Senators Harkin (D-Iowa) and Lugar (R-Indiana) have introduced legislation to encourage the construction of a dedicated ethanol pipeline from the Midwest to the Eastern seaboard. Charles Grassley (R-Iowa), ranking member of the Senate Finance Committee, appears to have endorsed the concept of a dedicated pipeline and says that he “will work in the [Senate] Finance Committee to see that this proposal is included in the legislation.”

The legislation does not provide for the construction of an ethanol pipeline, but provides equal tax treatment for biofuel pipelines as oil and natural gas pipelines. The current tax code requires Publicly Traded Partnerships to earn 90% of their income from the “exploration, transportation, storage or marketing of depletable natural resources”, including oil and gas, to take advantage of the tax benefit for pipelines. This excludes renewable fuels such as ethanol and biodiesel.

I support equal treatment of oil and biofuels pipelines under the tax code. I see no good reason for these fuel pipelines to be treated differently. I would raise two questions however. First, should Publicly Traded Partnerships building and operating pipelines of any type receive special tax treatment? Second, if there is sufficient demand for biofuels to warrant a pipeline, why haven’t large biofuel producers or oil pipeline operators constructed a pipeline, regardless of tax treatment?

According to a USDA publication, the U.S. has the most extensive pipeline network in the world with over 95,000 miles of oil pipelines. Given this, is there a need to provide a continued incentive for pipeline operators? While I admittedly have no special understanding of the pipeline industry, as a consumer and tax payer I find it difficult to provide a Publicly Traded Partnership with tax benefits for a well established industry. What is the public value in providing tax benefits to this industry? I sincerely doubt that oil would stop flowing if pipeline tax benefits are terminated. The oil will continue to flow and the market will absorb the additional costs.

Demand for ethanol is growing, due in part to federal and state renewable fuel mandates, but the demand has been insufficient for the industry to move forward with the construction of dedicated ethanol pipelines. The “demand” will continue to increase with the annual increases to ethanol mandates, but there is still concern in the industry about having a sufficient volume of ethanol to warrant the capital expenditure, $1 to $2 million per mile for small diameter pipeline. Brazil, the second largest producer of ethanol and one of, if not the, largest consumer of ethanol, only started to construct dedicated ethanol pipelines in 2006.

It is not clear that ethanol will be a viable fuel source long term for the United States. Many alternatives are being examined and the next dominant automotive technology is not yet clear. Is it reasonable to invest large sums and scar our landscape while so many questions still exist?

Greg ForbesEditor, grassleywatch.com

Originally posted 08/21/2008 on Grassley Watch