How did Oregon's largest producer of "green" fuel fail so fast?

It may go down as the most spectacular corporate flameout in recent Oregon history.

Last June, a company called Cascade Grain opened an ethanol plant in Clatskanie, 56 miles northwest of Portland. The largest such facility on the West Coast, Cascade's plant had the capacity to produce 113 million gallons of ethanol each year.

Buoyed by pioneering legislation and subsidized with millions of taxpayer dollars, the $200 million facility brought dozens of family-wage jobs to the depressed Coast Range town and cemented Oregon's leadership role in the nation's transition to renewable energy.

Seven months later—Jan. 8, to be exact—the plant shut down.

No longer do milelong trains carrying Midwest corn rumble through Columbia County. Cascade's gleaming stainless-steel tanks and 82,000 linear feet of spaghetti-strand piping hold little more than air. Only a skeleton crew of employees remains, assisting bankruptcy lawyers and protecting the plant from looters.

Cascade's lightning-fast skid into bankruptcy is more than a stunning story of a business failure. It's also a cautionary tale of the unanticipated speed bumps on Oregon's path to sustainability. Cascade's failure is not a uniquely Oregon story. One-fifth of the ethanol industry's production capacity in the U.S.—most of it less than five years old—has shut down.

But the story of Cascade Grain's bankruptcy is perhaps more alarming than failures elsewhere because Oregon did so much more than other states—with both carrots and sticks—to promote ethanol.

All those efforts were not enough. Today in Clatskanie, the jobs are gone. And Oregon taxpayers are on the hook for tens of millions of dollars.

Jeff Rouse, fuels manager of Carson Oil, an independent Portland ethanol and gasoline merchant, says no one should be surprised Cascade failed.

In the "rush to green," Rouse says, policymakers ignored common sense and basic economics.

"The State of Oregon bent over backward to make people want to come here and invest," Rouse says. "[Gov.] Ted Kulongoski wants Oregon to be the greenest state in the country—and that's great, but you need to know who you are and what you are."

An industrial ethanol plant such as Cascade's is a larger, higher-tech version of a moonshiner's still. The plant's operators grind corn, mix it with water and enzymes, and cook it into a "mash." After the mash ferments, the liquid is distilled into ethanol, and the solids, called distiller's grain, become animal feed.

The federal Clean Air Act of 1977, which began the phasing out of lead in gasoline for health reasons, catapulted ethanol into prominence.

Ethanol was one of two primary substitutes for lead (which raised gasoline's octane, a measure of performance). Over time, regulators realized the other substitute, MTBE, also carried health risks.

In recent years, ethanol began to serve another role: helping the U.S. reduce its dependence on foreign oil. Because ethanol comes from a renewable domestic source—corn—advocates promoted mixing it with gasoline to stretch each barrel of oil.

Given recent oil price spikes and Americans' addiction to driving, Congress and state legislatures passed laws to promote ethanol. Those laws created an investment frenzy much like the current race to line the Columbia Gorge with wind farms (see sidebar, page 19, and "A Mighty Wind," WW, March 11, 2009).

Federal figures show the number of ethanol plants has more than doubled since 2004 and annual capacity has skyrocketed from 3 billion gallons to 12.5 billion gallons—enough ethanol to fill 17,000 Olympic-sized swimming pools with corn-based fuel.

But even as Oregon rushed to join the ethanol party, the good times were nearly over.

State Sen. Jackie Dingfelder (D-Northeast Portland) is a bright-eyed, driven lawmaker with a cluster of ideas about how to make Oregon the greenest state in the union.

Nobody put more effort into making Oregon an ethanol pioneer than Dingfelder, 48, who works as a senior environmental planner when not serving as chairwoman of the Senate Energy and Environment Committee.

In a legislative hearing Jan. 24, 2007, Dingfelder made the case for why Oregon should jump ahead of other western states and pass an aggressive mandate for ethanol and other biofuels.

"I do believe that without this plan, our economic opportunities will be eclipsed by the states of California and Washington," she said. "We'll be well-positioned to be a national leader on both the economic and environmental fronts."

Dingfelder convinced her colleagues that ethanol and other renewable fuels such as biodiesel were the future. Producing such fuels not only meant new jobs and a cleaner environment, it would also help narrow the only chasm in Oregon wider than the Columbia Gorge—the urban-rural divide. Rural Oregon would profit by making green fuel for city dwellers.

"The time is now to jump-start rural Oregon and jump-start this industry," Dingfelder said. "But we have to act this session."

With the backing of agricultural interests and virtually every environmental group in the state, the legislation sailed through both houses.

Hearings about ethanol and other renewable fuels were more like Sierra Club meetings than legislative debates.

When the ethanol mandate came to a vote, most Republicans, often skeptical of green policies, climbed aboard: Only seven of 90 lawmakers voted no.

The bill created incentives for biodiesel, the conversion of wood waste to fuel, and other futuristic technologies. But most significantly, it required that all gasoline sold in Oregon contain 10 percent ethanol. With that mandate, Oregon leaped ahead of every other western state.

Brian Doherty, a lobbyist for the Western States Petroleum Association, was a lonely voice of opposition.

His group, which includes the gasoline blenders who would have to implement Oregon's ethanol mandate, thought the law was too much, too fast.

Doherty argued the mandate ignored all sorts of potential risks and unintended consequences.

"Nobody listened," Doherty says.

Within weeks of the passage of the bill, the new state mandate kicked in—guaranteeing a market for Cascade Grain.

A year earlier, the state had given Cascade an even more important boost: a crucial loan from the Oregon Department of Energy.

Cascade CEO Chuck Carlson, a 58-year-old Minnesota native who previously worked for the agri-business giant ConAgra in California and managed a grain company in Moro, Ore., had worked for more than four years to get the state's backing.

Carlson also lined up an equity investor, Berggruen Holdings of New York, which invested about $80 million.

The state had previously reviewed proposals from Cascade and found them wanting. But in 2006, Dave Stevens, the state loan officer who reviewed Cascade's application, gave it a green light.

"The current proposal brings together the necessary partners and management team in a well-designed plant, and presents a project that is comprehensive in its management of the commodity risks and has a sound financial structure," Stevens wrote in a May 1, 2006, loan review. "The investor will be able to realize a strong, ongoing return on their investment."

Soon afterward, the state Department of Energy approved what Stevens says is the largest single loan in the department's history: $20 million to be repaid over 14 years at 5.6 percent interest. Banks loaned another $100 million.

Stevens noted in his write-up that Oregon's willingness to loan money was a factor in locating the plant here.

"The willingness of the state to participate has been a positive note in dealing with the lenders and investors," he wrote. "No other state in the Northwest has an incentive like the loan program."

Taxpayers also provided Cascade with other help, including a five-year property tax break worth up to $2 million per year. And last year Cascade got about $11 million from a state business energy tax credit. And money from a Columbia County urban renewal district provided nearly $30 million of infrastructure, such as a road and a rail spur to Cascade's plant.

With all the goodies taxpayers provided Cascade and a new ethanol mandate in place, the company's prospects looked bright when it started production last June.

But Oregon's best intentions proved no match for wild swings in commodity prices and the ethanol industry's excess production capacity. Seven months after it started production, Cascade shut down.

The reasons Cascade failed are simple: lousy operating margins exacerbated by balky equipment. Or, put another way, ethanol prices were too low to cover the cost of production; and, for reasons that remain in dispute, Cascade's plant ran only intermittently, and its ethanol did not always meet industry specifications.

In his 2006 review of Cascade Grain's loan application, the Department of Energy's Stevens highlighted a key risk: the price of corn.

"The market for the major feedstock [corn] is a key to the successful operation of the Project," Stevens wrote. "The market for corn is currently favorable for the Project's finances. Corn prices are anticipated to rise from current lows, but remain in the 15-year historical range of $1.82 to $3.24 [per bushel]."

But ultimately, high corn prices and a weak gasoline market whipsawed Cascade.

Corn prices far exceeded historical prices, in part because ethanol plants multiplied like Las Vegas subdivisions.

All the new facilities boosted corn demand. Experts disagree about how much of the price increase came from ethanol and how much from increasing food demand, but ethanol claimed an ever larger chunk of the corn crop.

In 2002, for instance, federal figures show 11 percent of the nation's corn crop got converted into ethanol; in 2007, the number was about 25 percent. Over the next year, the USDA expects ethanol makers to buy fully one-third of corn production.

In July 2008, a month after Cascade started production, corn prices reached an all-time high of $7.99 a bushel. That was more than twice the high end of the range the Energy Department's analysis had contemplated.

And after corn prices peaked, they declined more slowly than gasoline prices. That divergence drove Cascade's operating margin—the difference between the price of ethanol and the price of corn—into negative territory.

Cascade's biggest problem was that there was just too much ethanol being produced in this country. By the end of 2008, figures show, ethanol capacity was about 12.5 billion gallons, but demand was a little more than 9 billion gallons a year.

"The entire ethanol industry has seen reduced and negative margins over the past several months," Carlson says.

Doug Vind of Western Ethanol, an Orange County, Calif., distributor active across the West, says Cascade simply showed up too late for the party.

"Three years ago, they could have made a lot of money and socked some away for later," says Vind, who purchased Cascade-produced ethanol. "But margins were negative from the get-go, and they had problems with quality control."

Cascade faced another challenge, as well. Building a $200 million piece of machinery is complicated, and even though ethanol technology is well-developed, construction of Cascade's plant did not go smoothly.

Carlson says the plant never performed as JH Kelly, the general contractor who built it, promised.

"In the seven months Cascade had the plant operating, there were less than 20 days in which we were able to run at full capacity," he says.

And the ethanol Cascade produced sometimes failed to meet buyers' quality specifications.

In January, Cascade's quality issues became severe. The company sent hundreds of thousands of gallons of ethanol to Portland that contained excessive amounts of sulfates, say industry sources. Buyers rejected the shipments, which meant Cascade did not get paid.

The financial hit was more than the company could absorb. On Jan. 28, the company declared Chapter 11 bankruptcy.

Carlson says Cascade's bankruptcy was painful to him because it cost so many employees their jobs, but it should not affect or lessen Oregon's commitment to ethanol.

"These were unforeseen problems that dramatically affected our ability to produce and run efficiently," Carlson says. "[But] renewable energy is vital to Oregon and the country as a whole."

Today, Cascade's hammer mill, designed to crush 7 million pounds of corn daily, sits in a silence broken only by the quacking of ducks and honking of geese on the rain-swollen Columbia. In a Portland bankruptcy court, creditors are picking at Cascade's carcass.

Not only did the nearly 60 jobs the plant created turn out to be fleeting, but ethanol critics are increasingly questioning the facility's environmental promise.

Although some research says ethanol is environmentally superior to gasoline, a number of studies have found that when the fertilizer and fuel used to produce, harvest, transport and process the corn are factored in, ethanol is no greener than gasoline and may in fact be worse for the environment.

The Oregon Legislature is now considering at least five bills aimed at scaling back or eliminating the 10 percent ethanol mandate because of concerns that it reduces mileage, harms some engines and raises food prices.

Sen. Vicki Walker (D-Eugene), a proponent of anti-ethanol legislation, believes the fuel drastically reduces a car's mileage.

"I hate ethanol," Walker told the House environment committee March 26.

While Carlson hopes to restart his ethanol plant soon, one creditor recently asked bankruptcy judge Elizabeth Perris to force Cascade into liquidation.

In March, Valero, a large Gulf Coast oil refiner, bought seven ethanol plants in a bankruptcy auction for about 30 cents on the dollar. An industry expert told the court here Cascade's plant is worth about $50 million, a quarter of its construction cost.

That means lenders—including taxpayers—will take a bath.

Kulongoski and Dingfelder are taking the position that while unfortunate, Cascade's problems are a short-term blip on the long-term path to sustainability.

Dave Van't Hof, Kulongoski's point man on energy and environment issues, says the governor believes the subsidies for Cascade and the ethanol mandate were good decisions and he would do nothing differently.

"We're staying the course," Van't Hof says. "We're not going to win on every investment, but on average we're going to get a positive return."

Dave Stevens, the state Department of Energy loan officer who reviewed Cascade's business plan, retired March 31, knowing that the biggest deal he approved was also probably the worst.

"I don't know if it [the loan] was a mistake," Stevens says. "I won't be overly defensive, but I don't know what else we could have done."

Ethanol boosters like Carlson, Cascade's CEO, say the future is bright: Consumption will catch up with production capacity and the industry will move toward "second generation" ethanol production using cellulosic sources unburdened by corn's drawbacks, such as wood-product waste.

But even some left-leaning critics, such as Chuck Sheketoff of the Oregon Center for Public Policy, say policymakers need to slow down and invest taxpayer money more carefully.

"I'm not sure we're asking basic questions like, 'Is this a good deal?' and, 'Will it happen anyway, without incentives?'" Sheketoff says. "Subsidies should be based on good business sense."

One bushel of corn (56 pounds) yields about 2.8 gallons of ethanol, carbon dioxide and corn waste called distiller's grain, which is used for animal feed.

Minnesota implemented a 10 percent ethanol mandate before Oregon did. California will move to a 10 percent mandate in 2010.

On June 21, 2007, Congress passed a federal mandate that the nation use 10 percent ethanol. The federal mandate is for total consumption nationwide, however, and does not commit any individual state to that figure.

Cascade and other ethanol makers' best reason for optimism is that the federal ethanol mandate will increase the amount Americans must buy from 9 billion gallons last year to 15 billion gallons in 2015 and 36 billion gallons by 2022.

After the passage of the 2007 ethanol mandate, Cascade and Oregon's other ethanol maker, Pacific Biofuels, which has a plant in Boardman, wrote Dingfelder $1,000 campaign checks.

WWeek 2015

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