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GAO-02-440R 1 (2002-02-27)

handle is hein.gao/gaobaalxw0001 and id is 1 raw text is: I Accountability * Integrity * Reliability United States General Accounting Office Washington, DC 20548 February 27, 2002 The Honorable Dianne Feinstein United States Senate Subject: U.S. Ethanol Market: MTBE Ban in California Dear Senator Feinstein: In response to your request, we obtained information on (1) U.S. ethanol consumption, supply, and prices, as well as factors that could potentially contribute to ethanol price spikes in California, and (2) the structure of the U.S. ethanol market and conditions that could conceptually affect competition. On February 22, 2002, we briefed your staff on the results of our analysis. The enclosed slides formed the basis of the briefing we presented. The 1990 amendments to the Clean Air Act (CAA) requires that an additive (oxygenate) be added to the gasoline used in areas with excessive carbon monoxide or ozone pollution to help mitigate these conditions. The CAA specifically requires those areas with severe ozone pollution to use reformulated gasoline, which contains at least 2 percent oxygen by weight. In California, like most other areas of the country, oil refining companies predominantly use the oxygenate methyl tertiary butyl ether (MTBE) to meet the CAA requirement. However, because MTBE has been detected in ground water, the governor of California issued an executive order in March 1999 to ban MTBE in the state's gasoline by the end of 2002. In summary, if California decides to use ethanol to replace MTBE, ethanol production capacity from 2003 through 2005 could likely satisfy U.S. consumption, according to available ethanol industry projections. However, if other states also banned MTBE and moved to ethanol, consumption could increase significantly and potentially affect the industry's ability to meet demand. Moreover, production capacity projections could be overstated because they include not only existing plants and plants under construction, but also new plants being planned, which may or may not materialize. According to our analysis of average monthly data from 1993 through May 1998 (the latest data available), U.S. ethanol prices generally ranged from $1 to $1.20 per gallon. While prices have been relatively stable to this point, ethanol price spikes could occur in California if supplies were disrupted by either production or distribution problems. Structurally, the U.S. ethanol industry is currently highly concentrated, as measured by the Herfindahl-Hirschman Index (HHI), a standard measure of market concentration. According to the guidelines of the Federal Trade Commission and the GAO-02-440R MTBE Ban in California

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