JACKFAU-85-322-6
THE EFFECT OF GASOLINE VOLATILITY CONTROL
ON SELECTED ASPECTS OF ETHANOL BLENDING
Final Report
Work Assignment 6-1
Contract No. 68-03-3244
Submitted to:
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Mobile Sources
Ann Arbor, Michigan, 48105
November 4, 1985

JACK FAUCETT ASSOCIATES
5454 WISCONSIN AVENUE • SUITE 1155
CHEVY CHASE, MARYLAND 20815
(301> 657-8223

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JACKFAU-85-322-6
THE EFFECT OF GASOLINE VOLATILITY CONTROL
ON SELECTED ASPECTS OF ETHANOL BLENDING
Final Report
Work Assignment 6-1
Contract No. 68-03-3244
Submitted to:
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Mobile Sources
Ann Arbor, Michigan, 48105
November 4, 1985
JACK FAUCETT ASSOCIATES
5454 WtSCONSIN AVENUE • SUITE 1155
CHEVY CHASE, MARYLAND 20815
<301i 657-8223

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TABLE OF CONTENTS
SECTION	PAGE
1	INTRODUCTION AND SUMMARY		1
2	INDUSTRY PROFILE		4
2.1	SUPPLY		4
2.2	DEMAND		11
2.3	ETHANOL PRICING	26
2.4	GASOHOL PRICING	26
2.5	CURRENT ISSUES		30
3	ETHANOL DISTRIBUTION AND BLENDING	33
3.1	THE GASOLINE DISTRIBUTION SYSTEM	33
3.2	ETHANOL AND GASOHOL DISTRIBUTION	41
3.3	TRANSPORTATION COSTS	45
3.4	STATE TAX INCENTIVES AND
EXCHANGE AGREEMENTS	46
4	IMPACT OF SPECIAL BLENDING REQUIREMENTS
FOR ETHANOL BLENDS ON THE
DISTRIBUTION SYSTEM		47
4.1	BLENDING LOCATION	48
4.2	TRANSPORTATION MODES	51
4.3	TRANSPORTATION COSTS	53
4.4	EFFECTS ON MARKET RELATIONSHIPS AND
TRANSACTION COSTS		60
4.5	STORAGE AND EQUIPMENT ISSUES		61
5	IMPACT OF REDUCING THE ETHANOL
CONTENT OF GASOHOL TO 5 PERCENT	63
5.1	BLENDING LOCATION		64
5.2	TRANSPORTATION MODE		64
5.3	TRANSPORTATION COSTS	65
5.4	EFFECTS ON MARKET RELATIONSHIPS AND
TRANSACTION COSTS	73
5.5	STORAGE AND EQUIPMENT ISSUES	75
REFERENCES	76
APPENDIX A	79
i

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CHAPTER 1
INTRODUCTION AND SUMMARY
Waivers currently exempt ethanol blends from volatility controls such as Reid Vapor
Pressure restrictions. As a result, ethanol (in volumes of up to 10 percent in unleaded
gasoline) may currently be added to any legal gasoHne to form an ethanol blend. If
regulations are implemented requiring gasoline to be specifically blended for ethanol
addition as a means of controlling evaporative hydrocarbon emissions, changes in the
ethanol, gasoline, and gasohol marketing and distribution systems may result. This
analysis evaluates potential adjustments in these distribution systems. The report
includes the following:
•	An overview of the domestic fuel ethanol industry, including detailed
analyses of supply, demand, pricing, tax incentives, and other current
issues affecting the market.
•	An overview of present fuel ethanol distribution and blending practices,
including analyses of transportation costs, gasohol distribution, the in-
fluence of state tax incentives and exchange agreements, and the
relationship between the fuel ethanol distribution system and the gasoline
distribution system.
•	An evaluation of the effects of volatility control on the logistics and costs
of ethanol distribution and blending practices for 10 percent ethanol
blends.
•	An evaluation of the effects of volatility control on the logistics and costs
of ethanol distribution and blending practices for 5 percent ethanol blends
(i.e., if mid-range volatifity control limits the maximum ethanol content
in gasoline to 5 percent).
Several assumptions of the analysis should be noted. Most importantly, effects of the
proposed blending requirements on demand for gasohol were not analyzed. Gasohol
demand in the 10 percent blending scenario was assumed to remain constant; demand in
the 5 percent scenario doubles. (The latter results from holding ethanol demand
1

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unchanged.) Furthermore, in the distribution scenarios presented in Chapters 4 and 5,
there is an implicit assumption that each refiner whose product is currently blended
with ethanol will produce the special gasoline blends; and that the specially blended
gasoline is mixed with the ethanol of the same producer and shipped to the same
terminals as was the case without special blending. An analysis of the effects on fuel
distribution systems of the change in blending practices that considers potential
changes in demand for gasohol and in relationships am org ethanol and gasoline suppliers
and terminal operators is recommended as a means of refining the study. However,
important conclusions about potential changes in ethanol, gasoline, and gasohol distri-
bution systems can be drawn based on the current analysis.
The 10 percent ethanol blend analysis shows that requiring the use of specially blended
gasoline for ethanol blending could increase the cost of delivering gasohol if terminal
blending continues. Transportation costs increase if the specially blended gasoline must
be shipped to the terminal using a transportation mode other than the mode used to
transport the standard gasoline previously blended with ethanol. This would happen if
the volume of specially blended gasoline did not meet the minimum batch requirement
for the latter mode. The maximum cost increase is estimated to be 0.82 cents per
gallon of gasohol for every 100 miles that the special gasoline is shipped to the
terminal. If refinery blending occurs and the gasohol is transported to the terminal by
the same mode as the previously used standard gasoline, transportation cost savings
could occur if the ethanol plant is much closer to the refinery than the terminal and/or
if the ethanol producer can realize sufficient transportation cost scale economies by
consolidating shipments. If, however, the gasohol is transported by a different mode (as
would be the case if a pipeline had transported the standard gasoline), gasohol
transportation costs could increase by as much as 0.91 cents per gallon per 100 miles,
less any cost savings in ethanol transport. Since it is probable that terminal blending of
gasohol will dominate refinery blending in 1990, total transportation costs will increase
by no more than 0.82 cents per gallon of gasohol for every 100 miles that the special
gasoline is shipped to the terminal.
The 5 percent ethanol blend analysis also shows that requiring the use of specially
blended gasoline for ethanol blending could increase the cost of delivering gasohol if
terminal blending continues. Transportation costs increase if the specially blended
gasoline must be shipped to the terminal using a transportation mode other than the
mode used to transport the standard gasoline previously blended with ethanol. The
2

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maximum cost increase is estimated to be 0.87 cents per gallon of gasohol for every 100
miles that the special gasoline is shipped to the terminal, less the estimated minimum
transportation cost savings associated with reducing the ethanol content of the blend to
5 percent (0.075 cents per gallon of gasohol). Similarly, refinery blending of 5 percent
blends could result in transportation cost savings if the gasohol is transported to the
terminal by the same mode as the standard gasoline and if the ethanol producer can
realize sufficient transportation cost scale economies by consolidating shipments. If,
however, the gasohol is transported by a different mode, transportation costs could
increase.
Finally, analysis of the results of the 10 percent and 5 percent scenarios indicates that
special blending requirements to control gasohol volatility will probably have a smaller
impact on transportation costs if 5 percent blends are required. This is because
reducing the ethanol content of blends replaces relatively expensive to transport
ethanol with gasoline; and because larger quantities of specially blended gasoline and
gasohol will generally move through the distribution system for 5 percent blends than
for 10 percent blends, reducing the likelihood of modal changes.
3

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CHAPTER 2:
INDUSTRY PROFILE
Ethanol, also known as grain alcohol, has been produced through a fermentation process
for thousands of years for use as a beverage. Since the development of the internal
combustion engine, ethanol has also competed with gasoline as a potential motor fuel.
This section profiles the supply, demand, pricing, and other characteristics of ethanol
used as a fuel.
2.1 SUPPLY
Fuel ethanol in the United States is supplied primarily through domestic production (77
percent in 1984), but increasingly through imports (23 percent), which have grown
steadily since they first became a factor in the U.S. supply in 1981. The ethanol may be
produced either synthetically from petroleum-derived naphtha or ethylene, or through
fermentation. Current tax incentives for the production and use of fuel ethanol, which
require that the ethanol be produced from renewable resources, favor the fermentation
process. Therefore, synthetically produced ethanol is limited to uses as a solvent or a
chemical feedstock by economic constraints. It is production through fermentation that
is the focus of the discussion of domestic supply in this chapter.
Exhibit 2-1 details the volumes of fuel ethanol supplied by fermentation and imports
since 1979. Detailed discussions of supply — including production processes, capacity,
imports, and factors influencing supply — are provided in the following sections.
Domestic Production
Fermentation technology is the primary means of producing fuel ethanol in the United
States today. Two fermentation processes are used — wet milling (70-80 percent) and
dry milling (20-30 percent).* Both fuel-grade ethanol and beverage-grade ethanol may
be produced by fermentation, but the processing requirements are sufficiently different
to prevent inexpensive conversion of beverage ethanol capacity to fuel ethanol
capacity. Stable beverage ethanol demand at 80-90 million gallons per year also works
to prevent conversion of production facilities.2
1E.E. Ecklund, "Status and Directions of the Use of Alcohols and Other Oxygenated
Hydrocarbons in North America," VI International Symposium on Alcohol Fuels
Technology, May 1984.
2 Thomas F. Killilea, Stanford Research Institute "Marketing Research Report: Ethyl
Alcohol," Chemical Economics Handbook, p. 644.5022P.
4

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EXHIBIT 2-1:
TOTAL FUEL ETHANOL SUPPLY
(million gallons)
Domestic
Production			Imports
Year
Volume
Percent
of
Supply
Volume
Percent
of
Supply
Total Supply
1979
25
100
0
0
25
1980
50
100
0
0
50
1981
70
64
40
36
110
1982
170
81
40
19
210
1983
385
87
60
13
445
1984
420
77
123
23
543
Sources: 1979-1983 statistics from E.E. Ecklund, "Status and Directions of the Use
of Alcohols and Other Oxygenated Hydrocarbons in North America," VI
International Symposium on Alcohol Fuels Technology, May 1984. 1984
statistics from Alcohol Outlook, March 1985.
5

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The production of fuel ethanol by fermentation requires four steps. First, starch or
sugar feed is treated to yield a sugar solution. Second, the solution is fermented to
produce ethanol and carbon dioxide using bacteria or yeast. Third, the fermentation
product is concentrated into 190-proof ethanol by distillation. Finally, the remaining
water is removed through a process called azeotropic distillation which involves
distillation with a solvent added and recovery of the solvent. Water must be reduced
below 0.3 percent of volume to prevent phase separation, which causes engine damage
and poor performance. If a grain feedstock is used, the remaining material, after the
ethanol has been removed, is a valuable by-product called distillers' grain, which is a
high protein animal feed.* Beverage ethanol production does not require the azeotropic
distillation step, but does require additional separation to remove toxic higher alcohols
present as impurities in the distilled ethanol. Fuel ethanol is typically denatured by
o
adding 2 percent gasoline, as required by law to discourage beverage use.
Current fuel ethanol production capacity at all fermentation ethanol production
facilities is approximately 625 million gallons per year. Actual production levels (67
percent of capacity)4 are considerably below capacity due to the downward pressure on
demand caused by l) the availability of low-priced imported fuel ethanol; 2) the
declining price of gasoline relative to ethanol; and 3) generally soft demand for motor
fuel (Exhibit 2-2). Capacity growth, which averaged 69 percent per year between 1979
and 1984, has slowed in recent years, to 29 percent in 1982-1983 and 13 percent in
1983-1984. At this time there are 53 major commercial facilities producing fuel-grade
ethanol via fermentation in the United States.ฎ
Factors affecting the availability of domestic fuel ethanol include the delivered price
and availability of feedstocks, and the price and marketability of byproducts.
Feedstocks, which account for as much as 80 percent of the price of fuel ethanol,
* Office of Technology Assessment, Gasohol; A Technical Memorandum, 1979, pp. 3-4,
10.
2
Mueller Associates, Inc., Gasoline Octane Enhancement; Technology, Economics, and
Environmental, Health and Safety Considerations, 1985, p. VI-10.
O
Office of Alcohol Fuels, Sixth Annual Report on the Use of Alcohol in Fuels, April 1985,
p. 1.
4Peter Busowski, Editor, Alcohol Week, personal communication, August 5, 1985.
Herman and Associates, July 1985.
6

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EXHIBIT 2-2;
DOMESTIC CAPACITY AND OPERATING RATES
(million gallons/year)
Year
Capacity
Operating Rate
1979
55
45.5%
1980
100
50.0%
1981
260
26.9%
1982
425
40.0%
1983
550
70.0%
1984
625
67.2%
1Domestie production -^-domestic capacity x 100.
Sources: 1979-1983 statistics from E.E. Ecklund, "Status and Directions
of the Use of Alcohols and Other Oxygenated Hydrocarbons in
North America," Vllntgrnational Symposium on Alcohol Fuels
Technology, May 1984. 1984 statistics from Office of Alcohol
Fuels, U.S. Department of Energy, Sixth Annual Report on the
Use of Alcohol in Fuels, April 1985, p. 1.
7

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include corn (92 percent of operating capacity in commercial facilities),* wood,
o
sorghum, molasses, other grains, and various food processing wastes. Variable gram
prices due to seasonal effects such as weather and crop yields may result in large
variability in the price at which fuel ethanol may profitably be sold. TTiis increases the
risk to investors and discourages future investment in fuel alcohol distilleries. Further-
more, aside from these yearly fluctuations, there may be a long run ceiling on the
amount of feedstock available to the fuel ethanol industry. An estimated 1 to 2 billion
gallons of ethanol per year may be produced in the United States before competition
between food demand for grain and fuel demand for grain will significantly increase
grain prices.3
A second factor which determines whether fuel ethanol can be produced competitively
is the marketability and value of byproducts from the fermentation process. The two
distinct fuel ethanol fermentation processes, wet milling and dry milling, yield different
byproducts. In wet milling facilities, the byproducts contain most of the non-starch
material in a grain feedstock and are recovered prior to the fermentation process. The
byproducts are corn oil, corn gluten meal and corn gluten feed which are sold as food
and high-protein animal feed. In dry milling facilities the byproducts are recovered
from the material remaining after fermentation has consumed most of the starches and
sugars in the feedstock. These byproducts, called distillers dried grains and solubles,
are also a high protein animal feed. Furthermore, either fermentation process yields
high quality carbon dioxide which may be recovered and sold for bottling, packing or
4
tertiary oil recovery.
The value of recoverable byproducts from feed ethanol produced from corn at a price of
$2.80 per bushel would be 43 cents per gallon of ethanol produced by dry milling,5 and
66 cents per gallon of ethanol produced by wet milling. If the fuel ethanol industry
were to expand to such an extent that the market for the animal feed byproducts
^Office of Alcohol Fuels, U.S. Department of Energy, Fourth Annual Report on the Use
of Alcohol in Fuels, March 1983, pp. 6-7.
2"Alcohol Week Price Watch: Key Fuel Grain and Byproducts Prices," Alcohol Week,
May 20, 1985, p.ll.
3 Office of Technology Assessment, op. cit., p. 31.
4David E. Hallberg, "Testimony before the Subcommittee on Energy Conservation and
Power of the Committee on Energy and Commerce, U.S. House of Representatives,"
June 28, 1983*
5Office of Technology Assessment, op., cit., p. 20.
8

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became saturated, then the price of fuel ethanol would no longer be competitive with
other octane-boosting components of gasoline, even with the federal and state
subsidies. It is estimated that the fuel ethanol industry would have to reach a
production level of 2 billion gallons per year to saturate the market for byproducts;
consequently, it is likely that the growth of the industry would be constrained by rising
feedstock costs before the byproduct credit would be reduced.1
Ethanol Imports
Ethanol imports account for a substantial fraction of the fuel ethanol supply in the
United States, 23 percent in 1984 (Exhibit 2-1). Brazil, which was the source of 80.3
O
percent of the ethanol imported into the United States in 1984 has lower labor costs
and lower feedstock costs for ethanol production than the United States. Imports by
country of origin are listed in Exhibit 2-3.
Ethanol imported for fuel use has increased from virtually nothing in 1980 to
approximately 123 million gallons in 1984. In the past, imports have been encouraged
by both federal and state tax subsidies: federal excise tax exemptions are available for
both domestic and imported ethanol, as are some state exemptions. However, when
imports were identified as a threat to the domestic industry, a customs duty was
imposed on ethanol imported for fuel use (in addition to the 3 percent ad-valorem duty
on ethanol imported for non-beverage purposes). The amount of this duty was 10 cents
per gallon in 1981, 20 cents per gallon in 1982, 40 cents per gallon in 1983, 50 cents per
gallon in 1984 and 60 cents per gallon in 1985, where it is to remain through 1992 when
3
the federal excise tax exemptions will expire. Since 1984, the customs duty on
imported fuel ethanol has been high enough to offset the subsidization of imported
ethanol by the federal excise tax exemption for gasohol.
Nevertheless, domestic consumption of imported fuel ethanol continues to grow. This
may be because some foreign-produced ethanol remains exempt from the import duty
on fuel ethanol. Of the 123 million gallons of ethanol imported into the United States
in 1984, 83 million gallons entered paying the tariff on fuel ethanol while an estimated
1 Office of Technology Assessment, op. cit., p. 20.
^"International Alcohol Outlook," Alcohol Outlook, March 1985, p. 14.
^Salvatore Lazzari, Congressional Research Service, Federal Tax Provisions Relating to
Alcohol Fuels Including Recent Changes Under the Tax Reform Act of 1984, November 6,
1984, pp. 15-16.
9

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EXHIBIT 2-3:
1984 ETHANOL IMPORTS, BY COUNTRY OF ORIGIN
Country
Volume (Thousand Gallons)*
Percent
Brazil
136,575
80.3
United Kingdom
10,652
6.3
Canada
7,318
4.3
Argentina
6,455
3.8
Spain
3,868
2.3
France
2,385
1.4
South Africa
1,616
0.9
Netherlands
896
0.5
Others^
279
0.2
TOTAL
170,045
100.0
^Includes ethanol imported for nonfuel purposes.
O
Other countries exporting ethanol were West Germany, Yugoslavia, Norway, Japan,
China, South Korea, and Mexico.
Source: "International Alcohol Outlook," Alcohol Outlook, March 1985, p. 14.
10

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40 milfion gallons more may have entered the country for fuel purposes without paying
the tariff.1 For example, importers may legally avoid the tariff by blending the ethanol
with gasoline to make gasohol and importing the gasohol, in which case the only duty
levied is the 1.25 cents per gallon duty on imported gasoline. The tariff may also be
avoided by blending imported fuel ethanol with 6 or 7 percent of another
octane-boosting component of gasoline, such as toluene or xylene, and paying a duty on
the shipment as though it were toluene or xylene instead of ethanol. Pure fuel ethanol
may also be imported duty-free into the United States if the ethanol has been upgraded
from 190 proof ethanol to fuel grade ethanol in a country covered by the Caribbean
Basin Initiative. Congressional action could possibly remove this last loophole within
4
a year.
2.2 DEMAND
Consumption of fuel ethanol has increased greatly in recent years, from 20 million
gallons in 1979 to 570 million gallons in 1984. By 1984, fuels uses accounted for 73
percent of all nonbeverage ethanol consumption.ฎ (Beverage ethanol is not considered
further here because of different product quality and regulatory requirements which
create a separate market for beverage ethanol.) Major nonfuel, nonbeverage uses
include applications as a solvent and as a chemical feedstock. However, since solvent
demand has been relatively stable, and feedstock demand has been declining in recent
years, fuel demand for ethanol accounts for all of the recent growth in total ethanol
g
demand. Nonbeverage ethanol consumption since 1979 is detailed by use in Exhibit 2-4.
(Fuel ethanol demand in Exhibit 2-4 does not match fuel ethanol supply in Exhibit 2-1
due to changes in inventories and the inexact nature of the import statistics.) Total
fuel ethanol demand and factors influencing it are described below.
^"International Alcohol Outlook," op. cit., p. 14.
2
"U.S. Firm Seeking to Import Ethanol Through Foreign Trade Zone," Alcohol Update,
May 27, 1985, p. 1.
3
John Gordley, member of Senator Dole's Staff, personal communication, August 12,
1985.
4
"Customs Refuses to Immediately Revoke CBI Rulings," Alcohol Update, May 6, 1985,
p. 1.
5
Migdon R. Segal, "Gasohol: The Alcohol Fuels." Prepared for Congressional Research
Service, July 12, 1985, p.6.
Thomas F. Killlea, Chemical Economics Handbook, op. cit., p. 644.5023L.
11

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EXHIBIT 2-4:
NONBEVERAGE CONSUMPTION OF ETHANOL, 1979-1984
{million gallons)
1979
Volume Percent
1980
VoSume
Percent
tan
Volume
19S2
Percent Volume
Percent
1983
Volume
Percent

Vohime
Percent
Fuel Vise
20
S.S
as
23.5
75
28.0
230
53.7
433
S7.9
570
73.1
Solve at
114
*5.9
108
38. J
109
37.9
100
23.1
ins1
IS.4
no1
14.1
Chemical Feedstock
107
42. a
98
54.6
94
31. 6
95
21.0
991
14.1
9o'
11.5
Exports
9
3.0
10
3.6
10
3.5
B
1.9
IB1
1.6
ID1
1.3
Estimated from SRI projections.
Source*: 19SI to 1IM fuel statistic* from Migdon R. Segal, "Gasoholi The Alcohol Fuels." Prepared for Congressional Research Service, July 11, 1ป85, p. t. Other
statistics from Thomas P. Killilea, SRI, "Marketing Research Report! Ethyl Alcohol," Chemical Economics Handbook, May 19*3, pp. M4.5D22 P-Q, A44.502JL.

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Fuel ethanol is marketed almost exclusively in 10 percent concentration as a component
of gasohol. In 1984, 5.7 billon gallons of gasohol were consumed, representing 5.5
1 2
percent of total gasoline consumption. ' This quantity of gasohol required 570 million
gallons of fuel ethanol for blending.
Demand for gasohol has a strong regional character related to the availability of
feedstocks for fuel ethanol production and state tax incentives for ethanol blending. In
certain states, the gasohol market share as a percent of total gasoline sales is nearly
3
five times the national average. Market shares for gasohol by state since 1982 are
shown in Exhibit 2-5. Gasohol sales volumes and market share by state for 1984 are
listed in Exhibit 2-6. From these exhibits it can be seen that gasohol sales are
particularly strong in the Midwest where corn, the primary feedstock for fuel ethanol,
is most readily available.
Although gasoline consumption is projected to fall from 102 billon gallons in 1984 to 86
4 5
billon gallons by 1990, ' demand for fuel ethanol as a blending agent in gasohol is
expected to continue to grow because ethanol, with current federal and state tax
incentives, is an economically viable subsitute for tetraethyl lead as an octane-boosting
0
component of gasolne. Consequently, demand for fuel ethanol may reach as much as
920 millon gallons in 1986, over 60 percent more than 1984 fuel ethanol demand.
Ethanol Demand and Octane Enhancement
Fuel ethanol can be marketed in two ways: as an additive to finished gasolne, and as
an alternative to other sources of octane in standard gasolnes. The former type of use,
*Midgon R. Segal, CRS, op. cit., p. 6.
2
1984 gasolne consumption is from Energy Information Administration, U.S. Department
of Enertrv, Petroleum Supply Monthly, December 1984, p. 25.
3
"January Gasolne and Ethanol Blend Sales," Alcohol Outlook, May 1985, p. 7.
4
Energy Information Administration, Petroleum Supply Monthly, op. cit., p. 25.
5Bonner and Moore Management Science, Impacts of Alcohol Fuels on the U.S. Refining
Industry, Volume I, August 1983, pp. 2-3.
g
The Environmental Protection Agency has required that the lead content in gasolne be
phased down to 0.1 grams per leaded gallon of gasolne by January 1, 1986.
''"Congressional Ethanol Caucus Seeks Senate Sponsor for EITC Extension," Alcohol
Week, May 13, 1985, p. 8.
13

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EXHIBIT 2-5;
MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE
JANUARY 1982
• to
rn
I to 5%
5 to \9*
ma
10 to W%

IS*

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EXHIBIT 2-5; (Continued)
MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE
JANUARY 1983

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EXHIBfT 2-5: (Continued)
MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE
JANUARY 1984
• to t%
~
I to 9V

5 to life
m
10 to *9%
n%

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EXHIBIT 2-5; (Continued)
MARKET SHARE OF GASOHOL IN GASOLINE MARKET, BY STATE
JANUARY 1985
Alcohol Wcrk *n
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EXHIBIT 2-6;
1984 GASOHOL SALES BY STATE
(thousand gallons}
Gasohol
Market Share,
State
Gasohol Sales
Gasoline Sales
Percent
Alabama
34,899
1,714,466
2.0
Arkansas
28,871
1,131,879
2.6
California
401,837
11,543,991
3.5
Colorado
62,371
1,564,085
4.0
Connecticut
5,421
1,324,617
0.4
District of Columbia
63
154,440
—
Florida
508,751
4,990,063
10.2
Georgia
16
2,817,217
—
Idaho
6,658
411,438
1.6
Illinois
263,127
4,171,725
6.3
Indiana
483,063
2,394,052
20.2
Iowa
457,228
1,421,217
32.2
Kansas
249,296
2,150,118
11.6
Kentucky
328,238
1,595,852
20.6
Louisiana
24,424
2,152,204
1.1
Maryland
82
1,785,164
—
Michigan
577,723
3,954,285
14.6
Minnesota
2,707
2,406,645
0.1
Montana
8,303
505,144
1.6
Nebraska
208,455
730,783
28.5
New Mexico
56,494
804,118
7.0
North Carolina
34,037
2,958,509
1.2
North Dakota
5,469
424,937
1.3
Ohio
399,988
4,497,646
8.9
Oklahoma
23,620
1,822,717
1.3
Oregon
298
1,299,318
—
South Carolina
154
1,485,242
—
South Dakota
37,850
381,163
9.9
Tennessee
109,762
2,623,163
4.2
Texas
207,152
10,455,038
2.0
Utah
25,862
703,798
3.7
Virginia
131,618
2,454,065
5.4
Washington
9,143
1,944,828
0.5
Wisconsin
1,962
1,998,435
0.1
Wyoming
288
300,638
0.1
TOTAL1
4,695,230
83,073,000
5.7
^Total does not include 15 states where gasohol is taxed at the same rate as gasoline and
gasohol data are not available separate from gasoline data.
Sources: Gasohol sales from Office of Alcohol Fuels, U.S. Department of Energy, Sixth
Annual Report on the Use of Alcohol in Fuels. April 1985, p. 6. Gasoline sales
from Energy Information Administration, Petroleum Marketing Monthly,
January 1984 through December 1964.
18

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as a "fuel extender," is by far the most common in today's fuel ethanol market.
However, there are signs that the second type of use may eventually dominate the
market. Many refiners are now offering sub-octane gasolines specifically produced for
blending with ethanol (Exhibit 2-7). This is part of a larger effort, among both small
and large refiners, to find an economical substitute for tetraethyl lead in the wake of
the EPA-mandated lead phasedown.
Demand for ethanol as an octane-enhancing additive to gasoline depends on tax
subsidies and the price and availability of other octane enhancers. Octane improvement
costs for increased refining severity and for several types of octane enhancing additives
are listed in Exhibit 2-8.* As can be seen in these statistics, without a tax subsidy,
ethanol is the most expensive means of octane enhancement. With a 5 cent per gallon
gasohol subsidy, ethanol becomes competitive with tertiary butyl alcohol. With a 10
cent per gallon gasohol subsidy, ethanol becomes less expensive than any other means of
octane enhancement. It is important to note, however, that even if ethanol is favored
as an octane enhancer because of its attractive cost relative to alternatives, its supply
is unlikely to be great enough to satisfy all demand for octane. By 1990, total demand
for octane enhancement is expected to reach 7.4 billion octane number-barrels. (All
demand for octane enhancement in 1990 will be for unleaded gasoline. Estimated 1985
octane requirements, in comparison, are 4.1 billion octane-number barrels for leaded
O
gasoline and 5.4 billion octane number barrels for unleaded gasoline.) If ethanol alone
were used to meet the demand, ethanol consumption would reach 20 billion gallons in
that year. This is at least ten times the projected capacity for fuel ethanol production
and also far exceeds the 1 to 2 billion gallon fuel ethanol demand level beyond which
fuel production would begin to compete with food uses for corn and other ethanol
feedstocks.^
Ethanol Demand and Tax Incentives
In 1978 there were no laws favoring the production or blending of alcohol fuels, and the
commercial production of fuel ethanol was virtually nonexistent. Rapid growth in fuel
ethanol production and consumption since 1978 has been encouraged by federal and
state legislation partially exempting ethanol blenders from federal and state excise
taxes on gasoline, and federal legislation granting federal income tax credits to ethanol
^Some small refiners do not have the capability to increase octane ratings of their
gasoline by increasing refining severity. These refiners have the choice of either selling
their product to a large refiner for further processing or blending their gasoline with an
octane-boosting agent to meet octane requirements.
^Mueller Associates, Inc., op. cit., pp. H-8, V-8.
David E. Hallberg, op. cit.	18

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EXHIBIT 2-7:
COMPANIES WHICH PRODUCE, EXCHANGE OR SHIP SUB-OCTANE GASOLINE
WHICH CAN BE BLENDED WITH ETHANOL
Pipeline Companies
Refiner/Marketer
Amoco
Amber
Apex
Ashland
Buckeye Pipeline
Derby
Indiana Farm Bureau
Koch Refining
La Gloria
Mobil
Rock Island
Southland/Citgo
Sun Refining
Texaco
Total Petroleum
Triangle
Unocal
Williams Pipeline Co.
Wolvering Pipeline
Source: Archer Daniels Midland, ADM Ethanol.
Number Of
Terminals With Ethanol
16
2
6
11
0
1
4
5
3
3
2
8
1
7
7
2
6
11
0
20

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EXHIBIT 2-8:
GASOLINE OCTANE IMPROVEMENT COSTS
Component
Volume Percent
Tetraethyl Lead
MMT2
Processing
Low Severity
Typical Severity
High Severity
Toluene ($1.19/gal.)^
Tertiary Butyl Alcohol
($1.00/gal.)
Methyl Tertiary BuXyl Ether
($1.19./gal.)
Oxinol 50*
(70*/gal.)
Ethanol ($1.63/gal.)3
with 5
-------
blenders. The federal tax exemptions for alcohol blends since 1978 are detailed in
Exhibit 2-9, and the current state tax exemptions are detailed in Exhibit 2-10 and
Appendix A.
The tax subsidies for alcohol blends have dictated a fuel ethanol market where fuel
ethanol is blended with gasoline in a 1:9 ratio. The resultant 10 percent ethanol blend,
commonly known as gasohol, is eligible for the highest subsidy through tax exemptions.
Gasohol has the lowest concentration of alcohol in gasoline which is still eligible for the
excise tax exemption.* Gasohol has the highest concentration of fuel ethanol in
gasoline which is allowed by a waiver. Fuel ethanol that is blended in lower
concentrations or that is not sold through retail outlets is qualified for an income tax
credit designed to encourage fuel ethanol use where the excise tax exemption is not
2
applicable. The income tax credit is not as advantageous to the blender as the excise
tax exemption, since use of the tax credit requires profitability. Consequently, no
3
company has claimed the blender income tax credit.
The impact of state tax incentives on gasohol sales may be seen by comparing the tax
incentives shown in Exhibit 2-10 and Appendix A to state sales and market share
statistics in Exhibits 2-5 and 2-6. The statistics suggest that the federal tax incentives
alone are not sufficient to bring the price of ethanol down to the level where gasohol is
competitive with gasoline. Of states with no tax incentive for the use of fuel ethanol,
only Arkansas, California and North Carolina have gasohol market shares in excess of 2
percent. In each of these states tax incentives for fuel ethanol have been discontinued
4 5
within the past two years and the gasohol market share may be expected to decline.
The effects of state tax subsidies may be further analyzed by examining the demand
impacts of changes in state tax subsidies, as illustrated in Exhibit 2-11. The doubling of
the tax incentive in Louisiana in July 1984 led to an increase in gasohol sales of 24.4
million gallons in six months (an increase from virtually nonexistent gasohol sales to a
2.3 percent market share). However, as the statistics for Wyoming show, there may be
very Sttle change in consumption in a state where limited feedstock availability
restricts ethanol production. fit the case of California the impact on demand was also
^Salvatore Lazzari, op. cit., p.3.
2
Ibid, pp. 7-8.
3
Eric Vaughn, President, Renewable Fuels Association, August 19, 1985.
4
Herman and Associates, Survey of Federal and State Alcohol Fuel Regulations, July
1985.
g
Office of Alcohol Fuels, Fourth Annual Report, op. dt., pp. 9-10.
22

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EXHIBIT 2-9:
FEDERAL GASOLINE EXCISE TAX AND ALCOHOL BLEND TAX INCENTIVES
(cents per gallon)
Excise Tax Exemption
Motor Fuel	For Alcohol Blends	Income Tax Credit
Year	Excise Tax	(cents per gallon of gasohol) (cents per gallon of ethanol)
1978
4
0
0
1979
4
4
0
1980
4
4
40
1981
4
4
40
1982
9
5
50
1983
9
5
50
1984
9
5
50
1985
9
6
60
*For gasoline blended with a minimum of 10 percent alcohol of at least 190 proof and
manufactured from renewable resources.
2
Credit is per gallon of ethanol of at least 190 proof instead of per gallon gasohol.
Cannot be taken if excise tax exemption is taken. A smaller income tax credit is
available for 150 to 190 proof ethanol.
Sources: Salvatore Lazzari, Congressional Research Service, Federal Tax Prov-
isions Relating to Alcohol Fuels Including Recent Changes Under the fax
Reform Act of 19*541 November 6, 1984, pp. 3-8} Tnomas F. killilea,
Stanford Research Institute, "Marketing Research Report: Ethyl Alco-
hol," Chemical Economics Handbook, May 1983, p. 644.50211, and Con-
gressional Quarterly, Inc., Energy Policy, 2nd Edition, March 1981, pp.
201, 223-235.
23

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EXHIBIT 2-10:
STATE TAX INCENTIVES FOR ALCOHOL BLENDED MOTOR FUELS1
Additional information ia provided in Appendix A.
* Not yet in effect.
Herman end Amoetates. Julv 1

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EXHIBIT 2-11;
EFFECT OF CHANGES IN STATE TAX EXEMPTIONS FOR GASOHOL IN SELECTED STATES
State Tm Exemption
Gaaohol Sales < thousand gallons)
Garohol Market Share (percent)
State
Louisiana
Utah
Wyoming
California
Minnesota
Date of Tax
Exemption Change Before Change
7-1-84
7-1-84
7-1-84
12-J1-83
1-1-83
St/gal.
5ซ/gal.
4*/gai.
3%
After Change
!6*/gaI
2t/gaL
6 Month Period
Before Change
25,243
101
223,695
0
6 Month Period
After Change
24,424
619
187
255,750
2,126
6 Month Period
Before Change
7.3
0.1
4.6
6 Month Period
After Change
2.3
0.2
0.1
4.5
0.2
Difference
*2.3
-7.1
0
-0.1
+0.1
Sources: Office of Alcohol Fuels, Sixth Annual Report on the Uae of Alcohol in Fuels, April 1985, pp. 8-8j Office of Alcohol Fuels, Fourth Annual Report on the Use of
Alcohol in Pueto, March 1983, pp. B-tO; and Knergy Information Administration, Petroleum Marketing Monthly, July 1982 through December 19M.

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slight, since California is a major market for imported ethanol that can be sold
profitably without a tax incentive. Furthermore, any growth in the federal tax subsidy
for alcohol fuels will have the effect of reducing or eliminating the state tax incentive
necessary to make gasohol competitive, tending to reduce regional differences in
gasohol demand.
2.3	ETHANOL PRICING
Historically, ethanol prices have been significantly higher than gasoline prices, prevent-
ing the large-scale use of ethanol as a motor fuel (Exhibit 2-12). The recent marketing
of ethanol as an octane enhancer, the federal and state tax subsidies for alcohol fuels,
and the escalation of gasoline prices in the 1970's and early 1980's have made ethanol
more competitive with gasoline. "Die current wholesale price for fermented fuel
ethanol is between $1.42 per gallon and $1.72 per gallon.* Hie current price of gasoline
2 3
averages $0.82 per gallon wholesale, without taxes, and $1,199 per gallon retail. '
Thus, gasoline still holds a considerable price advantage over ethanol if factors such as
tax incentives are not accounted for. If the price of ethanol is adjusted for the federal
excise tax exemption on gasohol as shown in Exhibit 2-12, the net price of ethanol to
the blender becomes much lower. For example, the current federal excise tax
exemption on gasohol of 6 cents per gallon of gasohol reduces the net price of ethanol
by 60 cents per gallon of ethanol blended in a 10 percent concentration. Thus the net
price of fermented ethanol to a blender is $0.82 to $1.12 per gallon when the federal
tax exemption is taken into account. If the blender can take advantage of a state tax
exemption for alcohol fuels, the net price of ethanol to the blender would be even
lower.
2.4	GASOHOL PRICING
Gasohol may be either regular unleaded gasoline blended with ethanol (a premium
blend), or ethanol which has been blended with a specially prepared leaded or unleaded
suboctane gasoline so that the octane rating of the blend qualifies it as a regular leaded
Information Resources, Inc., Alcohol Outlook, May 1985, p. 3.
2
Energy Information Administration, U.S. Department of Energy, Petroleum Marketing
Monthly, March 1985, p. 43.
3
Energy Information Administration, U.S. Department of Energy, Monthly Energy
Review, June 1985, p. 98.
26

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EXHIBIT 2-12;
ETHANOL AND GASOLINE PRICES, 1975-1985
(dollars per gallon)

Average Midyear Wholesale Ethanol Prices

Average Annual Retail Gasoline Prices

Year
Denatured, 200 Proof
Net of Federal Tax Exemption
Regular
Leaded
Regular
Unleaded
Premium
Leaded
Premium
Unleaded
Average
1VTS
1.100
1.100
0.567
	
0.609
	
	
1974
1.250
1.250
0.590
0.614
0.636
	
	
1977
1.250
1.250
0.622
0.656
0.674
	
	
mi
1.220
1.220
0.626
0.670
0.694
	
0.652
1979
1.365
0.965
0.857
0.903
0.922
	
0.892
1999
1.730
1.330
1.191
1.24S
1.281
	
1.221
1911
1.940
1.540
1.311
1.378
1.439
1.470
1.3S3
im
1.915
1.315
1.222
1.296
1.417
1.261
1.4(5
1993
1.015
1.315
1.157
1.241
1.372
1.383
1.225
1994
1.815
1.315
1.129
1.212
	
1.366
1.196
19951
1.635
1.035
1.119
1.205
	
1.340
1.199
1 Current prices.
Sourcea; Rthanol prices from "Current Prices of Chemicals and Related Material," Chemical Marketing Reporter, midyear issues and Alcohol Week, Jurie It, IMS, p. 1 J.
Gasoline prices from Energy Information Administration, U.S. Department of Energy. Monthly Energy Review, various issues.

-------
or regular unleaded grade. It is most common at present for gasohol to be blended by
wholesalers using 87 octane regular unleaded gasoline from pipeline terminals and
ethanol from fuel ethanol manufacturers. In this case, the gasohol blend is a premium
unleaded fuel of 90 to 91 octane, comparable to nonalcohol unleaded premium gasoline
with an octane rating of 91. Currently, the retail price of premium unleaded gasoline is
8.7 cents higher than the retail price of regular unleaded gasoline, while the gasohol
2
blended in this manner commanded a price over regular of about 4 cents in 1984.
Gasohol prices may be estimated from gasoline prices and ethanol prices if it is
assumed that the blender will price the gasohol in order to receive the same income and
net profit per volume of gasohol sold as per volume of gasoline sold. The methodology
for this calculation is shown in Exhibit 2-13, using current data for wholesale prices of
regular unleaded gasoline and gasohol and the retail price of regular unleaded gasoline.
The net profit per gallon of retail sales of 100,000 gallons of gasoline is determined
first as a base case. Case 1 is gasohol blended in a state where there is a 15 cent per
gallon state excise tax on gasoline and no state excise tax exemption for gasohol. Case
2 is gasohol blended in a state where there is a 15 cent per gallon state excise tax on
gasoline and a 5 cent per gallon state excise tax exemption for gasohol. The
calculations show that where there is no state tax exemption for gasohol, the gasohol
would be priced 1.3 cents per gallon higher than regular unleaded gasofine. Where there
is a state tax exemption of 5 cents per gallon for gasohol, the gasohol would be priced
3.5 cents per gallon lower than regular unleaded gasofine. However, since gasohol
blended from 87 octane regular unleaded gasoline would be a premium unleaded fuel of
90 to 91 octane, gasohol could sell at a much higher price in either case, a price closer
O
to the price of premium unleaded On this example, $1.31 per gallon). Thus, the blender
could improve his profits either by expanding his profit margin or by increasing sales at
the price of gasohol determined by a constant margin.
1Energy Information Administration, Monthly Energy Review, op. cit., p. 98.
2Office of Alcohol Fuels, Sxth Annual Report, op. cit., p. 3.
3
Energy Information Administration, Monthly Energy Review, op. cit., p. 98.
28

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EXHIBIT 2-13:
DETERMINATION OF GASOHOL PRICING BY BLENDER'S PROFIT MARGIN

Gasoline
Gasohol (10% Ethanol)

Base Case
Case 1
Case 2
Federal tax credit (~/gal.)
0
6
6
State tax credit ($/gal.)
0
0
5
REVENUES
Total Sales Revenue (100,000 gal.)
115,900
117,210
112,210
EXPENSES .
Gasoline Cost ($0.829/gaL)
Ethanol Cost ($1.56/gal.)
Total Fuel Cost (100,000 gal.)
State Tax ($0.15/gal.)
Federal Tax ($0.09/gal.)
Total Expenses
82,900
0
82,900
15,000
9,000
106,900
74,610
15,600
90,210
15,000
3,000
108,210
74,610
15,600
90,210
10,000
3,000
103,210
Operation Income
9,000
9,000
9,000
Tax Liability (45%)
4,140
4,140
4,140
Net Profit After Tax
4,860
4j860
4,860
Gross Margin ($/gal.)
0.090
0.090
0.090
Net Profit ($/gal.)
0.0486
0.0486
0.0486
Retail Sales Price
1.1593
1.1721
1.1221
March 1985 wholesale price for regular unleaded gasofine.
2
March 1985 wholesale price for fermented, 200 proof fuel alcohol.
3
March 1985 retail price for regular unleaded gasoEne.
Sources: Ethanol wholesale price from Alcohol Outlook, May 1985, p. 3. Gasoline wholesale
price from Energy Information Administration, Petroleum Marketing Monthly, March
1985, p. 45. GasoEne retail price from Energy Information Administration, Monthly
Energy Review, March 1985, p. 98.

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2.5 CURRENT ISSUES
The regulatory environment and economic situation of the domestic fuel ethanol
industry are in a state of constant change. Current issues which will affect the
long-term growth and stability of the fuel ethanol industry include: the EPA mandated
phasedown of lead in gasoline; a Clean Air Act waiver approval by the EPA for a
DuPont gasolne blend containing methanol, cosolvent higher alcohol, and a DuPont
proprietary corrosion inhibitor; a number of proposed legislative changes to tax
incentives and import regulations for fuel ethanol; and ongoing research in alcohol fuels
technology.
Lead Phasedown
On March 7, 1985, the EPA announced a final ruling on its proposed regulation regarding
gasoline lead phasedown. A limit of 0.1 grams of lead per leaded gallon of gasoline was
imposed, effective January 1, 1986, with an interim standard of 0.5 grams per leaded
gallon, effective July 1, 1985.1 The intent of this regulation was to reduce the health
risks of airborne lead and to reduce the use of leaded gasoline in unleaded
gasoline vehicles, which can poison the catalytic converter and significantly increase
exhaust emissions.
The phasedown of lead in gasolne could have a major impact on the fuel ethanol
market. While some major refiners may find it economically and/or logistic ally
attractive to make the capital investment needed to enhance octane ratings by
increasing reformer severity, others, especially small refiners, may turn to an alterna-
2
ti ve octane boosting additive such as ethanol. Ethanol availability and price, as well as
possible regulatory factors, will influence what part ethanol will have in filling the
o
increased demand for nonleaded octane enhancers.
The DuPont Waiver
On January 14, 1985, the EPA conditionally granted DuPont a waiver of the Clean Air
Act for a gasoline blend containing methanol, cosolvent alcohol, and a DuPont
proprietary corrosion inhibitor, DGOI-IOO. The waiver request, as submitted, called for
a maximum of 5 volume percent methanol and a minimum of 2.5 volume
^Volume 50, FR 9386 (March 7, 1985)
2
Information Resources, tic., Alcohol Outlook, March 1985, pp. 2,17.
3	~
"Under EPA's Lead Phase-Down Will Ethanol Blends Save the Independent," Lundberg
Letter. November 9, 1984, pp. 1-6.		*
30

-------
percent cosolvent alcohol with a maximum of 3.7 weight percent oxygen in the finished
fuel. The cosolvent alcohol could be one or a mixture of ethanol, propanols, and
butanols. Existing ASTM volatility standards for gasoline would need to be met, as well
as specifications for maximum temperature for phase separation. Due to potential
increases in evaporative emissions with the use of such a fuel, EPA attached certain
conditions to the waiver before granting it. The major condition is an Evaporative
Index standard — a function of Reid Vapor Pressure, fraction distilled at 200 degrees
Fahrenheit, and fraction distilled at 100 degrees Fahrenheit. Also, fuel blended with
DuPont blendstock may not be used as a base gasoline to blend with other oxygenates,
such as alcohols and ethers, and alcohol purity specifications must be met.1
Some members of the energy industry consider the terms of the DuPont waiver to be
restrictive, and so blenders and refiners have been slow initially to begin blending
methanol and ethanol into gasoline according to the terms of the DuPont waiver.
However, the potential demand for ethanol as a component of DuPont waiver blends is
large. The DuPont waiver blend is a less expensive octane-boosting gasoline additive
o
than blending gasoline with pure ethanol, and could increase blenders' profit margins.
Ethanol may be preferred to the propanols and butanols as a cosolvent alcohol in the
DuPont blend since ethanol blended in this proportion would be eligible for the blender's
federal income tax credit of $0.60 per gallon of ethanol. The DuPont blend may make
it possible to market ethanol economically in states where there is no state tax
incentive for ethanol blends, particularly in the heavy population centers on the East
3
and West Coasts.
Ethanol Legislation
At the federal level, both the tax subsidies for alcohol fuels and the duties on imported
fuel ethanol are subject to potential revision. Various state legislatures are also
considering legislation which will affect alcohol fuels regionally.
1"Vol. 50, FR 2615 (January 17, 1985)
2
"U.S. Fuel Alcohol Market Analysis,'" Alcohol Outlook, September 1984, d. 4.
-
"EPA DuPont Decision Seen Putting Ethanol in States Without Tax Breaks," Alcohol
Week, January 15, 1985, p. 2.
31

-------
Elimination of the federal tax incentives for alcohol fuels would have serious conse-
quences for the domestic fuel ethanol industry, since gasohol could not currently
compete with gasoine without the federal subsidy. Extension of the energy investment
tax credit would have the effect of encouraging continued growth of domestic fuel
ethanol production capacity. Legislation which would strengthen the fuel ethanol
import duty laws would provide a greater deterrent to fuel ethanol imports, and thus
encourage the development of domestic capacity. Such legislation includes a 60 cents
per gallon tariff on gasohol i mports, which are not currently subject to the 60 cents per
gallon fuel ethanol tariff; a bill closing the loophole for wet ethanol upgraded to fuel
ethanol in the Caribbean, presently exempt from duties under the Caribbean Basin
Initiative; a fuel ethanol duty imposed on allimported ethanol, followed by remission of
the duty to an end user of ethanol who could verify that the ethanol was used for
nonfuel purposes; and closure of the loophole for imported ethanol blended with another
octane enhancer, such as toluene or xylene, to avoid the tariff.
In the state legislatures, South Carolina, New Jersey and Maine have passed excise tax
exemptions which took effect between October 1, 1985 and January 1, 1986. These
exemptions will be 6 cents per gallon, 8 cents per gallon and 4 cents per gallon
respectively.* California is currently considering a 2 cent per gallon gasohol excise tax
exemption on gasohol, and Illinois is currently considering a bill to reduce the state
sales tax exemption by one percent for every cent increase in the federal excise tax
exemption.^
Ethanol Research
Currently, research is being conducted to develop an economically competitive process
technology for the production of ethanol from cellulose materials, such as wood. Work
is also being done to develop new strains of yeast which could increase ethanol yields
3
from fermentation by 30 to 40 percent. The economic analysis in this report assumed
no major breakthrough would occur in ethanol production technology in the next five
years. A breakthrough in either of these areas is unlikely to result in production scale
units in that time frame, but if such a breakthrough were to occur it could dramatically
lower the price of domestic fuel ethanol and increase demand for ethanol as a gasoline
additive.
^Herman and Associates, op. cit.
2
"State Tax and Regulation Update,1* Alcohol Update, July 1, 1985, p. 10.
3
Office of Alcohol Fuels, U.S. Department of Energy, Annual Report to the President
and the Congress, December 1984, p. 2
32

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CHAPTER 3
ETHANOL DISTRIBUTION AND BLENDING
This distribution system for ethanol has three components:
•	distribution of gasoline to be blended with ethanol, from the refinery to
the blender;
•	distribution of ethanol to be blended with gasoline, from the producer to
the blender; and
•	distribution of gasohol, from the blender to the retailer.
The following pages describe each of these aspects of the ethanol distribution system,
focusing on the characteristics of each that could be affected by gasohol special
blending requirements and/or a reduction in the ethanol composition of gasohol from 10
percent to 5 percent. The patterns of distribution described here, and their costs, serve
as the basis for the analyses of proposed changes in ethanol blending practices
presented in Chapters 4 and 5.
3.1 THE GASOLINE DISTRIBUTION SYSTEM
Gasoline is blended with ethanol in two forms. Standard gasolines that could be sold as
finished product are the most common (75 to 80 percent of the gasoline blended with
ethanol). When blended with ethanol, the resulting gasohol has a higher octane rating
than the standard gasoline, and with federal and state tax incentives, may have a lower
cost. The second type of gasolne blended with ethanol is the specially produced sub-
octane blend. Sub-octane blends of gasoline are blends that, when mixed with the
higher octane ethanol in a 9:1 ratio, result in motor fuels with standard octane ratings,
such as 87 octane regular unleaded and 88 octane regular leaded. The distribution
system for standard gasolines blended with ethanol is believed to be essentially identical
to that for gasolines not blended with ethanol. The distribution system for sub-octane
blends differs somewhat because they have not, until recently, been transported by
pipeline. An overview of the distribution systems for both forms of gasoline follows.
33

-------
Where there is no distinction made between standard and sut>-octane gasolines, the
discussion should be assumed to apply to both.
Overview
The gasoline distribution system is not a single system optimized either nationally or
regionally. It has developed gradually and consists of many competing and overlapping
parts. Its institutional structure is composed of many companies carrying out both
sequential and parallel operations. It involves complex relationships between major
refiners; independent refiners; resellers such as branded jobbers, commission agents,
and private-branded jobbers; and a variety of types of retail outlets. Exhibit 3-1
illustrates these institutional aspects of the flow of product from refiner to retailer.
The physical transportation system for petroleum products is, like the institutional
structure, a highly complex system. Petroleum products are transported by five modes:
pipelines, ocean vessel, barge, rail tank car, and tank truck (Exhibit 3-2). The methods
for any given shipment are selected to minimize the cost of transportation for the level
of service required.*
Pipelines
Pipelines play a large and growing role in the distribution of petroleum products. In the
early 1950's, they accounted for only about 15 percent of petroleum product transporta-
2
tion. By the early 1970's, they had reached 40 percent of the total ton-miles. In 1984,
3
the pipeline market share stood at 57 percent. The most frequent use of product
pipelines is in shipment of products from the refinery to distribution terminals. In a
4
few cases, the pipeline may deliver product directly to an end user.
DHR, Inc., Phase I: Methanol Use Options Study; Volume III, Appendix D, "Transpor-
tation and Distribution of Methanol Fuels." Prepared for the U.S. Department of
Energy, May 1, 1981, p. D-12.
O
D. Atkinson, Distribution of Methanol as a Transportation Fuel. Prepared for U.S.
EPA, June 1982, p. 2.
3
Transportation Policy Associates, Transportation in America; Supplement to the 3rd
Edition. Washington, DX: July 1985, p. 13.
4
Larie W. Harold, "Distribution Options for Alcohol Fuels," Fuel Alcohol: An Energy
Alternative for the 1980's; Appendix. Final Report, U.S. National Alcohol Fuels
Commission; Washington, D.C.t 1981, pp. 768-769.
34

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EXHIBIT 3-1:
GASOLINE DISTRIBUTION SYSTEM1
1For further information on the gasoline distribution system, see Jade Faucett Associates, Gasoline Price Data Systems.
Prepared for Economic Regulatory Administration, U.S. Department of Energy, 1980.
Source: DHR, toe., op. cit., p. D-2.

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EXHIBIT 3-2:
TRANSPORTATION OF PETROLEUM PRODUCTS
1972-1984
(billions of ton-miles)
Pipelines		Water Carriers	Motor Carriers	Railroads
Year
Total
Ton-Miles
%
Ton-Miles
%
Ton-Miles
%
Ton-Miles
%
1972
476.8
191.3
40.1
254.0
53.3
22.0
4.6
9.5
2.0
1973
480.4
205.0
42.7
238.0
49.5
23.7
4.9
13.7
2.9
1974
488.8
203.0
41.5
244.0
49.9
27.7
5.7
14.1
2.9
1975
515.2
219.0
42.5
257.4
50.0
26.2
5.1
12.6
2.4
1976
523.9
212.0
40.5
269.1
51.4
30.4
5.8
12.4
2.3
1977
530.9
219.4
41.3
270.2
50.9
27.6
5.2
13.7
2.6
1978
536.7
226.3
42.2
269.3
50.2
28.6
5.3
12.5
2.3
1979
534.2
236.1
44.2
257.4
48.2
27.8
5.2
12.9
2.4
1980
492.3
225.6
45.8
230.4
46.8
24.3
5.0
12.0
2.4
1981
477.7
230.6
48.3
212.3
44.4
22.7
4.8
12.1
2.5
1982
448.0
230.6
51.5
184.2
41.4
20.7
4.6
12.5
2.8
1983
416.5
223.7
53.7
159.3
38.3
22.2
5.3
11.3
2.7
1984p
416.0
234.8
56.5
146.6
35.2
23.6
5.7
11.0
2.6
P = Preliminary
Source: Transportation Policy Associates, Transportation in America; Supplement to the 3rd Edition, Washington, D.C: July
1985, p. 13.

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Pipelines are concentrated near highly populated areas and refinery centers, especially
in the East, Gulf Coast, and Midwest (Exhibit 3-3). In length, they range from a few
miles to a few thousand miles, and in diameter from 4 to 58 inches.* The minimum
batch size on a given pipeline may be as little as 5,000 barrels or as much as 75,000, as
2
set by the pipeline company.
Pipeline acceptance of a gasoline product is sometimes based on the concept of
"fungibitty," the ability to treat gasolines supplied by different producers as identical.
Thus, when a pipeline operating on this baas agrees to deliver product, it agrees to
deliver a barrel like in quality to the one received from the producer, but not
necessarily the same barrel. For each product, the pipeline operator develops a
specification that must be met by shippers. Other pipelines offer "segmentation" of
product, agreeing to deliver the same barrels provided by the shipper to the destination.
The limited demand for sub-octane blends to date, combined with the emphasis on
quality control (which can more easily be compromised in a small volume shipment), has
prevented pipelines from accepting sub-octanes for transportation in the past. With a
recent announcement by Willams Brothers Pipe line that it is prepared to begin
transporting sub-octane leaded regular, this impediment to the widespread use of this
type of gasolne in ethanol blending may begin to be less important. The company
operates a pipeline system based on fungibility in twelve midwestern states that moves
product from refineries and junctions with other pipeline systems to 41 company-owned
terminals, and off-line to 85 shipper-owned facilities. After considerable discussion
with its shippers regarding their plans for meeting octane requirements under lead
phasedown Williams Brothers elected to establish a regular leaded sub-octane grade and
to expand its terminal ethanol blending facilities. In October 1985, the company began
handling an 85 sub-octane leaded at eight terminals. The specification for the sub-
octane is the same as that for 88 octane regular leaded grade, except that the (R x M)/2
octane number specifies a minimum of 85. A sub-octane unleaded regular grade may
3
also be establshed in mid-1986 if demand materialzes. Colonial Pipeline, the nation's
4
largest pi peine company, is considering a similar proposal.
* Atkinson, op. eit., p. 1.
2
Industry information obtained through interviews with pipeline companies and the
American Petroleum Institute.
3
H. L. Teel, "Sub-Octane and Oxygenated Fuels in Willams Pipe Line Company."
Presented to the 1985 National Conference on Alcohol Fuels, Washington, D.C.,
September 1985.
4
Industry information obtained through discussions with pipeline companies.
37

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EXHIBIT 3-3:
THE U.S. PETROLEUM PRODUCT PIPELINE SYSTEM
Source: National Petroleum Council

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Water Transportation
Water transportation, where available, provides a low cost method of delivering fuel
when pipeline movement is not feasible. Waterborne vessels transport petroleum
products both on oceans and the nation's 25,000 miles of inland waterways, with the
latter concentrated in the Great Lakes region, along the Ohio and Mississippi Rivers and
parallel to the Atlantic and Gulf Coasts (Exhibit 3-4). Movements ranging from less
than 10 miles to over a thousand miles can be economical.1 Self-propelled tankers are
used in coastal and ocean transportation. Tank barges are used for inland transpor-
o
tation. Both are currently used extensively for petroleum product transportation. In
1984, water carriers accounted for 35 percent of the transportation ton-miles for
3
petroleum products.
Tank Trucks
Tank trucks are commonly used for local distribution of petroleum products and are
best suited for use in distances of less than 150 miles. Their most common use in the
gasoline distribution system is in transporting fuel from the terminal, or possibly the
refinery, to the end user. Trucks are also occasionally used in longer hauls in areas of
4
the country where pipeline and barge transportation are not available.
Truck shipments of petroleum products account for only a small portion of the total
g
transportation ton-miles, about 6 percent in 1984. This measure severely understates
the importance of this mode to gasoline and petroleum product transportation however.
g
Virtually all gasoline is at some point transported by truck.
Rail Tank Cars
Rail movement, once an important mode of transportation for refined petroleum
7	fl
products, now accounts for less than 0.2 percent of all gasoline tonnage transported.
*DHR, Inc., op. cit., p. D-12.
o
Atkinson, op. cit., pp. 6, 8.
3
Transportation Policy Associates, op. cit., p. 13.
4
Harold, op. cit., pp. 768-769.
5
Transportation Policy Associates, op. cit., p. 13.
6
Atkinson, op. cit., pp. 8, 10.
7
Harold, op. cit., p, 769.
a
U.S. Department of Transportation, 1981 Carload Waybill Statistics; Territorial
Distribution, Traffic, and Revenue by Commodities Classes. February 1983, pp.
137-138.
39

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EXHIBIT 3-4:
THF-lhSL	SYSTEM
		 ijess than ^ TeeA dee\>ซ
— 9 or more feet deep.

-------
Intense competition from other modes and the limited ability of rail carriers to supply
and move product to diverse locations quickly are cited as the primary causes of the
decline.1
3.2 ETHANOL AND GASOHOL DISTRIBUTION
The institutional and physical distribution systems for fuel ethanol are closely related
to those for gasoline and other petroleum products. Like petroleum products, the
institutional structure is currently comprised of many companies carrying out both
sequential and parallel operations, including producers, resellers, and retailers. It
involves transportation by a variety of modes, with each shipment planned to minimize
the cost of movement. The institutional and physical aspects of ethanol distribution are
discussed in the following sections.
Institutional Structure
Like the system for petroleum products, the institutional structure of the ethanol
marketing system is composed of producers, name brand and independent jobbers and
wholesalers, and name brand and private brand retailers. The elements of the
marketing chain are discussed further in the following paragraphs.
As discussed in Chapter 2, there are presently 53 major commercial facilities producing
o
fuel ethanol in the United States. Most are located in the Midwest and corn-producing
regions. To date, all of the ethanol plants are owned by companies other than oil
refining companies. However, this may change if moves continue by major oil
companies to acquire shares in ethanol companies, such as the partial ownership of
South Point Ethanol by Ashland Oil Company.
From the producer, ethanol is typically moved to a bulk terminal near the market, the
blending point for about 90 percent of ethanol blends. (With the exception of small
amounts blended at refineries, the remainder is blended at the retail outlet). In some
cases, the producer rents space from a terminal operator who also offers gasoline to
1Harold, op. cit., p. 769.
2
Herman and Associates, op. cit.
41

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buyers. In other cases, the ethanol terminal is entirely separate from a gasoline
distribution facility, and may be as many as 25 to 50 miles away. Generally, a
purchaser arrives with a tank truck that will be 90 percent filled with gasoline and 10
percent with ethanol. Some buyers fill their truck tanks solely with ethanol, which may
be taken to another terminal for blending, or blended at the retail outlet.*
Ethanol blending occurs for two reasons — to increase the margin which the gasoline
marketer can earn on a grade of fuel, and to increase the octane value of a sub-octane
grade to a marketable level. The impetus of the former reason is strongly dependent on
the level of the state tax exemption, as ethanol blending is not usually profitable when
only the federal tax exemption is available. The latter reason is related to the desire of
refiners to earn lead credits in the face of lead phasedown, as well as the desire to take
o
advantage of tax incentives so as to earn a higher margin on each gallon of fuel sold.
The type of gasoline with which the ethanol is blended depends upon the level of the
state tax exemption. In those states where the state tax exemption is one cent or more
per gallon of gasohol, ethanol is blended with unleaded regular and premium gasolines,
leaded regular gasoline, and sub-octane gasolines from each grade. The resultant blends
are marketed as premium (or super) grade fuels and as regular grade fuels. In states
where the state tax exemption is less than one cent per gallon of gasohol, ethanol is
3
blended primarily with 87 octane unleaded to produce a 90 octane premium gasohol.
In states where the tax exemption is one cent or more per gallon of gasohol,
ethanol/gasolne blends constitute 20 to 25 percent of the market for each grade of
gasohol, i.e. unleaded regular, unleaded premium, and leaded regular. In these states,
the gasohol market share of each grade of ethanol blend is approximately the same as
4
the market share for that grade of gasoline in the gasoline market. Thus, it is
estimated that 44 percent of ethanol blends sold nationally in 1984 were leaded regular
5
blends, 46 percent were unleaded regular blends, and 10 percent were premium blends.
1 Industry information obtained through interviews with ethanol producers, oil refiners,
pipeline companies, industry associations, and other industry analysts.
o
Discussions with various industry representatives.
3
Personal communications with Mr. Bob Reynolds, Manager, Marketing Department, New
Energy Company of Indiana, October 9, 1985.
4Ibid.
g
Petroleum Marketing Monthly, U.S. Department of Energy, Energy Information Admini-
stration, June 1985, Table 9, p. 16.
42

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Gasohol is sold at branded and unbranded service stations operated by independent
dealers (lessee and contract), and at branded and unbranded retail outlets operated by
the fuel supplier, who may be a refiner, a superjobber, or a chain discounter. It is not
sold by ethanol producers, who enter into long or short-term arrangements with gasoline
marketers to provide ethanol at spot prices for blending at the terminal. An estimated
80-100 chain discounters of motor fuel sold an estimated 2.83 billion gallons of ethanol
blends in 1984, 50 percent of total sales of 5.7 billion gallons. By comparison, the same
independent gasoline marketers sold 15.9 billion gallons of gasoline in 1984, roughly 15
percent of total gasoline sales. Thus, gasohol sales represented 17.8 percent of total
gasoline sales by these marketers, three times the national share of 5.5 percent of total
gasoline sales.1
Although all of the large integrated and large independent refiners except Exxon
market gasohol to some extent, Texaco, Amoco, Chevron, Sun, Ashland, Mobil, and
Union are more active than others. Their activities are primarily in those states with
2
tax incentives. Data detailing their gasohol sales are not publicly available.
Independent gasoline marketers such as the chain discounters discussed above sell a
disproportionate amount of ethanol blend fuels for several reasons. Major brand dealers
and small jobbers do not sell a lot of gasohol because their refiner/suppliers do not
blend ethanol to a significant degree, or encourage ethanol blending. This is because
many major refiners and independent refiners see ethanol as being competitive only if
state tax incentives exist. These refiners fear that the tax breaks will disappear if
gasohol achieves a substantial market share since the cost of the incentives to the
federal and state governments (in the form of reduced tax revenues) grows as the
gasohol market expands. Consequently, they are unwilling to make the investments
necessary to permit the wide distribution of alcohol fuels through the existing national
pipeline and terminal system. Furthermore, the widespread marketing of ethanol blends
could result in reduced refinery utilization, a situation which the refiners are not likely
to favor, especially given the high capital cost of a refinery. Consequently, multi-
branded superjobbers and chain discounters do the majority of blending. These
1Remarks by Kenneth A. Doyle, Executive Director of the Society of Independent
Gasoline Marketers of America (SIGMA) before the Renewable Fuels Association, 1985
Conference on Alcohol Fuels, September 19, 1985, Washington, D.C.
2
Personal Communication with Eric Vaughn, President, Renewable Fuels Association,
October 10, 1985.
43

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companies are small enough to be able to blend when it is profitable and to stop
blending when it is not. They are used to squeezing the extra 1/2 cent to 1 cent of
margin out of each gallon sold. Unlike major dealers and small jobbers, they are not
restricted by cominglingor labeling requirements as they have substantial private brand
and unbranded business. Furthermore, they usually have sufficient market power to
influence refiners who do not favor ethanol blending.*
The Physical Distribution System
Ethanol and gasohol are transported by barge, rail, and tank truck. Shipments from the
producer to the terminal may be by any one of these means, or may combine two or
more modes.^
Published statistics are not available describing the market shares of each mode.
However, a few comments can be made based on interviews with individual producers
and industry analysts.
•	Water transportation, the least costly means of shipping ethanol or
gasohol, is a primary source of ethanol transportation in the Midwest.
Barge movements account for as much as 50 to 80 percent of the
movements from the ethanol producer to the terminal in this region.
Water transportation is of little importance in the transportation of
domestic product in other regions of the country.
•	The distance the ethanol travels from the producer to the terminal
determines whether rail or tank truck will be used. Rail transportation
becomes attractive when trips exceed 200 to 300 miles.
•	Distances from the ethanol plant to the terminal vary considerably. The
average distance from the plant to the terminal cited by individual
producers ranges from 100 to 700 miles, with 200 miles a common
estimate. Actual distances cited range from 9 miles to more than 1,000
miles.
Kenneth A. Doyle, op. cit.
2
Harold, op. cit., pp. 769-772.
44

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• A 60,000,000 gallon per year plant would typically ship ethanol to 30 to 50
terminals.
Shipments of gasohol from the terminal to the reseller are typically made by tank
truck, though they may be by another mode. The distance from the terminal to the
retailer is generally within a radius of 150 miles.*
There are no pipeline shipments of ethanol or gasohol because of the special handling
required in their transport. Because multi-product pipelines are not dehydrated, water
can collect in them and cause phase separation in gasohols. Though multi-product
pipelines can handle alcohol blends satisfactorily if separate facilities are dedicated to
this service, the capital investment required to provide the separate line segments,
2
tankage, and loading facilities is substantial. The investment cannot be justified based
on current pipeline and refiner expectations for long-term demand that depends on the
continuation of state tax incentives.
3.3 TRANSPORTATION COSTS
Until recently, the tariff rates for movement of non-beverage alcohol were primarily
based on shipments of chemical grade ethanol for industrial use which requires special
handling. After manufacturers succeeded in negotiating improved rates for fuel ethanol
3
in the early 1980's, transportation costs dropped by almost half. Estimates of current
rates for fuel ethanol are provided in the following table:
1985 Tariff Rates for Fuel Ethanol4
Mode	Rate/Gallon	Typical Shipment Size (Gallons)
Truck	2.940/100 miles**	7,800 gallons
Rail	3.760/100 miles	29,000 gallons
5^/200 miles
6.50/300 miles
Barge	0.750/100 miles	420,000 gallons
^dustry information obtained through interviews of ethanol producers, oil refiners,
pipeline companies, industry association, and other industry analysts.
2
Teel, op. cit.
3Harold, op. cit., p. 769.
4
Estimates based on interviews of ethanol producers, industry analysts, and railroad
marketing personnel.
g
Truck rates are often quoted in "running miles," i.e., the miles needed for a round trip.
The rate in running miles is 1.470 per 100 running miles. Truck rates are presented here
in destination miles for purposes of comparison with other rates.
45

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Gasofine transportation costs, in contrast, are significantly less due to the availability
of low cost pipeline transportation, and correspondingly smaller reliance on expensive
truck and rail modes. PipeEne transportation costs 0.12$ to 0.35$ per gallon per 100
miles. Barge and truck rates for gasoline are somewhat lower than those for ethanol.
Barge movement of gasoline costs 0.15 to 0.47
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CHAPTER 4
IMPACT OF SPECIAL BLENDING REQUIREMENTS
FOR ETHANOL BLENDS ON THE FUEL DISTRIBUTION SYSTEM
Waivers currently exempt ethanol blends from ASTM volatility specifications. As a
result, ethanol may be added to any legal gasoline to form an ethanol blend which may
be more volatile than the base (alcohol-free) gasoline. In the future, it may be
necessary to control the volatility of ethanol blends to reduce automotive evaporative
hydrocarbon emissions. This would mean that instead of adding ethanol to any legal
gasoline, gasoline would have to be specifically blended for ethanol addition. This
chapter examines the effects of such a change on the logistics and costs of ethanol
distribution and blending practices. Among the issues addressed are:
•	Where will the ethanol be blended into the gasoline?
•	What transportation modes will be used for shipping the specially blended
gasoline, ethanol, and gasohol?
•	What will be the effect on transportation costs of the change?
•	What changes may take place in relationships between ethanol producers,
refiners, and terminal operators? What will be their cost?
•	What storage or equipment issues may arise as a result of the change in
blending practices?
The results of the analysis indicate that with special requirements for the gasoline
blended with ethanol, if gasohol is blended at the terminal, transportation costs will
increase by a maximum of 0.82 cents per gallon of gasohol for every 100 miles that a
special gasoline is shipped to the terminal. If gasohol is blended at the refinery,
transportation costs will increase by a maximum 0.91 cents per gallon of gasohol per
100 miles. However, several constraints of the study should be noted in interpreting
these findings. First, the effects of the proposed blending requirements on demand for
47

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gasohol were not analyzed. Gasohol demand was assumed to remain unchanged. If
gasohol demand were to fall, the transportation cost increase would tend to be at the
high end of the maximums cited above, but would not exceed it. If gasohol demand
were to increase, the transportation cost would increase by less than the maximum
increase, and could even decrease.
Second, there is an implicit assumption that each refiner whose product is currently
blended with ethanol will produce the special gasoline blends; and that the specially
blended gasoline is mixed with the ethanol of the same producer and shipped to the
same terminals as was the case without special blending. This assumption has more
significant implications for the analysis. If, for example, a terminal that previously
offered ethanol ceases to accept it after the new requirements are imposed, an ethanol
producer who supplied that terminal may have to ship the product to a more distant
terminal. With truck and rail rates of 2.94 cents per 100 miles and 3.76 cents per 100
miles for ethanol, respectively, the cost impacts could be substantial. Analysis of this
aspect of special blending requirements is suggested as a refinement to the study.
4.1 BLENDING LOCATION
Ethanol may be mixed with specially blended gasoline at any of three locations: the
refinery, the terminal, or the retail outlet. At present, 90 percent of all gasohol is
blended at terminals by adding ethanol to a tank containing any legal gasoline. The
remaining 10 percent is blended primarily at the retail level. The regulatory action
proposed by EPA could change these blending practices if an alternative location
becomes more economical. Factors that will influence the choice of blending location
are discussed below.
Refinery Blending
Refinery blending of gasohol provides the best control for a correct blend. With
refinery blending, the blending is carried out by skilled operators under optimum
conditions. The laboratory facilities needed to test the fuel are already in place. The
ethanol producers would need to deliver their product to only one refinery location,
rather than to dozens of terminals.* Finally, if volumes are large enough, the gasohol
*R. W. Hooks, R. Sagawe, "Gasoline Fuel Distribution and Handling Trial," Proceedings
of the Third International Symposium on Alcohol Fuels Technology, May 1979, p. 2.
48

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could in the long-term be transported by pipeline, the lowest cost fuel transportation
mode available. However, as discussed in Section 3.2, while pipeline transportation
has been determined in tests by Amoco and others to be technologically feasible,
current demand levels do not justify the expenses associated with preparing and
monitoring a pipeline for alcohol fuels. *
There are also several disadvantages to refinery blending. Gasohol is more susceptible
than gasoline to degradation during movement from the refinery through contamination
2
with water or sediment. This is particularly true when refinery blending tanks, which
normally have only floating roofs that allow some entry of rainwater, are used as
3
storage tanks. Thus, there is an incentive to make the blend later in the distribution
chain when water or sediment intrusion into the solvent-like gasohol (and subsequent
phase separation) are less likely.4
Storage Terminal Blending
An alternate blending site for gasohol is the storage terminal. Blending at the terminal
would involve reduced risk of phase separation compared with refinery blending because
the risk of water ingress into storage depot tanks, which are normally fixed roof tanks,
should be lower than with the floating roof tanks found at refineries. Furthermore,
storage depots, which have performed most of the blending to date, are already
equipped to handle and store ethanol. Finally, in many areas the volume of gasohol
consumed is great enough that refiners could still use their current transportation
modes, including pipelines, to move a specially blended gasoline to the terminal.
Section 3.1 details the recent Williams Brothers Pipe Line agreement to transport
g
specially blended gasolines.
There are also some potential disadvantages to terminal blending. Their importance
depends on the testing requirements for the fuel. Gasoline refiners presently subject
their fuels to constant laboratory testing at the refinery to achieve a consistent
product. If either EPA or the refiner requires that the gasoline be tested after being
combined with the ethanol, rather than solely at the refinery, there will be significant
costs associated with purchasing testing equipment and staffing the facility with quality
1 Indus try information obtained through interviews with pipeline companies.
2Harold, op. eit., p. 778.
3
Hooks, op. cit., p. II-32.
^Harold, op. cit., p. 778.
g
Hooks, op. cit., pp. 11-31 and 11-32,
g
Industry information based on interviews with refiners and pipeline companies.
49

-------
control personnel. It is possible that a few simple tests could be performed on the
blended gasohol at a reasonable cost. However, any requirement (either self- or
government-imposed) that involves terminal testing could reduce the interest of
refiners in providing the specially blended gasoline.1
Service Station Blending
The final option for blending ethanol with gasoline is the service station. One
advantage is the minimal risk of phase separation because of reduced time during which
o
the gasohol is exposed to water ingress. Only the alcohol portion of the blend would
have to be carefully guarded against impurities. The 90/10 blend percentage would be
3
virtually guaranteed by the gearing in the ratio-type service station blending pump.
Disadvantages are significant. The distribution and storage costs would be higher for
this approach than for refinery or terminal blending. Installation of blending pumps at
4
every location would represent a sizable investment to any retailer, and would entail
higher maintenance costs than standard pumps. There would be no opportunity for
routine lab testing. Also, storage of pure alcohol at the station would be complicated
by the more stringent safety practices associated with the fuel because of its different
flam inability limits and fire foam compatibility in comparison to gasoline. Higher
insurance costs could result.**
Conclusions
The choice of blending location will depend on the geographic availability of pipelines,
the proximity of the ethanol production facility to a refinery and to the market, and the
total demand for gasohol. The choice of location will also depend on whether there are
testing requirements for the blended fuel. For most producers, assuming demand is held
constant and testing requirements for the blended gasohol are not extensive, gasohol
will continue to be blended at the terminal. Key advantages to terminal blending are
that many refiners will be able to continue shipping specially blended product to the
Harold, op. cit., p. 778.
2
Hooks, op. cit., p. 11-32.
3
Harold, op. cit., p. 779.
4
Hooks, op. cit., p. 11-32.
5
Harold, op. cit., p. 779.
50

-------
terminal by the low cost pipeline method presently being used for other gasoline,
whereas if gasohol were blended at the refinery, volumes are not large enough to justify
the investment and operating costs involved in preparing and maintaining pipelines for
fuel containing alcohol.
4.2 TRANSPORTATION MODES
In most areas of the country, about 50 percent of fuel ethanol is shipped to the
distribution facility by rail and 50 percent by truck. Along the nation's navigable
waterways, primarily in the Midwest, barge transportation may account for 50 to
80 percent of distribution, with the remainder divided evenly between truck and rail.
Gasoline for splash blending typically meets the ethanol at the same or a nearby
terminal after being transported there by pipeline, barge, or in some areas, truck.
Pipeline transportation is concentrated in the South Central states, the Midwest, and
the Northeast. Barges are primarily used on the Mississippi, Missouri, and Ohio Rivers,
as well as on intracoastal waterways. Trucks tend to be relied upon for transportation
of gasoline in the West where neither pipelines nor water transportation are available.
In all locations, the blended gasohol is shipped primarily by truck from the terminal to
the station.
A requirement that gasoline be specially blended for mixing with ethanol could affect
the transportation modes used to move gasoline, ethanol, and gasohol. The first step in
the analysis of such changes is identification of the likely blending point for the fuel.
Since it was concluded in the previous section that terminal blending would probably
continue to dominate the industry, one of the scenarios considered here assumes
terminal blending. Since it is also likely that some blending will be shifted to
refineries, a scenario based on refinery blending is also considered. The effects on
transportation mode choice of service station blending are not evaluated because it is
expected to be a very small portion of the market.
Effects on Transportation Mode Assuming Terminal Blending
With terminal blending, the transportation mode used to move ethanol from the
producer to the terminal will not be affected if special blending requirements are
instituted. The mode used to transport gasohol from the terminal to the service station
will also be unaffected. It is only the transportation of gasoline from the refinery to
51

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the terminal that may change. The effects will vary depending on the current
transportation mode used and the level of demand for the special blend.*
For refiners currently transporting gasoline by pipeline, two requirements must be met
if pipelines are to continue to be used for special blends: 1) the pipeline operator must
be willing to accept the special blend, and 2) the shipments of the special blend must
exceed the minimum batch requirements for the pipeline. Programs for transporting
sub-octane blends for mixing with ethanol have been recently initiated by Colonial
Pipeline, the largest pipeline operator in the United States, and by Williams Brothers
Pipe Line Company, a medium-sized company. These initiatives indicate pipeline
2
companies will also be willing to carry the special blends.
The second criteria, achieving the minimum batch size, may be more difficult to meet.
Minimum batch sizes range from 5,000 to 75,000 barrels, depending on the diameter of
the pipeline; the typical minimum batch is 25,000 barrels. Assuming monthly
shipments, demand for the special blends must exceed 2.5 million to 37.8 million gallons
per year (2.8 to 42.0 million barrels of gasohol). This does not mean, however, that
demand for each refiner's special blend must exceed this level at each of the terminals
to which he delivers. In some cases, individual refiners can combine their shipments
with those of other refiners in order to achieve the minimum batch. In addition, most
pipeline operators permit multiple delivery points for a single batch. Thus, the
shipment volumes required between a given refiner and terminal may be substantially
*
less than the pipeline operator's minimum batch size. Where the necessary volumes
are not achieved, consolidation of special blend distribution and ethanol blending (i.e.
refiner or terminal exit from the market) will be necessary if gasoline is to continue to
be transported by pipeline. Otherwise, special blends will shift to alternative modes.
For refiners currently using water transportation, the analysis is similar. Minimum
barge shipments range from 4,000 to 12,000 barrels. Assuming monthly shipments, this
would correspond to annual gasohol demand of 2.2 to 6.6 million gallons. Where demand
proves insufficient for barge transportation, the refiner will likely turn to tank trucks.
1For purposes of the following scenarios, it is assumed that the shipping method
currently used to move motor gasoline to a given terminal is the most economical
method available and that, consequently, the shipper will want to continue to use that
method if possible for specially blended gasoline.
2
Industry information obtained through interviews with pipeline companies.
3Ibid.
52

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For refiners currently using tank trucks to transport gasoline to the distribution
terminal, the requirement for special blending of gasoline to be combined with ethanol
should have no impact. The minimum batch size for trucks ranges from 1,000 to 8,000
gallons. Assuming monthly shipments, gasohol demand in the terminal area would have
to exceed 13,000 to 107,000 gallons per year. In 1984, the smallest gasohol demand
listed for any state with gasohol sales was 16,000 gallons in Georgia, with the second
smallest being 63,000 gallons in the District of Columbia. Thus, it is unlikely that tank
truck shipments to any area would become infeasible.
Effects on Transportation Mode Assuming Refinery Blending
Refinery blending of gasohol may affect the mode used by an ethanol producer to
transport fuel ethanol if the ethanol producer can combine shipments of ethanol that
once traveled to numerous locations into a shipment to a single destination. By
combining shipments, the ethanol producer may be able to shift from truck or rail to
more economical barge or unit train transportation.*
Changes in the modal choice of the refiner will be observed only if the refiner
previously used pipeline transportation. Although transportation of gasohol by pipeline
has been shown to be technically feasible, it is not expected that gasohol will be
transported by pipeline unless demand for gasohol increases substantially and appears to
have a long-term market that justifies the required capital investment. Blended
gasohol will be transported, therefore, by a mode other than pipeline, possibly barge
where available. In any case, if the gasoline it replaces was transported from the
refinery to the terminal by any mode other than pipeline, the gasohol can be expected
to move by the same mode.
4.3 TRANSPORTATION COSTS
Any shift in transportation mode or destination for ethanol, gasoline, or gasohol has
implications for the cost of delivering gasohol to the consumer. Shifting gasoline from
pipeline to barge would increase transportation costs by 0.07
-------
Transportation costs could change in the event of either terminal blending or refinery
blending. In the refinery blending case, costs could either increase, decrease, or stay
the same. A decrease in ethanol transportation costs would occur if large, less frequent
shipments to the refinery replaced high cost, smaller shipments to numerous terminals.
Such benefits could arise when the plant is nearer to the refinery than to some
terminals or more economical modes of transportation become available. These cost
savings, however, could be offset by the higher cost of transporting the gasohol to the
terminal if the standard gasoline used in terminal blending had previously been moved
by pipeline. In the terminal blending case, costs could either increase or stay the same.
Transportation costs for gasoline will increase if there is a modal shift and there would
be no reduced ethanol transportation cost to offset them.
Examples of the potential impacts on transportation costs of special gasoline blending
requirements, with blending performed at either the terminal or the refinery, are
provided in Exhibits 4-1 to 4-4. Assumptions underlying these analyses are listed below:
1)	Batch minimums are 25,000 barrels for pipeline (1,050,000 gallons); 8,000
barrels for barge (336,000 gallons); 595 barrels for rail (25,000 gallons);
and 119 barrels for truck (8,000 gallons). In order to determine the
maximum cost increases, these minimums were assumed to be required of
shipments between any given refiner and terminal location.
2)	Shipments of the ethanol, special blends, and gasohol are made at least
once a month.
3)	The cost of gasoline transportation is 0.24$ per gallon per 100 miles by
pipeline; 0.31$ per gallon per 100 miles by barge; and 1.18* per gallon per
100 miles by truck.
4)	The cost of ethanol transportation is 0.75$ per gallon per 100 miles by
barge; 2.940 per gallon per 100 miles by truck; and 3.76$, 5$, and 6.5$ per
100, 200, and 300 miles, respectively, by rail.
5)	Terminal blending scenarios assume there is no impact on transportation
costs from the ethanol producer to the terminal since the terminal will
probably continue to be supplied by the same ethanol producer.
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EXHIBIT 4-1:
SCENARIO 1
Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles
Terminal Demand for Gasohol = 50,000 barrels per month
Base Case:
Alternative A:
Terminal Blending of Gasohol with Standard Gasolines
Transportation of Gasoline from Refinery to Terminal by Pipeline
Transportation of Ethanol from Ethanol Plant to Terminal by Average
of Rail and Truck Rates
Transportation Costs:
Gasoline: 1,2$ per gallon; $22,680 for 45,000 barrels
Ethanol: 5.025$ per gallon; $10,553 for 5,000 barrels
Total:	$33,233
Terminal Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasoline from Refinery to Terminal by Pipeline
Transportation of Ethanol from Ethanol Plant to Terminal
by Average of Rail and Truck Rates
Transportation Costs:
Gasoline: 1.2$ per gallon; $22,680 for 45,000 barrels
Ethanol: 5.025$ per gallon; $10,553 for 5,000 barrels
Total:	$33,233
Impact: None
Alternative B:
Comment: No transportation cost change since no change
in modes, volumes, or distances.
Refinery Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery
by Barge
Transportation Costs:
Ethanol: 3.0$ per gallon; $6,300 for 5,000 barrels
Gasohol: 1.55$ per gallon; $32,550 for 50,000 barrels
Total:	$38,850
Impact: Cost Increase of $5,617 Over Base Case and
Alternative A
Comment: Transportation cost increases because gasohol
must travel by more expensive mode, barge,
than gasoline. Increase here is greater than
cost savings realized in ethanol transportation.
Ethanol transportation cost savings result
from consolidation of shipments permitting
use of less expensive mode, barge.
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EXHIBIT 4-2:
SCENARIO 2
Distance from Refinery to Terminal = 50 miles
Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles
Terminal Demand for Gasohol = 50,000 barrels per month
Base Case:
Alternative A:
Terminal Blending of Gasohol with Standard Gasolines
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck
Transportation Costs:
Gasoline: 0.155$ per gallon; $2,930 for 45,000 barrels
Ethanol: 2.94$ per gallon; $6,174 for 5,000 barrels
Total:	$9,104
Terminal Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by
Truck
Transportation Costs:
Gasoline: 0.155$ per gallon; $2,930 for 45,000 barrels
Ethanol: 2.944 per gallon; $6,174 for 5,000 barrels
Total:	$9,104
Alternative B:
Impact: None
Comment: No transportation cost change since no change
in modes, volumes, or distances.
Refinery Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by
Barge
Transportation Costs:
Ethanol: 0.375* per gallon; $788 for 5,000 barrels
Gasohol: 0,155$ per gallon; $3,255 for 50,000 barrels
Total:	$4,043
Impact: Costs Savings of $5,061 Over Base Case and
Alternative A.
Comment: Transportation cost savings occur because
consolidation of ethanol shipments permits use
of a less expensive mode, barge; and because
ethanol is shipped a shorter distance to the
refinery than to the terminal.
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EXHIBIT 4-3:
SCENARIO 3
Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles
Terminal Demand for Gasohol = 20,000 barrels per month
Base Case:	Terminal Blending of Gasohol with Standard Gasolines
Transportation of Gasoline from Refinery to Terminal by Pipeline
Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates
Transportation Cost:
Gasoline: 1.2$ per gallon; $9,072 for 18000 barrels
Ethanol: 5.025$ per gallon; $4,221 for 2,000 barrels
Total:	$13,293
Alternative A: Terminal Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Rail and Truck Rates
Transportation Cost:
Gasoline: 1.55$ per gallon, $11,718 for 18,000 barrels
Ethanol: 5.025fc per gallon, $4,221 for 2,000 barrels
Total:	$15,939
Impact: Cost Increase of $2,646 Over Base Case
Comment: Transportation costs increase because special
blend volume is not sufficient to move by
pipeline: must be moved by barge, a more
expensive mode.
Alternative B: Refinery Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by
Barge
Transportation Costs:
Ethanol: 3.000 per gallon; $2,520 for 2,000 barrels
Gasohol: 1.55$ per gallon; $13,020 for 20,000 barrels
Total:	$15,540
Impact: Cost Increase of $2,247 Over Base Case, but
Cost Savings of $399 Over Alternative A.
Comment: Transportation costs increase in comparison to
the Base Case because gasohol must travel by
a more expensive mode, barge, than gasoline.
The increase here is greater than the cost
savings realized in the transportation of
ethanol, which are due to the consolidation of
shipments permitting use of a less expensive
mode.
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EXHIBIT 4-4:
SCENARIO 4
Distance from Refinery to Terminal = 50 miles
Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles
Terminal Demand for Gasohol = 20,000 barrels per month
Base Case:
Alternative A:
Terminal Blending of Gasohol with Standard Gasolines
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck
Transportation Cost:
Gasoline: 0.155$ per gallon; $1,172 for 18,000 barrels
Ethanol: 2.94$ per gallon; $2,470 for 2,000 barrels
Total:	$3,642
Terminal Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by
Truck
Transportation Cost:
Gasoline: 0.155$ per gallon; $1,172 for 18,000 barrels
Ethanol: 2.94$ per gallon; $2,470 for 2,000 barrels
Total:	$3,642
Impact: None
Comment: No transportation cost impact since no change
in modes, volumes, or distances.
Alternative B:
Refinery Blending of Gasohol with Specially Blended Gasoline
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by
Truck
Transportation Costs:
Ethanol: 1.47$ per gallon; $1,235 for 2,000 barrels
Gasohol: 0.155$ per gallon; $1,302 for 20,000 barrels
Total:	$2,537
Impact: Cost Saving of $1,105 Over Base Case and
Alternative A.
Comment: Transportation costs fall in comparison to the
Base Case and Alternative A because the
ethanol is shipped a shorter distance to the
refinery than to the terminal via the same
mode, truck.
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6) Transportation costs from the terminal to the service station served by
the terminal remain constant.
7)	Gasohol is transported at the same rates as gasoline.
8)	Pipelines do not transport gasohol.
As can be seen in the exhibits, several factors jointly determine the effect of
transportation costs on the delivered cost of gasohol at a distribution terminal. These
include transportation mode, shipment distance, volume of shipment, destination of
shipment, and point of blending. Implementation of special blending requirements for
gasoline blended with ethanol to control gasohol volatility can have a significant effect
on each of these factors and thus on the impact of transportation costs on the delivered
cost of gasohol. Of critical importance in terminal blending is whether the use of
special gasoline for blending will require the use of a more expensive transportation
mode to deliver the specially blended gasoline to the terminal blending point. If
specially blended gasoline shipments are not of sufficient size to meet the minimum
batch requirements of the mode currently used to move gasoline to the blending point,
the special gasoline will have to be delivered by a more expensive mode, and the cost of
delivering gasohol to the distribution terminal will rise. In this case, total transpor-
tation costs could be controlled only through consolidation of the market for special
blends in that area, resulting in the exit of firms from the gasohol distribution system.
If the gasoline transportation mode to the terminals blending gasohol remains the same,
however, transportation costs will not change, and consolidation will not be necessary.
Thus, where terminal blending continues under the proposed regulatory environment,
the major factor affecting transportation costs is whether the specially blended
gasoline will have to be transported by a more expensive mode than the standard
gasoline previously blended with ethanol to make gasohol.
The maximum increase in transportation costs due to terminal blending can be
estimated if it is assumed that:
•	the existing ethanol and gasoline supply relationships continue to exist;
•	all special gasoline is shipped to the terminal by truck; and
•	the gasoline previously blended with ethanol at the terminal was shipped
by pipeline and barge in proportions equal to those shown in Exhibit 3-2
for 1984 (62 percent of ton-miles by pipeline, 38 percent by barge).

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Given the gasoline transportation costs presented at the beginning of this chapter,
shifting from pipeline to truck increases the gasoline transportation cost by 0.94 cents
per gallon per 100 miles; shifting from barge to truck increases gasoline transportation
costs by 0.87 cents per gallon per 100 miles. The maximum average cost increase per
gallon of gasoline per 100 miles, therefore, is 0.9134 cents (equal to (0.94)(0.62) +
(0.87)(0.38)). Since gasoline constitutes 90 percent of the gasoline/ethanol blend, and
since the cost of transporting the ethanol to the terminal does not change with terminal
blending, the maximum cost impact on a gallon of gasohol at the terminal is an increase
of 0.82 cents per gallon for every 100 miles that the special gasoline is shipped to the
terminal (equal to (.90X0.9134) + (.10)(0)). The total maximum cost impact, then,
depends on the gasoline shipping distance.
In the case of refinery blending, several opposing cost factors must be considered.
Since gasohol will not move by pipeline in 1990 due to limited market penetration, the
cost of delivering the gasohol to a terminal will rise if the gasoline previously blended
with ethanol was transported by pipeline. Assuming that the gasoline previously shipped
to terminals for blending was shipped by pipeline and barge in proportions equal to those
shown in Exhibit 3-2 for 1984 (62 percent and 38 percent, respectively), and that all
gasohol blended at refineries is shipped by truck, the maximum cost increase will be
0.91 cents per gallon of gasohol per 100 miles. These costs may be offset partially or
totally if the ethanol plant is much closer to the refinery than to the terminal. The
largest potential for cost savings in this case, however, occurs when the ethanol
producer is able to realize economies of scale in transportation costs by shipping to one
point (a refinery) rather than to multiple points (terminals). The net result will depend
upon the individual circumstance.
Since it is probable that terminal blending of gasohol will dominate refinery blending in
1990, total transportation costs are likely to increase with special blending. This is
because terminal blending does not offer as many opportunities for transportation cost
savings as refinery blending, and then only if market consolidation occurs and ethanol
producers realize economies of scale in transportation costs by shipping product to
fewer terminal locations.
4.4 EFFECTS ON MARKET RELATIONSHIPS AND TRANSACTION COSTS
Terminal blending of special gasoline with ethanol will not affect existing business
relationships in the ethanol/gasohol distribution system, and therefore should not affect
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transaction costs, if all refiners who provided gasoline previously blended with ethanol
also provide the special gasoline to be blended at the terminals; and if all terminals
previously blending ethanol continue to blend ethanol. If some refiners do not provide
special gasoline, or if some terminals no longer blend ethanol, transaction costs could
increase, assuming that terminals and gasohol retailers previously had a least cost
supply relationship with a refiner and a terminal, respectively.
Transaction cost savings could occur with refinery blending if ethanol suppliers are able
to negotiate delivery contracts with fewer refiners than terminals. These cost savings,
however, could be offset by transaction cost increases if gasohol is not produced by
every refiner and if it is not supplied to every terminal previously involved in ethanol
blending.
4.5 STORAGE AND EQUIPMENT ISSUES
Since the volume of liquid product moved in the distribution system will remain
constant if special blending is required, it is not expected that major investments will
be needed in storage capacity or transportation equipment beyond those currently
planned between 1985 and 1990. Some modifications may be necessary in this capital
stock, however, to reduce technical problems in distribution. The construction of
barges and rail and truck tankers should present no problem to the distribution of
ethanol or gasohol, although improved seals may be needed to minimize water ingress.
In bulk storage, floating roof tanks with improved seals will be needed to minimize
water ingress. This type of tank, however, has become widespread in use in the past ten
years.1
Similarly, tanks suitable for the storage of ethanol and/or gasohol but not previously
used for that purpose may need to be cleaned or upgraded before they are put into
service. Tanks used to store petroleum products are likely to contain sediment and
water. To prevent contamination and subsequent phase separation of the gasohol blend,
these must be removed prior to using the tanks for alcohol fuel storage. Costs will thus
be incurred if the number of tanks containing gasohol or ethanol increases beyond the
number used when blending with standard gasoline. This may occur if special blending
requirements eliminate the current predominant practice of blending the gasohol as it is
placed into a distribution vehicle such as a tank truck.
1 Atkinson, op. cit., p. 17.
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Although it is anticipated that no additional transportation stock will be needed to
move the specially blended gasoline, ethanol, and gasohol, it is possible that the usage
patterns of the available stock will change. For example, either terminal blending or
refinery blending may result in increased usage of the existing barge and truck fleets
and lower usage of pipelines by refiners. Similarly, refinery blending may increase the
usage of unit trains to deliver ethanol to the refinery, and reduce the usage of
individual tank cars to deliver ethanol to terminals. Changes in shipment destinations
could affect transportation company routings and the geographical distribution of the
transportation stock. These changes will have economic costs and benefits associated
with them. Although these will be transitional in nature, they may be significant.
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CHAPTER 5
IMPACT OF REDUCING THE ETHANOL CONTENT OF GASOHOL TO 5 PERCENT
Ethanol is typically added to gasoline to produce a fuel that is 10 percent ethanol. One
means of reducing the mid-range volatility (e.g., percent evaporated at 160 degrees
Fahrenheit) of such ethanol/gasolne blends is to reduce the ethanol content of the fuel.
This chapter analyzes the effects on the logistics and costs of ethanol distribution and
blending practices of reducing the ethanol content of gasohol to five percent. The
analysis assumes that the gasoline mixed with the fuel must be specially blended for
mixing with ethanol, as discussed in Chapter 4. Total ethanol demand is assumed to be
the same as for 10 percent blending. Thus, gasohol sales are twice the level considered
in the 10 percent alternative, and demand for the specially blended gasoline is more
than twice its former level.
As in Chapter 4, the following issues are addressed:
o Where will the ethanol be blended into the gasoline?
o What transportation modes will be used for shipping the specially blended
gasoline, ethanol, and gasohol?
o What will be the effect on transportation costs of the change?
o What changes may be observed in market relationships and transaction
costs?
o What storage or equipment issues may arise as a result of the change in
blending requirements?
In the case of terminal blending, the analysis shows that the maximum transportation
cost increase per gallon of gasohol is 0.87 cents for every 100 miles the special gasoline
is shipped, less the estimated minimum transportation cost savings associated with
reducing the ethanol content of the blend to 5 percent (0.075 cents per gallon of
gasohol). The maximum net increase would occur if transportation of gasoline shifted
from pipefine (the least expensive mode) to truck (the most expensive). In the case of
refinery blending, transportation costs could increase a maximum of 0.91 cents per
gallon of gasohol, again an increase that could be observed only if transportation from
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the refinery to the terminal shifts from pipeline to truck. Actual increases are
expected to be much smaller because shifts in transportation mode for gasoline and
gasohol may not be necessary or may be less costly than shifting from pipeline to truck
as in the example above.
5.1 BLENDING LOCATION
The factors influencing the choice of a gasohol blending location are the same for
gasohol composed of 5 percent ethanol as for gasohol composed of 10 percent ethanol.
These include the total demand for the fuel, the location of the terminal and the
ethanol plant relative to the refinery, the transportation modes available, and the
technical factors (and associated costs) related to reducing or eliminating contamina-
tion of the gasohol.
The advantages and disadvantages of refinery, terminal, and service station blending
were presented in Chapter 4. The conclusions reached after analysis of these
advantages and disadvantages are the same for 5 percent blends as for 10 percent
blends. Assuming that testing requirements for the blended gasohol are not extensive,
most producers will continue to blend gasohol primarily at the terminal. Some refiners
and ethanol producers who are in close proximity, however, may choose to blend at the
refinery due to reduced transportation costs (Section 5.3). The number in this category
is likely to be small, however. Furthermore, given other costs associated with refinery
blending, such as the cost of adapting existing refinery storage facilities to ethanol or
gasohol storage and the cost of preventing water contamination of the fuel for a longer
time and/or distance, few gasohol marketers are likely to choose refinery blending.
5.2 TRANSPORTATION MODE
A requirement that gasohol be composed of 5 percent ethanol rather than 10 percent
ethanol could change the transportation modes used to move gasoline, ethanol, and
gasohol. These changes will depend upon the blending location and the respective
volumes of each fuel. In the following sections, the logistical considerations affecting
modal choice are examined for both terminal and refinery blending. Cost impacts are
examined in Section 5.3.1
*For purposes of the following scenarios, it is assumed that the shipping method
currently used to move motor gasoline to a given terminal is the most economical
method available and that, consequently, the shipper will want to continue to use that
method if passible for specially blended gasoline.
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Effects on Transportation Mode Assuming
Terminal Blending and Constant Ethanol Demand
If gasohol blending occurs at the terminal, the ethanol transportation mode will not
change because ethanol demand at a given terminal stays the same and the ethanol
producer continues to make the same number of shipments to the same destinations.
However, if the special blend volume is less than the minimum batch required for the
mode used to transport the standard gasoline previously blended with the ethanol, the
mode used to transport the specially blended gasoline will change to a more expensive
mode with smaller volume requirements. Because demand for gasohol is assumed to
double, this shift is less likely to occur than under a 10 percent terminal blending
scenario since over twice as much (2.11 times) specially blended gasoline will be
shipped.
Effects on Transportation Mode Assuming
Refinery Blending and Constant Ethanol Demand
If 5 percent gasohol blending occurs at refineries, an ethanol producer may be able to
combine numerous truck shipments to terminals into a single shipment to a refinery,
permitting use of a less expensive mode such as barge. As in the case of terminal
blending, however, there may be shifts in the modes used to transport product from the
refinery to the terminal if volumes are not large enough for use of the mode used for
standard gasolines. A change in transportation mode will also occur wherever the
standard gasoline previously blended with ethanol at the terminal was shipped by
pipeline, since pipelines will not be used for gasohol.
5.3 TRANSPORTATION COSTS
Any shift in transportation mode or destination for ethanol, gasoline, or gasohol would
have implications for the cost of delivering gasohol to the consumer. Four scenarios
are presented as a means of analyzing the potential transportation cost impacts of a
change from 10 percent to 5 percent ethanol content in gasohol (Exhibits 5-1 to 5-4).
The scenarios correspond to those presented in Chapter 4. Each contains a base case
and two alternatives, as follows:
• The base case is that developed for the corresponding scenario in Chapter
4, in which volatility controls do not exist.
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EXHIBIT 5-1;
SCENARIO 1
Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles
Base Case:
Alternative A:
Alternative B:
Terminal Blending of 10 Percent Ethanol with Standard Gasoline
Ethanol Blend Demand = 50,000 barrels per month
Transportation of Gasoline from Refinery to Terminal by Pipeline
Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates
Transportation Costs:
Gasoline: 1.2$ per gallon; $22,680 for 45,000 barrels
Ethanol: 5.025
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EXHIBIT 5-2:
SCENARIO 2
Distance from Refinery to Terminal = 50 miles
Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles
Base Case;	Terminal Blending of 10 Percent Ethanol with Standard Gasoline
Ethanol Blend Demand = 50,000 barrels per month
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck
Alternative A:
Alternative B:
Transportation Costs:
Gasoline: 0.155O per gallon; $2,930 for 45,000 barrels
Ethanol: 2.940 per gallon; $6,174 for 5,000 barrels
Total:	$9,104 for 50,000 barrels
Average: 0.430 per gallon
Terminal Blending of 5 Percent Ethanol with Specially Blended
Gasoline
Ethanol Blend Demand = 100,000 barrels per month
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck
Transportation Costs:
Gasoline: 0.1550 per gallon; $6,185 for 95,000 barrels
Ethanol: 2.940 per gallon; $6,174 for 5,000 barrels
Total:	$12,359 for 100,000 barrels
Average: 0.290 per gallon
Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case because the
proportion of gasoline in the blend increases,
and gasoline costs less to deliver than ethanol.
No change in modes.
Refinery Blending of 5 Percent Ethanol with Specially Blended
Gasoline
Ethanol Blend Demand = 100,000 barrels per month
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by Barge
Transportation Costs:
Gasohol: 0.1550 per gallon; $6,510 for 100,000 barrels
Ethanol: 0.3750 per gallon; $788 for 5,000 barrels
Total:	$7,298 for 100,000 barrels
Average: 0.170 per gallon
Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case and Alternative
A because consolidation of ethanol shipments
permits use of a less expensive mode, barge;
because ethanol is shipped a shorter distance
to the refinery than to the terminal; and
because gasohol is shipped by the same mode
as gasoline (barge).
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EXHIBIT 5-3:
SCENARIO 3
Distance from Refinery to Terminal = 500 miles
Distance from Ethanol Plant to Terminal = 150 miles
Distance from Ethanol Plant to Refinery = 400 miles
Base Case:
Alternative A:
Terminal Blending of 10 Percent Ethanol with Standard Gasoline
Ethanol Blend Demand = 20,000 barrels per month
Transportation of Gasoline from Refinery to Terminal by Pipeline
Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates
Transportation Costs:
Gasoline; 1.2* per gallon; $9,072 for 18,000 barrels
Ethanol: 5.025* per gallon; $4,221 for 2,000 barrels
Total:	$13,293 for 20,000 barrels
Average: 1.58$ per gallon
Terminal Blending of 5 Percent Ethanol with Specially Blended
Gasoline
Ethanol Blend Demand = 40,000 barrels per month
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by
Average of Truck and Rail Rates
Transportation Costs:
Gasoline: 1.55* per gallon; $24,738 for 38,000 barrels
Ethanol: 5.025* per gallon; $4,221 for 2,000 barrels
Total:	$28,959 for 40,000 barrels
Average: 1.72* per gallon
Comment: Transportation cost per gallon of gasohol in-
creases in comparison to the base case be-
cause the specially blended gasoline must be
shipped by a more expensive mode than the
standard gasoline, offsetting any transpor-
tation cost reductions related to the decreased
proportion of ethanol in the blend.
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Alternative B:
EXHIBIT 5-3; (Continued)
SCENARIO 3
Refinery Blending of 5 Percent Ethanol with Specially Blended
Gasoline
Ethanol Blend Demand = 40,000 barrels per month
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by Barge
Transportation Costs:
Gasohol: 1.55$ per gallon; $26,040 for 40,000 barrels
Ethanol: 3.0
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EXHIBIT 5-4:
SCENARIO 4
Distance from Refinery to Terminal = 50 miles
Distance from Ethanol Plant to Terminal = 100 miles
Distance from Ethanol Plant to Refinery = 50 miles
Base Case:	Terminal Blending of 10 Percent Ethanol with Standard Gasoline
Ethanol Blend Demand = 20,000 barrels per month
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck
Alternative A:
Transportation Costs:
Gasoline: 0.1554 per gallon; $1,172 for 18,000 barrels
Ethanol: 2.94$ per gallon; $2,470 for 2,000 barrels
Total:	$3,642 for 20,000 barrels
Average: 0.43$ per gallon
Terminal Blending of 5 Percent Ethanol with Specially Blended
Gasoline
Ethanol Blend Demand = 40,000 barrels per month
Transportation of Gasoline from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Terminal by Truck
Transportation Costs:
Gasoline: 0.1554 per gallon; $2,474 for 38,000 barrels
Ethanol: 2.944 per gallon; $2,470 for 2,000 barrels
Total:	$4,944 for 40,000 barrels
Average: 0.294 per gallon
Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case becuase the
proportion of gasoline in the blend increases,
and gasoline costs less to deliver than ethanol.
No change in modes.
Alternative B: Refinery Blending of 5 Percent Ethanol with Specially Blended
Gasoline
Ethanol Blend Demand = 40,000 barrels per month
Transportation of Gasohol from Refinery to Terminal by Barge
Transportation of Ethanol from Ethanol Plant to Refinery by Truck
Transportation Costs:
Gasohol: 0.1554 per gallon; $2,604 for 40,000 barrels
Ethanol: 1.474 per gallon; $1,235 for 2,000 barrels
Total:	$3,839 for 40,000 barrels
Average: 0.234 per gallon
Comment: Transportation cost per gallon of gasohol falls
in comparison to the base case and Alternative
A because ethanol is shipped a shorter
distance to the refinery than to the terminal
by the same mode (truck), and because gasohol
is shipped by the same mode as standard
gasoline (barge).
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•	Alternative A is a terminal blending scenario for 5 percent blends where
it is assumed that ethanol demand equals that for 10 percent blending.
This means that twice as much gasoholis sold.
•	Alternative B is a refinery blending scenario for 5 percent blends where it
is assumed that ethanol demand equals that for 10 percent blending.
The assumptions relating to batch mini mums, shipment frequency, transportation costs
by mode, and pipeline availability presented in Chapter 4 also apply to these scenarios.
As can be seen in Exhibits 5-1 to 5-4, several factors jointly determine the effect which
volatility controls requiring 5 percent ethanol blends will have on transportation costs.
As in the case of controlling the volatility of 10 percent ethanol blends, these include
transportation mode, shipment distance, volume of shipment, destination of shipment,
and point of blending. Implementation of special blending requirements necessitating
the production of 5 percent ethanol blends can affect each of these factors and thus
affect transportation costs and the delivered cost of gasohol.
As with 10 percent blends, of importance in terminal blending is whether the use of
special gasoine will require a more expensive transportation mode to deliver the
specially blended gasoline to the terminal blending point. Similarly, with refinery
blending, transportation costs could increase if the gasohol shipped from the refinery
must be shipped by a more expensive mode than was gasoline. If the ethanol producer is
able to realize economies of scale in transportation costs by shipping to one point (a
refinery) rather than to multiple points (terminals), however, total transportation costs
could fall.
Two additional factors will affect transportation costs if 5 percent ethanol blends are
required. First, reducing the ethanol content of gasohol blends to 5 percent to control
mid-range volatility reduces the total transportation cost per gallon of gasohol because
ethanol transportation costs are substantially higher than gasoline transportation costs.
Second, if ethanol blend demand doubles, more than twice as much specially blended
gasoline will be required than in 10 percent blending; and changes in gasoline
transportation mode and increases in transportation cost will be less likely to occur
than in the 10 percent case.
The maximum increase in transportation costs due to terminal blending of 5 percent
blends can be estimated if it is assumed that:
71

-------
•	the existing ethanol arid gasoline supply relationships continue to exist if 5
percent blends are required;
•	all special gasoline is shipped to the terminal by truck;
•	the gasoline which would have been blended with ethanol to produce a 5
percent blend in the absence of volatility controls would have been
shipped to the terminal by pipeline and barge in proportions equal to those
shown in Exhibit 3-2 for 1984 (62 percent of ton-miles by pipeline, 38
percent by barge); and
•	the ethanol is transported an average of 200 miles by barge to the
terminal.
Given the gasoline transportation costs presented in Chapter 4, gasoline transportation
costs increase with terminal blending by 0.94 cents/gallon per 100 miles if the mode
changes from pipeline to truck; and by 0.87 cents/gallon per 100 miles if the mode
changes from barge to truck. The maximum average cost increase per gallon of
gasoline per 100 miles, therefore, is 0.913 cents (equal to (0.94X0.62) + (0.87(0.38)).
Since gasoline constitutes 95 percent of the gasoline/ethanol blend, the delivered cost
of the gasohol at the terminal will increase by a maximum of 0.87 cents/gallon for
every 100 miles that the special gasoline is shipped to the terminal. The total cost
increase, however, will be slightly less than this amount since the ethanol transpor-
tation cost component of the gasohol will at a minimum be reduced from 0.15 cents per
gallon of gasohol (10 percent of the cost of transporting a gallon of ethanol 200 miles to
the terminal by barge) to 0.075 cents per gallon of gasohol (5 percent of the ethanol
transportation cost), a saving of 0.075 cents per gallon. The maximum cost increase is
less likely to occur than in the case of terminal blending of 10 percent blends, however,
because modal changes are less likely to occur if 5 percent blends are required.
In the case of refinery blending of 5 percent blends, the cost of delivering gasohol to
the terminal will rise if the gasoline previously blended with ethanol was transported by
pipeline, or if shipping the gasohol requires a more expensive mode than for gasoline.
Again assuming that the gasoline shipped to terminals for blending was shipped by
pipeline and barge in proportions equal to those shown in Exhibit 3-2 for 1984 (62
percent and 38 percent, respectively), and that the gasohol blended at the refineries is
shipped by truck, the maximum cost increase will be 0.91 cents/gallon of gasohol for
72

-------
every 100 miles that it is shipped. This cost increase, however, may be offset partially
or totally if the ethanol plant is much closer to the refinery than to the terminal; or if
the ethanol producer is able to realize reduced transportation costs by consolidating
shipments and by shipping to the refinery rather than to several terminals. The net
result will depend upon the individual circumstance.
Exhibit 5-5 presents the average transportation cost per gallon of gasohol (either a 5
percent blend or a 10 percent blend) delivered at the terminal for each scenario and
alternative examined in Chapters 4 and 5. Analysis of the results for comparable
alternatives indicates that, for both terminal blending and refinery blending, a 5
percent alternative offers the smallest cost increase or largest cost decrease in
comparison to the base case. This is because reducing the ethanol content of blends
replaces relatively expensive to transport ethanol with gasoline; and because larger
quantities of specially blended gasoline and gasohol are assumed to move through the
distribution system for 5 percent blends than for 10 percent blends, reducing the
likelihood that mode changes will be required for transporting these products. If,
however, ethanol demand falls because sales of ethanol blends do not at least double, it
is possible that modal changes will be required and that the total transportation cost
impact could be more severe than with a 10 percent blend. Consequently, it is not
possible to conclude that in all circumstances the transportation cost impact of
requiring 5 percent ethanol blends to control gasohol volatility will be less than that for
10 percent blends. Generally, however, 5 percent blends offer greater opportunities for
controlling transportation costs in the event of volatility controls.
5.4 EFFECTS ON MARKET RELATIONSHIPS AND TRANSACTION COSTS
Terminal blending of special gasoline with ethanol will not affect existing business
relationships in the ethanol/gasohol distribution system, and therefore should not affect
transaction costs, if all refiners who provided gasoline previously blended with ethanol
also provide the special gasoline to be blended at the terminals; and if all terminals
previously blending ethanol continue to blend ethanol. If some refiners do not provide
special gasoline, or if some terminals no longer blend ethanol, transaction costs could
increase, assuming that terminals and gasohol retailers previously had a least cost
supply relationship with a refiner and a terminal, respectively.
Transaction cost savings could occur with refinery blending if ethanol suppliers are able
to negotiate delivery contracts with fewer refiners than terminals. These cost savings,
73

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EXHIBIT 5-5;
TRANSPORTATION COST ESTIMATES FOR ANALYTICAL SCENARIOS
(Cents per Gallon of Gasohol at the Terminal)
Scenario 1 Scenario 2 Scenario 3 Scenario^
Base Case (10 percent)
10 Percent Alternatives
A
B
5 Percent Alternatives
A
B
74
1.58
1.58
1.85
1.39
1.70
0.43
0.43
0.19
0.29
0.17
1.58
1.90
1.85
1.72
1.70
0.43
0.43
0.30
0.29
0.23

-------
however, could be offset by transaction cost increases if gasohol is not produced by
every refiner and if it is not supplied to every terminal previously involved in ethanol
blending.
5.5 STORAGE AND EQUIPMENT ISSUES
Controlling the mid-range volatility of gasohol by requiring 5 percent ethanol blends
probably will not necessitate major investments in storage capacity or transportation
equipment since the volume of liquid product moved by the distribution system will
remain constant. As with 10 percent blends, some modifications may be necessary in
the capital stock to reduce technical problems in distribution. For example, improved
seals may be needed to reduce water ingress in storage and distribution tanks, and
receptacles suitable for storage of ethanol and/or gasohol but not previously used for
that purpose may need to be cleaned or upgraded before they are put into service.
Thus, costs will be incurred if the stock of tanks and transport equipment used to store
and ship gasohol or ethanol increases beyond that used when blending with standard
gasoline. This mil certainly occur if the requirement for 5 percent blends results in an
increase in the number of gallons of gasohol produced, and may occur even if gasohol
production stays constant but refinery blending becomes prevalent.
Although it is anticipated that additional transportation stock will not be needed, it is
posa ble that the usage patterns of the available stock will change. This is less likely to
occur for 5 percent blends than for 10 percent blends when ethanol demand is constant
because the production of larger volumes of specially blended gasoline and gasohol will
reduce the probability of a need for modal change (except in the instance of pipeline
transportation of gasoline and refinery blending of gasohol).
75

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REFERENCES
Alcohol Week, various issues.
Wayne Alexander, Staff of the Trade Subcommittee of the House Ways and Means
Committee, August 19, 1985.
American Petroleum Institute.
D. Atkinson, Distribution of Methanol as a Transportation Fuel. Prepared for U.S.
Environmental Production Agency, June 1982.
Bonner and Moore Management Science, Impacts of Alcohol Fuels on the U.S. Refining
Industry, Volume I, August 1983.
Peter Busowski, Alcohol Week, August 5, 1985.
Congressional Quarterly, Inc., Energy Policy, 2nd Edition, March 1981.
Congress of the United States, Office of Technology Assessment, Gasohol: A Technical
Memorandum, 1979.
"Current Prices of Chemicals and Related Materials," Chemical Marketing Reporter,
July 1984 to June 1975.
Department of Energy, Energy Information Administration, Monthly Energy Review,
DOE/EIA-0035, various issues.
Department of Energy, Energy Information Administration, Petroleum Marketing Mon-
thly, DOE/E1A-0380, July 1982 to March 1985.
Department of Energy, Energy Information Administration, Petroleum Supply Monthly,
DOE/EIA-0109, December 1984.
Department of Energy, Office of Alcohol Fuels, Annual Report to the President and the
Congress, December 1984.
Department of Energy, Office of Alcohol Fuels, Fourth Annual Report on the Use of
Alcohol in Fuels, March 1983.
Department of Energy, Office of Alcohol Fuels, Production Incentives, April 1985.
Department of Energy, Office of Alcohol Fuels, Sixth Annual Report on the Use of
Alcohol in Fuels, April 1985.
Department of Labor, Bureau of Labor Statistics, Producer Prices and Price Indexes,
January 1981, January 1985.
Department of Labor, Bureau of Labor Statistics, Wholesale Price Indexes, 1975-1984.
Department of Transportation, 1981 Carload Waybill Statistics: Territorial Distribu-
tion, Traffic, and Revenue by Commodities Classes, February 1983.
76

-------
DHR, Inc., Phase I: Methanol Use Options Study; Volume III, Appendix D, "Transporta-
tion and Distribution of Methanol Fuels." Prepared for the U.S. Department of
Energy, May 1, 1981.
E.E. Ecklund, "Status and Directions of the Use of Alcohols and Other Oxygenated
Hydrocarbons in North America," VI International Symposium on Alcohol Fuels
Technology, May 1984.
General Accounting Office, Potential of Ethanol as a Motor Vehicle Fuel, June 3, 1980.
Federal Register, Vol. 50, FR 2615 (January 17, 1985)
Federal Register, Vol. 50, FR 9386 (March 7, 1985)
John Gordley, Staff of Senator Robert Dole, August 12, 1985.
David E. Hallberg, "Testimony Before the Subcommittee on Energy Conservation and
Power of the Committee on Energy and Commerce, U.S. House of Representa-
tives," June 28, 1983.
Larie W. Harold, "Distribution Options for Alcohol Fuels," Fuel Alcohol; An Energy
Alternative for the 198Q's: Appendix. Final Report, U.S. National Alcohol Fuels
Commission; Washington, D.C.: 1981.
Herman and Associates, July 1985.
Herman and Associates, Survey of Federal and State Alcohol Fuel Regulations, July
1985.
R.W. Hooks, R. Sagawe, "Gasoline Fuel Distribution and Handling Trail," Proceedings of
the Third International Symposium on Alcohol Fuels Technology, May 1979.
Jerry Hurley, Transportation Section, American Petroleum Institute, August 22, 1985.
Information Resources, Inc., Alcohol Outlook, various issues.
Information Resources, Inc., Alcohol Update, various issues.
Thomas F. Killilea, et. al., Stanford Research Institute, "Marketing Research Report:
Ethyl Alcohol," Chemical Economics Handbook.
Salvatore Lazzari, Congressional Research Service, Federal Tax Provisions Relating to
Alcohol Fuels Including Recent Changes Under the Tax Reform Act of 19ง4^
November 6, 1984.
Jay Matley, nCE Plant Cost Index — Revised," Chemical Engineering, April 19, 1982.
Mueller Associates, Inc., Gasoline Octane Enhancement; Technology, Economics and
Environmental, Health and Safety Considerations, July 1985.
National Petroleum Council.
Migdon R. Segal, Congressional Research Services, Gasohol; The Alcohol Fuels, July
12, 1985.
77

-------
M.D. Tindall, Gasohol — Adding Octane to the Marketing Mix. Presented at the 1981
National Petroleum Refiners Association Annual Meeting, March 29-31.
Transportation Policy Associates, Transportation in America; 2nd Edition, Washington,
D.C: March 1984.
"Under EPA's Lead Phase-Down Will Ethanol Blends Save the Independents," Lundberg
Letter, November 9, 1984.
George H. Unzelman, "Problems Hinder Full Use of Oxygenates in Fuel," Oil and Gas
Journal, July 2, 1984.
Eric Vaughn, President, Renewable Fuels Association, August 19, 1985.
Steven B. Will, Social Cost of Alcohol Fuel Subsidies. Prepared for Argonne National
Laboratory, July 1982.
78

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APPENDIX A;
DETAILS OF STATE ALCOHOL BLENDING TAX INCENTIVES
79

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SUMMARY OF STATF, TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS
(July 1985)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Alabama
At least 10X ethanol
(gasoho1)
V ga 11 on
Derived from "agricultural format pro-
duct* or other renewable sources". Reci-
procity for ntatea reducing or exempting
Alahama-produced alcohol.
In Effect
No expiration date
Alaska
At least lOt alcohol
R/ gallon
None
In Effect
No expiration date
Colorado
i
At leant 10* alcohol
Rallon
At leant 601 must be derived from "cer-
eal grains, cereal grain by-priductn,
potatoes or other tubern, augur beetn,
sugar beet by-products, or forest pro-
ducts," and limited to the flr^t 2.5
million gallons per year from slants
with a 5 million gallon per yelr or
lean capacity."
In Effect
Expires: 7/I/H6
Connecticut
At leant 10X ethanol
or methanol
(gasohoI)
11 ga11 on
None
In Effect
No expiration date
Florida
At least I0X ethanol
(gasoho1)
2i gallon
None
In Effect
F.xpires: 6/30/H9
Hawaii
At leant 10Z ethanol
(gasohol)
t*7. Ra 1 1 on
(gross
exclne tax)
"Biomass-derived"
In Effect
Expires: 6/30/92
Idaho
At leant 10t ethanol
(gasoho1)
bt Rallon
"Manufactured" in Idaho "from agricul-
tural or forest products growr* In Idaho
"or wastes of those products.'
In Effect
Expires: 4/30/flft
Hrrmnn fc Anaor I at r* : 5ซirvry of Fr<
-------
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLF.NnF.O MOTOR FUELS (Cont'd)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPT ION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Illtnoia
At leaat 10% alcohol
(gaaoho I)
U7. gallon
(aalea tax)
Made from "agricultural products or by-
producta."
In Effect
Expire*:
12/31/92
Indiana
At leaat 10? ethanol
(gaaohoI)
IT gallon
(Bales tax)
"Agriculturally-derived ethyl alcohol"
In Effect
F.xpl rea:
7/1 /Rf>


15^ gallon
product ton
grant (on
nlcohol)
"Agricultural ethanol produced In the
U.S. only"
In Effect
Fxplrea:
7/1/92
I ova
At len*t 10? alcohol
(gnnohol )
\t. gallon
"D1at 11 led from cereal gralna...grown In
the U.S."
In Effect
Expi rea:
ft/30/92
Kanaaa
At leaat 10* ethanol
gallon
U (7/1/R6)
2/ (7/1/87)
"Agricultural ethyl alcohol...dlat 11 led
In U.S. from U.S. produced grain"
In Effect
No expiration date
Kentucky
"fuel-grade alcohol"
(10X or lean ethanol
or methanol)
35^ gallon
credit
(on ซ1cohol)
Derived from U.S. coal or U.S. renewable
resource* and "produced In a plant or
Facility powered primarily by U.S. pro-
duced coal or U.S. renewable r^aourcea."
Reciprocity not to exceed value of
credit for Kentucky-dlatllled alcohol.
In Effect
Expire*:
6/30/flf.
Louisiana
At least 10X alcohol
(gaaohol)
IfWf gallon
"Dlatllled In l/mlslana from *fcricultur-
al commodltlea", at leaat 101 Of which
!nunt he grown In Loulnfana (b> t*onetซry
vaI up)
In Effect
Explrea:
1/1/92
Herman & Anaoclntea

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SUMMARY OF STATF. TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS (Cont'd)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CKF.01T
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Ma Ine
At least IQTE ethanol
4/ ffft 11 on
(l/l/flfr)
U (1/1/87)
2i (1/1/HR)
1/ (1/1/89)
"Dlatillod In the State". RerUicซซd hy
Increase In Federal exemption f>rtor to
Jan. 1990. Reciprocity for nlaten pro-
viding at least equal exemptirn. Annual
cap of SI.25 million, total op of S3
mi 1 lion.
To Be Effective:
l/l/flft
Expires: 12/31/39
Maryland
lOt or more ethanol
3i gallon
None
In Effect
Expires: 6/30/R6
Michigan
lOt ethanol
\i gallon
Produced in Michigan from otlvt than
petroleum or natural gas, ReHuced by
Increase In Federal exemption. Recipro-
city for states providing equ*l or
greater tax exemption, credit br reduc-
t ion.
Tn Effect
Expires: 12/31/15
Minnesota
At leant 10* ethanol
hi ga 11 on
"Derived from agricultural or forest
products or other renewable r^lsources
dfatilled in the U.S. and derived frow
agricultural producta produced In the
U.S."
In Effect
Expires: 6/30/92
Mississippi
At least lOt ethanol
ftt Ration
(aalea tax)
"Distilled In Mississippi", a->d "pro-
duced from renewable resource*
Tn Effect
Expires: 12/31/92
Montana
Not less than 1Ot
ethanol
50/ gallon
30/ (4/I/B7)
product Ion
credit (on
alcohol)
"Distilled in Montana from Mrtitana agri-
cultural products including Montana wood
or wood producta". Cap of $2.5 million
per year.
In Effect
F.xpires: 4/1/R9
Nebraalca
At lปปsซt 1 OX rthanol
3/ Rill on
"Produced from cereal grains 6r domestic
agricultural commodities"
Tn Effect
Fxplres: 12/31/92
Herman h Associates

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SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FIFF.LS (Cont'd)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CRF.0IT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Nevada
At least 10% ethanol
M gallon
"Derived from agrlcultusl products"
In F.ffect
No expiration date
New Jersey
At least 10% ethanol
gn 1 Ion
( m/im)
fit ( I/l/RB)
Ut (1/1/90)
"Grain derived" and "produced In the
State from whole grain"
To Be Effective:
10/1/B3
Expires: 1/1/92
New Mexico
At leaat 10% ethanol
11/ gal1 on
U (7/1/87)
5if (7/]/flfl)
U (7/1/89)
U ( 7/I/90)
Until 7/I/B7, "manufactured exclusively
in New Mexico." After 7/1/B7 also re-
quires at leaat 50% of "agricultural
feedstock by volume used In fermen-
tation" be produced in New Mexico
In Effect
Expires: 7/1/91
North Dakota
At leant 10% ethanol
or methanol
M, Rail on
H (7/I/R7)
Methanol from coal or "agricultural pro-
ducts produced entirely In tM U.S."
Reciprocity equal to what othnr state
provides, hut not to exceed N* Dakota
exemption.
In Effect
Expires: 17/3t/ฐZ
Ohio
Not more than 10%
e thanol
2gallon
c red it (on
a 1coho1 )
Wood or cereal grain* In facilities of
Irs* than 2 million gallons per year, or
produced from wood or cereal grains
through a "coal-fired procesru" Reci-
procity for "similar fuel" produced out-
of-state not to exceed 0hio> credit.
in Effect
No expiration date
South Carolina
10% ethanol
hi gn 11 on
Distilled In South Carolina facility
with principal feedstock wood ^ cereal
grain, potatoes, sugar beets, or turnips
(and by-products). Reciprocity for
states providing at least equal Incen-
tive. Reduced by Increawe lr Federal
exemption prior to June "10, i99Z.
To Be Effective:
1/1/A6
Expires: 6/30/92
Herman & Ansoclates

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SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLF.NDI-D MOTOR FUELS (Cont'd)
STATE
South Dakota
Tennessee
Texan
Utah
Virginia
Washington
QUALIFYING ALCOHOL
(type and amount)
A minimum of 10%
e thanol
A minimum of 10%
ethanol (gasohol)
At least- JO? ethanol
Ethanol
At least 10X ethanol
or "synthetic motor
fuel"
At least 9.5%
alcohol (Ranohol)
EXEMPTION OR
CREDIT
V 1 1 on
gal Ion
u
It
\i
galIon
(1/1/87)
(1/1/88)
(1/1/89)
(1/1/90)
bOf. gallon
product Ion
c red 11
(on alcohol)
11on
hi (7/1/8ft)
W (7/1/88)
21 (7/1/90)
2.9^ gal Ion
blend
(hlpndrr tax
r rod 11 )
RESTRICTIONS AND
QUALIFICATIONS
'Derived from cereal grain"
"Derived from agricultural or forest
products or other renewable resources"
and manufactured In Tennessee. Recipro-
city for states reducing or exempting
Tennessee ethanol from its motor fuel
tax not to exceed value of Tennessee
exemption or reduction.
"Produced or distilled from a renewable
source." Applies first to ethanol
produced In-state, and then t6 ethanol
from states with reciprocal exemptions,
not to exceed a maximum annual limit of
$I 0.85 million.
"Produced from organic material" at a
Utah plant with name-plate capacity of
I million gallons per year. Must be
decreased by 10^ for every 1/ lncreaae
in Federal exemption.
Ethanol must be "distilled 1r Virginia
from agricultural, forestry, or waste
products" In a plant not uslrfc natural
gas or petroleum as a primary fuel.
Synthetic motor fuel must be ^produced
In Virginia from coal."
Must be "produced from ron^wrble re-
sources in-state". Reciprocity for
providing at least eqvhl t**
fxrmptlon or credit.
STATUS
In Effect
Expires: 6/30/92
In Effect
Expires: 12/31/M
In Effect
Expires:
1/1/91
In Effect
Expires:
7/1/90
In Effect
Expires:
7/1/92
In F.rf^ct
Expires:
12/11/92
rman fc ^ssocl nt.es

-------
1984 STATE TAX INCENTIVES
* Legislation Pending to Establish Exemption
Herman & Associates

-------
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS
(1984)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Alabama
1035 ethanol
3i gallon
produced from renewables
reciprocity for similar tax
exemption
Current law (8/1/80)
No expiration date
Alaska
10% ethanol
8^ gallon
None
Current law (1/1/81)
No expiration date
Arkansas
10% ethanol
(anhydrous)
9.5^ gallon
(full exemption)
full reciprocity to states
which exempt Arkansas ethanol
from excise taxes effective
5/1/84.
Current law (7/1/81)
Expires: 7/1/91
California
10% ethanol or
methanol
34 gallon
produced "from agricultural
commodities, renewable
resources or coal."
Current law (1/1/81)
Expires: 1/1/87
Colorado
10% ethanol
54 gallon
applies only to first three
million gallons of ethanol
produced at plants under
17 million gallon capacity
Current law (1/1/82)
Expires: 7/1/85
Connecticut
10% ethanol
li gallon
None
Current law (7/1/79)
No expiration date
Florida
10% ethanol
4^ gallon
decreases to 2^ per gallon
on 7/1/85. Proposal to extend
full ki per gallon exemption
pending.
Current law (7/1/80)
Expiration Date
Current: 6/30/87
Proposed: 6/30/92
Herman & Associate*

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Continued:
SUMMARY OF STATE TAX INCENTIVES
FOE ALCOHOL BLENDED MOTOR FUELS
(1984)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Hawaii
10Z ethanol
ki. gallon
must be produced or
manufactured In Hawaii
from biomass
Current law
Expires: 1992
Idaho
10% ethanol
hi. gallon
must be produced,
manufactured or blended
in Idaho
Current law (5/1/81)
Expires: 4/30/86
Illinois
10Z ethanol
4Z gallon
sales tax exemption only
Current law (12/1/83)
Expires: 1992
Indiana
10Z ethanol
3JC gallon
exemption
(to 6/30/84)
2.52 gallon
(7/1/84 to
6/30/85)
gross re-
tall tax)
effictive 7/1/84, some funds
collected from the motor fuel
tax will be earmarked for
Indiana "ethanol fuel produc-
tion in Incentive grants"
disbursement of accumulated
funds will begin 7/1/85
Current law
Expires: 7/1/85
I ova
10Z ethanol
34 gallon
None
Current law (7/1/78)
Expires: 6/30/86
Kansas
10Z ethanol
5i gallon
U.S. agricultural products
distilled in the U.S.
Current law (7/1/82)
(H.B. 3070 would
modify)
Heraan & Associates

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Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS
(1984)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Kentucky
10Z ethanol or
methanol ("fuel
grade alcohol" -
198 proof)
35^ credit per
gallon "fuel
grade alcohol"
produced from U.S. coal or
renewable resources at plants
powered primarily by U.S.
coal or renewable resources
reciprocity for similar
"fuel grade alcohol" if
Kentucky product similarily
exempted
Current law (7/1/82)
Expires: 6/30/86
Louisiana
10Z ethanol
8^ gallon
(full exemption)
fuel must be produced in
Louisiana
Current law (7/1/79)
Expires: 7/1/89
Maine
10Z ethanol
4^ gallon
(1/1/86)
U (1/1/87)
21 (1/1/88)
U (1/1/89)
reciprocity if other states
provide similar exemptions
to ethanol produced in Maine
Proposed law
L.B. #418 (effective
1/1/86) would expire
2/31/89
Maryland
10Z ethanol or
methanol
"H gallon
will not expire as long as
Dept. of Transportation
"sinking fund" is maintained
Current law (7/1/83)
No expiration date
Michigan
10Z ethanol
4^ gallon
2i (1/1/85)
1i (1/1/85)
reciprocity with states having
equal exemptions entitles
product to full exemption;
otherwise, only 2i per gallon
allowed now, or half of full
exemption
Current law(12/21/80)
Expires: 12/31/86
(H.B. 5339 pending
would revoke exemp-
tion)
Minnesota
10Z ethanol
24 gallon
H (1985)
None
Current law (7/1/83)
Expires: 1991
Heraan & Associates

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Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS
(1984)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Mississippi
10% ethanol
6i gallon
None
Proposed laws
S.B. 2350, 2503, 2505,
2506
Montana
ethanol
70*? gallon of
ethanol
50* (4/1/85)
304 (4/1/86)
available only to in-state
producers using Montana-grown
agricultural products
Current law (7/1/83)
Expires: 4/1/89
Hebraska
10Z ethanol
5i gallon
available only to agricultural
ethyl alcohol produced in
Nebraska
Current law (6/1/79)
Expires: 12/31/92
Nevada
101 ethanol
\4 gallon
None
Current law (1981)
No expiration date
New Mexico
102! ethanol
11* gallon
(7/1/87)
8* gallon
(7/1/88)
Must be produced from New
Mexico agricultural products
Current law (7/1/80)
Expires: 6/30/92
North Carolina
10% ethanol
54 gallon
must be produced from
agricultural or forestry
waste products for full
credit of 54, until 6/30/85,
Thereafter, all ethanol
qualifies.
Current law (10/1/83)
Expires: 6/30/92
HeraBn & Associates

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Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS
(1984)
STATE
QUALIFYING ALCOHOL
(type and amount)
EXEMPTION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
North Dakota
10% ethanol or
methanol
61 gallon
(1/1/84 -
12/31/85)
gallon
(1/1/86 -
6/30/92)
must be produced from agri-
cultural products
Current law (3/20/79)
Expires: 6/30/92
Ohio
ethanol or methanol
35^ gallon
("tax forgive-
ness )
produced from other than
natural gas or petroleum
Current law (7/1/81)
No expiration date
South Dakota
101 ethanol
hi gallon
must be derived from grain or
forest products produced in
the U.S.
Current law (1979)
Expires: 6/30/85
Tennessee
10Z ethanol
U4. gallon
blended with unleaded
gasoline
Current law (1/1/83)
Expires: 12/31/88
Texas
10Z ethanol
54 gallon
H (1/1/86)
U (1/1/87)
U (1/1/88)
U (1/1/89)
produced from renewable
resources only
maximum credit: $10.8 million
total per year
in-state ethanol has first
priority in claiming exemption
reciprocity provided when
other states provide a similar
exemption
Current law (9/1/81)
Expires: 12/31/90
Reman & Associates

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Continued:
SUMMARY OF STATE TAX INCENTIVES
FOR ALCOHOL BLENDED MOTOR FUELS
(1984)
STATE
QUALIFYING ALCOHOL
(type and amount)
1 EXEMPTION OR
CREDIT
RESTRICTIONS AND
QUALIFICATIONS
STATUS
Texas (con't.)


quarterly pro-rated adjustment
made so limit is not exceeded

Utah
ethanol or methanol
40rf gallon
tax rebate
must be made of plant in Utah
producing 1 million gallons
per year or more and certified
by the Utah Energy Office
Current law (1981)
and new revisions
Expires: 6/30/89
Virginia
10% ethanol
84 gallon
U (6/30/86)
H (6/30/86)
2i (6/30/90)
ethanol produced in-state from
agricultural, forestry, or
waste products at a plant
not using natural gas or
petroleum as a primary fuel
Current law
Expireet 7/1/92
Washington
ethanol
164 gallon
(tax credit)
None
Current law (1/1/80)
Expires: 12/31/86
Wisconsin
10Z ethanol
(with unleaded
gasoline)
ki gallon
reciprocity for equal
exemption, otherwise,
only Wisconsin products
qualify
Proposed law
(introduced 4/14/83)
Wyoming
lOt ethanol
ki gallon
"from agricultural products
or other renewable sources"
Current law (7/1/79)
Expires: 7/1/84
"erซn 6 Associates

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