UPDATE 2-U.S. court upholds higher blend of ethanol in gasoline

Sat Aug 18, 2012 12:25am IST

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* Ruling bullish for ethanol in long run -analyst

* Practical barriers keep E15 sales low for now

* Court acts as EPA mandate to use ethanol is attacked

WASHINGTON, Aug 17 (Reuters) - A U.S. appeals court upheld government approval for a higher blend of corn ethanol into gasoline on Friday in a ruling that may help the biofuels industry in the longer term but have little immediate impact on sales.

In a 2-1 ruling, the court said foodmakers, automakers and oil refiners failed to show they were harmed by approval of a 15 percent blend of ethanol, up from the usual 10 percent. Foodmakers said the approved blend could mean higher corn prices and automakers said they might be sued if the fuel leads to engine malfunctions.

The Environmental Protection Agency approved the 15 percent blend, known as E15, in 2011 for cars and light trucks made since model year 2000. E15 is barred from use in light equipment or older vehicles.

Biofuels makers sought the higher blend rate as a way to satisfy a federal guarantee of a share of the gasoline market, set at 13.2 billion gallons this year and rising to 15 billion gallons annually from 2015. Governors of four poultry-raising states asked EPA in the past week for relief from the mandate.

"It (the court ruling) is an important decision. It validates the EPA decision," said Bob Dinneen, head of the ethanol trade group Renewable Fuels Association. As for sales, "I'm not sure it's going to have much of an immediate impact."

There is a limited network for sale of E15, with practical barriers that include the cost of installing so-called blender pumps that can dispense blends as high as E85 and the ongoing process of obtaining state approval of E15 for sale. EPA gave its final regulatory approval in June.

Only one retailer, in Kansas, sells E15 at present. A comparative handful of about 2,500 pumps can dispense blends other than E10 at the nearly 160,000 gasoline outlets, such as gas stations, truck stops, convenience stores, grocery stores and marinas, across the country.

Besides the cost of equipment, retailers worry they will be legally liable if customers put the wrong blend in their cars and void vehicle warranties. Beyond that, "our customers aren't asking for it (E15)," said a spokesman for the National Association of Convenience Stores. The trade group says convenience stores ring up 80 percent of U.S. fuel sales.

"I think you'll see a slow progression of it showing up in more stations," said Michael Frohlich of Growth Energy, the ethanol trade group that petitioned EPA in 2009 for approval of E15. The ethanol industry is centered in the U.S. Midwest and Plains, so the regions probably will lead in E15 adoption, he said. "It won't happen overnight."

With its ruling, the court gave "a significant victory" to ethanol makers and kept E15 open as a route to expand biofuels sales and meet U.S. targets for renewable fuels, analysts Guggenheim Partners said in a market commentary.

The court decision "is notionally bullish for ethanol producers -- although high corn prices and slackening U.S. gasoline demand are not -- because it keeps open a principal pathway that could enable ethanol demand to expand," said analysts ClearView Energy Partners. "Blender pump roll-out has been slow but that could change."

Ethanol is popular in farm country as a home-grown fuel that reduces U.S. reliance on imported oil while creating rural jobs and boosting farmer income. The worst drought in half a century is forecast to cut the U.S. corn crop by 13 percent from law year. Corn futures are record-high levels.

The four state governors who want relief from the ethanol mandate say the corn crop is too small to allow 40 percent of it to be used in making biofuel without severe economic disruption. The Environmental Working Group said the court decision should prompt lawmakers to reform the ethanol mandate.

In its ruling, the U.S. Appeals Court for the District of Columbia Circuit said trade groups presented speculative and indirect claims of harm from approval of E15.

Engine manufacturers, for example, "provided almost no support for their assertion that E15 'may' damage the engines they have sold, subjecting them to liability," wrote Chief Judge David Sentelle.

Similarly, he wrote, the refiners said they would face additional expenses for handling E15 without showing there was no other way for them to meet U.S. targets for biofuel use. And foodmakers' desire for low corn prices has no footing in a statute about cars, he wrote.

Judge David Tatel joined Sentelle in the majority. He suggested the foodmakers' argument should be heard but noted prior rulings that precluded it. Judge Brett Kavanaugh dissented and argued EPA was wrong in approving E15.

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