Web exclusive posted Oct. 8, 2008 at 10:26 a.m. CST

On Sept. 30, San Antonio, Texas-based Tesoro Corp.'s operating subsidiary, Tesoro Refining & Marketing Co., filed a lawsuit against the California Air Resources Board to prevent the implementation of a new regulation from taking effect that would require refiners like Tesoro to put more ethanol into their gasoline.

On Aug. 29, the California Air Resources Board finalized a rule that targeted California refiners to increase the amount of crop-based ethanol in gasoline from the current level of 5.7 percent to as much as 10 percent by December 31, 2009, which would also increase greenhouse gas emissions. Tesoro has two refineries in California; one in Martinez and one in Los Angeles.

Tesoro is balking at the rule, suggesting that "recent scientific evidence reveals that crop-based ethanol is harmful to the environment in terms of increases in greenhouse gas emissions, damage due to runoff from greater fertilizer use and higher water usage", the company said in a statement.

Along with setting gasoline specifications, the California Air Resources Board also regulates GHG emissions in the state. In 2006, California enacted a climate change law mandating a cut in GHG emissions to 1990 levels by 2020. Currently, the California Air Resources Board is working on final proposed regulations to implement the law.

"To date, refiners have made significant investments in California to reduce emissions in [California] and to ensure full compliance with existing ethanol requirements," Tesoro Chairman, President and Chief Executive Officer Bruce Smith said. "However, more and more questions are emerging about the impact crop-based ethanol has on our environment and food supply. We think greater review of the environmental and economic impact of this fuel supply is needed before we increase the ethanol requirements in California gasoline."

In addition to the lawsuit, Tesoro "intends to meet with other industry and business participants, elected officials and regulators to urge a more comprehensive approach to ethanol use in the state and ultimately across the country," a company statement said.

Tesoro expects a ruling on the temporary injunction in the next 30 days to 60 days. A final ruling should be completed within the year. Manatt, Phelps & Phillips LLP is serving as legal counsel to Tesoro.

Meanwhile, The New Fuels Alliance called on the California Air Resources Board to request immediate dismissal of the case, declaring that the lawsuit is frivolous and a "blatant attempt by Tesoro to try to use the regulatory and legal process to gain competitive advantage in the marketplace," according to a statement released by the New Fuels Alliance.

The alliance is a national organization dedicated to educating business leaders, state regulators, grant makers, media outlets, existing advocacy and public interest groups as well as the general public about the economic and environmental benefits of non-petroleum fuel production and use. Two regional affiliates are organized under the New Fuel Alliance umbrella: the Northeast Biofuels Collaborative and the California Renewable Fuels Partnership.

"This is another case of an oil company executing a political and legal strategy designed to maintain the status quo, which in this case means Californians getting gouged at the pump while oil companies rake in tens of billions of dollars in profits every quarter," the New Fuels Alliance added. "It's well known that it's not in Tesoro's strategic interest to use ethanol because the company is long on octane and gasoline. It's cynical and wrong for them to prevent others from making good business decisions just because Tesoro is getting beat in the marketplace."

Oil companies are buying ethanol for approximately $2.50 per gallon, receiving an addition 50 cent-per-gallon tax credit and blending the gasoline additive with $3.00 per gallon wholesale gasoline.