EPA Considers Higher Ethanol Mix

Allowing 15% Gasoline Blends Would Help Industry, but Poses Car-Warranty Issue

By SIOBHAN HUGHES and LAUREN ETTER
WASHINGTON -- The U.S. Environmental Protection Agency has opened the door to allowing higher mixes of ethanol in gasoline, a potential boon to farmers and the struggling ethanol industry, but opposed by auto makers whose consumer warranties typically are tied to the current EPA standard.
The agency Thursday said it is seeking comment on whether to allow ordinary gasoline to consist of as much as 15% ethanol, an additive that has been heavily promoted by farm states. For decades, the EPA has allowed gasoline to include up to 10% ethanol.
The EPA's move came in response to a petition filed last month by the trade group Growth Energy to allow motor fuel ethanol blends of as much as 15%, citing an Energy Department study that found "no operability or driveability issues" with blends as high as 20% ethanol.

Corn is loaded into a truck at a farm in Valley Springs, S.D. Higher percentages of ethanol mixed into gasoline would be a boon to farmers. About one quarter of all corn produced in the U.S. is used to make the fuel additive.

Most car warranties, however, have followed the 10% standard, which means consumers who use blends with greater than 10% ethanol could get stuck paying the bills if there's damage to fuel lines or other components unless auto makers agree to shoulder the costs.
Auto makers offer so-called flex-fuel vehicles designed to accept up to 85% ethanol fuels. But many current and older model cars aren't designed for ethanol concentrations above 10%.
Alan Adler, a spokesman for General Motors Corp., said if the EPA allows higher ethanol blends "we want to be sure that we're not on the hook for vehicles" that end up having problems with higher blends.
Earlier this year Toyota Motor Sales USA Inc. recalled 214,500 Lexus vehicles sold in the U.S. that were vulnerable to corrosion problems in their fuel-delivery pipes when some ethanol fuels were used.
Pushing against the auto industry's objections are farmers, investors in ethanol-fuel start-ups, big agricultural commodities companies and some environmental groups that argue the U.S. would be better off substituting home-grown biofuels for foreign oil.
Currently nearly a quarter of all corn produced in the U.S. is used to make ethanol. That's up from about 12% in 2004. A higher blend ratio would help support corn prices.
"If we don't move that regulatory cap, without question grain supplies are going to grow and the next group looking for a bailout will be the American farmer," said Jeff Broin, chief executive officer of POET, one of the nation's largest ethanol producers, based in Sioux Falls, S.D.
An oversupply of ethanol has prompted a wave of bankruptcies and made the ethanol industry eager to expand its market. Ethanol producers are being squeezed as corn prices stay relatively high and as ethanol prices stay relatively low. Todd Alexander, a partner at Chadbourne & Parke LLP, estimates that some ethanol producers are losing up to 10 cents on every gallon of ethanol.
Another big ethanol producer, Archer Daniels Midland Co., based in Decatur, Ill., recently reported a loss in its ethanol business for its second quarter, ended Dec. 31. VeraSun Energy Corp. and Aventine Renewable Energy Holdings Inc. have both filed for bankruptcy protection. Pacific Ethanol Inc., which has counted Bill Gates as one of its star-studded investors, said recently in federal filings that it could run out of cash by the end of April if it can't restructure its debt or raise additional financing.
In response, pro-ethanol lobbyists have stepped up efforts to win more support from the government. An ethanol trade group hired retired U.S. general and former 2004 Democratic presidential candidate Wesley Clark to make its case for a higher blend. The industry also has turned to Congress, where lawmakers such as Sen. John Thune (R., S.D.) have held meetings with EPA staffers, urging them to allow blends of 12% or 13% ethanol immediately -- something he argues the EPA could do now without going through a public comment process.
By law, the EPA has until Dec. 1 to decide.
Write to Siobhan Hughes at siobhan.hughes@dowjones.com and Lauren Etter at lauren.etter@wsj.com