FTC finds US ethanol production 'not unduly concentrated'

New York (Platts)--5Dec2005

Ethanol production in the US is "not unduly concentrated" at present, the
US Federal Trade Commission has concluded in its first mandated analysis of
the market.

     FTC, which is required under the Energy Policy Act of 2005 to preform a
market concentration analysis of the ethanol producing sector, said that,
based on several criteria, the ethanol producing sector fall under the
"unconcentrated" or "moderately concentrated" models. FTC based its analysis
on the "Herfindahl-Hirschman Index" (HHI), which provides a guideline on
whether there is sufficient competition among industry participants to avoid
price-setting and other anticompetitive behavior.

     The agency said its staff from the Bureau of Competition and Bureau of
Economics jointly prepared the analysis, using both publicly available sources
and "voluntary interviews with industry participants" and calculations from
the Energy Information Administration.

     "Based on the HHIs and on qualitative considerations of the competitive
dynamics of ethanol production, staff concluded that US ethanol production
currently is not unduly concentrated," FTC said in its report, which was
released on Dec 1.

     FTC said that, depending on the model used, it had come up with HHIs of
between 499 and 1259, with the higher figure of market concentration linked to
the assignment of individual producers' shares to common marketers. HHI is
calculated by adding the squared market share of each market participant.
Under FTC guidelines, an HHI of 499 indicates an "unconcentrated" market and
an HHI of 1259 indicates a "moderately concentrated" market. Their is a third
HHI, over 1800, which indicates a "highly concentrated" market.

     "Viewed in isolation, these concentration levels do not justify a
presumption that one firm, or a small group of firms, could wield the market
power necessary to set prices or coordinate on prices or output," FTC said in
the report. "Moreover, the concentration figures overstate the likelihood of
anticompetitive behavior in light of significant new entry in ethanol
production and marketing that will occur in the next year and is expected to
continue for several more years."

     To support its finding, FTC noted that ethanol production in the US has
grown both in volume and the number of participants. It cited statistics
showing that production in 2004 was 3.4-bil gal, more than double the volume
produced in 2000. And it noted that, "more than 75 different firms operate
more than 90 fuel ethanol production facilities in the United States, with a
current capacity of more than 4.1-bil gal/year," versus 43 firms and just
under 2-bil gal/year of capacity in late 2000.

     FTC said the largest producer's share of capacity is now about 25%, down
from over 40% in 2000. "The industry continues to expand, as incumbent
producers are currently expanding existing plants and 18 new entrants are
constructing new plants. As a result, an additional 1.3-bil gal/year of
ethanol capacity are expected to be operational within the next year."

     The agency cited federal government subsidies and tax credits, its
acceptance as a replacement for MTBE as a fuel additive and state and local
support for ethanol as the three main factors behind the recent increase in
ethanol production and demand. And it noted that the Energy Policy Act of 2005
itself required the Environmental Protection Agency to issue regulations on
the volume of renewable fuel to be included in US gasoline supply.

     In 2006, the statute requires that gasoline sold or introduced into US by
refiners, blenders, and importers must contain 4-bil gal of renewable fuel.
That volume requirement is to increase annually, reaching 7.5-bil gal by 2012.

     "Although ethanol sales will likely exceed these requirements in the
short term, the Energy Policy Act's guarantee of certain renewable fuel sales
provides additional incentives for producers to build new ethanol production
capacity," the agency noted.

     FTC's annual findings go to both Congress and the EPA administrator.

				--Robert DiNardo, robert_dinardo@platts.com

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