Good morning, Mr. Chairman and Members of the Committee. My name is Bill Honnef, and I am Vice President, Sales and Marketing of VeraSun Energy Corporation, a renewable energy company headquartered in Brookings, South Dakota. The company is the nation's second largest ethanol producer. We operate a 120-million gallon per year production facility in Aurora, South Dakota, and a 110-million gallon per year production facility in Fort Dodge, Iowa.

VeraSun Energy Corporation is a member of the Renewable Fuels Association, the national trade association for the domestic ethanol industry. The RFA represents the 92 ethanol producing companies located in 20 states across the United States.

I greatly appreciate the opportunity to testify today as the Committee examines transportation fuels of the future. With crude oil costs at record highs, declining gasoline inventories and natural gas shortages across the country, it is clear the nation needs to do more to promote the increased production and use of additional energy sources other than petroleum, including domestic renewable sources like ethanol that can help build a sustainable energy future.

Mr. Chairman, I can tell you the U.S. ethanol industry is already doing its part. The domestic ethanol industry has doubled in size in just the last four years. Today, there are 92 ethanol production facilities with the capacity to process more than 1.5 billion bushels of grain into four billion gallons of fuel ethanol annually. Ethanol today is the third largest consumer of corn, behind only feed and export uses, providing the single most important value-added market for farmers today.

Ethanol is also becoming a ubiquitous component of the U.S. motor fuels market. Today, ethanol is blended into more than a third of the nation’s gasoline. This level of ethanol production and use is providing significant economic and energy benefits for the nation.

· In 2004, the ethanol industry added more than $25 billion to the nation’s gross economic output through annual operating spending and capital spending for new plants.
· The industry is now responsible for over 147,000 jobs across all sectors of the economy.
· Ethanol producers spent more than $3.1 billion on grain, using 13% of the corn and sorghum crops and becoming the third largest consumer of each, behind only feed and export. In fact, at a time when export markets are stagnating or declining, ethanol is providing farmers a critically important value added market.
· Another $4.4 billion went directly to consumers this past year through increased economic activity and new jobs – money that will go to pay for school shoes and college tuition and putting food on the table.
· And federal and state governments collected almost two-and-a-half billion dollars in needed tax revenues from the ethanol industry.

Domestic ethanol production displaced approximately 400,000 barrels of oil a day in 2004, about the volume of oil the U.S. imported from Iraq prior to the war. And the environmental benefits are significant also. According to Argonne National Laboratory, the use of ethanol in 2004 reduced greenhouse gas emissions by 7 million tons, or the equivalent of taking more than a million cars off the roads.

Industry Growth

Mr. Chairman, the tremendous growth in ethanol production continues. As a direct result of the Energy Policy Act of 2005, which includes an historic renewable fuels standard (RFS), ethanol producers are expanding at an unprecedented rate. There are 24 plants and seven expansions under construction today that when complete will add nearly two billion gallons of additional production capacity. This represents nearly a 50% growth in ethanol production capacity. And, there are literally scores of additional projects seeking financing or in various other stages of development.

Mr. Chairman, last week you heard from the oil industry about the challenges associated with expanding domestic oil refining capacity. Those challenges are real. But it is important to realize that new ethanol refineries are coming online throughout the country at a pace of almost one per month. We are expanding domestic fuel supplies. Unlike the issues that face oil refinery sighting, communities are encouraging and sometimes competing to have new refineries to be built in their back yard. This is due to the simple fact that these communities benefit from the additional demand for the feed source for ethanol production, corn. Processing corn into fuel creates local demand for corn, increasing the price of corn in the local market, which creates local economic development. It is a clear win-win.

As the industry grows, it is changing. The industry is no longer a Midwest phenomenon. Ethanol plants are now under construction from California to Texas to New York. There is even a great deal of interest in producing ethanol in Oklahoma! The industry is also no longer dominated by a few large agribusinesses. Indeed, taken as a whole, the single largest ethanol producer today is the farmer-owned ethanol plant, as farmers have recognized the benefits of being energy producers and not just energy consumers.

Importantly, today’s ethanol industry is becoming more and more energy efficient with new production facilities using the latest and most efficient technologies. According to the most recent analysis by the U.S. Department of Agriculture, ethanol now yields 167% of the fossil energy used to grow, harvest, transport and refine grain into ethanol. That represents a 24% improvement in efficiency since USDA completed a similar analysis just four years ago.

But there will be other changes as well, including perhaps new feedstocks. Indeed, I would like to take this opportunity to thank you, Chairman Inhofe, for your leadership in supporting efforts to speed the commercialization of technologies that will allow us to expand the feedstocks from which we can produce ethanol. The inclusion of the Cellulosic Biomass Ethanol and Municipal Solid Waste Loan Guarantee Program in your Committee's fuels bill and in the final energy bill will help our industry with the commercial demonstration of these promising technologies.

Commercialization of the technologies needed to produce ethanol from agricultural residues (wheat straw, corn stover, etc.) could add significantly to the amount of fuel currently produced from domestic resources. As they develop, cellulose conversion technologies will allow more energy to be extracted from each acre of energy crop. These new biorefineries would also bring hundreds of permanent, high-paying jobs to rural America. We hope you will encourage the Department of Energy to commit funds to using the authority they were given by your legislation.

Energy Bill/Renewable Fuels Standard

As noted, virtually all of this growth and the positive changes occurring in the industry are as a result of the energy bill and the RFS passed earlier this year. I would like to commend Congress for its foresight in creating this important program. If the terrible events along the Gulf Coast taught us anything this past summer, it is that we must diversify and expand our domestic energy resources. Congress had done that with the RFS, but Congress can and should do more. I must specifically praise the leadership of Senator John Thune, who has seen first hand the efficacy of expanded ethanol production as South Dakota’s economy has been transformed over the past several years by the value-added benefits of ethanol.

The RFS included in the Energy Policy Act of 2005 boosts the demand for renewable fuels such as ethanol and biodiesel to 7.5 billion gallons by 2012. It provides certainty to farmers and ethanol producers that markets will exist for their product while providing refiners with the flexibility they have sought in meeting Clean Air Act requirements by eliminating the federal RFG oxygen standard. The law maintains the existing clean air benefits of federal reformulated gasoline (RFG) with strong anti-backsliding provisions.

Importantly, the RFS does not require that any renewable fuels be used in any particular area, allowing refiners to use these fuels in those areas where it is most cost-effective. Moreover, there are several provisions allowing the requirement to be adjusted or eliminated if supply problems occur. Small refiners are exempted from the RFS for several years, allowing those companies an easier transition to the program.

The ethanol industry is well prepared and on track to produce more than the 4 billion gallons of renewable fuels required in 2006 under the law. The Renewable Fuels Association is currently working with EPA and other stakeholders to expedite an interim rulemaking that will allow the RFS to be implemented on schedule without unnecessarily complicating the marketplace for refiners. The industry intends to work to assure the RFS credit trading program is implemented as intended, providing maximum flexibility to refiners.

E85

E85 is a blend of 85% ethanol and 15% gasoline. It is designed for use in flexible fuel vehicles (FFVs). With approximately five million flexible fuel vehicles on the road today, E85 has great potential as an alternative fuel. But, because flexible fuel vehicles can run on both gasoline and E85, most owners are not aware they are driving an FFV and simply use gasoline. Our research indicates that nearly 70 percent of flexible fuel vehicle owners are unaware they are driving one.

Based on these research findings, we launched VeraSun E85, or VE85 for short, the nation’s first branded E85 early this year. The program is founded on three basic principles:

· E85 must be widely available and convenient to the consumer;

· E85 must be priced fairly; and,

· An E85 rollout must be accompanied by a comprehensive consumer awareness campaign.

In May, we began the program with the conversion of 35 pumps at stations throughout the Sioux Falls, South Dakota metro area. Simultaneously, we launched a marketing program to raise awareness to the benefits of FFV ownership and E85 use. The program is still ongoing today and includes elements such as adverting, direct mail, point of purchase marketing, and retailer education. The community is embracing the fuel as a viable alternative to gasoline.

VeraSun enlisted the support of General Motors, various local car dealerships, the National Ethanol Vehicle Collation, and other organizations across the state to assist with the rollout of the program. As a result, E85 awareness has increased, E85 fuel sales are increasing, and the demand for flexible fuel vehicles is up in the local market.

The success of the program attracted national attention, and the attention of Ford Motor Company. In early November, we announced a first-of-a-kind partnership with Ford to expand VE85 to other markets in the Midwest. The initiative will serve to convert existing fuel pumps to VeraSun's branded E85 - VE85 - in existing retail outlets. A consumer awareness campaign to promote the benefits and use of E85 and FFV ownership will also be launched. Local retail outlets and Ford dealerships will be asked to participate in the campaign.

Increasing FFV production and E85 use represent the best near-term solution to significantly reduce our dependence on foreign oil. But a complex interplay between four constituent groups must be recognized before E85 will succeed as a mainstream alternative:

· Auto Manufactures - Auto manufactures hold the keys to the future of greater E85 use. Today FFVs represent approximately two percent of all vehicles. Without a significant ramp up in the production of FFVs, E85 use will remain relatively small.

 

· Ethanol Producers – The ethanol industry must continue to rapidly expand production of ethanol to assure that ample supplies will be available.

· Fuel Retailers – Today only 500 of the nearly 180,000 retail stations offer E85. In order for retailers to offer E85, the owner must have confidence that the product will be priced appropriately and that there will be sufficient consumer demand. Without greater FFV production and ample supplies of ethanol, the retailer will not see the value.

· Consumer – Consumers are demanding alternatives. Consumer must be made aware that today they have a choice when purchasing a vehicle and filling the vehicle. The fact that nearly 70% of these vehicle owners are not aware that they have a choice indicates that much more work needs to be done.

With Ford as a partner, we believe we can make great strides in all areas.

Conclusion

Mr. Chairman, as this Committee contemplates future motor fuel markets, please recognize that ethanol is a viable bridge to the future. Today ethanol is blended into one-third of the nation’s fuel as a clean blend component. As we see growth in FFV production, ethanol will play a larger role in gasoline replacement. And in the future, ethanol shows great promise as a renewable feedstock for hydrogen fuel cells.

VeraSun Energy Corporation and the Renewable Fuels Association are committed to working with you and members of the Committee to promote the use of alternative, renewable fuels such as ethanol and biodiesel to ensure a reliable fuel supply, lower consumer fuel costs, protect the environment and stimulate further growth and development in communities across rural America. We are also committed to the expanded use of E85 to further reduce the nation’s deepening dependence of foreign oil.