethanol produced at our Kinross facility will be competitive 
with oil at $75 per barrel. In addition, we will be competitive with 
corn ethanol today when compared on a cash cost basis. On the financing 
and supply chain front, we announced, in January, that Valero Energy 
Corporation invested in Mascoma and will be partnering with us in the 
Frontier project. Additionally, we have a pending loan guarantee 
application under consideration at the Department of Energy.
    We have made considerable progress. However, we know we need to 
continue to drive down our costs to make cellulosic ethanol even more 
competitive in the marketplace. This is our job and our commitment. We 
will also need strong continued and consistent federal policies to help 
us reach our goal of breaking ground in 2011 and beginning operations 
in 2013.

           NEED FOR CONTINUING ROLE OF THE FEDERAL GOVERNMENT

    Advanced and cellulosic ethanol companies like Mascoma have made 
significant progress in recent years in large part because of backing 
of venture and strategic investors. Our technologies are well developed 
and proven at demonstration scale. What is needed is a significant 
capital infusion to scale up to full commercial operation. Venture 
capital firms do not provide this type of financing. Most private 
equity firms want to see that the technology works before they will 
commit large scale funding. Debt providers either won't engage because 
of risk or set the cost of debt too high in comparison to relevant 
risk. While companies like mine have been able to secure investments 
from strategic investors, a delta still exists. This is the so-called 
``valley of death.''
    It is during this critical time that clear signals must be sent to 
the marketplace about the Federal government's commitment to advanced 
biofuels. As we move forward in our discussions with investors, there 
are three critical areas where the Federal government needs to provide 
consistency.
    First, Congress must maintain DOE's authority and funding to 
provide renewable energy loan guarantees. To cross the valley and start 
construction of projects in 2011, this loan guarantee authority 
represents the best available tool for many projects. Last week, 34 
CEOs with loan guarantees pending at DOE sent a letter highlighting 
that their projects represent an additional $24 billion in near-term 
investment in America's energy infrastructure and would put another 
35,000 Americans to work. Additionally, seven leading trade 
associations representing, biofuels, biomass, wind, solar, and 
geothermal interests also sent a letter highlighting support for the 
program last week. With high crude oil and gasoline prices and a RFS2 
mandate calling for significantly more gallons of cellulosic biofuels, 
now is not the time to eliminate this program. It will delay projects 
and undermine confidence in the investment community.
    Second, the market signals for cellulosic ethanol provided by the 
RFS2 and the cellulosic biofuels production tax credit must be 
maintained. The RFS2's call for 36 billion gallons of renewable fuels 
including 16 billion gallons of cellulosic biofuels including the 
cellulosic waiver credit pricing mechanism are extremely important. 
Efforts to weaken this commitment must be avoided. In addition, the 
existing cellulosic biofuels production tax credit (PTC) is important 
to our financials in the near term as our capital and production costs 
continue to decline. The existing PTC is set to expire at the end of 
2012. Ideally, our industry would like to see long-term (10 year) tax 
incentives for advanced and cellulosic biofuels. Engaging in a yearly 
extenders game surrounding the cellulosic biofuels production tax 
credit will not provide the kind of consistent market signal that 
investors are looking for when making decisions in this industry. As 
you can imagine, incentives that expire before a facility is placed in 
service are very hard to market to investors. Well developed projects 
that break ground this year will likely not be in production until 
2013. A one year extension of tax incentives that expire in 2011 or 
2012 do not provide the type of certainty investors are looking for 
when making investment decisions.
    Third, the United States needs to make significant progress in 
breaking through the existing ethanol blend wall to ensure sufficient 
head room in the fuel marketplace for advanced and cellulosic ethanol. 
Investors are very aware of the limitations of the existing blend wall. 
While EPA, with the support of DOE and other agencies, have spent 
significant time working to approve increased ethanol blends in the 
existing automobile fleet from E10 to E15, focus needs to shift to 
removing infrastructure hurdles preventing the use of even higher 
ethanol blends in the future.
    In 2007, GM, Ford, and DaimlerChrysler committed to increasing 
production of FFVs to 50% by 2012 conditioned on having sufficient E85 
refueling infrastructure to meet this demand. While this was an 
important step forward, pledges and incremental progress help only to a 
degree. A robust commitment to FFVs is necessary to unlock the 
potential of advanced and cellulosic ethanol and provide investors with 
the certainty they need. Besides producing vehicles that are capable of 
running on high ethanol blends, efforts need to be focused on 
installing blender pumps that can handle higher ethanol blends in our 
country's approximately 180,000 gas stations. Today, there are only 
approximately 2,300 E85 pumps (up from 1,200 in 2007) at those 180,000 
stations. Addressing vehicles and pumps are essential to improving the 
investment climate and ensuring sufficient consumer demand for advanced 
and cellulosic ethanol. I commend Senator Harkin's efforts to address 
these issues in S. 187, the Biofuels Market Expansion Act of 2011 and 
thank the committee for holding this hearing on this critical issue.

                               CONCLUSION

    The time is now for the United States to make significant strides 
in the commercialization of advanced and cellulosic ethanol. The 
technologies are ready. Unfortunately, the valley is before us, and the 
market signals that will help drive investment are less than clear. 
High oil prices are not only driving up gasoline prices at the pump, 
but the costs of goods and services across the entire economy. The U.S. 
is spending $560 billion annually to import foreign sources of oil 
which make up 60 percent of our total oil requirements. In 2008, the 
price spike in the gasoline market cost the United States nearly $1 
trillion. It would be far better to invest funds to build out the 
advanced and cellulosic ethanol infrastructure that our country so 
badly needs for our energy security and economic well-being.
    Putting in place a consistent, long-term federal policy for 
advanced and cellulosic biofuels including significant focus on higher-
blend ethanol infrastructure and FFVs is critical to continued 
development in the United States and its ability to continue to keep 
pace with clean energy investments of other countries.
    Thank you.

    The Chairman. Thank you very much.
    Mr. Karr, go right ahead, please.

 STATEMENT OF SHANE KARR, VICE PRESIDENT FOR FEDERAL AFFAIRS, 
              ALLIANCE OF AUTOMOBILE MANUFACTURERS

    Mr. Karr. Thank you, Chairman Bingaman, Senator Murkowski 
and members of the committee. I appreciate the opportunity to 
be here today representing the Alliance of Automobile 
Manufacturers, a trade association of 12 car and light truck 
manufacturers, who together account for nearly 80 percent of 
annual motor vehicle sales in the United States.
    Auto manufacturing is a cornerstone of the U.S. economy. 
Indeed we're the largest remaining manufacturing sector in the 
U.S economy.
    Our sector accounts for more than 4 percent of gross 
domestic product.
    Supports eight million private sector jobs, $500 billion in 
annual compensation, and $70 billion in personal income tax 
revenues.
    On behalf of the Alliance I appreciate the opportunity to 
offer our views on the role biofuels can play in helping 
address our Nation's energy security and environmental 
concerns.
    Auto makers are fully engaged in development of vehicles in 
advanced technologies to help reduce gasoline consumption and 
emissions including carbon emissions. Today consumers can 
choose from more than 160 models that get over 30 miles per 
gallon. We're working on a variety of additional technologies 
that will also dramatically reduce gasoline consumption.
    However, there's no single--there's no silver bullet or 
single technology that will solve the challenges of enhancing 
energy security and reducing greenhouse gas emissions. 
Therefore, we strongly believe that any legislation mandating a 
particular technology is a step in the wrong direction for our 
Nation's energy policy. So let me say first and clearly, auto 
makers support biofuels and continue to believe they are an 
important component of a national strategy to lessen our 
dependence on foreign oil.
    Several of my member companies are direct investors in 
conventional and advanced biofuel companies. We also support 
flexible fuel technology and are manufacturing flexible fuel 
vehicles faster than the fueling infrastructure can keep up. In 
fact there are already more than 8.2 million FFVs on U.S. 
roads. Yet less than 2 percent of gas stations have an 
alternative fuel pump and most are concentrated in the Midwest 
which makes sense because that's where most ethanol is 
produced.
    But even in states where E85 pumps are concentrated, actual 
sale of E85 has been stagnant. For example, in 2008 which is 
the last year for which we have complete data, Minnesota had 
more stations than any other State in the country, 364 with an 
E85 pump. But on average, FFVs in that State use less than one 
full tank of E85 for the whole year.
    The data suggests that widespread market penetration of 
biofuels is not as simple as it is sometimes portrayed. FFVs 
will continue to be an important vehicle technology. But their 
effectiveness in helping to reduce U.S. oil consumption is a 
function of fuel price and availability and consumer's 
willingness to use the fuel.
    So S. 187 calls for 90 percent of vehicles to be FFVs 
beginning in model year 2016 and 90 percent mandate would cost 
consumers more than $2 billion per year to purchase FFVs which 
is a significant tax if consumers have little or no access to 
the alternative fuels or little incentive to use them. But for 
manufacturers there's also a large opportunity cost with this 
plan. Hundreds of millions of dollars annually that we could be 
applying to other fuel saving technologies would be diverted to 
one single technology that would result in oil savings and 
emissions reductions only if consumers actually use the 
biofuels in significant quantities.
    So while auto makers oppose FFV mandates we recognize the 
need for pragmatic policies to address expanding production of 
biofuels under the RFS. Our industry has a vision for how we 
could work together to ensure that our Nation's passenger 
vehicle fleet and our national fuel pool remain compatible as 
we transition to greater use of renewable fuels. For our part, 
auto makers would commit to a dialog with Congress and the 
appropriate Federal agencies to discuss making our future light 
duty vehicles capable of running on gasoline alcohol blends at 
a higher level than what is available today at E10 for model 
years beyond the established timeframe.
    The availability of the new fuel should coincide with the 
availability of vehicles that can run on the new fuel. So we 
have a market for both. In order to ensure successful 
implementation we would work closely with other stakeholders to 
determine the right level and timeframe. We would propose 
government policies where necessary to safeguard consumer 
access to the fuels.
    Some key considerations in a transition like this would 
include:
    Maintaining a high octane level since ethanol provides less 
energy per gallon than gasoline, it would be important that the 
future fuel would provide higher octane which would allow us to 
minimize fuel economy decreases and corresponding increases in 
greenhouse gas emissions.
    Legacy fuels. Legacy fuels would have to continue to be 
available for older vehicles and other small engines while the 
refueling infrastructure for higher level ethanol blends is 
transitioning. Likewise we would need to take serious steps to 
ensure that we don't have widespread mis-fueling.
    Finally liability protection because we know some mis-
fueling is likely to occur despite our best efforts. 
Appropriate consideration should be given for some liability 
protection for auto makers and fuel providers.
    This approach that I've outlined would give auto makers the 
lead time required and the certainty needed to design and 
develop vehicles that can best meet the multitude of 
requirements placed on us by our regulators and the 
expectations of our customers. It should also provide a clear 
path for producers, retailers, engine manufacturers and other 
stakeholders. With certainty about the fuels our vehicles will 
be using our engineers can design vehicles that are optimized 
for these fuels. This will allow us to deliver better fuel 
economy, better performance and more cost effective compliance 
with the mission standards which in turn improves the value 
proposition for our customers.
    Thank you for the opportunity to testify. I would be happy 
to answer any questions.
    [The prepared statement of Mr. Karr follows:]

 Prepared Statement of Shane Karr, Vice President, Federal Government 
           Affairs, the Alliance of Automobile Manufacturers

    Thank you, Chairman Bingaman, Ranking Member Murkowski and members 
of the Committee. My name is Shane Karr and I am Vice President for 
Federal Government Affairs at the Alliance of Automobile Manufacturers 
(Alliance). The Alliance is a trade association of twelve car and light 
truck manufacturers including BMW Group, Chrysler Group LLC, Ford Motor 
Company, General Motors Company, Jaguar Land Rover, Mazda, Mercedes-
Benz, Mitsubishi Motors, Porsche Cars, Toyota Motors, Volkswagen Group 
and Volvo Cars. Together, Alliance members account for nearly 80 
percent of annual motor vehicle sales in the U.S. Auto manufacturing is 
a cornerstone of the U.S. economy, supporting 8 million private-sector 
jobs, $500 billion in annual compensation, and $70 billion in personal 
income tax revenues. On behalf of the Alliance, I appreciate the 
opportunity to offer our views on the role biofuels can play in helping 
address our nation's energy security and environmental concerns.
    Automakers are fully engaged in development of vehicles and 
advanced technologies to help reduce gasoline consumption and 
emissions, including carbon emissions. Today, consumers can choose from 
more than 160 models that get over 30 miles per gallon--and we are 
working on a variety of additional technologies that will also 
dramatically reduce gasoline consumption. However, there is no silver 
bullet or single technology that will solve the challenges of enhancing 
energy security and reducing greenhouse gas emissions. Therefore, we 
strongly believe that any legislation mandating a particular vehicle 
technology is a step in the wrong direction for our nation's energy 
policy.
    Automakers support flexible fuel technology and are manufacturing 
flexible fuel vehicles (FFVs) faster than the fueling infrastructure 
can keep up. In fact, there are already more than 8.2 million FFVs on 
U.S. roads, yet less than 2 percent of gas stations have an alternative 
fuel pump, and most are concentrated in the Midwest, where most ethanol 
is produced. The GAO predicts that federal fleet alternative fuel usage 
requirements are unlikely to be met in the foreseeable future ``because 
of limited availability of alternative fuel.'' But even in states where 
E85 pumps are concentrated, actual sale of E85 has been stagnant. For 
example, in 2008 (the last year for which complete data is available), 
Minnesota had 364 stations with an E85 pump, but on average, FFVs in 
the state used less than one full tank of E85 each for the whole year. 
The data suggests that widespread market penetration of biofuels is not 
as simple as it is sometimes portrayed. FFVs will likely continue to be 
an important vehicle technology, but their effectiveness in helping to 
reduce U.S. oil consumption is a function of fuel price and 
availability and consumers' willingness to use it.
    S. 187 calls for 90 percent of vehicles to be FFVs beginning in 
model year 2016. At costs of $100-$300 per vehicle, a 90 percent 
mandate would cost consumers more than $2 billion per year to purchase 
FFVs (if fully passed through), even though consumers will have little 
or no access to alternative fuels. Therefore, such a mandate is 
essentially a tax with little consumer benefit. There is also a large 
opportunity cost with such a plan. Hundreds of millions of dollars 
annually that could be applied to other fuel saving technologies would 
be diverted to one technology. Without companion fuel use, the overall 
GHG and oil consumption reductions from an FFV mandate would be 
marginal and possibly less impactful than other technology 
applications.
    The cost of making vehicles flex fuel capable is also expected to 
increase in the next few years as smog-forming emissions requirements 
are tightened. Today's FFVs do not comply with the most stringent state 
emissions standards and testing requirements. California has indicated 
it will require virtually all vehicles to certify to the most stringent 
standard in the coming years under LEV III, and the federal government 
is likely to follow suit under Tier 3. It is not clear that future FFVs 
may be engineered to meet these regulations at an affordable cost for 
consumers.
    All of this said, automakers continue to believe that renewable 
fuels are an important component of our national strategy to lessen our 
dependence on foreign oil. Our industry also understands that calls for 
FFV mandates are largely motivated by the requirements of the Renewable 
Fuel Standard (RFS) to greatly increase the amount of ethanol and other 
biofuels in the national fuel mix.
    While our industry opposes FFV mandates for all of the reasons I 
have previously noted, we recognize the need for pragmatic policies to 
address expanding production of biofuels under the RFS. We know the 
auto industry has a role to play in helping to make the RFS a success.
    The question is: What combination of fuel-related and auto-related 
policies will best facilitate that goal? FFV mandates that fail to 
align the vehicle population with the fuel available in the marketplace 
are not the answer. The pressing need going forward--for automakers, 
for fuel providers, and for American consumers--is to ensure that our 
nation's passenger vehicle fleet and our national fuel pool remain 
compatible as we transition to greater use of renewable fuels. Our 
industry has a vision for how we can work together prospectively with 
policymakers and fuel providers to accomplish that goal.
    For our part, automakers would commit to a dialog with Congress and 
the appropriate federal agencies to discuss making our future light 
duty vehicles capable of running on gasoline/alcohol blends at a level 
higher than what is available today at E10, for model years beyond an 
established timeframe. The availability of the new fuel should coincide 
with the availability of the vehicles that can run on the new fuel, so 
there is a market for both. Such a prospective approach is a far 
preferable alternative to the use of E15 in MY 2001 and newer vehicles, 
which are not designed, certified or warranted to run on greater than 
10% volume ethanol blends.
    In order to ensure a successful implementation, we would work 
closely with other stakeholders to determine the right level and to 
identify and propose government policies to safeguard consumer access 
to the fuels needed to maintain vehicle performance, reliability, and 
refueling convenience. Some key considerations in such a transition 
include:

   Octane Level: Since ethanol provides less energy per gallon 
        than gasoline, the future fuel may need to provide higher 
        octane--to minimize fuel economy decreases and corresponding 
        increases in greenhouse gas emissions--as more ethanol is added 
        to gasoline. This change may be crucial for consumer 
        acceptance. It is also critical that automakers not be 
        penalized under future regulations for any decreases in fuel 
        economy that are attributable to greater ethanol use.
   Legacy Fuels--Misfueling: Legacy fuels must continue to be 
        available for older vehicles while the refueling infrastructure 
        for higher level ethanol blends is transitioning. Government 
        assistance in implementing an effective program to educate 
        consumers about the fueling capabilities of their vehicles to 
        prevent misfueling will also be crucial to the success of the 
        effort. In addition, enforcement of fuel blend and labeling 
        requirements must be extensively and effectively executed.
   Liability Protection: Because some misfueling is likely to 
        occur despite the best efforts of regulators, automakers and 
        fuel providers, consideration should be given for appropriate 
        liability protection that would stem from misfueling.

    The approach I have outlined here provides a strong path forward to 
helping to meet our energy security goals. By taking a responsible, 
prospective approach, for both the vehicles and the fuels, we can avoid 
the problems that have undermined the ability of E85 to make a 
meaningful contribution to date and the problems likely posed by using 
E-15 in older vehicles not designed for such fuels.
    Above all, this approach would give automakers the lead-time 
required and establish the certainty needed to design and develop 
vehicles that can best meet the multitude of requirements placed on us 
by regulators, and by consumers. It should also provide a clear path 
for producers, retailers, engine manufacturers and other stakeholders. 
With certainty about the fuels our vehicles will be using, our 
engineers can design vehicles that are optimized for these fuels. This 
will allow us to deliver better fuel economy, better performance, and 
more cost-effective compliance with emissions standards--which in turn 
improves the value proposition for our customers.

    The Chairman. Thank you very much.
    Mr. Dinneen, go right ahead.

 STATEMENT OF BOB DINNEEN, PRESIDENT AND CEO, RENEWABLE FUELS 
                          ASSOCIATION

    Mr. Dinneen. Thank you, Mr. Chairman. Good morning, 
Chairman Bingaman, Senator Murkowski, members of the committee. 
My name is Bob Dinneen. I'm the President of the Renewable 
Fuels Association.
    This is an important and timely hearing. I would echo 
Senator Harkin's comments that because of the vision of this 
committee in the passage of the energy bill in 2007. That bill 
put our Nation on a path toward greater energy diversity and 
national security through an expanded renewable fuel standard.
    That has stimulated unprecedented investment in the U.S. 
ethanol biofuels industry. As a consequence with more than 13 
billion gallons of production, the U.S. now leads the world in 
the production and use of clean, renewable, domestic liquid 
transportation fuels. Consider the progress that has been made 
as a consequence of that bill.
    Today ethanol is blended into roughly 90 percent of the 
gasoline sold in this country. In 2010 ethanol production 
contributed $53 billion to the national gross domestic product 
and added $36 billion to household income.
    Ethanol production has meant jobs to this country. 70,000 
Americans are employed directly in the production of ethanol 
and in the industries providing goods and services. But the 
economic activity generated by ethanol production supports a 
total of more than 400,000 jobs across this country.
    Domestic ethanol production improves our Nation's balance 
of trade while also reducing our reliance on foreign oil. The 
production of 13 billion gallons of ethanol means that the U.S. 
needed to import 445 million fewer barrels of oil in 2010 to 
refine gasoline. That is more oil than the U.S. imports from 
Saudi Arabia. Displacing these imported oil barrels saved the 
U.S. more than $34 billion last year.
    But finally at a time when American consumers are faced, 
once again, with skyrocketing gasoline prices, ethanol is 
helping to hold the price of gasoline lower at the pump. 
Economists estimate that increased ethanol blending has reduced 
the price of gasoline from 15 to 50 cents a gallon. For the 
average American driver that's an annual savings of $120 to 
$400 each year. Those savings result not just from the fact 
that ethanol has been priced 50 cents to a dollar less than 
gasoline over the last several years, but also because 13 
billion gallons is reducing the net amount of oil that we have 
to import and use.
    But for the energy bill 2007 to reach its ultimate goal of 
36 billion gallons of renewable fuels additional Federal 
efforts to open markets, stimulate investments in new 
technologies and assist in the development of infrastructure 
for these new fuels will absolutely be necessary. Without 
question moving beyond 10 percent ethanol blends is essential 
to meeting the 36 billion gallon RFS. Importantly cellulosic 
and advanced ethanol will largely represent the renewable fuel 
supply beyond E10. To leave the blend market artificially 
constrained further limits the market opportunities for next 
generation biofuels that are so very close to commercialization 
today. That's why E15 is so important.
    But in addition to expanding the ethanol blend market it is 
going to be critical to the future growth of cellulosic and 
advanced ethanol to promote ethanol's important role as an 
alternative fuel as well. Currently, as Shane indicated, the 
E85 market represents just a fraction of the overall U.S. 
ethanol market. But it's growing.
    We estimate that there are about eight and a half billion 
flex fuel vehicles on American roads today. That's up 
significantly from recent years and is a testament to the 
leadership of General Motors and Ford and Chrysler. But it 
still represents just 3 percent of the total automotive fleet. 
We need more flex fuel vehicles.
    I was greatly encouraged by the comments a moment ago from 
the Alliance of Automobile Manufacturers recognizing the need 
to move our passenger vehicles beyond E10 is a big step. I 
welcome the offer of a dialog to discuss the most appropriate 
blend level and timeframe. I would encourage this committee, 
however, that this dialog should happen expeditiously because 
with each passing day America's energy crisis grows ever worse.
    Mr. Brady has articulated quite well the challenges of 
financial investment in second generation technologies. But I 
will merely underscore that if the volume of advanced biofuels 
envisioned by the energy bill are to be realized in the 
infrastructure to support them, the Department of Energy's Loan 
Guarantee Program must be more effectively implemented. Federal 
funding to this program should be restored.
    Now addressing the infrastructure needs of America's 
renewable fuels policy cannot be based on a wish list. It must 
be grounded in sound analysis. The RFA has released a study on 
how future requirements of the RFS can be met if the right 
commitments are made to ensure a steady evolution of refueling 
infrastructure and the automotive fleet.
    In short, blender pumps will need to be installed at a 
minimum of 53,000 service stations. This represents roughly 33 
percent of service stations across the country. Efforts to 
install blender pumps should focus on areas with the highest 
levels of vehicle miles traveled throughout the country.
    Many of the challenges I've discussed are addressed by S. 
187. The RFA supports that legislation. At a minimum Federal 
policies should maintain and extend existing tax incentives for 
higher ethanol blends to allow for the continued growth of 
these fuels, expand tax incentives for refueling infrastructure 
and create new consumer based incentives to encourage the 
purchase of FFVs.
    The RFA supports legislative action to require a percentage 
of new vehicles sold in the U.S. be FFVs. Further the RFA 
supports legislation requiring the installation of higher level 
ethanol blends refueling infrastructure. But there may be many 
ways to accomplish these goals. We want to work with this 
committee and all stakeholders to accomplish that.
    Mr. Chairman, thank you for your continued leadership. I 
look forward to working with you and the rest of the committee 
in the coming months to move this country's energy future 
forward.
    [The prepared statement of Mr. Dinneen follows:]

  Prepared Statement of Bob Dinneen, President & CEO, Renewable Fuels 
                              Association

    Good morning, Chairman Bingaman, Ranking Member Murkowski, and 
Members of the Committee. My name is Bob Dinneen and I am president and 
CEO of the Renewable Fuels Association (RFA), the national trade 
association representing the U.S. ethanol industry.
    RFA is the leading trade association for America's ethanol 
industry. Its mission is to advance the development, production, and 
use of fuel ethanol and co-products by strengthening America's ethanol 
industry and raising awareness about the benefits of renewable fuels. 
Founded in 1981, RFA's 300-plus members are working to help America 
become cleaner, safer, more energy secure and more economically 
vibrant.
    This is an important and timely hearing, and I am pleased to be 
here to discuss the future of our nation's ethanol industry and how S. 
187--the ``Biofuel Market Expansion Act of 2011 can help our country 
achieve its energy security goals.
    Due to the visionary and invaluable work of this Committee in the 
110th Congress, the Energy Independence and Security Act of 2007 (EISA) 
put our nation on a path toward greater energy diversity and national 
security through the expanded Renewable Fuels Standard (RFS). EISA has 
stimulated unprecedented investment in the U.S. biofuels industry and, 
as a consequence, the U.S. now leads the world in the production and 
use of clean, renewable, domestic liquid transportation fuels. For 
EISA's ultimate goal of 36 billion gallons of renewable fuel use to be 
realized, however, additional federal efforts to open markets, 
stimulate investments in new technologies and assist in the development 
of infrastructure for these new fuels will be necessary.

                               BACKGROUND

    Today, ethanol is blended into roughly 90 percent of the gasoline 
sold in the U.S., the majority as E10 (10 percent ethanol and 90 
percent gasoline)--a blend component adding octane, displacing toxics 
and helping refiners meet Clean Air Act specifications. Ethanol is a 
thoroughly tested, safe, and effective motor fuel. Americans spend 
nearly $1 billion a day importing oil, often from hostile regions of 
the world. If the chaos in the Middle East teaches us anything, it 
should be that America must forcefully begin down the path of energy 
self-reliance. Increasing the use of domestic renewable fuels like 
ethanol is the first, and arguably, the easiest step we can take.
    Already, ethanol production is contributing to our nation's 
financial well-being as well as that of American households. In 2010, 
ethanol production contributed $53.6 billion to the national Gross 
Domestic Product and added $36 billion to household incomes.
    According to an economic analysis from Cardno ENTRIX, 70,600 
Americans are employed directly in the production of ethanol and in 
industries providing goods and services to ethanol producers. The 
economic activity generated by ethanol production supported a total of 
more than 400,000 Americans in 2010.
    Additionally, ethanol production is paying for itself. The 
increased economic activity and income generated by America's ethanol 
industry added some $12 billion to federal, state and local governments 
through increased tax revenue.
    Domestic ethanol production improves our nation's balance of trade 
while also reducing our reliance on foreign oil. The production of 13 
billion gallons of ethanol means that the U.S. needed to import 445 
million fewer barrels of oil in 2010 to refine gasoline. That is more 
oil than America imports from Saudi Arabia annually. Displacing these 
imported oil barrels saved the U.S. $34 billion in 2010.
    Finally, at a time when American drivers are facing rising gas 
prices, ethanol is helping to hold pump prices lower than they would be 
otherwise. Economists from government agencies like DOE, universities 
like Iowa State, and financial institutions like Merrill Lynch have 
examined the impact of increased ethanol blending on consumer gas 
prices. Their studies have concluded that increased blending of ethanol 
has generally reduced the price of gasoline by 15-50 cents per gallon. 
For the average American driver, that's an annual savings of $120 to 
$400 dollars. These savings result not only from the fact that ethanol 
has been $0.50-$1.00 cheaper than gasoline at the wholesale level for 
the last several years, but also from the fact that replacing 13 
billion gallons of gasoline reduces aggregate oil demand and, thus, 
exerts downward pressure on gasoline prices.

                              OPEN MARKETS

    Because U.S. ethanol production capacity continues to grow 
steadily, there is a sense of urgency surrounding the need to move to 
ethanol blends that include more than 10 percent ethanol. The RFA is 
dedicated to maximizing the use of ethanol consistent with sound 
technical evidence. The RFA supports the safe and effective use of 
higher level ethanol blends in both conventional as well as Flex-Fuel 
Vehicles (FFVs). The RFA continues to work with engine and vehicle 
manufacturers, as well as non-road engine and vehicle manufacturers, to 
secure their support for the use of higher level blends of ethanol.
    Moving beyond 10 percent ethanol blends is essential to achieving 
our nation's goals of reducing our reliance on foreign oil, and to 
foster the growth of a robust, domestic renewable fuels industry. The 
implementation of EISA and its 36 billion gallon RFS will require the 
use of ethanol beyond the traditional 10 percent blends. Cellulosic and 
advanced ethanol will largely represent the renewable fuel supply 
beyond the E10 blend market. To leave the market artificially 
constrained further limits market opportunities for next generation 
biofuels very close to commercialization, missing an opportunity to 
meaningfully increase America's use of renewable fuels and reduce our 
dependence on imported oil.
    The U.S. Environmental Protection Agency (EPA) has approved E15 
blends to be safe for use in all cars, pickups and SUVs built in 2001 
and later, or 62 percent of vehicles on the road today according to car 
industry data--nearly two out of every three cars on the road today. If 
E15 were used in all vehicles covered by this decision, the theoretical 
blend wall for ethanol use would be approximately 17.5 billion gallons. 
The EPA continues to move in the right direction with respect to 
increasing ethanol blends, but challenges still remain. The RFA 
continues to urge EPA to extend the waiver for E15 use to all passenger 
vehicles. A report by the highly regarded automotive engineering firm, 
Ricardo Inc., concluded there were no unique emissions, material 
compatibility or drivability issues with older vehicles compared to 
2001 automobiles. Our nation can and should move in the direction of 
ethanol blends in excess of 10 percent in conventional, gas-only 
vehicles.
    As with any new fuel, additional testing and some regulatory issues 
relating to the fuel's properties must be addressed before widespread 
E15 use can occur. The RFA is working to address those issues and 
accelerate the commercial use of E15.
    In addition to expanding the blend market, it will be critical to 
the future growth opportunities for cellulosic and advanced ethanol to 
promote ethanol's important role as an alternative fuel as well. 
Currently, the E85 market represents just a fraction of the overall 
U.S. ethanol market, but it is growing. We estimate that there are 
about 8.5 million flexible fuel vehicles on America's roadways today. 
That's up significantly from recent years and a testament to the 
leadership and commitment of General Motors and Ford; but it still 
represents just 3 percent of the total automotive fleet. Likewise, we 
estimate E85 and mid-level blends are offered at approximately 2,700 
retail gas stations across the U.S. That's a huge improvement over the 
handful of E85 stations just a decade ago, but it still represents just 
1.5 percent of the nation's gas stations. Obviously we have a long way 
to go if consumers are to be given the flexibility to maximize their 
use of domestic renewable fuels like ethanol. Efforts to expand FFV 
technology must be a part of our energy future.

                          STIMULATE INVESTMENT

    A major policy objective of EISA was to accelerate the 
commercialization of new technologies and next generation biofuels. 
Certainly, by creating demand for at least 21 billion gallons of 
advanced biofuels by 2022, cellulosic ethanol and other advanced 
biofuels were given a tremendous boost. But the economic collapse of 
2008 and the concurrent banking crisis made it extraordinarily 
difficult for these new technologies to secure financing. The U.S. 
Department of Energy (DOE) Loan Guarantee Program this Committee 
thoughtfully created has been hamstrung by a bureaucracy seemingly 
unwilling to meaningfully reduce the risk associated with these 
investments.
    If the volumes of advanced biofuels envisioned by EISA and the 
infrastructure to support them are to be realized, the DOE Loan 
Guarantee Program must be more effectively implemented and Federal 
funding to this important program should be restored.

                        REFUELING INFRASTRUCTURE

    Achieving the goals of the RFS and giving Americans more control 
over their energy future can be done with smart policies and targeted 
investment that expand ethanol refueling infrastructure and use. In a 
climate of fiscal concerns, we can meaningfully expand the ethanol 
market, reduce our reliance on imported oil, and create jobs without 
breaking the bank. Addressing the infrastructure needs of America's 
renewable fuels policy cannot be based on a wish list. It must be 
grounded in sound research and analysis that identifies policy needs 
and the needs of the marketplace.
    On March 7th, the RFA released a study on how the future 
requirements of the RFS can be met primarily with ethanol if the right 
commitments are made to ensure a steady evolution of refueling 
infrastructure and the automotive fleet.
    The study, conducted by Air Improvement Resource, Inc. (AIR) and 
commissioned by the RFA, shows that the long-term requirements of the 
RFS can indeed be met mostly with ethanol if ``blender pumps'' are made 
available at approximately one-third of nation's 162,000 service 
stations, and if automakers honor and expand their commitment to 
produce more FFVs. (Blender pumps are fuel dispensers designed to 
dispense a variety of ethanol blends from 10 percent up to 85 percent 
ethanol.)
    The AIR study examines 27 future scenarios regarding available 
ethanol volumes, FFV availability, ethanol use in non-FFVs, and the 
availability and location of blender pumps and/or E85 pumps. Based on 
the results of the scenarios, certain conclusions can be drawn about 
the role ethanol can play in meeting the RFS2, which ultimately 
requires the use of 36 billion gallons of renewable fuels by 2022.
    Expanding the use of ethanol will take a multi-pronged approach. 
The EPA's approval of E15 for use in vehicles made in 2001 and 
subsequent years will help grow the potential market for ethanol to 
approximately 20 billion gallons over the next several years. Still, 
even if E15 is eventually used in all conventional vehicles, meeting 
long term RFS requirements with ethanol will necessitate a substantial 
increase in the availability and use of ``mid-level'' ethanol blends 
(i.e., blends consisting of more than 15 percent ethanol and less than 
85 percent gasoline).
    If all light-duty vehicles sold in the United States in 2015 and 
later years are FFVs, and if a corresponding expansion of refueling 
infrastructure occurs, ethanol could be used to meet the majority of 
the long-term RFS2 requirements. Under this scenario, the average 
ethanol blend needed in FFVs by 2022 would be nearly 30 percent (E30), 
while it is assumed all non-FFVs would be using E15.
    The AIR report provided some key insights into the infrastructure 
and vehicle needs to make the RFS2 successful, including:

   Long term RFS requirements can be achieved if automakers 
        honor and expand their commitments to ramp up production of 
        FFVs, and if blender pumps are installed at roughly one-third 
        of the nation's retail service stations.
   Even if E15 is eventually used in all conventional vehicles 
        (non-FFVs), meeting long term RFS requirements with ethanol 
        will necessitate a substantial increase in the availability and 
        use of ``mid-level'' ethanol blends.
   Without the commitment of the ``Detroit Three'' automakers 
        to ensure that 50 percent of the vehicles they produce in 2012 
        and subsequent years are FFVs, it would not be possible to meet 
        long term RFS requirements.
   Even with the 50 percent FFV production commitment by the 
        ``Detroit Three,'' FFVs would need to refuel with E85 
        essentially three-quarters of the time or E56 all of the time 
        by 2022. This highlights the need for an expanded commitment to 
        FFV production from all automakers.
   If all vehicles sold in 2015 and subsequent years are FFVs, 
        and if E15 is used in all non-FFVs, the average fuel blend 
        consumed in FFVs will need to contain 29 percent ethanol by 
        volume (E29) in order to satisfy the 2022 RFS2 requirements. 
        Incidentally, E30 is one of the most common and popular blends 
        dispensed from blender pumps today.
   If the RFS2 is to be met, blender pumps will need to be 
        installed at a minimum of 53,000 service stations. This 
        represents roughly 33 percent of service stations in the 
        country. Efforts to install blender pumps should focus on areas 
        with the highest levels of vehicle miles traveled per service 
        station.

           S. 187--THE ``BIOFUEL MARKET EXPANSION ACT OF 2011

    Many of the challenges discussed are addressed by S. 187, 
legislation introduced by Senator Tom Harkin that would require certain 
fuel marketers to install blender pumps and tanks at an increasing 
percentage of their stations beginning in three years, and would also 
mandate that half of all new passenger vehicles sold in the U.S. be 
flexible fuel vehicles (FFV). The bill would also direct the Secretary 
of Energy to make grants to direct retailers for 50 percent of the cost 
of installing blender pumps and storage tanks for ethanol.
    The RFA supports S. 187. Without question, policies that expand the 
number of certified and approved blender pumps available to consumers 
to support the sale of blends between E15 and E85 for FFVs, and 
incentives that favor ethanol sales into the E10-E85 market will aid in 
the transition beyond the blend market for ethanol.
    At a minimum, federal policies should maintain and extend existing 
tax incentives for higher level ethanol blends to allow for continued 
growth, expand tax incentives for refueling infrastructure, and create 
new consumer-based tax incentives to encourage the purchase of FFVs. 
The RFA supports legislative action to require a percentage of new 
vehicles sold in the U.S. be flexible fuel capable. Further, the RFA 
supports legislation requiring the installation of higher level ethanol 
blends refueling infrastructure.

                               CONCLUSION

    The continued commitment of the 112th Congress, this Committee, and 
the enactment of legislation such as S. 187 will all contribute to 
ensuring America's future energy security.
    Chairman Bingaman and Ranking Member Murkowski, you have made clear 
your commitment to the hardworking men and woman across America who are 
today's newest energy producers. The RFA looks forward to working with 
you to further develop and implement sound policies that provide the 
proper incentives to grow ethanol use across a variety of blending 
levels.
    Thank you.

    The Chairman. Thank you very much.
    Mr. Eichberger, go right ahead.

   STATEMENT OF JOHN EICHBERGER, VICE PRESIDENT, GOVERNMENT 
    RELATIONS, NATIONAL ASSOCIATION OF CONVENIENCE STORES, 
                         ALEXANDRIA, VA

    Mr. Eichberger. Thank you, Chairman Bingaman, Senator 
Murkowski, members of the committee. My name is John 
Eichberger. I'm with the National Association of Convenience 
Stores and our industry operates around 117,000 retail fueling 
outlets in the country. We generate about half a trillion 
dollars in sales every year. That is one out of 28 American 
dollars spent goes through the convenience store industry.
    Fifty-seven and a half percent of all of our fueling 
stations are one store companies. They're not chains. They're 
Mom and Pop operations. We sell through--about 80 percent of 
the gasoline and diesel fuel in this country.
    We're here today to evaluate the challenges facing the 
implementation of renewable fuel standard and to consider 
options for overcoming these challenges. I want to make it 
clear our members want to sell the fuel products that our 
customers want to buy. We want to find the best way to move 
forward in doing that.
    In thinking about how to prepare my oral statement today I 
thought it might be a good idea to walk through the 
decisionmaking process a retailer faces when considering 
offering a new fuel. It's not the same as offering a new candy 
bar. It takes a little bit more of an investment.
    So what I thought we'd start off doing is pick a retailer 
from your State that you're familiar with and let's pick a 
fuel. I'm going to use E15 as my example because that's the one 
we're familiar with. But it really could be anything.
    It could be E40. It could be E50. It could be a liquefied 
chicken McNuggets and barbecue sauce. The facts are the same in 
terms of the decisionmaking process.
    The first thing the retailer needs to consider is how much 
it will cost to enter this new market. Now assume he just 
installed state-of-the-art tanks, pipes and dispensers a year 
and a half/two years ago. He's probably thinking my equipment 
is probably safe enough to handle E15. Maybe I could just go 
ahead and do that.
    Perhaps he's correct in the equipment is safe and 
compatible. But it does not necessarily mean that it is lawful 
to do so. Federal law requires that any equipment that stores 
or dispenses a flammable or combustible liquid must be 
certified by nationally recognized testing laboratories such as 
Underwriters Laboratories, as compatible with that fuel.
    Now the challenge is that it wasn't until last spring that 
you all had listed that any dispensers as compatible with any 
fuel containing greater than 10 percent ethanol. That's means 
all the E85 stations in the country are using equipment that 
was not UL listed. They agreed to do that when they bought the 
equipment from their dispenser manufacturers. The dispenser 
manufacturer offered them an E85 compatible dispenser and 
charged them a seven to $8 thousand premium for that unit, 
although it was not UL listed.
    So it is most likely since no equipment was certified until 
last March, that the equipment at this retailer's location is 
not certified by UL. Therefore it must be replaced completely. 
A new dispenser, blender pumps that we've been talking about 
today, can cost upwards of $20,000.
    It's important to know what a blender pump is. We use them 
all the time. Typically you take premium tank. You take an 
unleaded tank. You run it through a blender pump and you 
provide the customer with a mid grade option. It's just a 
mixing unit.
    In today's discussion we're talking about blender pumps 
maybe you're going to take an E85 tank and an E10 tank. Mix it 
together to get E15, E40 or whatever the mixture might be. But 
you're going to have to replace that dispenser under current 
law.
    If the retailer has to replace his tanks and pipes. The 
second you crack concrete you're looking at maybe 100,000 or 
more depending on where they operate and what the environmental 
regulations are. So the retailer could be looking at an 
investment cost of $120,000 just to sell E15 in a lawful 
manner.
    But this retailer we're talking about, he's committed. He 
wants to be a leader in his community to renewable fuels. So he 
makes the investment.
    Now he has to ask the question that Mr. Karr was 
referencing. Does the customer want to buy it? According to Mr. 
Dinneen's testimony, about 62 percent of vehicles approved by 
EPA to use E15 can do so. About 65 percent--or he said another 
3 percent can use E85, flex fuel vehicles. So we're looking at 
a total population of vehicles, about 65 percent on the road, 
can lawfully buy E15.
    But the question is can that 65 percent of the population. 
Do they want to buy it? The auto makers have already said they 
don't necessarily support EPA's decision on E15. Their 
warranties and user manuals do not support the use of that 
fuel. This could definitely impede demand. The retailer has to 
think about that.
    This takes us to an important distinction. This is the 
first transition to a new fuel that does not require the 
customer to buy it. If you look back at the last couple decades 
when we pulled lead out of gasoline. We pulled sulphur out of 
on road diesel fuel. The new vehicles manufactured were 
required to run on that fuel. So you had a definite guaranteed 
demand and that demand was going to grow over time because all 
new vehicles had to run on that product.
    The other main difference is unleaded gasoline and ultra 
low sulphur diesel were backward compatible. All vehicles on 
the road were able to run on those fuels. You didn't have a 
concern with mis-fueling causing problems.
    So we look at it now and say, we also have to look at the 
fact that the equipment at retail was able to run/use those 
fuels without being replaced. So now we look at the retailer 
and we think about OK, we have a limited demand. I'm going to 
do it anyway.
    But how do I prevent consumers from mis-fueling? If a 
retailer offers a fuel and the customer mis-fuels that retailer 
could be held for violation of the Clean Air Act. He could be 
sued for any damage to the engine and voiding the warranty.
    More importantly if that fuel is eventually ruled to be not 
appropriate and ruled defective he could be sued for selling a 
defective product. Even though at the time he sold it, it was 
lawful and compliant with all applicable laws and regulations. 
Retroactive liability is something he has to think about.
    So with all these factors of play he may reconsider his 
decision to sell the fuel. So we need to talk about how we can 
eliminate these challenges and get the retailer to an answer of 
yes. I'm going to sell the fuels.
    Several proposals being discussed today that are in my 
written statement, I just want to point out a couple things 
that we need to be considering when you think about new 
programs.
    The first question is will the new fuels were discussing be 
backward compatible? If not, how do we protect consumer to 
legacy fuels vehicles and manufacturers and sellers of the fuel 
from potential damage and liability?
    Will the consumers be able to use the new fuels being 
offered and will they actually buy them? That's demand.
    Will retailers have to replace their equipment or will the 
new fuels be compatible and reduce costs?
    Finally will the fuels be economically beneficial to the 
consumer?
    NACS recommends four things.
    One, Congress should authorize a new method for determining 
the technical and lawful compatibility of equipment. We need to 
be able to look back and see if our existing equipment is 
compatible. Under current law and UL policy, we cannot 
recertify existing equipment. We have to replace it. We should 
be able to determine if that new tank and dispenser is safe, 
make it lawful to sell a new fuel. Reduce the cost of entry.
    Congress should provide a regulatory certainty and legal 
protection to market participants who lawfully sell fuels 
according to today's regulations and protect them from 
retroactive liability if the laws change in the future.
    Congress should refrain from picking a fuel of the future. 
We've talked about innovation. We've talked about where we need 
to go.
    If we pick a fuel as the winner in the future, we will 
stifle innovation in new fuels, drop in fuels, biobutol. The 
research may actually stop because Congress has already said 
this is the fuel we're going to go to. We want to make sure 
those options stay open.
    But challenges in implementing RFS are real but they can be 
overcome if we focus on the elements necessary to do so. I 
thank you for the opportunity to show our perspective. I look 
forward to your questions.
    [The prepared statement of Mr. Eichberger follows:]

  Prepared Statement of John Eichberger, Vice President of Government 
 Relations, National Association of Convenience Stores, Alexandria, VA

                                SUMMARY

   NACS members make decisions each day regarding what products 
        to sell and which services to offer their customers. But taking 
        a chance by offering a new candy bar is very different from 
        switching their fueling infrastructure to accommodate a new 
        fuel. For this reason, and many others, they are often slow to 
        adopt new fuel products until they are certain sufficient 
        consumer demand exists to provide a reasonable return on their 
        investment--an investment which in many cases can be 
        significant.
   Our industry is committed to complying with today's laws and 
        regulations, to provide our customers with the best products 
        and services we can offer and to adapt to new technologies and 
        market opportunities as they arise. NACS members are not 
        beholden to any specific product--they simply desire to sell 
        what the customer wants to buy provided it is lawful and, 
        hopefully, profitable to do so. As new fuels come onto the 
        market, our members want to have the legal option to sell these 
        fuels if their customers wish to buy them.
   Retailers face many challenges when considering whether to 
        sell a new fuel and these challenges must be overcome if the 
        goals of the RFS are to be realized. Among these issues are the 
        compatibility of retail storage and dispensing equipment; 
        associated risks of a customer fueling a non-authorized engine 
        with a new fuel; and associated risks of retroactive liability 
        if today's laws governing the sale of such fuels change in the 
        future.
   S. 187 highlights many of the issues standing in the way of 
        new fuels, specifically the compatibility of engines to run on 
        higher-blend ethanol fuels and the availability of these fuels 
        at retail facilities. The discussion generated by this 
        legislation is critical to finding the right solutions. 
        Although NACS believes S. 187 misses the mark with its proposed 
        solutions, we believe from this discussion other ideas can be 
        developed that will move the market in the right direction and 
        prepare it to accommodate new fuels.
   Proposals to set a fuel specification of the future would 
        enable engine and equipment manufacturers time to build units 
        that can accommodate the new fuel. NACS believes this is an 
        interesting concept and if sufficient lead time were provided 
        could yield some positive outcomes. However, NACS cautions 
        against dictating specifically which fuel should be the ``fuel 
        of the future'' since making such a decision based upon 
        currently available technologies could undermine innovation and 
        prevent the emergence of new fuel products that are more 
        suitable to the nation's objectives and require less investment 
        in infrastructure modifications. NACS is also concerned about 
        the consequences of requiring another wholesale change in 
        existing infrastructure to accommodate the new fuels.
   NACS urges Congress to consider proposals that will allow 
        retailers to have existing equipment evaluated and certified as 
        compatible with new fuels, thereby eliminating some of the 
        costs associated with necessary replacements; protect market 
        participants from liability in the event self-service consumers 
        ignore warning notices and misfuel their vehicles; protect 
        market participants from retroactive liability should today's 
        laws governing fuel sales change in the future; and promote 
        development of new fuel products that are more compatible with 
        existing vehicles and infrastructure.

                              INTRODUCTION

    Chairman Bingaman, Senator Murkowski and members of the Senate 
Energy and Natural Resources Committee. Thank you for the opportunity 
to present to you the perspective of the convenience and fuel retailing 
industry concerning the future of renewable and alternative fuels in 
the United States.
    My name is John Eichberger and I am Vice President of Government 
Relations for the National Association of Convenience Stores (NACS). 
NACS is an international trade association comprised of more than 2,200 
retail member companies and more than 1,800 supplier companies doing 
business in nearly 50 countries.
    As of December 31, 2010, the U.S. convenience and fuel retailing 
industry operated 146,341 stores of which 117,297 (80.2%) sold motor 
fuels. In 2009, our industry generated $511 billion in sales (one of 
every 28 dollars spent in the United States), employed more than 1.5 
million workers and sold approximately 80% of the nation's motor fuel.
    Our industry is dominated by small businesses. In fact, of the 
convenience stores that sell fuel, 57.5% of them are single-store 
companies--true mom and pop operations. Despite common misperceptions, 
the large integrated oil companies are leaving the retail market place 
and today own and operate fewer than 2% of the retail locations. 
Although a store may sell a particular brand of fuel associated with a 
refiner, the vast majority are independently owned and operated and the 
relationship to the fuel brand they sell ends there. The rest have 
sought to establish their own brand in the market.\1\
---------------------------------------------------------------------------
    \1\ See Attachment 1.
---------------------------------------------------------------------------
    NACS members make decisions each day regarding what products to 
sell and which services to offer their customers. But taking a chance 
by offering a new candy bar is very different from switching their 
fueling infrastructure to accommodate a new fuel. For this reason, and 
many others, they are often slow to adopt new fuel products until they 
are certain sufficient consumer demand exists to provide a reasonable 
return on their investment--an investment which in many cases can be 
significant.
    Our industry is committed to complying with today's laws and 
regulations, to provide our customers with the best products and 
services we can offer and to adapt to new technologies and market 
opportunities as they arise. NACS members are not beholden to any 
specific product--they simply desire to sell what the customer wants to 
buy provided it is lawful and, hopefully, profitable to do so. As new 
fuels come onto the market, our members want to have the legal option 
to sell these fuels if their customers wish to buy them.
    It is with this background that NACS approaches the discussion 
about the future of renewable fuels. In this testimony, I will outline 
the challenges facing the retail motor fuel marketplace as it tries to 
accommodate the demands of the Renewable Fuel Standard (RFS), evaluate 
different legislative proposals designed to help overcome these 
challenges and provide NACS recommendations for policies that will 
assist the market transition to new, renewable and sustainable fuels.

                             THE BLEND WALL

    Since enactment of the Energy Independence and Security Act (EISA) 
of 2007, Washington has been discussing the pending arrival of the 
blend wall--that point beyond which the market cannot absorb any 
additional renewable fuels. We can now say unequivocally that we are 
there.
    The 2011 statutory mandate for the RFS is 13.95 billion gallons. If 
10% ethanol were blended into every gallon of gasoline sold in the 
nation in 2010, we would max out at 13.85 billion gallons.\2\ Meanwhile 
the market for higher blends of ethanol for flexible fuel vehicles 
(FFVs) has not developed as rapidly as some had hoped and there are few 
indications for a rapid expansion. So clearly we have a problem.
---------------------------------------------------------------------------
    \2\ U.S. Energy Information Administration Product Supplied 2010, 
Finished Motor Gasoline: 3.297 billion barrels (http://www.eia.doe.gov/
dnav/pet/pet_cons_psup_dc_nus_mbbl_a.htm)
---------------------------------------------------------------------------
    The recent decision by EPA to authorize the use of E15 in certain 
vehicles and engines does very little to expand the use of renewable 
fuels. This is primarily because there are many barriers to the 
introduction of E15 that must be overcome before it is fully legal or 
advisable for it to be sold\3\ and the number of markets into which it 
may be sold are extremely limited.\4\
---------------------------------------------------------------------------
    \3\ See Attachment 2.
    \4\ Once E15 is officially registered and satisfies the various 
conditions required by EPA for sale in the market, other factors will 
continue to limit its availability. These include: 1) the Federal 
Reformulated Gasoline Program's complex model for emissions 
characteristics must be amended to accommodate E15; 2) The Clean Air 
Act's Reid Vapor Pressure one pound allowance afforded to gasoline 
blended with 9-10% ethanol must be amended to apply to fuels with up to 
15% ethanol, otherwise such fuels would violate air quality control 
programs in many states and counties; 3) The California Reformulated 
Gasoline program does not allow for ethanol concentrations above 10%; 
and 4) Various contractual obligations with supplier companies may 
reduce the ability of branded retail outlets (representing 
approximately 50% of retail facilities) to sell fuels containing more 
than 10% ethanol.
---------------------------------------------------------------------------
    But let's imagine for a moment that all barriers to E15 are 
removed, it can be used in all engines and it becomes ubiquitous in the 
market. At 15% maximum blend, we still can only blend 20.78 billion 
gallons of renewable fuels. While this would buy us four additional 
years of compliance with the RFS schedule, it is far short of the 36 
billion gallons ultimately required.
    That leaves us with the real issue facing us today--How can we get 
from here to there in a way that benefits consumers, our energy 
security and our economy?
    One of the primary challenges facing the fuels market is the lack 
of planning that goes into establishing energy policy. The RFS was 
developed to promote energy independence, reduce our reliance on fossil 
fuels and benefit the environment. It set ambitious goals and focused 
on the materials used to produce our fuel. It did not, however, take 
into consideration how the fuel would be delivered into the consumer's 
vehicle. The distribution and retail infrastructure was largely ignored 
in favor of broader policy issues, yet it is precisely this component 
of the system that is presenting some of the greatest obstacles to 
successful implementation of the program.
    Our backs are now to the wall, so to speak. We recognize there are 
infrastructure issues that must be addressed: more than 160,000 retail 
facilities, 230 million vehicles and hundreds of millions of small 
engines are incapable of accommodating any additional renewable fuels.
    So what policies can Congress consider that will help bridge the 
gap between what we can do and what we are required to do by law? 
Before we can answer that question, it is critical to understand the 
challenges that face the retail infrastructure.

                       INFRASTRUCTURE LIMITATIONS

1) Compatibility
    The reason the retail market is unable to accommodate additional 
volumes of renewable fuels begins with the equipment found at retail 
stations. By law, all equipment used to store and dispense flammable 
and combustible liquids must be certified by a nationally recognized 
testing laboratory. These requirements are found in regulations of the 
Occupational Safety and Health Administration.\5\
---------------------------------------------------------------------------
    \5\ 29CFR1926.152(a)(1) ``Only approved containers and portable 
tanks shall be used for storage and handling of flammable and 
combustible liquids.'' ``Approved'' is defined at 29CFR1910.106 (35) 
``Approved unless otherwise indicated, approved, or listed by a 
nationally recognized testing laboratory.''
---------------------------------------------------------------------------
    Currently, there is essentially only one organization that 
certifies such equipment--Underwriters Laboratories (UL). UL 
establishes specifications for safety and compatibility and runs tests 
on equipment submitted by manufacturers for UL listing. Once satisfied, 
UL lists the equipment as meeting a certain standard for a certain 
fuel. Prior to last spring, UL had not listed a single motor fuel 
dispenser (a.k.a, pump) as compatible with any fuel containing more 
than 10% ethanol. This means that any dispenser in the market prior to 
last spring is not legally permitted to sell E15, E85 or anything above 
10% ethanol--even if it is technically able to do so safely.
    If a retailer fails to use listed equipment, that retailer is 
violating OSHA regulations and may be violating tank insurance 
policies, state tank fund program requirements, bank loan covenants, 
and potentially other local regulations. Furthermore, if the retailer 
experiences a petroleum release from that equipment, he could be sued 
on the grounds of negligence for using non-listed equipment, which 
would subject him to penalties above and beyond the cost of 
remediation.
    This brings us to the primary challenge: If no dispenser prior to 
early 2010 was listed as compatible with E10+ fuels, what options are 
available to retailers to sell E10+ fuels?
    In February 2009,\6\ UL issued a letter announcing that dispensers 
listed under a certain UL standard as compatible with E10 were in fact 
safe to handle fuels containing up to 15% ethanol. UL said that it 
would support ``local authorities having jurisdiction'' to provide 
waivers to retailers who wished to increase their ethanol blends 
through these dispensers. UL did not, however, change the official 
certification of those dispensers. Consequently, retailers who relied 
upon local authority waivers would still be in violation of all laws 
and regulations requiring listed equipment.
---------------------------------------------------------------------------
    \6\ Underwriters Laboratories. (http://www.ul.com/global/eng/pages/
corporate/newsroom/
newsitem.jsp?cpath=%2Fglobal%2Feng%2Fcontent%2Fcorporate%2Fnewsroom%2Fpr
essreleases%2F
    data%2Funderwriterslaboratoriesannouncessupportforauthoritieshavi 
ngjurisdiction20090219140900_20090219140900.xml)
---------------------------------------------------------------------------
    However, in December 2010\7\ UL rescinded that notice based upon 
new research that indicated issues with gaskets, seals and hoses when 
exposed to E15. UL now recommends that only equipment specifically 
listed by UL as compatible with E10+ fuels be used for such fuels.
---------------------------------------------------------------------------
    \7\ Underwriters Laboratories. (http://www.ul.com/global/eng/pages/
offerings/industries/energy/alternative/flammableandcombustiblefluids/
updates/)
---------------------------------------------------------------------------
    Unfortunately, this places a significant economic burden on the 
retail market. UL policy prevents retroactive certification of 
equipment. In other words, only those units produced after UL 
certification is issued are so certified--all previously manufactured 
devices, even if they are the same model, are subject only to the UL 
listing available at the time of manufacture. This means that no retail 
dispensers, except those produced after UL issued a listing last 
spring, are legally approved for E10+ fuels.
    In other words, under current requirements any retailer wishing to 
sell E10+ fuels must replace their dispensers. On average, a retail 
motor fuel dispenser costs approximately $20,000.
    It is less clear how many underground storage tanks and associated 
pipes and lines would require replacement. Many of these units are 
manufactured to be compatible with high concentrations of ethanol, 
however they may not be listed as such. Further, if there are concerns 
with gaskets and seals in dispensers, care must be given to ensure the 
underground gaskets and seals do not pose a threat to the environment. 
Once a retailer begins to replace underground equipment, the cost can 
escalate rapidly and can easily exceed $100,000 per location.
2) Misfueling
    The second major issue facing retailers is the potential liability 
associated with improperly fueling a vehicle with a non-approved fuel. 
The EPA decision concerning E15 puts this issue into sharp focus for 
retailers. Under EPA's partial waiver, only vehicles manufactured in 
model year 2001 or more recently are authorized to fuel with E15. Older 
vehicles, motorcycles, boats, and small engines are not authorized to 
use E15.
    For the retailer, bifurcating the market in this way presents 
serious challenges. How does the retailer prevent the consumer from 
buying the wrong fuel? Typically, when new fuels are authorized they 
are backwards compatible so this is not a problem. In other words, 
older vehicles can use the new fuel.

          Example 1: When EPA phased lead out of gasoline in the late 
        1970s and early 1980s, older vehicles were capable of running 
        on unleaded--newer vehicles, however, were required to run only 
        on unleaded. These newer vehicle gasoline tanks were equipped 
        with smaller fill pipes into which a leaded nozzle could not 
        fit--likewise, unleaded dispensers were equipped with smaller 
        nozzles.

          Example 2: When EPA mandated a 97% reduction in the sulfur 
        content of on-road diesel fuel, trucks manufactured beginning 
        with model year 2007 were required to use only ultra low sulfur 
        diesel (ULSD) fuel. Earlier model trucks were able to run on 
        this new fuel. Misfueling was limited by a combination of a 
        mandated oversupply of ULSD (which limited the supply of the 
        restricted fuel and therefore limited the potential for 
        misfueling) and enforced labeling requirements.

    E15 is very different--legacy vehicles are not permitted to use the 
new fuel. Doing so will violate Clean Air Act standards and could cause 
engine performance or safety issues. Yet, there are no viable options 
to retroactively install physical countermeasures to prevent 
misfueling. Further, the risk to retailers of a customer using E15 in 
the wrong engine--whether accidentally or intentionally--are 
significant.
    First of all, retailers could be subject to penalties under the 
Clean Air Act for not preventing a customer from misfueling with E15. 
This concern is not without justification. In the past, retailers have 
been held accountable for the actions of their customers. For example, 
because unleaded fuel was more expensive than leaded fuel, some 
consumers physically altered their vehicle fill pipes to accommodate 
the larger leaded nozzles either by using can openers or by using a 
funnel while fueling. The retailer had no ability to prevent such 
behavior, but the EPA often levied fines against the retailer for not 
physically preventing the consumer from bypassing the misfueling 
countermeasures.
    To EPA's credit, they have asserted that they would not be 
targeting retailers for consumer misfueling. But that provides little 
comfort to retailers--EPA policy can change in the absence of specific 
legal safeguards. Further, the Clean Air Act includes a private right 
of action and any citizen can file a lawsuit against a retailer who 
does not prevent misfueling. Whether the retailer is found guilty does 
not change the fact that defending against such claims can be very 
expensive.
    Furthermore, the consumer may seek to hold the retailer liable for 
their own actions. Using the wrong fuel could void an engine's 
warranty, cause engine performance problems or even compromise the 
safety of some equipment. In all situations, some consumer may seek to 
hold the retailer accountable even when the retailer was not 
responsible for the improper use of the fuel. Once again, the defense 
to such claims can be expensive.
3) General Liability Exposure
    Finally, there are widespread concerns throughout the retail 
community and with our product suppliers that the rules of the game may 
change and we could be left potentially exposed to significant 
liability. For example, E15 is approved only for certain engines and 
its use in other engines is prohibited by the EPA due to associated 
emissions and performance issues.
    What if E15 does indeed cause problems in non-approved engines or 
even in approved engines? What if in the future the product is 
determined defective, the rules are changed and E15 is no longer 
approved for use in commerce? There is significant concern that such a 
change in the law would be retroactively applied to any who 
manufactured, distributed, blended or sold the product in question.
    Retailers are hesitant to enter new fuel markets without some 
assurance that their compliance with the law today will protect them 
from retroactive liability should the law change in the future. It 
seems reasonable that law abiding citizens should not be held 
accountable if the law changes in the future. Congress could help 
overcome significant resistance to new fuels by providing assurances 
that market participants will only be held to account for the laws as 
they exist at the time and not subject to liability for violating a 
future law or regulation.

                        RESOLVING THE CHALLENGES

    While these challenges facing the retail market are significant, 
they are not insurmountable. Several proposals have been put on the 
table by Members of Congress or other stakeholders, and each deserves 
consideration. While none may be a solution by itself, there are 
elements within each that can help guide the discussion towards a 
solution that might benefit all stakeholders and help achieve the 
national objectives.

S. 187, The Biofuels Market Expansion Act of 2011
    The Biofuels Market Expansion Act of 2011 (S. 187) seeks to require 
the production of additional flexible fuel vehicles that can run on 
anything from E0--E85. This section seeks to increase the potential 
demand for higher blends of ethanol. This is a critical factor because 
when retailers are considering the introduction of a new product they 
want to know if their customers can and will buy that product. By 
expanding the number of customers who ``can'' buy the product, part of 
this equation is addressed. The other component (will the customer buy 
the product?) is much more difficult to quantify, but the legislation 
is trying to make some progress by expanding the customers' ability to 
buy the product.
    But is a production mandate necessary? Perhaps not. The domestic 
auto manufacturers are committed to increasing the volume of FFVs on 
the road and they do receive fuel economy credits for doing so. What 
incentives might Congress consider to encourage foreign auto makers to 
bring FFVs to the U.S.? The incremental cost of an FFV compared to a 
regular gasoline engine is quite low so perhaps the incentive would be 
cost effective.
    Another option that could be considered to increase the number of 
FFVs on the market is to review the EPA approval process for after-
market conversion kits. There are companies making kits to retrofit 
legacy vehicles to run on higher ethanol blended fuels, but the 
approval process is quite costly and burdensome. Perhaps Congress can 
review policies that would expedite the availability of such retrofit 
kits and provide consumers an incentive to convert their vehicles to 
run on both gasoline and higher ethanol-blended fuels. The cost of 
doing so is not prohibitive and this could help increase the number of 
FFVs on the market, thereby improving the economic calculation for the 
retailer.
    Another component of the bill addresses the availability of higher 
ethanol blended fuels. One of the complaints the auto makers have 
raised is that their FFV customers have few options to refuel with E85. 
That is true, but I must point out that there is no requirement for 
customers to fuel with E85 (unlike with the transitions to unleaded and 
ULSD) and their purchase decisions are predominantly driven by 
economics. In many markets, the economics of E85 do not enable the 
product to remain competitive with gasoline and E85 retailers often 
watch FFV customers fuel with regular gasoline, rendering their 
investment in E85 infrastructure moot.
    S. 187 tries to address concerns about the limited availability of 
higher blended ethanol fuel by requiring that refiners pay for the 
installation of blender pumps capable of selling these fuels.\8\ The 
bill stipulates that a certain percentage of the stations directly 
owned by the refiner, as well as those owned by independent operators 
selling the refiner's brand of fuel, install blender pumps. It further 
establishes a grant program for independent non-branded operators to 
install blender pumps.
---------------------------------------------------------------------------
    \8\ ``Blender pumps'' are dispensers that can mix liquid fuel 
products from multiple storage tanks to produce another product. The 
most popular example is a blender pump using Premium gasoline and 
Regular octane gasoline to produce Mid-grade. In the case of S. 187, a 
blender pump would conceivably use a higher ethanol blended fuel 
product (perhaps E85) and mix it with a lower ethanol blended fuel 
product (E10) to produce a mid-level ethanol product. The blend ratios 
are set by the owner of the dispenser to provide the consumer with a 
pre-set selection of fuel blends. Some misunderstand this technology 
and assume the consumer will be able to adjust the blend ratio to their 
preference. This would create significant challenges and involve 
multiple regulatory agencies.
---------------------------------------------------------------------------
    While it is clear that the bill is trying to bring ethanol 
dispensers to market without placing a financial burden on independent 
retailers, it fails to recognize that costs incurred upstream will be 
passed through to the retailers and ultimately the consumer. So how 
much will S. 187 potentially cost?
    According to the National Petroleum News' Market Facts 2010 
report,\9\ in 2009 the top 15 refiner brands were sold through 83,150 
branded locations. S. 187 would require that 10% of these locations 
install a blender pump by 2014; 20% by 2016; 35% by 2018 and 50% by 
2020.
---------------------------------------------------------------------------
    \9\ See attachment 3.
---------------------------------------------------------------------------
    To estimate the potential cost of this program, we can use a very 
rough estimate that a new UL listed blender pump will cost 
approximately $20,000. Replacing the underground equipment at each site 
could cost on average $100,000. The total cost per location could be 
$120,000. In this worst case scenario, the associated costs to the 
industry and, ultimately, consumer would be:

----------------------------------------------------------------------------------------------------------------
                       Year                               Locations Mandated              Cumulative Cost
----------------------------------------------------------------------------------------------------------------
2014                                                                       8,315                       $0.997 B
----------------------------------------------------------------------------------------------------------------
2016                                                                      16,630                       $1.995 B
----------------------------------------------------------------------------------------------------------------
2018                                                                      29,102                       $3.492 B
----------------------------------------------------------------------------------------------------------------
2020                                                                      41,575                       $4.989 B
----------------------------------------------------------------------------------------------------------------

    For the independent, non-branded locations the legislation creates 
a grant program to help offset the cost of installation of a compatible 
blender pump and associated equipment including tanks, offering 50% of 
the entire cost of the project. Understandably, and in keeping with 
reasonable public policy, those who accept the federal cost share must 
commit to selling an eligible fuel through the new equipment for at 
least two of the subsequent four years.
    While many retailers will seek to avail themselves of federal 
financial assistance, grant programs come with challenges for the 
retailer. In some situations, the retailer may wish to try offering his 
customers a new fuel. But if that fuel is not successful, the retailer 
may wish to revert to the original product offering. Under the grant 
program, this is not easy to do. Consequently, a grant program may 
provide some benefits to retailers who are already committed to selling 
a new fuel, but because of its conditions it may not have much 
influence over those who are not convinced a new fuel is the right 
decision for their store.
    While NACS does not believe S. 187 hits the target with its 
approach to the issues, we believe it helps highlight the core problems 
facing the retail market and the introduction of new fuels. But perhaps 
there is a better approach.

Prospective Compatibility Requirements
    Another proposal that has been floated and might be under 
consideration by some members of this committee is to set a target date 
at which time a new renewable fuel blend will be authorized and engines 
will be engineered to run on that fuel. For example, it could stipulate 
that E40 will be approved and engines will be designed to run on it by 
year 2016.
    This approach is very interesting. If developed appropriately, it 
could provide auto and other engine manufacturers sufficient lead time 
to calibrate their products to run on the new fuel. In addition, the 
new engines can be engineered with physical misfueling countermeasures 
that can help limit the incidence of consumers using the wrong fuel in 
their engines.
    Such a proposal also could eliminate the stair step process that 
will inevitably occur in our efforts to reach the goals of the RFS--a 
process begun with the E15 rule and that will likely initiate a new 
battle with each subsequent step. A necessary component of such a 
strategy would be to amend the implementation schedule of the RFS to 
provide sufficient time for the new fuel to enter the market.
    For these reasons, it is a worthy of further consideration to see 
if remaining issues can be resolved. However, these remaining issues 
are primarily found at the retail level of trade and may be the most 
challenging to overcome. For if the current infrastructure is unable to 
accommodate E15, how likely is it to be able to accommodate a fuel 
formulation that would ultimately satisfy the RFS, such as E30 or E40?
    Once again, we find ourselves trying to adjust an infrastructure 
composed of 160,000 retail outlets to a new fuel formulation that might 
not be compatible with the underground storage tanks, pipes and 
dispensers currently in use.
    Considering that the typical store operates eight fueling position 
through four dispensers, we can estimate a total retail dispenser 
population of 640,000. How many of these will have to be replaced? If 
only UL-listed devices are allowed to sell these products, one can 
assume nearly all of them would have to be replaced.
    Further, according to EPA's Office of Underground Storage Tanks, 
there are 215,000 sites in the U.S. (retail plus non-retail) that 
operate approximately 597,000 active underground storage tanks.\10\ How 
many of these will have to be replaced? It is uncertain how many are 
listed as compatible with anything higher than E10, so one would have 
to assume the majority would have to be replaced.
---------------------------------------------------------------------------
    \10\ U.S. Environmental Protection Agency Office of Underground 
Storage Tanks ``FY 2010 Annual Report on the Underground Storage Tank 
Program'' (http://www.epa.gov/oust/pubs/fy10_annual_ust_report_3-
11.pdf)
---------------------------------------------------------------------------
    Congress must take into consideration that it was not long ago 
(1988-1998) that federal law required that all USTs in the country be 
removed from the ground and retrofitted with leak detection, spill 
prevention and anti-corrosion systems. The wholesale retrofit 
requirements led to the closure of thousands of facilities due to the 
costs required to comply with the new law. Since then, many states have 
enacted additional requirements that have forced retailers to retrofit 
or replace the systems that were installed to comply with the federal 
law. Another round of mandatory replacements will be a very hard sell.
    Using the same estimated costs applied to the requirements under S. 
187 ($20,000 per dispenser and $100,000 per UST system), one could 
estimate the cumulative cost of a wholesale retrofit of the entire fuel 
dispensing infrastructure to be $12.8 billion for dispensers and $59.7 
billion for UST systems. In addition, it would likely take 10--15 years 
to roll-over the existing infrastructure.
    For the individual store owner who might operate two underground 
storage tanks and four dispensers, the cost could be upwards of 
$200,000. In 2009, an average a single convenience store reported 
approximately $33,000 in pre-tax profits. That is only a small fraction 
of the cost such a contemplated upgrade would require.
    NACS further cautions against picking one specific fuel as the 
``fuel of the future.'' Rather, it would be more constructive to 
identify key characteristics of the new fuel to which engines and 
equipment could be manufactured, set the timeline for attaining the 
goal, and allow technology, science and the market determine which fuel 
will be the sustainable choice. It most definitely will be a renewable, 
cleaner burning fuel that will help achieve the overall objectives of 
national energy policy.
    As discussions on these strategies continue, it would be in the 
best interests of consumers and the economy as whole to consider 
alternatives that could alleviate the costs associated with the 
infrastructure retrofit.

Alternative Strategy
    Under current legal requirements that equipment must be listed by a 
nationally recognized testing laboratory, most of the nation's retail 
infrastructure must be replaced to accommodate any new fuel. However, 
NACS questions if that is technically required to ensure environmental 
health and safety?
    At one time, UL believed existing dispensers could accommodate 15% 
ethanol without problem. Further research demonstrated challenges with 
some seals, gaskets and hoses. Clearly, no retailer wants their 
equipment to leak, but can susceptible components be replaced with 
compatible components and deliver a safe dispenser at a fraction of the 
cost for a new one?
    Furthermore, many underground storage tanks are likely compatible 
with certain new fuels even if they are not listed as such. For 
example, a double wall steel tank equipped with a proper anticorrosion 
system is likely compatible with any concentration of ethanol. Should 
such a system be required to be replaced simply because it was not 
originally listed for such fuels?
    NACS believes that there is an opportunity to provide a lower cost 
of entry for new fuel blends by adjusting the legal requirements for 
demonstrating compatibility of retail fueling equipment. Because UL 
will not retroactively certify any equipment, perhaps Congress could 
authorize an alternative method for certifying legacy equipment. Such a 
method would preserve the protections for environmental health and 
safety, but eliminate the need to replace all equipment simply because 
the certification policy of the primary testing laboratory will not re-
evaluate legacy equipment.
    Legislation to accomplish this objective was introduced in the 
House of Representatives last Congress by Reps. Mike Ross (D-AR) and 
John Shimkus (R-IL) as H.R. 5778, the Renewable Fuels Marketing Act. 
This bill directed the EPA to develop guidelines for determining the 
compatibility of equipment with new fuels and stipulates equipment that 
satisfied such guidelines would thereby satisfy all laws and 
regulations concerning compatibility.
    Such an approach would ensure that equipment used for new fuels is 
fully compatible with those fuels and provide retailers the possibility 
that does not exist today to enter new fuel markets without having to 
replace all of their equipment. While this approach will not resolve 
all compatibility issues in the market, it will provide opportunities 
for many retailers to avoid costly and unnecessary investments, which 
will in the long run save consumers money.

                            RECOMMENDATIONS

    This transition to a new fuel market is unique in the fact that it 
is not backwards compatible and consumers are not required to buy the 
new fuel. As noted above, the transition to unleaded gasoline and ultra 
low sulfur diesel was accompanied by a requirement that consumers must 
purchase the new fuel for new vehicles. But they also were developed in 
such a way that older vehicles were fully capable of operating on the 
new fuel. Such is not the case today.
    Another difference between today's transition and those of the past 
is the effect the new fuel blends have on the retail infrastructure. 
There was no need to replace tanks or dispensers when lead and sulfur 
were phased out of the fuel--retailers simply needed to ensure an 
appropriate transition of their inventories. But the transition to 
higher blends of ethanol poses very serious challenges due to the 
corrosive nature of the additive product. How to overcome this 
challenge must be a priority of this Congress.
    To date, most policymakers focus on the future of renewable fuels 
and the role for ethanol in that market. This is understandable 
considering ethanol is the dominant renewable fuel additive and likely 
will be for the foreseeable future. But whether produced from corn, 
sugar cane or switchgrass, ethanol has chemical characteristics which 
negatively affect the infrastructure--both at the retail station and in 
the consumers' engines. This should cause Congress to pause and 
consider carefully in which direction it wishes to go.
    NACS believes the challenges standing in the way of the RFS are 
surmountable, provided Congress is willing to address them directly and 
provide alternative pathways to achieving the national objectives. To 
accomplish the stated objectives of the RFS, NACS suggests Congress 
consider the following policies:

   Provide retailers with a mechanism to have existing storage 
        and dispensing equipment evaluated to determine if they are 
        technically compatible with new fuels and, if so, provide legal 
        authority to use that equipment to sell new fuels. This will 
        potentially save the industry, and consumers, billions in 
        unnecessary investments.
   Provide retailers with labeling requirements for new fuels 
        that educate and inform consumers about the authorized uses of 
        new fuels. Ensure that compliance with such requirements will 
        satisfy a retailer's requirements under the Clean Air Act and 
        protect them from violations or engine warranty claims in the 
        even a self-service customer ignores the notifications and 
        misfuels a non-authorized engine.
   Provide market participants with regulatory and legal 
        certainty that compliance with current applicable laws and 
        regulations concerning the manufacture, distribution, storage 
        and sale of new fuels will protect them from retroactive 
        liability should the laws and regulations change at some time 
        in the future.
   Encourage and facilitate the production and conversion of 
        flexible fuel vehicles, thereby increasing the potential market 
        demand for higher blends of ethanol fuels and creating a more 
        attractive market for retailers to offer such fuels.
   Evaluate the prospects for marketing of infrastructure-
        compatible fuels and support the development of such fuels. 
        These could aid compliance with the RFS and save retailers, 
        engine makers and consumers billions of dollars. Policymakers 
        might consider establishing characteristics that new fuels must 
        possess so that equipment and engines can be manufactured or 
        retrofitted to accommodate whichever new fuel provides the 
        greatest benefit to consumers and the economy.
   Refrain from pre-selecting the ``fuel of the future'' and 
        allow the market to determine the product that will most 
        benefit consumers and the economy. To pre-select a winner based 
        upon current available technologies will undermine innovation 
        and prevent the market from developing a better option that may 
        not be apparent to policymakers.

    The nation's convenience and fuel retailers are ready to assist 
Congress in its consideration of policies that will promote a stable 
and efficient market for transportation fuels. There are many factors 
to consider and we hope that policymakers will proceed cautiously and 
avoid imposing unnecessary and costly burdens on the system.
    Thank you for the opportunity to share our perspectives with the 
Committee.*
---------------------------------------------------------------------------
    * [Note: All attachments have been retained in committee files.]

    The Chairman. OK. Thank you all for your excellent 
testimony. Let me start with a few questions.
    On this issue of reduced BTU content for ethanol compared 
to traditional gasoline. I think Mr. Karr, you talked about 
this issue, I think, and how this poses a problem. I'd be 
interested in any of the rest of you responding to that.
    Mr. Dinneen, do you see this as an issue that we need to 
worry about here? I mean, what's the solution to this problem?
    Mr. Dinneen. I think every gasoline component is going to 
have different qualities. Ethanol has higher octane content 
than most other gasoline components. That's why it's valuable 
to refiners.
    I do think it makes a great deal of sense as we're moving 
forward and trying to improve fuel efficiency. The auto 
companies have made a pretty compelling case that they need to 
increase octane. There's probably not much more fuel efficiency 
they can get with--if they have to design a vehicle for 89 
octanes.
    So a fuel of the future, most likely, is going to have to 
have a higher octane. I think they can design vehicles for 
that.
    The Chairman. This question that, sort of, is embedded in 
this, all of these discussions of whether we should be 
promoting more use and the building of infrastructure to 
accommodate E85 or whether we should put more emphasis on some 
kind of mid-level blend, something above E15, but something 
substantially less than E85. I'm not clear as to where any of 
you come out on that decision.
    Mr. Eichberger, did you have a thought as to which of those 
two makes the most sense from the perspective of the folks you 
represent?
    Mr. Eichberger. From an infrastructure compatibility 
standpoint there's very little difference. However, from a 
marketing perspective I've always questioned why was E85 picked 
as the fuel for alternative refueling cars for flex fuel 
vehicles? E85 has a 25 to 30 percent fuel economy disadvantage 
compared to gasoline.
    E40/E50 have a much lower penalty on fuel economy. So 
consumer acceptance to a mid-level fuel that provides more 
miles per gallon would probably be greater. Plus, if you don't 
have that huge distinction in fuel economy the retailer may 
actually be able to obtain product that can be priced 
competitively at the retail location with gasoline and actually 
encourage consumption.
    Whereas E85 the price differential is so significant. 
Sometimes that cost factor is not available at the retailers. 
So I think a mid-level ethanol blend if we can get to a 
compatible infrastructure makes a little bit more sense from a 
marketing perspective.
    The Chairman. OK. Any of the rest of you have a thought on 
this?
    Mr. Karr. I think our experience with E85 today shows, as I 
sort of indicated in my testimony that maybe the chicken and 
egg problem isn't as simple as, you know, we thought it was 
five or more years ago. That price, again, price and 
performance from the consumer perspective are critical. From an 
engine manufacturers perspective the narrower the range or more 
precise fuel spec that you're building a vehicle to, the better 
you can optimize the performance of that vehicle both from a 
smog forming emissions perspective and also from a fuel economy 
perspective.
    So for example, the ethanol producers are running this 
really kind of interesting experiment if you're a NASCAR fan. 
With NASCAR this year where they're running E15 at all the 
NASCAR races. They're not, you know, Kyle Busch is not pulling 
into the pits and putting a different blend of fuel in his car 
each time, E20 or E30 or E10. I mean, they are running on a 
very precise fuel. That's because they are optimizing the 
performance of those vehicles.
    The same way, I mean, we're not building NASCAR race cars 
for everyone. But we are building great cars that perform very 
well. We can do that best, again, from an engine manufacturer's 
perspective, when you know what fuel spec you're building to.
    The Chairman. OK.
    Mr. Dinneen, did you have a thought on this?
    Mr. Dinneen. I did. Actually I'm all about flexibility. The 
point is we need to move beyond E10.
    I think flex fuel vehicles provide the most flexibility to 
consumers. It's not a mandate that they can dial in the blend 
that they think makes the most sense. Frankly there is a fair 
amount of anecdotal evidence to suggest that given the 
opportunity people seem to be gravitating toward E30 because 
that is a blend level that they have noticed to provide them 
with the best gas mileage and performance.
    But I'm very encouraged by Mr. Karr's testimony today that 
they acknowledge the need to move beyond E10. I think we need 
to move in that direction.
    The Chairman. Mr. Brady, is this something that you have a 
perspective on?
    Mr. Brady. I do. As I said earlier, breaking through the 
blend wall is critical. I think if E30 motivates auto makers 
and motivates blender pump installations then we should do it.
    I do think we have to ask ourselves whether E30 will get us 
all the way to the RFS-2 gallons and whether or not higher 
blends, such as E85, gives us more flexibility in our ability 
to get there.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you.
    I'm going to bring up the issue that we're all talking 
about here which is how do we pay for all the things that we 
want. Mr. Dinneen, Mr. Brady, you have both asked for a strong 
flex fuel mandate and the blender pump assistance, the 
extension of the cellulosic tax credit and perhaps more funding 
for the Loan Guarantee program. So the real question is how do 
we pay for it? Where do we find the offset?
    As you know there's discussion on the floor. I don't know 
whether we actually get to a vote on the ethanol subsidy. But 
you know as well as anybody that that's circulating out there. 
A real focus right now on what is happening with the level of 
subsidies and basically how do we pay for those things that 
clearly would help the industry. I wouldn't disagree with that. 
But how do we do it?
    Mr. Dinneen. Senator, I think our industry has stepped up 
and worked with members of the Senate and the House and the 
Administration to reform the Ethanol Tax Incentive program. We 
do think that that is necessary. We think it's appropriate.
    The fact of the matter is the ethanol industry has grown 
considerably. The cost of the incentive has grown. I think that 
there is a way to do it in a way that would allow the industry 
to continue to evolve and to grow but is sensitive to the 
fiscal concerns that you're expressing.
    I sort of wait for any other industry that is benefiting 
today from tax incentives to step up and offer to do the same 
thing. Look, we recognize that the ethanol incentive, as it has 
been, needs to change. We want to do that in a way that is 
fiscally responsible. We want to do that in a way that 
recognizes that, you know, there's a great deal of volatility 
in the oil market that continues to jeopardize our fuel.
    While it's a little hard to remember right now at $105 a 
barrel of oil, we're 24 months removed from $39 a barrel of 
oil. So let's protect the investments that the taxpayers made 
in this industry by having some kind of a variable incentive 
that would provide marketers with the incentive to blend when 
the marketplace isn't doing that. But at $105 a barrel of oil, 
the marketplace is already doing it.
    I do think that there's other ways that we can use the tax 
policy to encourage investments in second generation biofuels. 
We need to be focused on that as well. But I don't think it 
makes sense to just throw the baby out with the bath water.
    I think we need to be fiscally responsible. But I do think 
we need to allow this industry to continue to grow and evolve. 
Like I said, I await any other energy industry to step up and 
make that same commitment.
    Senator Murkowski. Let me ask you then since talking 
subsidies here. Let me ask you a question about the tariffs 
because we're now seeing Brazil importing. It's a small 
quantity, but they're importing a small quantity of ethanol 
from the United States. I think it's probably fair to say it 
was kind of a surprise to see the barges going in the other 
direction.
    But ethanol clearly appears to have made some real strides 
in the cost competitiveness. So the question would then be is 
it time to reduce or perhaps eliminate our tariffs on imports?
    Mr. Dinneen. The tariffs on imports has never been a 
barrier to entry. Yes, we are shipping ethanol today to Brazil 
because their marketplace demands it. But in the past we have 
imported product from Brazil when our marketplace has needed 
it. The product test flowed back and forth as the market--the 
situation requires it.
    The tariff has been there not to protect the industry, but 
to protect the taxpayer lest the tax incentive that is made 
available to refiners, whether that product is imported or 
domestic, would be supporting product from Brazil that's 
already the beneficiary of decades of government investment. So 
it's merely to assure that the tax incentive does what it's 
intended to do. That is to stimulate domestic production and 
domestic demand.
    Senator Murkowski. Let me ask a question. This would 
probably be to Mr. Karr and Mr. Eichberger and this is both of 
you have mentioned the liability issue.
    Mr. Eichberger, you spoke more directly to the issue of the 
potential for mis-fueling. How do we deal with this liability 
issue? Is EPA doing enough, I guess, to really educate the 
consumer about not selecting the wrong fuel blend?
    Mr. Eichberger. When you look at going backward in the 
legacy fleets you cannot retrofit the vehicles to put a 
physical mis-fueling countermeasure. When we pulled lead out of 
gas and then we changed the fill pipe size.
    Senator Murkowski. Right.
    Mr. Eichberger. But change the nozzle size. They can't do 
that anymore.
    Senator Murkowski. Why not?
    Mr. Eichberger. You'd have to retrofit the vehicles. You'd 
have to do a complete recall of all the cars. It just doesn't 
make a whole lot of logistical sense.
    We have been supporting legislation in the House of 
Representatives that would put a little more meat on the bones 
for the labeling requirements. We've all--EPA is working on 
labels for E15. We advocated extremely high profile labels, 
different colors, different sizes, to make sure the customer 
sees it. To educate the customers as best we can.
    We believe that if a retailer does everything they're 
supposed to do and educates the consumer. There's an education 
program from EPA which has not been rolled out yet. Then if the 
consumer, self service customer, ignores the warning labels, 
the self service customer should take responsibility on 
themselves for any damage to the engine.
    Now that does not prevent mis-fueling. But from a retailer 
perspective it makes it a little more comfortable to move in to 
try new fuels that may have a limited market application. If we 
know that if the self service customer ignores everything we 
tell them, they're not going to turn around and sue us. We're 
not going to be fined for Clean Air Act violations.
    It doesn't prevent. But it helps provide a little bit more 
comfort to the marketplace.
    Senator Murkowski. Do you see the liability issue as one 
that if we fail to resolve this you will have your Mom and Pop 
operators who simply choose not to go there with these other 
fuel selections?
    Mr. Eichberger. You will have quite a few retailers choose 
not to go in this direction. Mom and Pop retailers may actually 
try because they have less to lose. The larger chains----
    Senator Murkowski. That's fair.
    Mr. Eichberger. They're much more hesitant to move into 
this market because not only do you have the mis-fueling issues 
but what if the mis-fueling causes a determination that it's a 
defective product down the road. A lot of us are familiar with 
the MTB litigation that resulted in multibillions and billions 
of dollars of lawsuits. We're not willing to go down that road 
again.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Senator Shaheen.
    Senator Shaheen. Thank you.
    Mr. Brady, I have to start with you since you're from New 
Hampshire. Can you just briefly describe what some of the 
benefits and also the disadvantages are to cellulosic verses 
ethanol from corn?
    Mr. Brady. The advantages are first of all that it's a non 
food source. It is also has a better carbon footprint when you 
look at the total life cycle of cellulosic relative to first 
generation. Those are the advantages.
    I think on an operating cost basis they're pretty similar.
    The disadvantage to build a cellulosic ethanol plant is 
more expensive than to build a corn ethanol plant. So the 
capital costs are significantly higher. They will come down 
over time. But fundamentally they'll always be a bit higher 
than first generation.
    Senator Shaheen. Why is it higher?
    Mr. Brady. It's all along the process. But if you just 
think in the beginning. We, in the Michigan project, we bring 
in wood and have to debark it and chip it whereas corn is 
generally just ground up in the front. That's No. 1.
    No. 2, it takes twice as long to ferment cellulosic than it 
does corn based starch. Those facts just carry through the 
entire process.
    Senator Shaheen. OK.
    In 2007 there was a renewable fuel standard created in the 
Energy Independence and Security Act. Has that been enough to 
really drive investment in biofuels? I'll ask you that, Mr. 
Brady and then if the others would like to comment.
    Mr. Brady. It definitely helped. The 16 billion cellulosic 
mandate in 2022 definitely helped. I think when we now get to, 
as I tried to explain earlier, as we now get to the big capital 
investment in the big plant. Investors start to ask are there 
the infrastructure pieces in place to match that 16 billion 
gallons.
    So that was a terrific start. I think we have to put the 
second piece in place for completeness.
    Senator Shaheen. So, one of the things that's being talked 
about as part the budget agreement is the fairly significant 
reduction in the DOE Loan Guarantee Program. What would that do 
to trying to do the follow on investment that is needed?
    Mr. Brady. It's about the worst possible thing that we 
could do for second generation ethanol and frankly for advanced 
biofuels. It's about the worst possible thing we could do. This 
Valley of Death, I know it's a bit of cliche. But I must tell 
the committee it's real.
    The Loan Guarantee Program is the solution. It's a terrific 
solution. We just have to get it to work. We have to keep it. 
We have to get it to work.
    Senator Shaheen. Thank you.
    Mr. Eichberger, I apologize I missed most of your 
testimony. But I did hear you say that right now we can't 
recertify existing equipment and that that's one of the 
challenges, that we need to change that.
    Do you have any estimates on what the cost differential 
would be if we could recertify and also maybe you could 
describe how challenging a process that would be?
    Mr. Eichberger. Certainly. The current rules are you must 
be listed by a nationally recognized testing laboratory, such 
as Underwriters Laboratories. They have a very strict policy 
that once it's been manufactured and in the market they're not 
going to go back and retest it. Because they don't know what's 
happened to it since it's left. I understand that position.
    The challenge is if I just put in a brand new system last 
month, but it wasn't certified and listed. It very well could 
be technically safe. Why should that not also be legally safe 
to do so?
    We have been proposing that the EPA set up a system of 
issue guidelines for determining the compatibility of 
equipment. We think EPA is a right source to do that. They've 
come out with proposals say UL manufacturer tested or meeting 
the API recommended practice or some other.
    If we meet those criteria they're legally safe, legally 
authorized. If there's a release, we're still on the hook for 
clean up. We're not asking for a get out of jail free in case 
we have a spill. We clean it up.
    What we're hoping to do is avoid potential negligence 
claims for the simple fact we were using non-listed equipment. 
If we can move forward in that direction you can lower the cost 
of entry for a lot of retailers, not all of them. Because they 
have to know everything they have in the ground.
    But you're going to lower the cost of entry. Maybe they 
just have to replace a couple seals and gaskets rather than 
replacing the entire system. It could be a much greater 
incentive to move into new fuels.
    Senator Shaheen. Thank you.
    Mr. Dinneen, do we currently have a tariff on imported 
ethanol? How does that affect the Blender's Tax Credit?
    Mr. Dinneen. There is a tariff on imported ethanol today. 
It is there to offset the tax incentive that refiners and 
blenders get when they utilize ethanol. I would note that 
Brazil also has a tariff that is in place today. So, you know, 
everybody is looking to ensure that the incentives that they're 
putting in place for domestic energy production is not 
exported.
    Senator Shaheen. Thank you. Thank you, Mr. Chairman.
    The Chairman. Senator Portman.
    Senator Portman. Thank you, Mr. Chairman. Thank you all for 
your good testimony today.
    This is a great opportunity to learn more about, not just 
how we meet the standard that we've established in the 2007 
legislation. But how we do it in the context of increasing 
budget deficits and an economy that continues to be weak coming 
out of the recession. So if you'd noted by some of the 
questions today already we're in a little different environment 
than we were in 2007 when incidentally our budget deficit was 
one tenth of what it is today.
    We had a very different economic growth projection. I'm 
encouraged by the progress that has been made. It looks like 
between 10 and 12 percent of our oil imports have in fact been 
replaced by biofuels.
    Mr. Dinneen, in your testimony you said that saved the U.S. 
about $34 billion. In a way that's true. Again, I'm supportive 
of biofuels, but in a way you have to also look at, you know, 
who it saved.
    It saved $34 billion one way to look at it. Another way to 
look at it is when you add up the blender's credit, 45 cents a 
gallon. The tariff we talked about which I think is 54 cents. 
Fifty-four percent is the tariff now or 54 cents----
    Mr. Dinneen. It's 54 cents.
    Senator Portman. [continuing]. Per gallon and then I think 
there's a 2.5 percent tax as well. Of course the R and D 
funding through DOE which we talked about, Mr. Brady talked 
about. So at some point we have to just figure out what is the 
apples to apples comparison here.
    Any thoughts on that?
    Mr. Dinneen. I happen to think that the existing Federal 
program for ethanol has been extraordinarily cost effective. I 
mean there are other things on that balance sheet.
    The fact that the growing demand for grain is helping to 
reduce farm program costs, for example.
    The fact that we are creating 70,000 jobs in direct 
employment and 400,000 jobs across the economy is also helping 
to add to Federal and State tax coffers.
    If you look at the overall balance sheet, there's no 
question but that the investment that the taxpayers is making 
in this industry is paying dividends.
    Yes, we have to be fiscally responsible. We ought to look 
at ways to reform these programs. But we ought not cut them off 
all together.
    We can be penny wise and pound foolish. The fact of the 
matter is the only thing that we have today that is reducing 
our dependence on imported oil is ethanol. What is causing so 
much havoc in/throughout the entire economy? It is skyrocketing 
and volatile oil prices.
    So if we don't get a handle on our dependence on oil and 
the consequences for our economy that result from it then 
that's the real fiscal issue we ought to be concentrating on.
    Senator Portman. Good points. Other thoughts?
    Mr. Brady.
    Mr. Brady. I would more or less agree with Mr. Dinneen.
    Senator Portman. OK.
    Let's talk a little bit about the next generation 
cellulosic ethanol. Again, coming from Ohio corn based ethanol 
is an incredibly important part of our economy as Mr. Dinneen 
said. In fact we have $700 million now in annual sales. At 
least 210 jobs being created at a single facility, well at five 
different facilities.
    I've had an opportunity to tour a couple of them. But the 
opportunities to move toward cellulosic ethanol do provide some 
economic benefits in theory and particularly wood chips that 
you're working on. Grasses, algae, we've talked about today.
    What's the timing? We've had some optimism, you know, in 
the early part of the last decade about this. Then in 2007, I 
think there was optimism that we could meet the standard by 
corn based ethanol, but also a lot of other cellulosic sources 
more quickly perhaps than people think now.
    But since you're in the business why don't you tell us what 
you think the real potential is? What's the timing?
    Mr. Brady. Yes. I think first we should address the issue 
of how long it's taking, as you bring up, Senator. I think 
there are really two things that happened since the 2007/2008 
timeline.
    One, of course, was the financial crisis which set these 
projects back.
    Senator Portman. Yes.
    Mr. Brady. Frankly speaking I think the rate of 
technological advancement at that time was a bit oversold. The 
technologies were not nearly as ready, I think, as they were 
advertised.
    I can tell you now we have put together an Advanced Ethanol 
Council which I chair. I can tell you there are 10 members in 
there. A number of them have projects at about the level I just 
described, our Michigan project which is technology ready. 
Working on the financing, but facing this gap in financing and 
a way to close that gap.
    So I think the industry has made significant progress. I 
think the most important thing we can do is to get the 
company's whose technology is ready to get these first plants 
built. They won't be perfect, but to get them built and to work 
the technology out and then proliferate quickly after that.
    But we are very, very close.
    Senator Portman. That's what I think. In your written 
testimony, you talked about the Valley of Death of sort of 
getting to the point of commercialization and the need to move. 
You think there are a number of different technologies that are 
poised to make that leap?
    Mr. Brady. I do.
    Senator Portman. Let's talk about the blender credit and 
the fact that at the end of this year the tariff expires and 
there needs to be some kind of a decision made. Where are you, 
Mr. Dinneen, in terms of what you see as the right mix? You 
said earlier that the industry is looking to come up with 
something that meets the economic and fiscal conditions of the 
day.
    What do you think that is? What's the right mix in terms of 
the tariff and in terms of the blender's credit?
    Mr. Dinneen. We've been working with the folks in the 
Senate and the House on a reform package that would essentially 
create a variable tax incentive that would recognize that at 
$105 a barrel of oil that you have today you probably don't 
need an incentive to encourage a gasoline marketer to use a 
fuel that is so much cheaper than gasoline. But recognize that 
there is volatility in this market. If you have a situation as 
you did just 24 months ago where you've got $39 a barrel of 
oil.
    Let's protect the investment that the taxpayer has made in 
this industry and make sure that there's something so that you 
are reducing the cost of these fuels in those circumstances. I 
think, quite frankly, given where most people anticipate oil 
prices are going to be that that would be a pretty fiscally 
responsible approach.
    But it's got to be more than just, you know, the tax 
incentive. I think the things we've talked about here. You also 
do need to address a market. You need to make sure that there 
are vehicles capable of using more than 10 percent of ethanol 
blends so that when Mascoma is producing cellulosic ethanol 
there's a market for it.
    You do have to have an infrastructure capable of delivering 
those fuels. I would caution folks that, you know, are 
enthusiastic about drop in fuels. I come from the school, we 
need it all.
    These technologies are absolutely very promising. But there 
may not be any such thing as a drop in fuel. Until these things 
are produced you don't know what co-contaminants there are 
going to be.
    The infrastructure investments that we're making will quite 
likely be necessary for those as well. Most certainly aren't 
going to be standard investments because they'll be able to use 
that infrastructure.
    Senator Portman. My time is up. I think it would be helpful 
to the committee to have, maybe in writing, what the blender 
tax credit range you're looking at when you talk about having a 
variable rate. It might be helpful for us although we're not 
the tax writing committee. I know the chairman and others will 
be looked at for input.
    Thank you.
    The Chairman. Thank you.
    Senator Stabenow.
    Senator Stabenow. Thank you very much, Mr. Chairman.
    I want to indicate as Chair of the Agriculture Committee we 
held a hearing last week as well on this topic. I want to thank 
you for doing this. I'm looking forward to working with you on 
this both in the Energy Committee.
    But also as we move forward on the next farm bill. As we 
look for ways to be able to strengthen the energy title of the 
farm bill and the cellulosic ethanol tax credit that came as 
part of the package with the farm bill last time to focus on 
advanced biofuels. I think is very important for us to be able 
to extend and to be able to work together on the issues that 
we're talking about today.
    I firmly believe that biofuels ethanol, our opportunities 
around advanced biofuels are critical to provide competition to 
get us off of foreign oil. I mean, we need American, home 
grown, energy. We're talking about something this morning that 
will certainly be a major role in doing that.
    Ethanol, corn based ethanol, is a maturing industry. Adding 
cellulosic is, I think, very important for all of us. Mr. Karr, 
I want to agree with you when said we're making great 
automobiles, by the way. We are.
    Mr. Chairman, just for the note, it's our American 
companies winning all the awards last year. So it put a smile 
on my face and the hard working folks from Michigan that have 
been producing and making and engineering those vehicles. We're 
very proud about that.
    But let me talk about, sort of, those two pieces. Because, 
you know, there's no question reducing dependence on foreign 
oil is an incredibly important. Moving to cleaner, renewable 
fuels are very important for many, many reasons.
    It's also important to continue what is happening in our 
American automobile industry. The great work that's being done, 
the progress, the jobs being created, the vehicles that are 
highly efficient, creating more options for consumers. We're 
hearing a lot of concerns about those two goals being in 
conflict or not being able to be addressed together in terms of 
policy priorities particularly in light of the upcoming cafe 
rules and the debate about higher ethanol blends.
    So I'd like to ask anyone who would like to respond on the 
panel to talk about these two goals and the extent to which we 
can move forward and make this a win/win and resolve any 
conflicts right now in our ability to meet those goals.
    Mr. Karr. Thank you for that question.
    I would take slight issue with one of Bob Dinneen's earlier 
statements that the only we're doing to lessen our dependence 
on foreign oil is in the biofuel space. Because, of course, 
auto makers are going to spend over $50 billion between now and 
2016 to significantly increase the fuel economy of our national 
fleet. We are in the process of talking to the Administration 
right now about fuel economy standards going from 2017 forward.
    But with regard to the question of conflict between our 
various goals, it is true that the possibility for conflict 
exists. But I think part of my purpose in being here today is 
to at least lay out, from our perspective, an outline of an 
approach that we think could help to minimize that conflict. In 
addition to the fuel economy standards that we are looking at, 
we're also facing, you know, significant ratcheting up of 
stringency of smog, on the smog forming emissions side.
    So for our perspective it makes sense to look at this from 
a comprehensive way and incorporate how we move forward in the 
biofuels space as part of that overall package. I understand 
that there are a lot of details and that there are a lot of 
stakeholders at the table. But, you know, we are prepared to 
sit down and have that conversation.
    Senator Stabenow. Thank you.
    Anyone else on the panel?
    Mr. Dinneen.
    Mr. Dinneen. I just think I'd agree. I think, look there 
may be some potential for conflict. But I think if we're 
sitting down and working through some of these issues we can 
determine a policy that makes the most sense.
    I actually agree with Mr. Karr about the conservation. 
That's certainly a part of what needs to be in the mix. I come 
from the school that we need all energy sources. That our 
energy situation is such that we ought not be saying no to 
anything right now.
    So I think, you know, the statement that he made earlier 
about sitting down with stakeholders and trying to determine 
what is the most appropriate level and timeframe is something 
that's a conversation that I want to engage in today.
    Senator Stabenow. Great.
    Mr. Eichberger. Senator, if I may?
    The thing that was missing from the 2007 energy discussions 
and the RFS was kind of a topic of today's hearing is 
infrastructure. Now we're trying to play catch up. So any 
discussion as we move forward we're more than willing to sit 
down and talk about it.
    We want to make sure that infrastructure remains important 
because you can produce all the fuels you want. You can produce 
all the cars you want. But if you can't get the fuel into the 
cars----
    Senator Stabenow. Right.
    Mr. Eichberger. It makes no difference.
    Senator Stabenow. Right.
    Mr. Eichberger. So.
    Senator Stabenow. Yes. Thank you very much.
    I know my time is up, Mr. Chairman. I would just again say 
to Mr. Brady, we are excited about your coming, Mascoma, 
working very hard to come and create the first commercial scale 
cellulosic facility in the upper peninsula of Michigan. Looking 
forward to working with you to make sure that we can have the 
right policies in place and continue those to allow you to be 
successful.
    Mr. Brady. We can't wait to have you up there for the 
ground breaking.
    Senator Stabenow. I'm ready.
    Mr. Brady. Great.
    Senator Stabenow. Thank you.
    The Chairman. Senator Hoeven.
    Senator Hoeven. Thank you, Mr. Chairman.
    I'm going to start my questions along the lines of Senator 
Murkowski because I think she's right. The challenge is 
dollars. As you know we're a little short of dollars here, 
spending more than we're taking in and that's a problem that 
we've got to change.
    The other is mandates. I've always found that people react 
better if you ask them to do something then if you tell them 
they have to do something. So I think incentives work better 
than mandates.
    Big fan of blender pumps. Believe in flex fuel vehicles. 
Both give consumers choice.
    I also believe in simple is best. Enhance of EPA can come 
out with higher blends and said that all vehicles can use it 
including small engines, large engines. It's a lot easier for 
your retailers than if some can use it and some can't.
    Sixty-two percent on and on, it's got to be a certain year 
and so on and so forth. It makes it pretty hard for your 
retailers to set up their pumps to serve everybody on a cost 
effective basis. When some can use it and some can't.
    Now you've got all your labeling requirements and a lot of 
other confusion. I think one of the biggest problems in terms 
of the Federal Government is they're making things more complex 
instead of making it simple. So I appreciate some of your 
recommendations in that regard.
    With that in mind I'd like to ask each one of you. Given 
the financial constraints and all of the mandates how do we 
effectively, most effectively, maybe your one or two best 
concepts, get more flex fuel vehicles out there. Get more 
blender pumps out there and get this higher blend standard so 
we simplify the process to expand the use of biofuels.
    Mr. Brady, if you would start? Run right through it.
    The other question I'd add and throw something in there on 
it. This relates, of course, to what you're doing. Is how do we 
migrate to this second generation biofuels, to cellulosic and 
so forth?
    I know Senator Portman talked a little bit about corn and 
the need to move to next generation. So if you'd touch on those 
two things. Your best one or two ideas, I'd like to hear them.
    Mr. Brady. Senator, on your first question, having the 
least amount of time to think about it I would say two things. 
I think we do need to reform the Vtech, the current tax scheme 
for biofuels. I think we need to reformat.
    I think it needs to be more oriented to next generation, 
diversifying the feed stocks and better environmental 
performance. So I would start there. I would start with that 
pot of money.
    The other thing I would say. The Loan Guarantee Program, by 
the way, I don't think we need more money. I think we need the 
money that's been put aside for the current DOE Loan Guarantee 
Program to be more effective.
    So I think on both of those things there are existing 
programs that can work a lot better in helping this transition 
from first to second generation.
    Senator Hoeven. Good example of what I'm asking for. The 
squaring makes a difference, but loan guarantees is a good 
example. Maybe the kind of thing we can sell. So appreciate 
that.
    Mr. Brady. Yes.
    Senator Hoeven. You'd made that comment earlier.
    Mr. Brady. Yes, sir.
    Senator Hoeven. Thank you.
    Mr. Karr. In the vehicle space one of the policy options 
that Congress has pursued that doesn't cost is to allow auto 
manufacturers to earn credits toward meeting their fuel economy 
standards through the production of FFVs. In 2007 in the Energy 
Independence and Security Act, Congress had put those in place 
through 2020. In the last round of fuel economy rulemakings the 
Administration is phasing those out in 2016 unless we can 
demonstrate that biofuels are actually being used in those 
vehicles.
    So I think there's room to have more discussion about that 
type of incentive both, legislatively and in the regulatory 
arena.
    Senator Hoeven. Alright.
    Mr. Dinneen. Senator, we've talked already about how we 
certainly are committed to reforming the tax incentive and 
doing it in a way that is fiscally responsible. So I'll leave 
that alone.
    I'll say that moving forward you got to have a market. I 
give great credit to Ford and General Motors and Chrysler that 
have committed the 50 percent of the vehicles that they will 
produce in 2012 and later are going to be flex fuel vehicles. 
That is a tremendous commitment.
    We need to figure out a way to get the other auto 
manufacturers to match the commitment of the U.S. companies. 
Whether that's a cafe credit or some other sort of----
    Senator Hoeven. Yes. How do you do it without a mandate? I 
mean, what ideas, without a mandate.
    Mr. Dinneen. Mr. Karr has mentioned the cafe credit. That 
will certainly create other issues. I mean, it's--there are no 
easy policy options here. If, you know, the challenge is 
finding something that you say, not a mandate. Mandates 
wouldn't cost anything.
    Senator Hoeven. But the cafe credit is a good example.
    Mr. Dinneen. Yes. The cafe credit would. But there would be 
other issues, you know. But it's certainly worth exploring.
    The other thing though, you need to figure out a way to get 
more blender pumps out there. John may have some ideas on that 
that don't involve money. I think his notion that, you know, 
just making sure that we can recertify existing equipment is 
certainly one we ought to be looking at.
    Senator Hoeven. I agree. That's a good example, John, that 
I wrote down when you brought it up earlier. Other ideas?
    Mr. Eichberger. That's the critical one. I believe there's 
a lot of retail facilities out there that could move into 
higher blend of ethanol if it was lawfully allowed to do so. 
It's a matter of recertifying that equipment and making sure 
that we can do without retribution.
    Senator Hoeven. So not only certification, but some kind of 
recertification where somebody comes in and looks at it and 
says this is fine for E15 or?
    Mr. Eichberger. Right. Yes. Some way to have the legacy 
equipment that's at retail facilities eligible to sell new 
fuels. Then as we increase supply of ethanol and other 
renewable fuels we increase the demand of flexible fuel 
vehicles.
    More retailers will look at this as an opportunity to 
service our customers without a huge investment in resources. 
If we can do this, you can eliminate the need for any type of 
government support for new equipment by allowing retailers to 
use what's already in the ground.
    Senator Hoeven. Thank you.
    The Chairman. Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman and so many of 
the witnesses. I was going to ask a question about the Loan 
Guarantee Program. But so many of the witnesses and my 
colleagues have mentioned the Loan Guarantee Program that I 
just want to say that yesterday I sent a letter with the 
chairman and my colleagues, Senator Landrieu and Wyden and 
Coons and Johnson and Shaheen, urging that Senator McConnell 
and Reed not consider any HR1 language in the continuing 
resolution that would gut the Loan Guarantee Program.
    This is about 58,000 construction jobs, 30 billion in clean 
energy projects and I think it's very important that we make 
sure that the CR does not include that gutting proposal. I 
think you all have done a good job this morning of discussing 
the whys of that. But just know that we are fighting to make 
sure that isn't part of a continuing resolution.
    I also want to associate myself with my colleague, Senator 
Murkowski about ethanol. I never understood why the ethanol--I 
understand why the ethanol producers have some anxiety about 
lifting the tax barriers on ethanol. But at the same time I 
think it would have helped create the market faster and 
allowing that import.
    But I want to go to this question of gas prices and how 
alternative fuel--what we really need to be doing to drive 
down, you know, the price. I mean, Brazil was staring at $147 
oil and basically had the ability to have 90 percent of their 
vehicles be flex fuel vehicles. So when the price spiked they 
just turned over to their domestic production. So they 
basically insulated their economy from those gas spikes.
    Here we are with the same choice now saying we could move 
forward and insulate ourselves from those gas price spikes if 
we gave ourselves an alternative to the monopoly that is 
currently oil and particularly foreign oil. So, first I wanted 
to ask Mr. Karr, were there any technical or economic hurdles 
for making those flex fuel cars for the Brazilians?
    Mr. Karr. No. I don't think the concern is that we can't 
make flex fuel vehicles. As I said in my testimony, we're in 
support of a flex fuel technology and have put over 8.2 million 
on U.S. roads today. So they're not technical hurdles 
currently.
    There are potential technical hurdles having to do with the 
next round of smog forming emissions. But they're not 
technical----
    Senator Cantwell. Yes, different. We came very close. The 
Senate actually passed language as part of the 2007 energy bill 
that would have required 50 percent of cars to be flex fuel 
cars. But in the negotiations with the House, unfortunately, 
that provision was dropped.
    So but as far as the fuel though, if we had a fleet like 
that do you think that the alternative sources could help us 
drive down the price? How do you see the price? I mean, maybe 
Mr. Dinneen, how do you see current alternative fuel prices, 
you know, compared to gasoline today?
    How do you see that for the future? Particularly if we had, 
you know, a 50 percent fleet or something like that?
    Mr. Dinneen. Senator you're absolutely right that Brazil 
has insulated itself from those energy shocks by just giving 
its consumers the flexibility. The flex fuel vehicles are about 
50 percent of the automotive fleet in Brazil. The rest of the 
vehicles run on a 25 percent ethanol blend. So, I mean, they 
have maximized their use of renewable fuels. It's a heck of a 
program.
    Their 50 percent of the fleet, you know, compares to our 3 
percent of the fleet being FFV. So we do need to do far more. 
If we are able to there's no question that we'll continue to 
have a beneficial impact on gas prices. I say continue to have 
because as I said, ethanol today is driving down the price of 
gasoline.
    It's a little hard to really recognize it when you got $4 a 
gallon. But because ethanol today is 50 cents cheaper than 
gasoline it's already driving down the price of motor fuel and 
just by the fact that we have 13 billion gallons of domestic 
renewable fuel adding to our gasoline pool. That is driving 
down the price of fuel generally.
    So the economists have generally said that the 13 billion 
gallons of ethanol that we're using today is responsible for 15 
to 50 cents reduced price on gasoline. If there's more FFVs, if 
there are more biofuels, when we get to the point when there's 
36 billion gallons of fuel from domestic renewables in this 
country gasoline prices will have to moderate. No question.
    Senator Cantwell. So the faster that we can go on that, the 
more we're going to see a drop in gasoline prices. I think 
that's the headline for today. I mean, consumers all over 
America want to know.
    I mean, I personally think the era of cheap oil is over and 
that all we are now is on the roller coaster. So this is about 
whether we're going to allow the U.S. economy to be continually 
subject to that level of volatility and/or are whether we're 
going to produce something that is going to take that monopoly 
and give it some competition.
    So I appreciate your testimony today about this. Thank you, 
Mr. Chairman for the hearing.
    The Chairman. Thank you very much. We appreciate all of you 
being here. I think it's been excellent testimony.
    We do have one additional panel which is the Representative 
from the Department of Energy. Dr. Henry Kelly, the Acting 
Assistant Secretary in the Office of Energy Efficiency and 
Renewable Energy. So we would ask him to please come forward 
and give us the Administration's perspective on this set of 
issues.
    Please go right ahead.

STATEMENT OF HENRY KELLY, ACTING ASSISTANT SECRETARY, OFFICE OF 
  ENERGY EFFICIENCY AND RENEWABLE ENERGY, DEPARTMENT OF ENERGY

    Mr. Kelly. Thank you very much, Chairman Bingaman, Ranking 
Member Murkowski. Thank you again for inviting me. I'm here to 
discuss the Department of Energy's biofuels program and the 
Biofuels Market Expansion Act of 2011.
    Transportation is obviously a key part of the U.S. energy 
economy. It's two-thirds of the United States oil consumption 
and one-third of the Nation's greenhouse gas emissions. After 
housing, it's the second biggest monthly expense for most 
American families.
    As the President said last week in an economy that relies 
so heavily on oil rising prices at the pump affect everybody 
and biofuels are clearly a part of the American solution. Home 
grown biomass can provide a cost effective alternative to oil 
imports and create businesses and jobs throughout the U.S. 
economy including rural areas.
    DOE is making investments in research and development of 
the next generation of biofuels. It is also working hard to 
create markets for existing and new technologies through new 
fueling station technologies and other methods. I'm pleased to 
report that we've made significant progress in this area. The 
Administration's FY 2012 budget proposes to maintain this 
momentum.
    Now the Biofuels Market Expansion Act of 2011 addresses 
several key barriers to increase use of biomass. The bill would 
require auto makers to make an increasing fraction of their 
vehicles flex fuel and includes a number of other provisions to 
expand existing infrastructure capable of handling higher 
ethanol blends. DOE is currently taking a number of steps, 
already, to address these exact challenges.
    Prior to October 2010, the amount of ethanol that could be 
blended in gasoline for use in standard vehicle engines without 
modification was limited to 10 percent by volume. DOE has 
conducted extensive tests and worked closely with EPA to 
provide the data needed to determine the potential impact of 
E15. Again, that's gasoline containing up to 15 percent of 
ethanol by volume.
    On compliance with the vehicle and engine emissions 
standards established under the Clean Air Act, EPA ultimately 
decided based on DOE and other test data analysis that E15 may 
be introduced into commerce for the use in model year 2001 and 
newer passenger vehicles once several considerations are met. 
This would allow the approximately 150 million vehicles that 
are on the road that are post 2001 and newer to be using E15.
    Now DOE is also working with auto manufacturers to assess 
the viability of making new vehicles compatible with higher 
ethanol blends. DOE estimates that about 3 percent of the 
vehicles now on the road are already manufactured to be 
compatible with E85. Roughly 15 percent of the sales of new 
vehicles are also compatible with E85.
    Most of these come from the domestic manufacturers who have 
committed to having 50 percent of their vehicles be compatible 
with E85 in model year 2012. The total average in 2012 is 
likely to be between 18 and 20 percent of all new vehicles. We 
estimate that the incremental cost of adding E85 compatibility 
to a new vehicle is between $50 and $100 per vehicle.
    Moving to E15 and higher blends also requires making the 
fuel dispensers, the fuel pumps and underground storage tanks 
compatible with these fuels. DOE has been working with 
Underwriters Laboratories and pump manufacturers to accelerate 
production of new pumps that can operate with E15 and higher 
blends. Pumps capable of dispensing much higher blends, like 
E85, currently cost about 60 percent more than conventional 
dispensers or pumps. That's largely because of limited 
production volume. If these pumps were produced in quantity the 
differential cost could be down to a few hundred dollars per 
pump. We're also working to develop retrofit kits working with 
Underwriters Lab and the dispenser manufacturers to develop an 
inexpensive kit where you can build to an existing dispenser 
and retrofit it and get it approved.
    The funding could be made available for this through our 
DOE's existing State Energy Program funding and through 
Recovery Act funding. We've informed the states that this is 
possible. The Department, of course, is willing to work with 
this committee on any new ideas for moving these retrofits and 
the incentive for new pumps compatible with higher ethanol 
blends forward.
    As we take steps to break down the barriers to greater use 
of today's biofuels, DOE is also making investments into the 
next generation of biofuel technologies. The American 
Reinvestment and Recovery Act accelerated the investment in 
biofuels considerably. We were able to fund an additional 18 R 
and D projects which added to the 11 projects that were funded 
in 2007/2008. This has allowed us to explore a number of very 
interesting new technologies on a significant scale.
    These projects are helping scientists and entrepreneurs 
explore techniques for converting cellulose such as wood and 
corn stover waste to ethanol as well as technologies for 
converting corn and the cellulosic materials into drop in 
substitutes for gasoline diesel and jet fuel. To accelerate the 
development of these technologies, President Obama recently 
announced a goal of breaking ground on four commercial scale 
cellulose or advanced biofuels plants over the next 2 years. To 
meet this goal, the FY 2012 budget includes funding for both R 
and D and for a reverse auction which cellulose and advanced 
biofuel project sponsors would be able to compete for 
additional support.
    With support for such plants, advanced conversion 
technology could play a significant role in the next few years, 
and we're supporting two main pathways to achieve advanced 
biomass. One is thermo-chemical based on pyrolysis or just 
gasifying material. The second is advanced biochemical 
techniques using enzymes and other methods. Over the long term 
we think that both of these show considerable progress and have 
the potential for driving prices down so that they're fully 
compatible with petroleum based fuels.
    The President recently set of goal of reducing petroleum 
imports by a third by 2025. Together with increased fuel 
economy in vehicles and acceleration of electric vehicle 
deployments, biofuels are a critical part of our national 
effort to achieve this goal. The Administration is still 
formulating its position on the bill before this committee and 
welcomes the opportunity to continue working with the committee 
to advance our energy goals.
    I'd be happy to answer any questions.
    [The prepared statement of Mr. Kelly follows:]

   Prepared Statement of Henry Kelly, Acting Assistant Secretary for 
 Energy Efficiency, Office of Energy Efficiency and Renewable Energy, 
                          Department of Energy

    Chairman Bingaman, Ranking Member Murkowski and Members of the 
Committee, thank you for the opportunity to discuss the Department of 
Energy's biofuels program and the ``Biofuels Market Expansion Act of 
2011'' (S. 187).
    The transportation sector accounts for approximately two-thirds of 
the United States' oil consumption and contributes to one-third of the 
Nation's greenhouse gas emissions\1\. After housing, transportation is 
the second biggest monthly expense for most American families\2\. As 
the President said last week, ``In an economy that relies so heavily on 
oil, rising prices at the pump affect everybody.'' Biofuels are a key 
part of the solution. They can provide a costeffective alternative to 
oil imports that create business opportunities and jobs in the U.S. 
economy--including the economies in rural areas. The Administration has 
set a goal to help fueling station owners install 10,000 blender pumps 
over the next five years, to enable widespread use of E-15. DOE is 
supporting this goal through investment in research and development for 
the next generation of biofuels and new fueling stations technologies.
---------------------------------------------------------------------------
    \1\ http://www1.eere.energy.gov/vehiclesandfuels/pdfs/
vehicles_fs.pdf
    \2\ http://www.bls.gov/news.release/cesan.nr0.htm
---------------------------------------------------------------------------
    The Administration is focused on a range of challenges, and is 
prioritizing efforts that can accelerate the substitution of imported 
petroleum with home grown bio-based and renewable fuels. This requires 
a research and programmatic balance to help both new and existing 
biomass technologies permeate the market. I am pleased to report that 
we have made significant progress in this area. The Administration's 
Fiscal Year (FY) 2012 budget proposes to maintain this momentum.
    The ``Biofuels Market Expansion Act of 2011'' addresses several key 
barriers to increased use of biofuels. The bill would require 
automakers to make an increasing percentage of ``flexfuel'' vehicles, 
and includes a number of provisions to expand fueling infrastructure 
capable of handling higher ethanol blends. DOE is currently taking a 
number of steps to address these challenges.
    Prior to October 2010, the amount of ethanol that could be blended 
in gasoline for use in standard vehicle engines without modification 
was limited to 10 percent by volume. Through extensive vehicle testing, 
DOE worked closely with EPA to provide data needed to determine the 
potential impact of E15 (gasoline containing more than 10 volume 
percent and up to 15 volume percent ethanol) on compliance with vehicle 
and engine emission standards established under the Clean Air Act. EPA 
ultimately decided, based on DOE and other test data and analysis, that 
E15 may be introduced into commerce for use in model year (MY) 2001 and 
newer passenger vehicles once several conditions are met. This would 
allow the approximately 150 million MY 2001 and newer passenger 
vehicles on the road today to fuel with E15.
    DOE is also working with auto manufacturers to assess the viability 
of making new vehicles compatible with higher ethanol blends. DOE 
estimates approximately 3 percent (8 million out of approximately 240 
million) of passenger vehicles on the roads today are already 
manufactured to be compatible with blends up to 85 percent. Roughly 15 
percent of new vehicle sales are also compatible and domestic 
manufacturers have pledged to increase this fraction to 50 percent by 
model year 2012 (18-20 percent of total sales, including a few non-
domestic models). DOE estimates that the per-vehicle cost is in the 
range of $50-$100/vehicle.
    Moving E15 and higher blends also requires work to ensure that fuel 
pumps and underground fuel storage tanks are equipped to handle these 
fuels. DOE is working with pump manufacturers to accelerate production 
of new pumps that can operate with E15 and higher ethanol blends. While 
pumps capable of dispensing very high ethanol blends such as E85 
currently cost 1.6 times as much as the conventional pumps 
(conventional pumps cost $15,000, E85 pumps cost $25,000) DOE 
analysis suggests that the cost differential could be driven down to a 
few hundred dollars if the high-blend pumps were manufactured in 
volume. DOE is working with pump manufacturers to develop and market 
retrofit kits to upgrade existing pumps to be compatible with E15. In 
addition, DOE is working with states, who are able to use State Energy 
Program or Recovery Act funding, to upgrade existing fuel pumps to be 
compatible with higher ethanol blends. DOE is also collaborating with 
the U.S. Department of Agriculture in this area. The Department 
welcomes the opportunity to work with this Committee to further 
encourage the installation of new pumps equipped to handle higher 
ethanol blends and to retrofit existing pumps.
    As we take steps to break down barriers to greater use of today's 
biofuels, DOE is also making investments in next-generation biofuels 
technologies. The American Reinvestment and Recovery Act of 2009 (the 
Recovery Act) accelerated investment in innovative biorefineries, 
providing funding for an additional 18 RD&D projects, in addition to 
the 11 projects previously funded in 2007 and 2008. Through these 
projects, DOE is helping scientists and entrepreneurs explore 
technologies for converting cellulose such as wood waste and corn 
stover, as well as technologies for products other than ethanol--
including drop-in substitutes for gasoline, diesel, and jet fuel. To 
help accelerate the development of these technologies, President Obama 
announced a goal of breaking ground on four commercial-scale cellulosic 
or advanced biofuels plants over the next two years. To help meet this 
goal, the FY 2012 budget includes funding for a reverse auction in 
which cellulosic and advanced biofuels project sponsors would compete 
for additional support.
    With support for such plants, advanced conversion technologies 
could play a significant role in a commercial biofuels market within a 
few years. DOE is supporting two main pathways to convert biomass into 
biofuels in a cost-effective manner: (1) thermo-chemical conversion, 
based on pyrolysis or gasification, and (2) biochemical conversion 
using enzymes, fermentation, and other mechanisms, including algae. 
Over the longer term, research advances showing promise in the 
laboratory could greatly increase the productivity and reduce the cost 
of biochemical processes using engineered yeast, bacteria, and other 
organisms.
    The President recently set a goal of reducing petroleum imports by 
one third by 2025. Together with increased fuel economy in vehicles, 
and acceleration of electric vehicle deployments, biofuels are a 
critical part of a national effort to achieve this goal. The 
Administration is still formulating its position on the bill before 
this committee and welcomes the opportunity to continue working with 
the committee to advance our energy goals.

    The Chairman. OK. Thank you very much.
    Let me ask just a few questions here. Your statement about 
DOE is working with pump manufacturers to develop and market 
retrofit kits to upgrade existing pumps to be compatible with 
E15. How does that relate to the concern that we just heard 
from Mr. Eichberger about the difficulty in getting approvals 
or certification on pumps that people with convenience stores 
are faced with? How do those issues relate?
    Mr. Kelly. We're trying to work through that exact issue. 
The first is to make sure that we have the technology that 
actually works and find whether we can get the kit itself 
certified. Then we have to find a way to work with people to 
make sure that they have a retrofit at their facility that 
meets all of the local and national regulations. We're working 
through that right now.
    The Chairman. So what is the timeframe for getting that 
done?
    Mr. Kelly. I will have to check with my experts. They are 
confident that we can at least begin testing in the next few 
months. I can get back to you with the exact schedule.
    The Chairman. Yes, that would be useful to know how quickly 
that's going to happen.
    [The information referred to follows:]
    The Department can only supply estimates for the timeline because 
it does not control the critical tasks required to test and list 
(certify) retrofit kits with UL (Underwriter's Laboratory). The design 
of the kits is the responsibility of the dispenser manufacturers. The 
Department has agreed to pay for the required testing with UL once the 
manufacturers supply a suitable kit. Without Department support for the 
testing there would be no business case for either manufacturer to 
complete their design changes and testing expeditiously because the 
expected profit margin would likely not cover the initial investment. 
The Department is actively urging both dispenser manufacturers to come 
up with retrofit kits as quickly as possible and has been in continuous 
contact with UL to arrange for testing as soon as the kits are 
available. The testing is anticipated to take at least 16 weeks once it 
begins. At the current time, the Department is hopeful a retrofit kit 
will be available to test in several months, which could enable at 
least one listed retrofit kit by the end of the calendar year if no 
development issues are encountered and no testing failures occur.

    The Chairman. Maybe you're not the right person to ask on 
this. But on some of the other issues that were raised here in 
the previous panel has the Administration taken a position on 
the current structure of subsidies that we have for production 
of ethanol as to what we ought to be doing with that?
    Mr. Kelly. I know that they are in conversation with the 
Senate on this subject. I don't know that we have a firm 
position on this. We obviously went forward with the proposal 
for continuing funding this year, but----
    The Chairman. What's your take on this whole business? 
We've had this focus here for some years now on developing the 
infrastructure and producing more vehicles that will be capable 
of using E85. That's something of a different mission or goal 
than trying to say let's just increase the amount of ethanol 
that we're blending into our fuel mix.
    Does it make sense for us to keep pursuing this E85 idea? 
Instead of just saying, OK, we're going to go to E30 and have 
that be the standard in the U.S. or E25 or whatever the right 
figure is so that we don't have--we've got this bifurcated 
circumstance in here where we've just got EPA saying it's OK to 
use E15 if the car is of a certain vintage. It's OK to use E85 
if you can find it.
    But, it seems as though we really just haven't come down 
with a concrete standard here that everybody can plan against.
    Mr. Kelly. We are trying to make sure that we have a 
diverse portfolio of options.
    The Chairman. Usually that means ethanol or gasoline or 
electricity. It doesn't mean E15, E85. It seems like at some 
point having so much diversity and in the different mixtures is 
counterproductive.
    Mr. Kelly. We haven't supported a particular mixture. We 
certainly have supported----
    The Chairman. But I guess my guess my question is shouldn't 
you? Shouldn't the Administration say here's what we're going 
to have and everybody, the car manufacturers can plan on it. 
The ethanol industry can plan on it. The convenience stores can 
plan on it.
    This is what it's going to be from now until 2020 or 
whatever date.
    Mr. Kelly. The fact is the total amount of biomass that the 
U.S. can produce that would be not harmful to the environment 
or compete with food is probably about a billion tons a year. 
The question is how do you best want to use that. There are 
lots of markets including jet fuel and diesel which are things 
that the Department of Defense wants as well as vehicle 
markets.
    It's premature to say that any particular use of this 
scarce biomass resource is clear to us at this point. We are 
optimistic that we're going to be able to convert the fuel into 
something which can be directly substituted for things like jet 
fuel. That's an attractive outcome.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you. Thank you, Dr. Kelly.
    You mentioned the competition between biofuels and fuel. I 
want to ask you a question about the competition with biofuels 
and water. I've got five different questions that I'm going to 
submit to you for the record.
    But last week we had a hearing on several hydropower bills 
and discussion about the intersection, the nexus, between 
energy and water and how critical that is and in a hand out 
that we got from one of our witnesses here, Catch 22 water 
verses energy. This is Michael Webber.
    He states, ``The production cycle with biofuels from 
growing irrigated crops on a farm to pumping biofuel into a car 
can consume 20 or more times as much water for every mile 
traveled in the production of gasoline. When scaling up the 
water could well become the limiting factor.'' He speaks to the 
controversy in several cities or municipalities in Illinois 
that opposed an ethanol plant's petition to withdraw two 
million gallons a day to produce the ethanol. Resistance will 
grow as rancher's wells run dry.
    Whether the proponents realize it or not any plan to switch 
from gasoline to electricity or biofuels is a strategic 
decision to switch our dependence from foreign oil to domestic 
water. Just because I've been thinking a lot about water we had 
some good testimony on this issue from Department of Energy. 
I'd ask you your opinion on this.
    Are we, within the Department, looking critically enough at 
this issue? When we talk about these policies that will build 
out, the ethanol, the biofuels, in an effort for us to consume 
less oil and there's essentially a tradeoff here. Because we 
are moving to utilization of another commodity if you will, 
that of water, which is exceptionally valuable and also limited 
in many, many areas.
    Can you just discuss that very quickly?
    Mr. Kelly. I don't think this is something that can be 
discussed terribly quickly, but----
    Senator Murkowski. That's probably true. That's not a fair 
ask of you.
    Mr. Kelly. No. It's a very serious question and one that 
we're examining. We would certainly be pleased to answer 
questions if you don't think that we're looking at it carefully 
enough.
    But one thing that we're intrigued by is if you're moving 
to cellulosic biofuels you can do things like take corn that 
was grown and use the seeds for fuel or food. But then there's 
stover, which is what's left over, and use that material to 
produce a fuel.
    That doesn't add a lot of additional water, as you've grown 
the corn already. Some of these other crops can be grown in, 
like sugar canes and other things that are grown in places 
where they don't have a big impact. You certainly want your use 
of scrap material. Again, the material has already been 
produced for wood or pulp or paper, for some other reason you 
can use that scrap material. But as you start pushing to very 
large volumes then clearly you do have to take greater and 
greater care.
    Senator Murkowski. Do you think that our policies as we're 
talking about, you know, how we build this out? How we build 
out the biofuels? Are we looking at the issue of our water 
usage and the water nexus in the creation of energy, are we 
looking at that critically enough or are we moving to these 
policies and saying well it's important that we reduce our 
reliance on oil?
    We're not factoring in sufficiently the issue of water.
    Mr. Kelly. It is true that virtually every major energy 
facility, as I'm sure you discovered in this hearing, uses a 
considerable amount of water.
    Senator Murkowski. Some are worse offenders than others. 
Apparently the biofuels is one of the worst offenders, at least 
in the presentation that we had last week, so. But it is 
something that I worry that we are not focused enough on.
    We're looking at exciting technologies. We're looking at 
ways that we can advertise that we are reducing our consumption 
on oil. But we are not factoring in the very critical 
assessment that must go on when we look at water and our water 
consumption, how that figures into the equation.
    I'd like to know a little bit more in terms of what DOE is 
doing. Because it seems like a get a little bit from one 
hearing and then a little bit from another hearing. But I'm 
interested in understanding the nexus just a little bit more.
    So if you can help us out with that I'd certainly 
appreciate it.
    Mr. Kelly. Absolutely.
    [The information referred to follows:]
    EERE is doing extensive work to manage water use in producing 
renewable energy. For biomass, there are two primary concerns: 
production of the feedstock which may receive irrigation water, and the 
conversion of that feedstock into a liquid fuel for transportation. 
EERE's work on feedstocks is focused on crops such as switchgrass that 
do not require irrigation. In contrast, about 14% of the total U.S. 
corn crop is irrigated, resulting in a weighted average irrigation 
requirement for the corn used to produce biofuels of about 67 gallons 
of water used for irrigation per gallon of ethanol produced (http://
www.transportation.anl.gov/pdfs/AF/557.pdf). To convert biomass 
feedstocks to ethanol, about 3 to 7 gallons of water are used to 
produce a gallon of fuel (http://www.swhydro.arizona.edu/archive/V6_N5/
feature4.pdf). Water consumption in the conversion process is being 
reduced as one component of a broader set of efforts to improve the 
efficiency and lower the cost of ethanol production.
    Solar photovoltaics and wind do not require water to produce 
electricity. For thermal technologies such as concentrating solar 
thermal power and geothermal, attention has been focused on using dry 
cooling systems that have minimal use of water, rather than 
conventional evaporative cooling. This was the focus of a report to 
Congress in 2009, ``Concentrating Solar Power Commercial Application 
Study: Reducing Water Consumption of Concentrating Solar Power 
Electricity Generation'' (http://www1.eere.energy.gov/solar/pdfs/
csp_water_study.pdf).
    These activities reflect the focused work being done which includes 
water as an important component of a host of factors that must be 
optimized together in order to provide the most robust, cost-effective, 
sustainable energy solutions possible.

    To brag a bit, we're working on photovoltaics and wind.
    Senator Murkowski. Right.
    Mr. Kelly. Which fortunately don't require a lot of water. 
Some of these solar thermal ones, the original plants, do use 
water. But we're trying to minimize that in advanced designs.
    Senator Murkowski. Good. I look forward to discussing that 
with you. I've got some additional questions that I'll submit 
for the record.
    Thank you, Mr. Chairman.
    Thank you very much. I think it's been a useful hearing. We 
will adjourn the hearing at this point.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]

                               APPENDIXES

                              ----------                              

                               Appendix I

                   Responses to Additional Questions

                              ----------                              

      Responses of Bill Brady to Questions From Senator Murkowski

                         CELLULOSIC SHORTFALLS

    Question 1. Cellulosic biofuels have been slow to enter commercial 
production. When do you believe production will catch up to the annual 
volumes listed in the Renewable Fuels Standard?
    Answer. The 16 billion gallon mandate included in the Renewable 
Fuels Standard is critical to attracting additional investment to build 
out the cellulosic biofuel sector. More than 10 cellulosic biofuel 
companies are very far along in plans to construct the first commercial 
scale projects. Assuming financing issues can be worked through, 
several of these facilities can be in production in 2013. At that 
point, the industry would need to build 20 facilities a year to meet 
the 16 billion gallon mandate in 2022. The construction infrastructure 
exists for this type of build out. During the peak of construction in 
the corn ethanol industry, over 1.5 billion gallons of production 
capacity was being put on line per year.

                               LOGISTICS

    Question 2. In your written testimony, you note that Mascoma is 
planning to make 40 million gallons of cellulosic ethanol each year at 
the Kinross, Michigan plant. For perspective, can you explain how much 
material that will require each year? How many tons of biomass will be 
used to produce 40 million gallons of fuel?
    Answer. The Kinross facility is situated in an area where annual 
growth significantly outpaces existing harvest. Even with our facility, 
the area will continue to have an annual growth surplus. Initially, 
this facility will use 1 million wet tons (500,000 dry tons) of 
pulpwood to produce the 40 million gallons in fuel. We expect our 
technology to continue to improve our yield over time.

                                PIPELINE

    Question 3. In your testimony, you state that you support S. 187. 
Are you concerned that if an ethanol pipeline receives a loan guarantee 
and is ultimately constructed, it could affect the Northeast's market 
for cellulosic ethanol made by companies like yours?
    Answer. The RFS2 caps corn ethanol at 15 billion gallons. The 
remainder of the RFS2 will be met with advanced and cellulosic biofuels 
including 16 billion gallons of cellulosic biofuels. Upon breaking 
through the existing blend wall, the cellulosic ethanol industry will 
make up these additional gallons.
    An ethanol pipeline does not threaten this market. Instead, it 
could make ethanol an even more cost effective option in the fuel 
supply. This could help build out additional ethanol infrastructure 
that can be beneficial to cellulosic ethanol companies. That said, 
given the current federal budget constraints, we would prioritize an 
ethanol pipeline below other infrastructure issues including FFVs and 
blender pumps.

                               SUBSIDIES

    Question 4. In considering a 10-year extension for the tax credit 
for cellulosic ethanol, we could quickly find ourselves in a situation 
where the costs become unsustainable. If this credit is extended, how 
could it be offset? Do you believe it should be phased down, or made 
variable with the price of oil?
    Answer. Consistency of tax incentives in the next 10 years is 
critical to attracting investment for our first facilities. Investors 
are making investment decisions, in part, based upon expectations for 
continuation of tax incentives in the space. Given the history of tax 
incentives for the oil and gas industry, investors continue to evaluate 
whether the Federal government will provide similar treatment to 
advanced biofuel technologies. That said, after initial buildout of the 
industry is complete and as our production costs continue to come down 
over time, it would be natural to have a discussion about how to refine 
incentives put in place to spur initial investment in the industry.

                            PRODUCTION COSTS

    Question 5. Your written testimony states that Mascoma's ethanol 
will be ``cost-competitive'' with oil at $75 per barrel. You also urge 
a 10-year extension of cellulosic ethanol's production tax credit. Can 
you explain the apparent discrepancy? With oil currently above $100 a 
barrel, shouldn't there be less of a need for a large, long-term tax 
credit?
    Answer. Mascoma is cost-competitive with oil at $75 per barrel when 
you include the cellulosic production tax credit. Our goal is to be 
competitive with $50 per barrel oil without tax incentives as we 
continue to make developments in our technology. We believe we can hit 
this milestone within the next decade.

                            PLANT ECONOMICS

    Question 6. Your Kinross, Michigan facility is estimated to cost 
$350 million. Does that include your feedstock costs, your operation 
and maintenance costs, or any distribution costs? How much do you 
expect your next facility, after Kinross, to cost?
    Answer. The $350 million cost is the capital cost for our first 
facility. Capital costs will decrease for future facilities. We expect 
that a second green-field facility will see significant savings and 
cost $300 million. Our feedstock, operation and maintenance costs will 
be $1.50 per gallon at startup. We expect continued decreases in these 
costs over time.

                     REGIONAL VS. NATIONAL APPROACH

    Question 7. Given all of the challenges associated with scaling up 
biofuels usage--ranging from production costs to compatibility with 
vehicles and infrastructure--would it make more sense to focus on a 
regional, rather than national, approach to deployment? After reaching 
the blend wall, would it be more cost effective to grow the market for 
biofuels in the Midwest before looking to expand it throughout the rest 
of the United States?
    Answer. Use of higher blends is critical to meeting the levels of 
ethanol use mandated in the RFS2. This requires significant increases 
in both FFVs and blender pumps.
    One recent analysis indicated that a likely way to meet the RFS 
mandate include:

          1) All existing non-FFVs running on E15;
          2) Automakers produce 100% of their cars as FFVs beginning in 
        2015; and
          3) These FFVs run on E85 for 33% of the time.

    This scenario argues for focusing FFVs and blender pumps in highly 
populated areas where the most cars and gas stations are focused. 
Rather than focus on the Midwest, policies should focus on fostering 
car and pump infrastructure in large urban areas where gasoline demand 
is greatest.

        Response of Bill Brady to Question From Senator Johnson

    Question 1. Can you elaborate on the infrastructure needs of 
cellulosic ethanol as compared with grain-based ethanol? If we build 
out infrastructure now for our current biofuel market, will this also 
accelerate development of a market for the next generation of biofuels 
from cellulosic sources?
    Answer. Developing automobile and pump infrastructure is critical 
to the cellulosic ethanol industry. Investors understand the 
implications of the existing blend wall and want to know that there 
will be room in the transportation fuel marketplace for our product. 
Investors want to see ethanol infrastructure align with the RFS2 
mandates.
                                 ______
                                 
    Responses of John Eichberger to Questions From Senator Murkowski

                         MISFUELING E15+ BLENDS

    Question 1. In October 2010, a spokesman for your organization, 
speaking about the potential for misfueling with E15, said that, ``The 
easiest way to remedy this situation is to mandate that everything's 
full-serve, that you do not allow the customer to have the opportunity 
to misfuel.'' Can you estimate what it would cost for every service 
station to revert back to full service? Do you expect that sort of 
shift will be necessary with blends above E10? If liability is not 
addessed for E15 or higher blends, can you discuss the negative 
economic consequences that could result?
    Answer. With reference to the quote attributed to my NACS 
colleague, it is important to note that some have suggested that this 
may be the easiest ``solution'' to prevent misfueling, however NACS 
does not believe this is a viable nor effective option for a variety of 
reasons. First, the costs would be unsustainable. The average starting 
hourly salary for an entry-level convenience store employee in 2009 was 
$7.67. On average, a convenience store is open 157.8 hours each week. 
To ensure that an E10+ dispenser was staffed full-time would require an 
additional $1,210 per week in hourly wages paid, not including 
affiliated employment taxes. On an annual basis, this would require an 
additional $62,920 per year. If every service station in the nation 
(159,006) employed one worker to provide full-service at just one 
dispenser, the cumulative cost to the industry would be $10 billion.
    Further, there are no assurances that a full-service E15 dispenser 
would prevent misfueling. There are many consumers who are unaware of 
the make and model of the vehicle they are driving, let alone the model 
year. It would be impossible for the station attendant to identify 
those vehicles authorized to use E15 from those which are not, and if 
the consumer is unable to accurately provide that information the 
chance of misfueling will remain. In addition, if there is an economic 
incentive to the consumer to fuel with E15 (the relative price of 
ethanol and the associated tax credits could yield a lower retail price 
for E15 vis-a-vis E10), the consumer may simply misrepresent the model 
year of the vehicle being fueled.
    NACS believes there are no full-proof options available to prevent 
misfueling because any physical countermeasures would require 
retrofitting millions of vehicles. Consequently, NACS believes that the 
onus for ensuring compliance with Federal law should be placed on the 
individual responsible for introducing the fuel into the fuel tank, 
whether that be the self-service customer or the full-service 
attendant. Any liability for violating the Clean Air Act or for 
damaging the engine should reside with that individual. Compliance with 
the labeling program being developed by the Administrator of the 
Environmental Protection Agency should satisfy the retailer's 
responsibility to warn the consumer.
    Failure to reform the liability provisions surrounding fuels like 
E15 to protect those not directly responsible for the misfueling (i.e., 
the retailer who complied with the labeling requirements of the EPA and 
any other party not involved in the act of misfueling) could dissuade 
many retailers from offering such fuels. Without reform, retailers 
could face fines from EPA for violating the Clean Air Act (fines can be 
assessed up to $37,500 per violation), could be sued under the private 
right of action that exists within the CAA or could be sued by the 
engine owner for voiding the engine's warranty, damaging the engine or 
perhaps causing injury to the engine's user. Whether such lawsuits 
would be successful is unclear, but the retailer would have to expend 
significant funds to mount a defense and that might not be a viable 
option--in 2009 the average per-store pre-tax profit for a convenience 
store was only $33,170.

                               LIABILITY

    Question 2. In your testimony, you note that misfueling liability 
and general liability exposure are some of the most important 
constraints for more ethanol entering the market. Can you explain what 
would happen if liability is not addressed before higher blends reach 
the market? Do you believe that fuel wholesalers and retailers may 
decide to not sell the higher blends? Who should be liable for any 
potential damages that result from higher ethanol/gasoline blends?
    Answer. I believe my response to question one addresses the 
questions regarding what would happen if misfueling liability were not 
addressed prior to higher blends reaching the market and who should be 
liable for potential damages the result from misfueling. Exposure to 
such liability could very well prevent many retailers from offering 
higher ethanol/gasoline blends.
    Smaller retailers who operate in markets where consumers are 
heavily vested in the agriculture community and where demand for 
ethanol is strong may decide to enter the market even in the absence of 
such liability reform. Their cost-benefit analysis is very different 
from that of a larger operator who may operate in markets where support 
for ethanol is less robust. Large operators may determine they face 
higher risks of consumer complaints associated with such fuels and may 
determine their risk of liability might exceed the potential benefits 
of offering the new fuel.
    The issue concerning general liability exposure is potentially more 
significant. The motor fuels industry is very hesitant to adopt new 
fuels or fuel additives that may at some point in the future be 
determined to be defective products. Recent experience, when fuels 
mixed with the additive MTBE were declared defective, resulted in 
multi-billion dollar class action lawsuits that are ongoing today. 
Legal expenses alone are in the hundreds of millions of dollars.
    This experience will likely deter many of the larger companies from 
entering new product markets without some assurance that they will not 
be retroactively held liable if in the future it is decided to declare 
these fuels defective and revoke the authorization to sell them. For 
the outlets selling fuel under the brand of a refiner (representing 
about 50% of the retail facilities in the country), it is likely that 
the supply contract will prohibit that location from selling a product 
with more than 10% ethanol. The Energy Information and Security Act of 
2007 included amendments to the Petroleum Marketing Practices Act to 
ensure that branded retail locations could sell renewable fuels 
provided they were sufficiently debranded--however, the definition of 
renewable fuels in this section applied only to E85. (PL 110-140 
Section 241)
    The fact that EPA has approved E15 for only a subset of the engine 
population raises concerns that the product may cause engine 
performance or safety issues. In light of this situation, the concern 
about potential liability associated with the manufacture or sale of 
this product is elevated. Consequently, absent meaningful liability 
reform (both misfueling and product liability) it is likely that a 
majority of retail facilities will not assume the risk of selling a new 
fuel.

                         TECHNOLOGY NEUTRALITY

    Question 3. Near the end of your written testimony, you recommend 
that Congress ``refrain from pre-selecting the `fuel of the future' and 
allow the market to determine the product that will most benefit 
consumers and the economy.'' Please expand on that statement. What 
would the policy look like if this recommendation was followed?
    Answer. Currently, there are limited fuel choices available in the 
market: traditional petroleum products, ethanol and biodiesel. Other 
options are very limited in market penetration and do not show much 
promise to expand their market share. In such a situation, it is 
understandable that legislators would focus on promoting the expanded 
market development of products with which they are familiar.
    Renewable fuel debates in Congress typically focus on the 
feedstocks used to produce the fuels. The Energy Independence and 
Security Act developed a renewable fuels standard based on feedstock 
and emission characteristics, limiting the market use of corn-based 
ethanol and providing a framework for cellulosic ethanol to support the 
program. However, whether ethanol is derived from corn, sugar cane or 
cellulose, it remains ethanol and presents the same infrastructure 
hurdles.
    In setting future targets, Congress could establish a target for 
vehicle and equipment compatibility standards based upon today's 
available options, perhaps setting a standard for an E40 fuel. If 
Congress proceeds in this manner, the resources available for 
developing alternative, innovative fuel products could evaporate and 
the possibility of new fuels that are more environmentally progressive 
and more compatible with existing vehicles and refueling equipment 
could evaporate with it.
    NACS is very interested in the development of new fuel options and 
providing opportunities for consumers to determine which fuel products 
will power the future of our transportation needs. Congress can provide 
guidance by developing specific criteria that new fuels must meet 
(i.e., compatibility and performance standards), thereby providing 
engine and equipment manufacturers a target for compatibility without 
stifling innovation.

                               FUEL SALES

    Question 4. In looking at state-by-state data on E85 sales, it 
appears that the presence of a pump and the availability of the fuel is 
no guarantee that it would be sold in significant quantities. Do you 
think we could face a similar situation with blender pumps, if their 
installation is mandated?
    Answer. NACS believes you could face a similar situation with 
blender pumps, even if they are not mandated. The challenge with this 
transition to renewable fuels is that no vehicles are required to run 
on them. As I mentioned in my testimony, prior fuel transitions were 1) 
backwards compatible and 2) mandatory for new vehicles. Retailers knew 
that the new fuel would be purchased because 1) every engine could use 
it and 2) new engines had to use it. That is not the case now, so 
consumer demand is very uncertain.
    In most circumstances, fuel purchase decisions are driven by price. 
In a survey of 1,200 consumers in 2009, NACS found that 70% of 
consumers select their fuel retailer based upon price. We also found 
that 26% of consumers will drive 10 minutes out of their way to save as 
little as 3 cents per gallon. In such a market, the price of an 
alternative fuel will play a significant role in level of consumer 
demand.
    Sales of E85 have been slow in many markets because it cannot be 
sold for a competitive price. Because ethanol has fewer BTUs per 
gallon, E85 delivers between 25-30% fewer miles per gallon. 
Consequently, for the consumer to break even E85 must be priced 25-30% 
below regular gasoline.
    This is not always possible to do, and E85 sales suffer. Fuels like 
E15 will deliver miles per gallon that are more similar to regular 
gasoline, so the price differential may not need to be as severe. In 
fact, the mileage difference between E10 and E15 may be negligible 
while the price of E15, due to the relative cost of ethanol and the tax 
credit applied, may be more attractive. This could drive consumer 
interest.
    However, the authorization to use E15 only in certain vehicles and 
engines, combined with the auto industry's warranties covering only up 
to E10 and the skepticism the auto makers have expressed about the 
fuel's use in legacy vehicles, could substantially dampen potential 
demand.
    Retailers are aware of consumer perceptions and potential 
marketability of new products. Therefore, if the cost of entry to these 
new fuel products can be lowered by changing the certification 
procedures for equipment and providing liability protection for law-
abiding retailers, more may be willing to try new fuels in the market. 
If the fuels are not accepted by their customers, the retailers' 
investment is minimal and they can revert to traditional fuels. 
However, if the cost of entry is substantial (new equipment may cost 
$120,000 or more) the retailers' willingness to take a chance on a new 
fuel is considerably reduced.

                               E15 SALES

    Question 5. Could you list all of the steps that you believe must 
be taken before fuel retailers will sell E15 at their stations? How 
many of those steps have been taken so far, and how many remain 
unresolved as of today?
    Answer. To help answer this question, I have attached a document 
published by the Renewable Fuels Association outlining the numerous 
steps that must be taken to make E15 a lawful fuel for use in the 
market. I believe many of these steps are in progress, but have not yet 
been completed. I have also attached a March 24, 2011, letter from the 
Environmental Protection Agency outlining the steps remaining before 
E15 is a lawful fuel.
    Assuming the fuel satisfies all of the criteria listed in the 
attached documents, the following steps are required for the retailer 
to offer E15:

          1) Equipment.--Retailers must ensure all equipment satisfies 
        federal and local requirements for compatibility. Regulations 
        of the Occupational Safety and Health Administration require 
        that ``flammable and combustible'' liquids be stored in 
        equipment that has been listed by a nationally recognized 
        testing laboratory, such as Underwriters Laboratories. Tank 
        insurance policies, state tank fund programs, bank loans and 
        many local regulations require compliance with this regulation. 
        Consequently, the retailer must ensure its dispensers and 
        underground storage tank systems are listed as compatible with 
        E15. This could be complicated because there were no UL listed 
        dispensers for ethanol concentrations above 10% until spring 
        2010. Further, many retailers are not the original owners of 
        the facility and, given there are no requirements that 
        underground storage tank system documents and details must be 
        transferred at the time a facility is sold, many retailers may 
        not know what specific equipment they have underground to 
        determine if it is listed. The attached document from RFA 
        references that such equipment ``will have to operate on an 
        exception basis unless or until equipment is listed.'' There 
        are no exceptions to the requirement that retail equipment be 
        listed by a nationally recognized testing laboratory.
          2) Demand.--Retailers must determine whether there is 
        sufficient demand to justify the expenditure to secure 
        compatible equipment. Only 3% of the vehicles in the market are 
        flexible fuel vehicles manufactured and warrantied to operate 
        on E10+ fuels. Another 62% (2001 and newer vehicles) of the 
        market is authorized by EPA to operate on E15, but the auto 
        manufacturers do not support this decision and do not warranty 
        their vehicles to run on this fuel. If the auto industry 
        determines that use of E15 in these vehicles is acceptable, 
        then a national marketing campaign will be essential to educate 
        the consumers about the appropriate use of E15 and drive 
        consumer demand for the product. Then, the economic calculation 
        for a retailer to invest in upgrades to sell E15 might more 
        positively justify the decision.
          3) Misfueling.--Retailers cannot sell E15 until the EPA 
        finalizes regulations governing the labeling of E15 dispensers. 
        NACS has learned that during the week of April 18, 2011, the 
        Agency had submitted a final rule to the Office of Management 
        and Budget. Once this rule is published, retailers will know 
        what is required of them to provide appropriate notice to 
        consumers regarding the authorized and prohibited uses of E15. 
        However, these labels will not provide much legal protection to 
        retailers. In the absence of legislation that gives these 
        labels the force of law, retailers may still be subject to 
        violation or litigation under the Clean Air Act if a self-
        service consumer misfuels a non-authorized engine with E15. 
        Further, that customer might sue the retailer in the event E15 
        voids the engine warranty or causes engine failure. The 
        retailer must comply with the labeling regime published by EPA, 
        but without further congressional action many retailers may not 
        be willing to accept the risks associated with consumer 
        misfueling.

                          INFRASTRUCTURE COSTS

    Question 6. In your testimony, you note that the blender pump 
mandate in S. 187 could cost nearly $5 billion, and it could cost 
around $70 billion to retrofit all dispensers and underground storage 
tanks. If equipment can be certified retroactively, however, how much 
could that reduce your industry's costs?
    Answer. It is difficult to specify the savings associated with 
recertification since it is impossible for us to know what equipment 
each retailer has at their facility. However, recent studies indicate 
that the gaskets and seals in dispensers pose the greatest challenge to 
E15 compatibility for these units. Underwriters Laboratories cited 
these studies as rationale for retracting their prior statements that 
most E10 listed dispensers could safely accommodate up to 15% ethanol 
blends. Consequently, if retailers could retrofit their existing 
dispensers to eliminate the incompatible components, rather than 
spending $20,000 on new dispensers their investment could be 
dramatically reduced.
    With regards to underground storage tank systems, certain 
components are generally recognized as compatible with high 
concentrations of ethanol but they are not specifically listed as such. 
Recertification of these units could save retailers substantial sums.
    In general, if the investment for any one retailer can be reduced 
from $120,000+ to less than $20,000, the potential for that retailer to 
enter the new fuel market is substantially increased. Likewise, the 
economic burden on government grant and tax programs designed to 
encourage such equipment would be dramatically reduced.

               Attachment 1.--Renewable Fuels Association

      REGULATORY SUPPORT NECESSARY FOR HIGHER LEVEL ETHANOL BLENDS

    The approval by the U.S. Environmental Protection Agency (EPA) of 
higher-level ethanol blends in gasoline is only the first step in the 
process of moving to ethanol blends beyond E10. As stated in the EPA's 
recent update on the E15 waiver application: ``It's also important to 
remember that there are a number of additional steps that must be 
completed--many of which are not under EPA or DOE control--to allow the 
sale and distribution of E-15. These include but are not limited to: 
testing on dispensing equipment; changes to state laws to allow for the 
use of E15; and completion of the fuels registration process by 
industry.''
    Beyond the approval of the E15 waiver request by the EPA, there 
remain several regulatory challenges, including:

EPA Fuel Additive Registration
   All new fuel additives must be registered with the EPA under 
        40CFR79
   Registration process is the submission of evaporative and 
        combustion emission species representative of the new fuel 
        blend
   Health effects testing is underway for higher level ethanol 
        blends
EPA Extension of 1 lb. Waiver of Reid Vapor Pressure (RVP) Regulations
   Nonattainment areas (areas required to use reformulated 
        gasoline (RFG)) are granted a one pound per square inch (1psi) 
        RVP waiver for blends containing nine to ten percent ethanol 
        (40CFR80.27)
   RFG represents ?35 percent of the market
   15 percent ethanol blends do not increase the RVP greater 
        than 10 percent ethanol fuel blends; however, to maintain the 
        current unleaded gasoline profiles an extension of the 1psi RVP 
        waiver is needed
   The RFA has submitted the request both in the E15 waiver 
        request docket and in a separate letter (dated May 17, 2010) to 
        the EPA
EPA Detergent Certification Status
   Currently, all gasoline is required to contain a minimum 
        amount of detergent
   These detergents go through a certification process with EPA
   Additional amounts of ethanol are not expected to increase 
        deposit forming tendencies of gasoline; however, this 
        discussion is in the very early stage.
Fire Code and Retail Fueling Sites
   All retail fueling sites must meet both the local and state 
        fire code
   Most state fire codes require ``listed'' equipment 2
   Underwriters Laboratories Inc. (UL)\1\ has stated that the 
        current listing is for ethanol blends ``up to'' but not 
        including E15
---------------------------------------------------------------------------
    \1\ UL is an independent product safety certification organization 
that develops standards and test procedures for products, materials, 
components, assemblies, tools and equipment, chiefly dealing with 
product safety. UL also evaluates and certifies the efficiency of a 
company's business processes through its management system registration 
programs. UL is one of several companies approved for such testing by 
the U.S. Occupational Safety and Health Administration.
---------------------------------------------------------------------------
   All tanks, pumps, dispensers, nozzles, etc. will have to 
        operate on an exception basis unless or until equipment is 
        listed
Automaker Warranties
   Each vehicle has an owner's manual that includes a ``Fuel 
        Recommendation'' section noting warranty implications
   No vehicle owner's manuals recommend the use of ethanol 
        blends above 10 percent
   Implications are that if there is equipment failure while 
        using blends above E10, the vehicle warranty could be voided
Fuel Specifications
   States adopt ASTM\2\ fuel specifications into regulation
---------------------------------------------------------------------------
    \2\ Originally known as the American Society for Testing and 
Materials, ASTM is an international standards organization that 
develops and publishes voluntary consensus technical standards for a 
wide range of materials, products, systems, and services.
---------------------------------------------------------------------------
   The current ASTM specification for gasoline (D4814) limits 
        some of the volatility offsets to E10 which may be necessary 
        for E15
   The current ASTM specification for fuel ethanol (D4806) is 
        limited to use in 10 percent blends
   Current NIST\3\ HB130 limits the ethanol content to 10 
        percent in all gasoline blends
---------------------------------------------------------------------------
    \3\ The National Institute of Standards and Technology is a 
measurement standards laboratory which is a non-regulatory agency of 
the U.S. Department of Commerce.
---------------------------------------------------------------------------
   Technical representatives are currently discussing the 
        necessary modifications to both the ASTM fuel specifications 
        and NIST HB130
Octane Certification
   The Federal Trade Commission regulations and99 percent of 
        all state fuel laws require that a fuel's octane be certified
   Existing ASTM methods to measure and determine octane do not 
        include, nor exclude, blends above 10 percent ethanol; however, 
        test method precision is needed for these specific fuel blends.
   An ASTM task force is currently investigating the influence 
        of higher levels of ethanol on gasoline's octane and the 
        measurement process
   RFA precipitated this discussion and an active participant 
        in this data development
Safety and Handling
   There is no existing information on the safety and handling 
        of ethanol blended fuels above E10
   Laboratory tests show that traditional fire-fighting foams 
        (or, AFFF) can extinguish an E10 fuel fire
   The RFA is currently soliciting research support to evaluate 
        the effectiveness of these same fire-fighting foams with E15 
        fuel incidents

     Attachment 2.--Letter from the Environmental Protection Agency

     United States Environmental Protection Agency,
            Office of Enforcement and Compliance Assurance,
                                    Washington, DC, March 24, 2011.
John Eichberger,
Vice President, Government Relations, National Association of 
        Convenience Stores, 1600 Duke Street, Alexandria, VA.
Charles T. Drevna,
President, National Petrochemical & Refiners Association, 1667 K 
        Street, NW, Suite 700, Washington, DC.
Bob Greco,
Downstream and Industry Operations, American Petroleum Institute, 1220 
        L Street, NW, Washington, DC.
Carl Boyett,
President, Society of Independent Gasoline Marketers of America, 3930 
        Pender Drive, Suite 340, Fairfax, VA.
Dan Gilligan,
President, Petroleum Marketers Association of America, 1901 North Fort 
        Myer Drive, Suite 500, Arlington, VA.
Bob Dinneen,
President and CEO, Renewable Fuels Association, 425 Third Street SW, 
        Suite 1150, Washington, DC.
Re: Gasoline Ethanol Blends

    Dear Messrs. Eichberger, Drevna, Greco, Boyett, Gilligan, and 
Dinneen: The United States Environmental Protection Agency (EPA) has 
recently received a number of inquiries asking whether it is currently 
legal for retail gasoline stations to sell gasoline blended with more 
than 10% ethanol for use in motor vehicles and nonroad engines. EPA has 
granted conditional waivers to allow the use of gasoline containing 
between 10% and 15% ethanol (E15) in model year 2001 and newer light-
duty motor vehicles. The conditions associated with EPA's waivers, 
however, have not yet been satisfied. Thus, the Clean Air Act (Act) 
currently prohibits the sale of gasoline containing more than 10% 
ethanol for use in gasoline-only vehicles and engines.\1\ Selling E15 
gasoline for use in certain gasoline-only vehicles and engines will 
only become legal when the waivers' conditions, including the elements 
discussed below, are met.
---------------------------------------------------------------------------
    \1\ A ``gasoline-only vehicle or engine'' refers to a motor vehicle 
or nonroad engine that has been certified by EPA to meet emissions 
standards using gasoline containing up to 10% ethanol.
---------------------------------------------------------------------------
    The conditions in the El5 waivers are designed to mitigate the 
potential for misfueling of E15 in vehicles, engines, and equipment for 
which E15 is not approved. These conditions include labeling 
requirements for pumps dispensing E15, product transfer document 
requirements, and participation in a compliance survey at fuel retail 
dispensing facilities to ensure proper labeling of dispensers. EPA has 
also published proposed regulations to promote the successful 
implementation of the E15 partial waivers. The proposed regulations 
parallel the misfueling conditions on the El 5 partial waivers.
    In addition, Section 211(a) of the Act, 42 U.S.C. Sec.  7545(a), 
prohibits any fuel manufacturer from selling designated fuel, such as 
motor vehicle gasoline, unless it is registered with EPA. However, 
since the conditions associated with the El5 waiver have not yet been 
met, it remains illegal to blend more than 10% ethanol into gasoline 
sold for use in gasoline-only vehicles and engines. The Act does not, 
however, prohibit retail gasoline stations from selling gasoline 
blended with up to 85% ethanol for use in flexible-fueled vehicles or 
engines,\2\ and it does not prohibit the sale of gasoline containing up 
to 10% ethanol for use in gasoline-only vehicles and engines.
---------------------------------------------------------------------------
    \2\ A ``flexible-fueled vehicle or engine'' refers to a motor 
vehicle or nonroad engine that has been certified by EPA to meet 
emissions standards using E85 (85% ethanol and 15% gasoline), gasoline 
without ethanol, or any intermediate combination of gasoline and 
ethanol.
---------------------------------------------------------------------------
    Sections 211 and 205 of the Act, 42 U.S.C. Sec. Sec.  7545 and 
7524, authorize EPA to assess significant civil penalties for improper 
fuel blending. To avoid violations of the Act, EPA suggests that retail 
gasoline stations that sell gasoline blended with more than 10% ethanol 
for use in flexible-fueled vehicles or engines take appropriate steps 
to prevent gasoline-only vehicles and engines from being rnisfueled 
with fuel containing more than 10% ethanol.
    For example, the likelihood of violations can be reduced for a 
retailer selling fuel containing greater than 10% ethanol if the 
retailer affixes warning labels to all pumps dispensing this product 
informing the public that the product may only be used in flexible-
fueled vehicles or engines. EPA encourages fuel providers to employ 
other strategies at their facilities that are cost-efficient and 
effective in further reducing the risk of misfueling.
    If you have any questions regarding this matter, you may call Jeff 
Kodish, Fuels Team Leader, at (303) 312-7153.
            Sincerely,
                                         Phillip A. Brooks,
                                Director, Air Enforcement Division.
                                 ______
                                 

      Responses of Shane Karr to Questions From Senator Murkowski

                               FUEL SPECS

    Question 1. Near the end of your written testimony, you note that 
vehicles built to a certain fuel specification can ``deliver better 
fuel economy, better performance, and more cost-effective compliance 
with emissions standards.'' Can you explain what that means in more 
detail, and then explain the difference between a narrow 
specification--say, E30--as compare to a requirement that vehicles be 
able to run on blends up to E85?
    Answer. Automotive designs are similar in this regard to almost any 
other product engineering design; the narrower the design 
considerations or real-world constraints the more optimally the product 
can be designed to function. For example, a vehicle that has to be 
designed to operate on a large range of fuel blends (blends up to E85) 
at many different operating conditions is designed and calibrated 
differently, and less optimally, than a vehicle that is designed to run 
on a single fuel.
    There are many characteristics of a fuel. These include performance 
characteristics (such as octane) and chemical characteristics (such as 
sulfur content). Fuels with higher octane, when matched with engines/
vehicles optimized to the higher octane, enable the engine to be more 
energy efficient and deliver better fuel economy through increased 
compression ratio. When a vehicle must be designed to operate on a 
large range of fuel properties, the powertrain can only be optimized 
for the worst case scenario--all other design points are less than 
optimal. A vehicle driver expects a smooth start-up of a cold vehicle 
and a smooth re-start of a hot vehicle followed by smooth acceleration 
every time and in whatever environmental conditions. Fuels with closely 
controlled distillation characteristics, typically represented by a 
lower drivability index, enable the vehicle to give the customer the 
warm-up drivability that is expected while at the same time meeting 
rigorous emissions standards.
    Ethanol fuel provides another challenge because of the wide range 
of ethanol compositions in the fuels marketplace. Because ethanol 
content greatly affects gasoline volatility, the range of ethanol 
compositions increases the necessary calibration window and reduces 
optimization. Another example is the effect of sulfur in fuel on 
emissions performance. Sulfur is a well-known catalyst poison and fuels 
with low sulfur contents are essential to meeting in-use emissions 
standards. Lastly, in the case of an E85 flex-fuel vehicle, 
manufacturers must certify that the vehicle meets the standards on the 
entire range of fuel combinations which significantly increases the 
engineering workload and the vehicle cost beyond what would be needed 
with one fuel.

                               LEAD TIME

    Question 2. In your testimony, you noted that the auto industry 
would need sufficient ``lead time'' to comply with legislation 
requiring vehicles to run on a higher ethanol blend. What do you 
consider sufficient lead time? How long would it take to engineer, and 
then begin to manufacture, vehicles that ran on a higher blend?
    Answer. Manufacturers typically need about 5 years lead time to 
introduce products that are optimized to run on a new fuel blend. 
Primarily the lead time is required to optimize the combustion system 
for the characteristics of the new fuel to ensure satisfactory 
performance and durability. Lead time is also required to develop the 
emission control system for that specific fuel. This is especially 
important given that very low tailpipe emissions will be required under 
LEV3 and Tier 3 regulations. Also, it must be recognized that a 
manufacturer cannot redesign its entire product portfolio in a single 
year due to limited resources (people, time and money). Realistically, 
it would take about 4 additional years to optimize the entire product 
portfolio for the new fuel blend.

                               LIABILITY

    Question 3. You alluded to the need to address liability for any 
damages that result from higher ethanol blends. Could you explain your 
industry's position--or summarize the positions within your industry--
on liability, and how you think liability would ideally be established 
for higher ethanol blends?
    Answer. Addressing liability for misfueling is one of the most 
challenging issues with implementing higher ethanol blends into an 
existing market of engine products (vehicle, marine and off-road or 
non-road small engines) that were designed, tested, certified and 
warranted to E10. Trying to determine whether engine damage, especially 
in older vehicles or engines, is attributable to misfueling is 
complicated and costly. Fundamentally, no manufacturer wants to be at 
odds with a large segment of their customers. Widespread customer 
dissatisfaction with its product would be a bad outcome for any 
manufacturer, regardless of who is at fault.
    Consequently, any move to bifurcate the market with higher blends 
of ethanol must be accompanied first and foremost by a serious and 
meaningful effort to prevent misfueling. Automakers believe that one of 
the significant advantages of a prospective approach to introducing 
higher level blends into the national fuel pool is that it gives engine 
manufacturers, fuel retailers and other stakeholders the opportunity to 
work together with regulators to develop adequate countermeasures to 
minimize accidental misfueling.
    Nonetheless, no matter what measures are put in place, no mechanism 
guarantees that there will not be any misfueling. Automakers know from 
experience from the introduction of unleaded gasoline into the market 
that some level of misfueling is likely, whether it is intentional or 
not. In cases where consumers are inadvertently ignoring warnings or 
deliberately circumventing measures to prevent them from using blends 
that are not intended for their engines, manufacturers should not be 
forced to bear any liability, either for recalls or for damages.

                               MISFUELING

    Question 4. To help minimize the potential for misfueling with E15, 
the EPA has proposed a label to warn drivers not to put the fuel into 
older vehicles and other non-approved equipment. As proposed, do you 
believe that campaign will be sufficient to inform drivers about their 
choice of fuels, and sufficient to ensure that drivers do not misfuel?
    Answer. In the case of the E15 waiver and the proposed misfueling 
rule, EPA's approval of E15 use in some existing vehicles is in direct 
conflict with manufacturer recommendations and warranties. Automakers 
currently design, test, certify, and warrant all non-FFV vehicles to 
E10. Thus, EPA's blanket approval of E15 use in 2001 model year 
vehicles and newer will likely cause significant confusion in the 
marketplace, regardless of label design or misfueling strategy. It is 
true that previous introductions of new fuels--unleaded gasoline, 
reformulated gasoline, low sulfur gasoline, ultra-low sulfur diesel 
fuel--also faced bifurcated markets and misfueling potential, but there 
is a critical distinction here: the new fuels were required only for 
new vehicles, which are a small fraction of the market, but they were 
all ``backward compatible'' for older vehicle use. In other words, all 
vehicles, old as well as new, could use the new fuel without adverse 
consequences. This is not the case with E15.
    The Alliance views pump labeling as a necessary component of a 
misfueling strategy, but by itself, it will be insufficient to prevent 
misfueling by consumers, or potential damage to vehicle and non-vehicle 
equipment and emission systems. EPA concedes this point by using the 
word ``mitigate'' instead of ``prevent.'' The only question, then, is 
what will be the extent of the misfueling? EPA should postpone the 
introduction of E15 until the overall misfueling approach--including 
but not limited to labeling--is well developed, to enable affected 
parties such as automakers time to prepare. Such preparations may 
include, for example, the development and deployment of communication 
materials for customers.

                            FFV COMMITMENTS

    Question 5. It appears that automakers, anticipating greater 
volumes of ethanol production, could add flex-fuel capability to their 
cars and portray it as a competitive advantage. Please describe the 
Alliance's views on commitments to FFV production, as compared to 
government mandates. How many of your members have made voluntary 
commitments to produce flex-fuel vehicles? Is it reasonable to expect 
that more will make commitments in the future?
    Answer. As indicated in my testimony, the Alliance is not 
supportive of government picking winners and losers among vehicle 
technologies. We believe consumers should have the choice to purchase 
the vehicles that best suit their needs--whether they live in Alaska or 
Florida, in a large city or small town, or drive 5,000 or 15,000 miles 
per year.
    In 2007, the CEOs of General Motors, Ford and Chrysler stated their 
intent to make 50% of their fleets for sale in the US capable of 
operating on blends up to E85 by 2012, provided that adequate fuel and 
fueling infrastructure exists to make those vehicles desirable to 
consumers. The caveat is often forgotten. While no other manufacturers 
have made similar public commitments, several others have introduced 
FFV models to respond to market demand or regulatory incentives.
    If the FFVs produced by the Detroit companies alone actually used 
E85 rather than E10, the so-called ``blend wall'' would not exist. 
Instead, the average FFV on the road today uses about one tank of E85 
per year. There are a variety of reasons for the limited uptake of E85, 
including availability of fuel, price and performance relative to a 
gallon of E10.
    These challenges will not be solved simply by manufacturing more 
FFVs, which is why we believe it is time for a comprehensive review of 
how best to expand the use of biofuels in our nation's fuel pool. Any 
future commitments to produce vehicles with particular features would 
be made only in conjunction with a comprehensive and cogent set of 
policies ensuring that such vehicles will be a value proposition for 
our customers.

                               FFV COSTS

    Question 6. In your testimony, you note that ``the cost of making 
vehicles flex fuel capable is also expected to increase in the next few 
years as smog-forming emissions requirements are tightened.'' Please 
expand on that statement. How much do you think costs will rise?
    Answer. California currently has a stringent emissions standard 
called PZEV (Partial Zero Emissions Vehicle). An examination of 
emissions certification data would show that no OEM has marketed an FFV 
certified to this standard. California has indicated that they are 
planning on extending standards of this stringency across the whole 
fleet, as has EPA. In addition, the new methane emissions standards 
have proven quite challenging. Meeting the new standards with E85 
certification fuel will require a significant investment in precious 
metal and investment in or invention of new hardware. In some cases it 
is estimated that the piece cost of an FFV meeting the new standards 
could rise by up to $500 and in other cases the cost is unknown because 
no technical solution currently exists. These challenges stem from the 
physical characteristics of ethanol and E85 and how they affect 
emissions in the first 30 seconds of the EPA emissions test.

     Responses of Shane Karr to Questions From Senator Tim Johnson

    Question 1. My understanding is that the difference between making 
a flex fuel vehicle and a standard vehicle is minimal in technology and 
cost. Further, you are currently making cars to fit Brazil's FFV 
mandate. Why not accelerate the deployment of FFVs here in the United 
States? Are there any regulatory hurdles?
    Answer. The widespread availability of competitively priced E100 in 
Brazil has prompted the Brazilian car-buyer to demand FFVs. Virtually 
all spark ignition vehicles produced in Brazil are FFVs. In view of 
this success the Brazilian government has not felt it necessary to 
mandate the sale of FFVs. In addition, Brazil has substantially 
different emissions standards than exist in the U.S. The adoption of 
Brazilian emissions standards by the United States and California would 
greatly ease the expansion of the FFV production in the U.S. Brazil 
sets much less stringent emissions requirements on E100 than exist for 
E22. For this reason, the incremental cost impact for E100 emission 
controls is negligible in Brazil. Also, on-board diagnostic regulations 
in Brazil are less constraining than in North America, further reducing 
the cost of FFVs in Brazil relative to the United States. Many have 
commented on the widespread marketing of FFVs in Brazil and asked why 
these cars cannot be sold here. Those advocates fail to realize that a 
variety of state and federal regulations preclude the sale of these 
vehicles in the U.S., even if the second fuel tank used in Brazil (a 
gasoline tank needed to start the vehicle because of the lower 
volatility of E100) was removed.
    Question 2. If there are remaining concerns about the approach in 
S. 187, what policies could you support to ensure consumers have access 
to vehicles that have the flexibility to run on clean, alternative 
fuels? Would you support a consumer-based tax credit or rebate similar 
to what is available for the purchase of electric vehicles?
    Answer. As mentioned in my testimony, the Alliance supports FFVs as 
one important technology to reduce our use of imported oil. Your 
question implies that FFVs are not available for consumers who want to 
purchase them. There are more than 8.2 million FFVs on our nation's 
roads, and we are selling close to a million new FFVs each year. There 
are a variety of reasons that existing FFVs are not using significant 
quantities of E85, including availability of fuel, price and 
performance relative to a gallon of E10. These challenges will not be 
solved simply by manufacturing more FFVs, which is why we believe it is 
time for a comprehensive review of how best to expand the use of 
biofuels in our nation's fuel pool.
    Consumer-based tax credits, rebates and other incentives (such as 
CAFE credits) historically have helped make new technologies viable in 
the market. Recognizing that additional financial incentives will be 
extremely challenging in light of the significant and appropriate focus 
on reducing the deficit, the Alliance would be prepared to work with 
you or any other Senator on proposals to expand the use of biofuels.
                                 ______
                                 
                               Renewable Fuels Association,
                                                    April 18, 2011.
Hon. Jeff Bingaman,
Chairman, Energy and Natural Resources Committee, U.S. Senate, 
        Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, Energy and Natural Resources Committee, U.S. Senate, 
        Washington, DC.
Hon. Tim Johnson,
U.S. Senate, Washington, DC.
    Dear Chairman Bingaman, Ranking Member Murkowski and Senator 
Johnson: The Renewable Fuels Association (RFA) appreciates the 
opportunity to respond to follow up questions from the April 7, 2011 
hearing to review U.S. Department of Energy (DOE) biofuels programs and 
biofuels infrastructure issues, and to consider the Biofuels Market 
Expansion Act of 2011.
    As I stated in my testimony before the Committee, getting more 
Americans behind the wheel of a car capable of utilizing higher ethanol 
blends is critical to our nation's energy goals and those of the 
Renewable Fuels Standard. The RFA is eager to begin this dialogue with 
automakers to permanently tear down artificial barriers to ethanol use. 
That means more flexible fuel vehicles, more conventional vehicles 
using blends above E10, and more blender pumps at gas stations. While 
differences in approach may exist, I believe we can find common ground 
that meets the needs of both our industries as well as satisfying the 
performance and safety needs of American drivers.
    In addition to the responses below, I would like to respond to a 
line of questioning during the hearing from Ranking Member Murkowski on 
biofuels production and water use. The efficiencies adopted by ethanol 
producers have led to great improvements in the use of water. According 
to a 2010 study published in Biotechnology Letters, the average dry 
mill ethanol plant used 2.7 gallons of water per gallon of ethanol 
produced in 2008. That is down some 40 percent compared to 2001 and 
about half of the average water use in the mid-1990s. Further 
reductions in water use are expected in the near term, as new 
technologies promise to more efficiently use and recycle the water 
required for cooling towers, boilers and other processing components.
    Ethanol's water use must be viewed in proper context. Consider that 
an average-sized modern ethanol plant uses less water per year than is 
used to irrigate a standard 18-hole golf course. Moreover, it takes 40 
gallons of water to produce one cup of coffee; 4 gallons for a pound of 
hamburger; 11.6 gallons of water to produce a pound of chicken; and, 
300 million gallons to produce just one day's worth of the newspapers 
across the country. Further, approximately 87 percent of all corn grown 
in the U.S. requires no irrigation. Nearly 97 percent of all corn used 
at ethanol biorefineries is not irrigated, according to the National 
Renewable Energy Laboratory.
    These gains in ethanol industry water efficiency stand in contrast 
with oil and other energy industries which are seeing their water 
profiles worsen. As easy sources of oil are exploited, more marginal 
sources of petroleum are needed. These sources, such as tar sands and 
oil shale, require far more water than conventional petroleum 
extraction and refilling. According to the Pembina Institute, ``For oil 
sands mining, approximately 12 barrels of water are needed to produce 
each barrel of bitumen in surface mined oil sands operations.'' 
Additionally, the water is so toxic following this procedure that it 
must be held in enormous tailing ponds until it is deemed safe to 
release.
    Attached please find RFA's responses to questions from Members of 
the Committee. If there is any additional information you would like 
RFA to provide, please do not hesitate to ask.
            Sincerely,
                                               Bob Dinneen,
                                                   President & CEO.

      Responses of Bob Dinneen to Questions From Senator Murkowski

                               SHORTFALLS

    Question 1. Cellulosic biofuels have been slow to enter commercial 
production. When do you believe production will catch up to the annual 
volumes listed in the Renewable Fuels Standard?
    Answer. There are more than 50 cellulosic and advanced biofuel 
demonstration and pilot projects built, under construction or in 
scale?up in the United States. There are many more potential projects 
under consideration, hinging largely on whether Congress makes clear 
that it is standing behind its initial commitment to advanced biofuels. 
The technology for cellulosic and advanced biofuels is ready. Companies 
have demonstrated success and significantly reduced cost at each stage 
of the research, development and scale?up process. The industry is 
moving toward deployment of commercial?scale volumes to meet the RFS.

                         CELLULOSIC PRODUCTION

    Question 2. Which company do you project will be the largest 
cellulosic ethanol producer in 2011? How many gallons of cellulosic 
ethanol will that company produce over the course of the year? Do you 
agree with the EPA's assessment that somewhere between 5 million and 17 
million gallons will be produced their year?
    Answer. The RFS was designed in part to ensure the evolution of 
America's biofuels industry is successful. By reducing the standard for 
cellulosic biofuels, EPA is accurately reflecting the difficulties 
cellulosic biofuel technologies have encountered in obtaining the 
capital needed to fully commercialize. However, being aware of this 
fact, EPA should have been and must be careful to keep cellulosic 
biofuel targets ambitious so as to stimulate the kind of investment 
these technologies need to finish commercialization.

                               LIABILITY

    Question 3. During the hearing, liability for E15 and intermediate 
ethanol blends emerged as a significant, but unresolved, issue. Can you 
share your industry's perspective on liability? You urged the approval 
of E15 for all vehicles, which appears to indicate that your industry 
expects no damages to result. Would your industry be willing to assume 
liability in exchange? Please explain.
    Answer. The liability concerns of marketers related to misfueling 
should not be summarily dismissed. There is liability already present 
every day at the retail station for fuels, safety, spills, and consumer 
education. In today's marketplace, gasoline and diesel present the same 
educational, safety and misfueling issues for consumers. No additional 
or unique challenges will exist with the introduction of new fuels, 
like E15.
    The RFA will continue to work with marketers to address their 
concerns. The RFA has jointly supported legislation with the Petroleum 
Marketers Association to provide a pathway forward. In Iowa, Secretary 
of Agriculture Bill Northey is working with the industry and insurers 
to find a solution that may prove to be a model for other states. The 
RFA applauds his effort and any others to address these concerns. 
Ultimately, moving beyond E10 is critical to us all. Without expanded 
market opportunities, it will be exponentially more challenging to 
secure investments in the next generation of ethanol technologies.

                                LENDING

    Question 4. During the financial crisis and economic recession, it 
was understandable that most large projects were unable to secure loans 
needed to move forward. Has this situation improved over the past year? 
Is it any easier to obtain credit for advanced biorefineries today?
    Answer. Commercial development of advanced biofuels continues to be 
slowed by the recession. There are also acute financing gaps--often 
associated with the so?called Valley of Death--that are exacerbated by 
an unsettled, policy?driven and largely non?competitive U.S. fuel 
marketplace. The ``financing gap'' and ``restricted marketplace'' 
problems must be addressed in order for our industry to reach its full 
potential.

                              FFV MANDATE

    Question 5. You have endorsed a strong flex fuel vehicle mandate, 
but it is unclear whether enough biofuel will be produced over the next 
20 to 30 years to justify requiring up to 90 percent of vehicles be 
able to run on E85. The EIA, for example, forecasts that biofuel 
production will reach 24 billion gallons per year in 2022 and 39 
billion gallons a year by 2035. As welcome as those increased 
production levels would be, is it appropriate to mandate that nearly 
all vehicles be able to run on E85, when in most cases that fuel will 
not be available?
    Answer. Flex fuel vehicles (FFVs) are designed to operate on 
ethanol blends up to 85 percent. Blender pumps, offering mid-level 
ethanol blends between E10 and E85, provide a unique opportunity for 
consumers to benefit from a new array of fuel choices at the pump. With 
just one piece of equipment, a petroleum marketer can offer a variety 
of new fuels to customers and these customers can select their 
preferred formulation with just the touch of a button. Even if a 
station does not wish to begin retailing new ethanol fuels immediately, 
the infrastructure is in place for the future for ethanol blends beyond 
E10.

                                  E85

    Question 6. Despite high hopes for E85 stations, and some growth in 
their number in recent years, E85 has not helped channel ethanol into 
the market to the extent that many expected. Can you offer any insight 
into why E85 has been slow to take off, and what would be necessary to 
increase its use?
    Answer. The market for alternative fuels such as E85 is growing, 
driven by many factors, including fluctuating gasoline prices and 
energy security. With consumer demand for alternative fuel vehicles 
increasing, auto manufacturers are working to produce more FFVs. There 
are more than eight million FFVs on the roads today, and automakers 
will produce several million more each year. The number of E85 fueling 
stations continues to grow nationwide. As of early 2010, there are more 
than 2,600 retail stations (out of 160,000 stations nationwide), 
offering E85 across the country.
    In order for the ethanol and E85 market to grow, we must also 
expand the fleet of FFVs able to use ethanol blends above E10. In his 
testimony at the April 7th hearing, Shane Karr, Vice President of 
Federal Governmental Affairs for the Alliance of Automobile 
Manufacturers, also pointed to the need to put more cars on the road 
that are approved to run on increased ethanol blends: ``For our part, 
automakers would commit to a dialog with Congress and the appropriate 
federal agencies to discuss making our future light duty vehicles 
capable of running on gasoline/alcohol blends at a level higher than 
what is available today at E10, for model years beyond an established 
timeframe. The availability of the new fuel should coincide with the 
availability of the vehicles that can run on the new fuel, so there is 
a market for both.''

                     REGIONAL VS. NATIONAL APPROACH

    Question 7. Given all of the challenges associated with scaling up 
biofuels usage--ranging from production costs to compatibility with 
vehicles and infrastructure--would it make more sense to focus on a 
regional, rather than national approach to deployment? After reaching 
the blend wall, would it be more cost effective to grow the market for 
biofuels in the Midwest before looking to expand it throughout the rest 
of the United States?
    Answer. The Midwest has always been quick to embrace and expand the 
use of the biofuels that are being produced in the region. Most of the 
nation's E85 consumption occurs within the Midwest, and the move to 
mid-level blends has already begun in the region. The overwhelming 
majority of blender pumps that exist today are in states like 
Minnesota, South Dakota, Iowa, and Wisconsin. We believe the Midwest 
region will continue to serve as the proving ground for expanded 
biofuels usage and an incubator for new bioenergy technologies. 
However, nearly 70 percent of the nation's gasoline consumption occurs 
in coastal states. Thus, for biofuels to achieve their full potential 
in reducing imported oil consumption and stabilizing fuel prices, every 
state in the nation should be aggressively taking steps to expand the 
market for renewable fuels like ethanol. Additionally, many of the 
second generation biofuels facilities that are under development will 
be located outside of the Midwest and closer to coastal population 
centers. The most economical and efficient use of these second 
generation fuels would be in local markets. Accordingly, it is 
imperative that the states where these new facilities are being 
developed join in the efforts to expand the market for biofuels.

      Response of Bob Dinneen to Question From Senator Tim Johnson

    Question 1. Consumers make choices about fueling their cars every 
day. They know not to put diesel into tanks and they make decisions 
about premium, mid-grade and regular based on prices. Can you comment 
further on the benefits consumers would see if they have the same type 
of choice with ethanol blends?
    Answer. In its decision to limit the use of E15 to just 2001 and 
new cars and pickups, EPA has denied consumers choice in the type of 
fuel they use. Instead, they have chosen to continue giving oil 
companies a virtual monopoly over the fueling system. EPA continues to 
move in the right direction with respect to increasing ethanol blends, 
but challenges still remain.
    Ultimately, EPA needs to make E15 available to all vehicles. 2001 
and newer cars represent approximately 60 percent of the vehicle fleet. 
And while that's a good start and it will grow as newer vehicles 
replace the legacy fleet, it still leaves far too many consumers 
without an option to use E15 and it undermines the potential 
marketplace impact of EPA's decision. The analysis the RFA released 
last fall, prepared by the highly regarded automotive engineering firm, 
Ricardo, clearly demonstrated there is NO reason not to approve the use 
of E15 for vehicles older than 2001. There is no difference in 
emissions control equipment, materials compatibility, driveability or 
regulatory construct between a 2001 vehicle and an older model that 
would justify denying the opportunity to use E15 to all consumers.
    A copy of the comprehensive engineering analysis performed by 
Ricardo, Inc., an internationally recognized engineering firm, is 
attached for the record.*
---------------------------------------------------------------------------
    * Document has been retained in committee files.
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                                 ______
                                 
      Responses of Henry Kelly to Questions From Senator Murkowski

                               R&D FOCUS

    Question 1. In looking at the Department's recent budget requests, 
it appears that much of your focus is shifting from ethanol fuels to 
drop-in replacements. How advisable do you believe it is for Congress 
to consider strong mandates and large investments for ethanol 
infrastructure, considering that new fuels may soon emerge that affect 
the efficacy of those mandates and investments?
    Answer. If federal support for ethanol were totally pulled out at 
this time, it would send a very negative signal to many in the 
cellulosic ethanol biofuels community and send a signal to others 
interested in the future development of other advanced biofuels. The 
Department has been a catalyst in terms of long-term federal research 
for cellulosic ethanol. The investments have been central to technology 
and industry growth as well as industry efforts to meet the Renewable 
Fuels Standard requirements. But even with the R&D strides that have 
been made over the years, securing cellulosic ethanol's place in the 
transportation sector--both as a blend and E85--will require strong 
markets for ethanol that are dependent on investments in vehicles, 
infrastructure, and safety.
    In the near term, we need to be able to deliver ethanol for 
blending up to EIS throughout the whole United States. Retail 
infrastructure to enable higher level blends (up to E85) for use in 
Flex-fuel Vehicles (FFVs) will be required in the Midwest where the 
supply of ethanol is the greatest and will likely remain so even after 
additional bioftiels enter the market. Drop-in replacements for 
petroleum fuels that do not require significant infrastructure 
investment can also be an important addition to ethanol if the United 
States is to achieve its renewable fuel goals.
    The Biomass Program has taken substantial steps to accelerate 
cellulosic hydrocarbon biofuels research, development, demonstration, 
and deployment (RDD&D) in the past few years, while maintaining robust 
R&D and deployment efforts on cellulosic ethanol. Much of our work on 
cellulosic ethanol can be directly applied to drop-in fuels or readily 
adapted to them, which should translate to faster development and 
deployment of drop-in fuels.

                          SMALL REFINERS STUDY

    Question 2. The Energy Policy Act of 2005 directed DOE to complete 
an economic impact assessment before small refiners were folded into 
the Renewable Fuel Standard. After your Department issued the study in 
2009, Congress declared it was not satisfactory, and required DOE to 
revise the study. It was due last year, but still has not been 
released. In the meantime, the EPA has declared that small refineries 
are now subject to the RFS, even without a firm understanding of the 
costs that could result. Can you provide an update on this study? When 
will it be completed? Do you believe small refineries should be subject 
to regulation before its completion?
    Answer. As of April 7, the report was in the final review stages at 
DOE. The study determined that certain refineries would experience 
disproportionate economic hardship if their exemptions were not 
extended. Based on the developed metrics and analysis, DOE recommended 
that thirteen refineries receive an extension of their exemption. As 
explicitly directed by EISA, EPA has notified the 13 affected 
refineries that the exemption from the RFS2 provisions has been 
extended for a period of 2 years.

                              BIOCHEMICALS

    Question 6. Several companies believe that biochemicals are a 
better value proposition than biofuels, especially at the early stages 
of development. Has the Department focused on the potential of 
biochemicals? Going forward, do you intend to allow biochemical 
projects to compete for a greater share of biomass R&D funds than in 
the past?
    Answer. The Department of Energy Biomass Program's current aim is 
to focus on replacing the entire barrel of oil with fuels and chemicals 
from cellulosic feedstocks. As a replacement for a large portion of the 
barrel of oil, production of cost competitive biofuels will continue to 
be the priority of the program because of energy security; however, 
there is renewed interest in including opportunities in bioproducts 
development subject to appropriations. In fact, the recent ``Integrated 
Process Improvements for Biochemical Conversion of Biomass Sugars'' 
funding opportunity announcement allowed for R&D conversion of biomass 
to bioproducts as a part of an integrated biorefinery.

                            CELLULOSIC COSTS

    Question 7. The Department has set a goal of making sure cellulosic 
ethanol is ``cost-competitive in the blend market'' by 2012. Can you 
describe any progress towards that goal? Do you expect it will be met 
next year?
    Answer. The Department is on track to meet the goal of cost 
competitive cellulosic ethanol by 2012. In 2010, DOE-funded research 
and development at our National Labs and in cooperation with the 
private sector resulted in a mature modeled cost\1\ of $2.70/gal for 
the thermochemical conversion route, which is a 17% improvement over 
2009 costs and a 43% improvement over 2007 costs. The biochemical 
conversion route improved 13% from 2009 (24% from 2007) with a modeled 
cost of $2.77/gal achieved. The technologies are expected to achieve 
modeled costs of $2.05-$2.15/gal by 2012, a cost range that is 
anticipated to be competitive with gasoline.
---------------------------------------------------------------------------
    \1\ Mature Modeled Cost assumes cost and risk reduction over time 
as a process becomes more efficient. This is different from first-of-a-
kind costs which are higher as a rule. The Department has design case 
reports that describe the ``nth-Plant Assumptions'' in Section 1.4 of 
the 2011 ``Process Design and Economics for Biochemical Conversion of 
Lignocellulosic Biomass to Ethanol'' (http://
www.nrel.govidocsify11osti/47764.pdf).
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                         CELLULOSIC PRODUCTION

    Question 8. Cellulosic biofuels have been slow to enter commercial 
production. Can you provide the Department's best estimate of when 
production will catch up to the annual volumes listed in the Renewable 
Fuel Standard?
    Answer. The cellulosic biofuels industry is a new industry that is 
moving rapidly from demonstration scale projects to commercial 
facilities. The Department is working to to facilitate this transition 
through our Biomass Program (financial assistance grants), the loan 
guarantee program (loans for commercial scale facilities), and the 
Office of Science (developing fundamental knowledge to support new 
technologies). In addition, we have included in our FY12 budget request 
a cellulosic biofuels reverse auction which would create a production 
incentive to reduce risk and encourage investment for ``pioneer'' 
cellulosic biofiiels conversion facilities. These actions, together 
with the investments being made by the U.S. Department of Agriculture, 
provide government support to accelerate the start of this industry. 
There is also significant interest from the private sector, the 
aviation community, and the Department of Defense in biofuels.

                           BLENDER PUMPS (I)

    Question 9. Agriculture Secretary Vilsack has announced that USDA 
will help install 10,000 blender pumps over the next five years. S. 187 
authorizes $1 billion for a blender pump program at DOE. Do you believe 
it is necessary for two federal departments to carry out programs with 
the same goal? Is there an upper limit on the number of blender pumps 
that the federal government should help deploy?
    Answer. On April 8, 2011, Secretary Vilsack announced in a 
statement that a ``renewable energy system'' in the Rural Energy for 
America Program (REAP) includes blender pumps. REAP primarily works 
with communities with populations of 50,000 or less and the grants 
apply only to farmers and small businesses in rural areas. These 
communities have fewer vehicles and many of those are typically older 
models. DOE recommends that these efforts include all communities, 
particularly those with higher populations. DOE has provided assistance 
to USDA in the form of technical support that includes safety issues 
and outreach and education materials for blender pumps. DOE has not 
requested funding for blender pumps in light of Secretary Vilsack's 
announcement. Were USDA to lead the blender pump installation program, 
DOE would continue its collaboration efforts as needed. With regard to 
the upper level of blender pumps that the federal government should 
help deploy, we do not have a precise number, but believe that for 
these pumps to reach major populations a private manufacturer or 
manufacturers will need to capitalize on this business opportunity.

                           BLENDER PUMPS (II)

    Question 10. S. 187 would establish a grants program for blender 
pumps within the Department of Energy. Given that the Department's 
primary focus is on feedstocks and biorefinery development, do you 
believe it is appropriate for the Department to administer this type of 
infrastructure deployment program?
    Answer. DOE has administered infrastructure projects with fuels 
defined by the Energy Policy Act of 1992, better known as alternative 
fuels. Since Secretary Vilsack's announcement to install 10,000 blender 
pumps, based on its experience with alternative refueling pumps DOE has 
provided assistance to USDA with technical support that includes safety 
issues and outreach and education material for blender pumps. In light 
of Secretary Vilsack's announcement, DOE has not requested funding for 
blender pump installation projects. Were USDA to lead the blender pump 
installation program, DOE would continue its collaboration efforts as 
needed.

                          ETHANOL PIPELINE (I)

    Question 11. S. 187 would amend the loan guarantee programs to add 
a new category of eligible project--``renewable fuel pipelines.'' Would 
the Department prefer a category that narrow, or instead a more 
technology-neutral approach for ``transportation fuel infrastructure'' 
that could include natural gas pipelines, hydrogen highways, and 
perhaps even clusters of battery recharging stations for electric 
vehicles?
    Answer. The Administration does not have a position on this 
proposal.

                         ETHANOL PIPELINE (II)

    Question 12. S. 187 provides 90 days for the Secretary of Energy to 
promulgate regulations adding renewable fuel pipelines to the loan 
guarantee program. How long does the Department anticipate it would 
need to publish a final rule, develop a solicitation, and make any 
other programmatic changes or additions necessary to support a new 
statutory directive before the Department could begin soliciting 
applications? Is 90 days sufficient time?
    Answer. This question is difficult to answer definitively and 
depends on a number of factors to include, for example: (1) how 
detailed the statute may be, (2) the amount of detail required in 
analysis and data gathering, (3) the number of outside stakeholders 
that are involved and how many comments they provide, (4) and the 
length of internal DOE and interagency review. Based on experience, the 
Department assumes the process to publish a final rule could take 
between 12 to 18 months.

                         ETHANOL PIPELINE (III)

    Question 13. Please list any hurdles that the Department has 
identified that could hinder the financing of renewable fuel pipelines 
under the Title 17 loan guarantee programs.
    Answer. The Department has not undertaken the analysis that would 
be required to take an informed position on this issue.

                                 TARIFF

    Question 14. Please summarize the administration's position on the 
tariff on ethanol imports.
    Answer. This issue impacts several U.S. government agencies 
including USDA, Office of the U.S. Trade Representative (USTR), 
Department of Commerce, and State Department. There is currently no 
Administration position on this issue.

       Response of Henry Kelly to Question From Senator Stabenow

    Question 1. I would like to ask you a question about coordination 
and streamlining. I think we all share a common goal on this committee 
to find solutions to decrease our dependence on foreign energy sources. 
This is a goal that is shared with many other government agencies.
    As you know, I chair the Senate Agriculture Committee which 
oversees the Department of Agriculture's energy programs. One of my 
hopes as we enter Farm Bill discussions on the Ag Committee is to look 
at how to increase coordination between USDA and DOE to ensure that we 
are making sound investments and not duplicating efforts.
    I'm specifically interested in ensuring that we take a 
comprehensive look at duplication and streamlining--not just within the 
department but across other agencies as well. Can you tell me how DOE 
is working with USDA to ensure that we are maximizing our resources and 
not duplicating efforts? For example, I know that USDA and DOE work 
together on the Biomass Research and Development Initiative (BRDI), and 
I would like to know what you are doing to coordinate on other 
programs.
    Answer. The primary coordination mechanism between the Department 
of Energy (DOE), Department of Agriculture (USDA), and other Federal 
agencies in the area of biomass energy is under the Biomass R&D Act of 
2000 (as amended). The Act consists of three primary efforts: an annual 
Initiative solicitation; the Biomass Research and Development Board, 
and the Biomass Research and Development Technical Advisory Committee. 
The annual solicitation is administered jointly by DOE and USDA, with 
staff from both agencies involved in each step of the process, 
including drafting the solicitation, announcing the solicitation, 
reviewing proposals submitted, and selecting/awarding meritorious 
projects. We believe that research programs are well coordinated and we 
work together on an as-needed basis for other programs (e.g. loan 
guarantee projects, etc)
    The Biomass Research and Development Board\2\ is an interagency 
collaborative composed of senior decision-makers from federal agencies 
and the White House, co-chaired by the USDA and the DOE. USDA and DOE 
annually implement the Biomass Research and Development Initiative\3\. 
The Board meets quarterly and currently includes members from the DOE, 
USDA, Department of the Interior, Department of Transportation, 
Department of Defense, the Environmental Protection Agency, the 
National Science Foundation, and the White House Office of Science and 
Technology Policy.
---------------------------------------------------------------------------
    \2\ http://www.usbiomassboard.gov/board/board.html
    \3\ httP://WWW.USbi0MaSSbOard.g0V/initiatiVe/initiatiVe.htM1
---------------------------------------------------------------------------
    The Technical Advisory Committee provides external oversight of 
Federal biomass energy coordination by advising the Secretaries of 
Energy and Agriculture through the development of annual 
recommendations. These recommendations are developed at public, 
quarterly meetings during which the Committee interacts directly with 
DOE, USDA, and other Federal representatives, as well as members of the 
broader, non-public biomass community. The Committee consists of 
approximately thirty members from industry, academia, non-profit 
organizations, state agencies, and trade associations.
    In addition to the formal coordination efforts that take place 
through the Board, DOE and USDA coordinate on a regular basis through 
other mechanisms. For example, DOE often includes USDA representatives 
on programmatic peer review and proposal application review panels, and 
vice versa. USDA and DOE/National Laboratory researchers work side-by-
side on a variety of existing and proposed projects, including the 
Regional Biomass Energy Feedstock Partnership with the Sun Grant 
Initiative and the USDA-sponsored Coordinated Agricultural Project.
    Both agencies (in addition to the Department of Defense, 
Environmental Protection Agency, National Aeronautics and Space 
Administration, National Institutes of Health, National Institute of 
Standards and Technology, and the National Science Foundation) 
participate on the Metabolic Engineering Working Group to stimulate 
increased awareness of this emerging field, which has great promise to 
improve the efficiency of biofuels production and to develop new means 
for producing advanced biofuels and other bio-based products. The group 
identified two major initiatives: announcements of interagency, rather 
than agency-specific opportunities for funding research grants, and the 
beginnings of a government-wide Metabolic Engineering Project 
Inventory.

     Responses of Henry Kelly to Questions From Senator Tim Johnson

    Question 1. It is my understanding that automakers are moving 
toward technologies that rely upon a fuel with high octane in order to 
meet the fuel economy targets. Ethanol is the cleanest source of octane 
available on the market today. Can you comment on the Administration's 
new fuel economy standards and how ethanol's octane benefits might 
help?
    Answer. Automobile manufacturers are considering a range of 
different technologies to meet higher fuel economy standards. Several 
of these technologies could benefit from increased octane rating; in 
the past, they may have required high octane, but with advancements in 
modern engine design and controls, this may not be the case. While 
ethanol does increase octane, the finished gasoline will have a 
standard minimum octane rating based on its grade (i.e., no one will 
sell premium gasoline for the price of regular). Higher octane by 
itself does not increase fuel efficiency. Vehicles that do not require 
premium fuel will not benefit from increased octane, regardless of the 
source of the octane. Therefore, the Department views the primary 
benefit of ethanol to be petroleum displacement, rather than impact on 
octane.
    Question 2. If we don't get behind the blend wall or if we pull 
federal support for ethanol as some have suggested, what implications 
would that have for developing the next generation of advanced 
biofuels? What would it mean in the larger context of our energy 
security and dependence on foreign oil?
    Answer. If federal support were totally pulled out at this time, it 
would send a very negative signal to many in the cellulosic ethanol 
biofuels community and send a signal to others interested in the future 
development of other advanced biofuels. The Department has been a 
catalyst in terms of long-term federal research for cellulosic ethanol. 
Most recently, through the American Reinvestment and Recovery Act of 
2009 (ARRA), DOE accelerated investment in innovative biorefineries, 
providing funding for 18 RD&D projects in addition to the 11 projects 
previously funded in 2007 and 2008. DOE is also currently addressing 
several key market barriers relevant to the ``Biofuels Market Expansion 
Act of 2011,'' including restrictions on higher blends of ethanol in 
gasoline, by providing data for vehicle and engine testing that has 
helped assess ethanol use above the 10 percent level. DOE is also 
working with vehicle manufacturers and has received pledges from 
domestic manufacturers to increase the fraction of flexible fuel 
vehicles to 50% by 2012. DOE also recognizes the importance of blender 
pumps and associated underground storage for these higher ethanol 
blends, as well as retrofit kits to upgrade existing fuel pumps to be 
compatible with E15.
    Within the larger context of energy security and reducing our 
nation's dependence on oil, continued support for cellulosic ethanol is 
critical. However, in order to reduce petroleum usage, we need to focus 
on displacement of the whole barrel, not just the portion that can be 
displaced by cellulosic ethanol. Only about 44% of a barrel of crude 
oil is used to produce light duty petroleum gasoline. About 25% is used 
to produce petroleum diesel fuel and about 17% is used to produce other 
petroleum products. Ethanol can be used to address the gasoline 
fraction of each barrel, and if ethanol's market is further limited by 
the blend wall, then only a fraction of that petroleum can be 
displaced. If we reduce total petroleum usage by substituting renewable 
fuels in one market, we need to think about how that impacts other 
markets. The most obvious issue is that we have to replace diesel and 
jet in proportion to gasoline, since their combined volume from a 
barrel of crude oil is approximately 1/4 that of gasoline, their 
markets are projected to grow significantly faster than that for 
gasoline, and refineries are constrained in the proportion of gasoline 
and diesel/jet fuel they produce. But other products are important, 
too. The largest chunk of the ``other products'' is the petrochemical 
industry, virtually all of which is based on crude oil and natural gas. 
If we do not replace the ``whole barrel'', we risk creating ensuing 
effects that will cause shortages or gluts in other markets, with 
additional economic consequences.
    Question 3. It seems to me that if we deployed more FFVs and 
blender pumps as called for in S. 187, and urged EPA to continue 
phasing-out the dirty and carcinogenic aromatics (benzene, toluene, and 
xylene) the winner would be the American consumer who would have access 
to cleaner, safer, and efficient fuel. Can you comment on the public 
health benefits of burning renewable fuels as compared with fossil 
fuels?
    Answer. The combustion of gasoline generates many air toxic 
pollutants. When ethanol is blended with gasoline, the emissions from 
vehicles and engines change, with some pollutants increasing (such as 
NOx and acetaldehyde) and others decreasing (such as carbon monoxide). 
Aromatics and benzene emissions may also be reduced if refiners 
reformulate their gasoline to reduce its aromatic content by taking 
advantage of the added octane from the ethanol. In addition to changes 
in direct emissions it is important to point out that the emissions 
from combustion, and the resulting human exposure, are affected by many 
factors including chemical reactions, temperature, sunlight, clouds, 
wind, and precipitation. In particular, under some conditions the 
combustion of higher-level blends of ethanol has been estimated to 
increase some harmful emissions (tailpipe and evaporative) relative to 
conventional gasoline blends.\4\ Both direct human-health effects and 
atmospheric-pollution effects are extremely complex; the ``best'' fuel 
may differ from one locality to another, and only continued improvement 
of our ability to model and measure these impacts will enable well-
informed policy decisions.
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    \4\ http://www.stanford.cdu/group/efmh/jacobson/E85PaperEST0207.pdf

                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                                             Growth Energy,
                                     Washington, DC, April 6, 2011.
Hon. Jeff Bingaman,
Chairman, U.S. Senate, Committee on Energy and Natural Resources, 304 
        Dirksen Senate Office Building, Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, U.S. Senate, Committee on Energy and Natural Resources, 
        709 Hart Senate Office Building, Washington, DC.
    Dear Chairman Bingaman and Ranking Member Murkowski: As the 
country's leading advocate for ethanol, Growth Energy urges the Senate 
Committee on Energy and Natural Resources to swiftly approve 
legislation to expand biofuel consumption--such as S.187, the Biofuels 
Market Expansion Act, a bill introduced by Senators Tom Harkin, Tim 
Johnson, Al Franken and Amy Klobuchar. This legislation is designed to 
grow domestic demand for biofuels through the easing of market-
restricting regulations and construction of infrastructure to deliver 
biofuels directly to consumers.
    We applaud the Committee on holding today's hearing, and welcome 
the opportunity to discuss the impact that expanding ethanol 
infrastructure will have on securing our energy security and improving 
consumer choice at the pump. For too long, foreign cartels have 
manipulated oil production to the detriment of both our economy and the 
security of our nation. This Committee has before it the opportunity to 
begin to right the wrongs that have plagued our national energy policy 
despite the efforts of the last eight Administrations, dating back to 
President Nixon.
    As a maturing industry, domestically-produced ethanol can do much 
more today to replace foreign oil in our transportation fuels market. 
However, if we fail to lift the artificial barriers that block ethanol 
from entering the market, we will continue a policy that mandates that 
90 percent of our motor fuel be gasoline, two-thirds of which is 
derived from foreign oil.
    However, we cannot help the American economy or our national 
security if ethanol is prevented from entering the market. This starts 
with allowing higher levels of ethanol in the fuel supply. The U.S. 
Environmental Protection Agency recently answered Growth Energy's Green 
Jobs Waiver, a regulatory petition to allow blends of up to 15 percent 
ethanol, or E15. After exhaustive and extensive engine testing, the EPA 
announced that E15 could be used in all vehicles built since 2001--that 
means every auto and light truck built in the last decade, a fleet 
which consumes about 75 percent of all fuel in the United States. 
Opening this market means increased access for our less-expensive, 
American-made, environmentally-friendly fuel. It means that instead of 
importing 7 billion gallons of oil from countries like Saudi Arabia, 
Yemen or Venezuela, we will use a cleaner, greener, more economical 
solution made right here at home. It also will create 136,000 new jobs 
in the United States; these are jobs that cannot be outsourced because 
they will be at ethanol plants and at the small businesses that are 
supported by the $211 million in economic activity generated by the 
average 100 million gallon-a-year ethanol plant.
    The second step is to require every automobile sold in the U.S. to 
be a Flex Fuel vehicle. We applaud domestic automakers for agreeing to 
make 50 percent of the passenger vehicle and light truck fleet flex 
fuel capable in the 2012 model year. But we believe a further expansion 
of Flex Fuel vehicles is warranted. In order to ensure that American 
consumers have access to the highest quality vehicles that allow a 
consumer to have a full choice at the pump of any gasoline or ethanol 
blend, we should require foreign automakers to comply with the path 
already laid out by U.S. automakers. This can be done at virtually no 
cost as these automakers already do it for the vehicle markets in 
foreign nations, such as Brazil, a country that has over 90 percent of 
their vehicle fleet flex fuel capable. Producing the same vehicles for 
the American market as well would not be a significant burden.
    Additionally, every filling station in the United States should be 
encouraged to install Flex Fuel pumps--so-called `blender pumps'--that 
give the motorists the ability to choose their fuel blend. By 
incentivizing the installation of Flex Fuel pumps, we would give the 
consumer the first real choice in what kind of fuel they put in their 
car. We recommend a combination of infrastructure grants and tax 
incentives to gasoline retailers as the most effective way to address 
this issue.
    If you give a driver a choice between ethanol--an inexpensive, 
home-grown, clean option--and regular gasoline, they will choose 
American-made ethanol. But for those who wish to use regular gasoline, 
they too will have that option. The installation of Flex Fuel pumps is 
about giving the consumer a choice, a choice that is currently made for 
them by requiring them to put at least 90 percent regular gasoline in 
their car.
    Growth Energy also continues to support the construction of 
renewable fuel pipelines as outlined in the Biofuels Market Expansion 
Act. Our economic studies have consistently shown economic value for 
renewable fuel shippers, and thus for the American consumer, using a 
pipeline versus the existing rail infrastructure. These economic 
benefits rise over time as rail tariff rates increase on a congested 
rail system, even against the operating costs of maintaining a 
pipeline.
    To be clear, Growth Energy is seeking simple parity with the oil 
and gas industry--we are not asking for the government to build 
pipelines, but because of the size and nature of such a project, we are 
seeking a federal loan guarantee of 80 percent of the cost in order to 
provide the certainty and stability to get the job done. A loan 
guarantee will also enable access to affordable debt financing. The 
Department of Energy completed a feasibility study in March 2010 and 
concluded that a loan guarantee was necessary to construct a renewable 
fuel pipeline. Without such a guarantee, the project cannot move 
forward.
    It is also worth noting that these market infrastructure reforms 
will also encourage the development and deployment of next generation 
fuels like cellulosic ethanol by creating market space and certainty. A 
commitment to the transition is necessary for private market 
investments and innovation. The blend wall and petroleum mandate 
discourage next generation ethanol.
    How significant an impact can ethanol make on gasoline prices with 
these market reforms? According to a study conducted jointly by 
McKinsey & Co. and the National Renewable Energy Laboratory found that 
ethanol reduces gasoline prices by at least 17 cents a gallon. Other 
studies have shown a consumer savings of 30 cents. These market reforms 
will only increase the level of consumer savings.
    Further, the high-oxygen content of ethanol means it is better for 
the environment; the Yale Journal of Industrial Ecology published a 
peer-reviewed study that found grain ethanol is at least 59 percent 
cleaner than conventional gasoline in a full Life Cycle Analysis. And 
as the American ethanol industry continues to innovate--by using 
renewable energy sources at the plant and precision farming 
techniques--we continue to drive more reductions in greenhouse gas 
emissions.
    Finally, a study completed by the Windmill Group found that as many 
as 600,000 American jobs depend on the U.S. ethanol industry. We could 
create more jobs, especially in hard-hit rural communities, if 
artificial barriers to the market are lifted, and if policy is changed 
to encourage the development of infrastructure--particularly the 
installation of Flex Fuel pumps--in order to give consumers a choice in 
their fuel.
    Growth Energy fully supports the Biofuels Market Expansion Act of 
2011, S. 187, and encourages the Committee to swiftly approve this bill 
and others that would expand biofuels programs and infrastructure. 
Thank you in advance for your consideration of our comments. We look 
forward to working with the Committee on these important issues.
            Sincerely,
                                              Tom Buis CEO,
                                                     Growth Energy.
                                 ______
                                 
                                                    Propel,
                                                  Redwwod City, CA.
                              White Paper

              ALTERNATIVE FUEL INFRASTRUCTURE DEVELOPMENT

Objective: Modify and expand the existing federal income tax credit to 
        assist with offsetting the costs associated with the storage 
        and dispensing of mid/high level renewable ethanol blends used 
        as alternative fuels.
Outline:
          1. The tax credit should be expanded to offset up to 50% of 
        the total cost of the improvements necessary to store and 
        dispense renewable alternative fuels, not to exceed $100,000 
        per site.
          2. An applicant should receive the tax credit based on the 
        entire cost of the alternative fuel improvements, not simply 
        the incremental cost of the alternative fuel equipment as 
        currently allowed by the IRS.
          3. The alternative fuel infrastructure income tax credit 
        should be transferable and exempt from the Alternative Minimum 
        Tax.

                  a. Transferability will assist the large number of 
                single store operators who may not have a significant 
                federal tax liability, and;
                  b. Many single store owners and others who do have 
                tax liability are subject to the Alternative Minimum 
                Tax. Exempting the tax credit from the impact of the 
                AMT will allow these small operators the ability to 
                establish alternative fuel infrastructure.

          4. The renewable alternative fuel income tax credit may only 
        be used to offset costs associated with improvements necessary 
        to store and dispense renewable alternative fuels as defined by 
        the Secretary of the Dept. of Energy.
          5. The tax credit would be subject to recapture rules for 
        failure to use equipment for alternative fuels for at least 7 
        years.

                        WHY NOT A GRANT PROGRAM

    Grant programs are onerous for the applicant (62% of convenience 
stores are owned by single-store operators), require significant 
federal grant management oversight, and often consume more than 18 
months to promulgate rules and issue awards. Long term and on-going 
grant programs are also subject to annual appropriations which may be 
problematic.
    Upon Legislative and Executive approval, a federal income tax 
credit can be initiated in a short period of time. Furthermore, all 
retailers are familiar with quarterly federal income tax reports which 
would be used to claim the credit. Financial support would be available 
in a timely manner, absent onerous and costly administrative expenses, 
and all expenditures would still be subject to IRS audit and oversight.

                                SUMMARY

    Propel supports the extension and modification of the existing 
federal alternative fuel income tax credit:

   A tax credit program is much easier for the applicant to 
        understand and process,
   requires less federal staff involvement, and is thus less 
        costly for agency administration,
   provides funds in a rapid manner, and
   can be used to limit total outlays similar to grant 
        programs.
                                 ______
                                 
               Petroleum Marketeres Association of America,
                                      Arlington, VA, April 7, 2011.
Hon. Jeff Bingaman,
Chairman, Senate Energy and Natural Resources Committee, U.S. Senate, 
        Washington, DC.
Hon. Lisa Murkowski,
Ranking Member, Senate Energy Committee, U.S. Senate, Washington, DC.
Re: Letter before the Senate Energy and Natural Resources Committee 
Hearing Concerning the Department of Energy biofuel programs, biofuel 
infrastructure issues, and the ``Biofuels Market Expansion Act of 
2011''

    Dear Chairman Bingaman and Ranking Member Murkowski: Many PMAA 
members will welcome the opportunity to sell greater ethanol blends, 
but concerns arise with the potential unintended consequences that 
create liability issues for retailers. PMAA supports expanded use of 
ethanol in our nation's fuel supply, however, until legal, regulatory, 
and financial concerns are addressed, greater ethanol usage will be 
minimal.
    PMAA is a national trade association in the petroleum industry 
representing 8,000 independent petroleum marketing companies who own 
60,000 retail fuel outlets such as gas stations, convenience stores and 
truck stops. Additionally, these companies supply motor fuels to 40,000 
independently owned retail outlets and heating oil to seven million 
households and businesses. Of the 162,000 gasoline stations nationwide, 
nearly 97 percent are owned by small businesses. While they may sell a 
particular gasoline name brand, they are not owned by the major oil 
companies. Therefore, for a small business retailer to make the 
necessary upgrades to existing infrastructure to safely and legally 
sell greater ethanol blends, they must see an economic opportunity to 
market these new fuels.
    Before I address the financial hurdles to accomplish USDA's goal to 
provide 10,000 blender pumps by 2022 and the ``Biofuels Market 
Expansion Act of 2011'' (S. 187), legal and regulatory uncertainties 
remain. Motorist misfueling is a great concern. Pay at the pump is very 
popular in the U.S. and a gas station or convenience store clerk is not 
in a position to stop a motorist from dispensing greater ethanol blends 
in an unapproved vehicle. Retailers need confidence that if the 
dispenser is labeled as specified by EPA, the retailer will not be held 
responsible for motorists' misfueling. Similarly, we need liability 
protection for retailers should mid-level ethanol blends damage a 
vehicle, so that the retailer will not be held responsible. For 
example, some experts believe greater ethanol blends could damage 
catalytic converters. The retailer must not be held responsible for 
repairs if he/she met every requirement specified by EPA. If EPA 
approves E15, they are in essence promising consumers that it will not 
damage their car. Retailers must not be held liable if it turns out 
that EPA was incorrect.
    Another concern relates to underground storage infrastructure. We 
need EPA's Office of Underground Storage Tanks (OUST) to publish a list 
determining which storage tanks, piping, associated equipment, and 
dispensers are acceptable for greater ethanol blends. If a retailer 
does due diligence and confirms that his equipment meets EPA's 
standards, the retailer will then need protection from legal and 
insurance problems resulting from a leak caused by ethanol blends above 
ten percent. This topic relates to the Underwriters Laboratory (UL) 
certification requirement. Currently, very little existing 
infrastructure is UL certified for anything higher than 10 percent 
alcohol. If problems arise, we do not want fire officials citing 
retailers for not having UL certification. In the same sense, we do not 
want insurance companies using the UL certification requirement as a 
basis for denying a marketer's claim. Finally, it is unfortunate if the 
only way for a retailer to be absolutely certain that his liability is 
limited, is to replace all underground storage tanks, piping and 
dispensers--a very costly and unlikely scenario without significant tax 
and grant programs.

                       USDA BLENDER PUMP PROGRAM

    Some PMAA member companies see the blender pump infrastructure 
proposal is a thinly veiled attempt at getting 100 percent of the cost 
of dispensers paid for, with little or no thought given to the 
underground issues. We are concerned that some retailers will sell E15 
due to the price advantage compared to E10 while not confirming that 
the underground equipment is compatible with anything over E10. 
Additionally, there are concerns that retailers will install blender 
pumps in counting on marketer funded state tank funds to cover any 
releases. This would increase state tank funds for every marketer even 
for the ones that play by the rules in making sure that their 
underground equipment is compatible with E15.

  EPA'S OFFICE OF UNDERGROUND STORAGE TANKS (OUST) E15 COMPATIBILITY 
                                GUIDANCE

    Recently, EPA's Office of Underground Storage Tanks (OUST) released 
its Notice of Proposed Guidance (NPG) to interested parties that would 
clarify its compatibility requirement for UST systems storing E15. This 
is an interim guidance period which is subject to change when EPA 
determines what compatibility means in its Notice of Proposed 
Rulemaking likely to be issued this summer. Guidance is just a 
suggested road map that marketers and states could use to determine the 
compatibility of E15 with legacy equipment.
    PMAA would like to see the EPA OUST develop a risk-based assessment 
tool for legacy UST equipment that could be used to determine system 
compatibility. Risk assessments could be based on the age of equipment 
in the ground, the type of tank used in the system, such as single 
wall, double wall, fiberglass, lined, or steel tank, the type of 
piping, leak detection systems and release prevention equipment used in 
the system. Once a risk assessment judgment is made on the system, a 
compatibility determination can be made. A compatibility finding could 
also be conditioned on additional requirements that must be met before 
the system qualifies for E-15 service. A risk based system for 
determining compatibility would be cost effective and a reliable 
indicator of which systems is suitable for E-15 use. For example, if 
the federal government's blender pump grant program could also be 
directed at investments in electronic leak detection systems, this 
could help satisfy compatibility requirements even if a retailer was 
uncertain whether piping, glues, adhesives was fully compatible with a 
higher ethanol blend. The electronic leak detection would notify a 
retailer within a matter of minutes if there was a leak and the 
retailer could then take the proper steps to clean up the leak. 
Electronic leak detection systems are very effective for quickly 
finding a leak underground and would be a cost effective way for 
retailers to determine compatibility with mid-level ethanol blends.

               BIOFUELS INFRASTRUCTURE GRANTS/TAX CREDITS

    Financially speaking, grant programs focused solely on dispensers 
is inadequate and can potentially be a public safety concern. 
Underground leaks from piping and tanks do occur and it is important 
that the proper precautions are taken to ensure that the tank and 
piping is compatible to handle E10 plus fuels and that the tank is 
thoroughly clean and water is not present in the tank. One underground 
storage leak can force a retailer out of business. A $100,000 grant per 
site that is applicable to underground storage tanks, piping, 
submersible pumps, drop tubes, level sensors, and blender pumps may 
encourage retailers to make the necessary upgrades to market greater 
ethanol fuels in addition to tax credits. Additionally, marketers must 
be reimbursed within 30 to 60 days.
    Additionally, the current alternative fuel tax credit must be 
increased to a minimum of $250,000 for a potential 50 percent credit 
worth $125,000 per site. The credit must be eligible to be carried back 
at least 2 years and forward 20 years and must be applicable to blender 
pumps and all associated underground infrastructure. The credit must 
also be eligible for 100 percent of the cost of a complete blender 
pump. This may incentivize the station owner to make the necessary 
upgrades to market greater ethanol blends. Additionally, if USDA/DOE 
wants to entice a retailer to replace perfectly serviceable 
infrastructure currently compatible with E10 (in many cases only one-
third to one-half through the expected useful life), USDA and DOE will 
need to provide significant financial assistance.
    PMAA looks forward to working with you as the federal government 
moves forward with its program to expand ethanol use. Again, PMAA would 
like to emphasize that it supports the expanded use of ethanol and is 
committed for a sustained and effective marketing plan to convince 
retailers that financial incentives are available to help them make the 
necessary upgrades to safely and legally sell greater ethanol blends.
            Sincerely,
                                              Dan Gilligan.

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