An Interview with T. Jack Huggins

T. Jack Huggins, chairman and chief executive officer of Pekin Energy Company, was born in Texas and raised in California before going east to graduate from Yale with a degree in chemical engineering. He later earned his MBA from Pace University’s Westchester, NY, campus in 1979, and after working for Union Carbide from 1964-1969, went to work for a computer consulting firm. He joined CPC International, Corn Products Division, one of the partners in Pekin Energy Company, 23 years ago at their world headquarters in Englewood Clifts, New Jersey. In 1986 he came to Pekin Energy Company where he became president in 1989, and chairman and CEO in 1990. He is a director of the Central Illinois Employers’ Association, a director of the Heartland Water Resources Council, and chairman of the board of the Renewable Fuels Association.

Pekin Energy has grown to become the second-largest manufacturer of ethanol in the United States, next to Archer Daniels Midland. How did this growth develop in just over a decade?

This plant’s history goes back to the 1890s. It was a sugar beet processing plant which was converted into a corn processing plant in 1903. At that time it became part of Corn Products, making corn sweeteners and corn starch. The refinery area of the plant eventually became worm out. Around 1980 ethanol started to gain some prominence. The company talked with Texaco and they were interested in ethanol, so CPC International (Corn Products) and Texaco formed a joint venture called Pekin Energy Company. They built a new portion onto the plant to make ethanol, including fermentation and distillation facilities. It was completed in 1981 and the old part of the plant was disconnected and some of the facilities torn down. So we now have a plant with some older sections for corn processing (they’re older but still state-of-the-art) and a very new ethanol facility.

The picture for ethanol use as an alternative fuel has changed throughout the closing days of the Bush administration and the first two months of the Clinton administration. Where does the situation stand at present with the controversy over the Environmental Protection Agency’s implementation of the Clean Air Act?

The current situation dates back to the Clean Air Act of 1990. The ethanol industry and farm groups worked very hard to get oxygenated fuels into the Clean Air Act. This is because when you put ethanol or ether into a fuel, carbon monoxide our of a vehicle’s tailpipe is reduced. It also increases octane, so other toxic substances in gasoline can be reduced. Congress passed the Clean Air At, mandating 2.7 percent oxygen fuel content in areas with a carbon monoxide problem. – 39 cities across the country – basically a winter program. We’ve just completed the first year of that program and we moved a lot of product to the states of Oregon and Washington, and some to Phoenix, areas where a carbon monoxide problem exists. This was received quite favorably, since ethanol in gasoline at a ten percent level reduces carbon monoxide by 25-30 percent. Oregon and Washington both have tax incentives which prefer ethanol to ether.

The second part of the Clean Air Act has to do with reformulated gasoline. This is to help cities which have a smog problem – an ozone problem. The government is requiring nine U.S. cities to use a reformulated gasoline starting in 1995 – Chicago, Los Angeles, New York, Baltimore, San Diego, Houston, Philadelphia, Hartford and Milwaukee. Congress has also mandated a fuel oxygen content of two percent in those cities. Our problem is not with that part of the law; our problem is will how the EPA intends to implement that.

Just how does the EPA plan to implement it?

The first phase of implementation is what is called a simple model – done basically to help refiners, who would have trouble meeting all of the composition requirements right away. What the EPA did in the simple model was require a simple reduction of the vapor pressure (measured in pounds) of gasoline. The problem, for the ethanol industry, is when you blend ethanol with gasoline you increase the vapor pressure of the mixture by about one pound. So the route the EPA chose to pursue is the only one that could give the ethanol industry difficulty.

In the past the EPA has had vapor pressure controls on gasoline in the summertime and ethanol has always been granted a one-pound waiver. For example, when the EPA has required eight pound maximum vapor pressure in the summertime to prevent excessive evaporation of gasoline, an ethanol blend was allowed a nine pound vapor pressure. The reason for the exemption being granted is when ethanol is mixed with gasoline, tailpipe emissions are cleaned up significantly, since oxygen gets rid of a lot of the unburned hydrocarbons. The net of those two is the reduction of ozone.

If the simple model were enacted, how serious a problem would it pose for the ethanol industry?

The simple model has the potential to almost knock out the ethanol industry. Although reformulated gasoline would only be required in the nine smoggiest cities, other areas may choose to opt in and ask for reformulated gas. It’s estimated that 60-80 percent of the gasoline sold in America in the summertime will be reformulated. If ethanol were excluded from that, it would shut down most of the markets that we have. That just wouldn’t be in the best interests of the country.

Our problem with the simple model that the EPA plans to implement in 1995 is they are not looking at the tailpipe emissions – only the evaporative emissions. They are not addressing smog in the simplest model – they don’t even pretend to. Yet the law was specifically written to reduce smog. Smog is formed by certain chemicals in the air combining – nitrous oxides, carbon monoxides and some hydrocarbons. It is most aggravated by the unburned hydrocarbons coming out of auto tailpipes. This is where ethanol does its best job. Our modeling showed that we do have more evaporative emissions because we are higher vapor pressure, but we reduce smog because of the way ethanol cleans up tailpipe emissions. The net of the two is very favorable.

The ethanol industry went to the consulting group that the EPA was using and addressed the issue of smog, which the EPA was not addressing. But the EPA was unyielding, saying, “We’re just going to control vapor pressure, and you’ll just have to sit out for two years until we change the regulations.” Well, you can’t really shut an industry down for two years, so we did a lot of lobbying. Congressmen began saying, “That wasn’t the intent of the law. We intended ethanol to play a major role in reformulated gas.” We ended up taking it to President Bush. Bush agreed, and announced what was called the “ethanol compromise” that would allow a 30 percent participation of ethanol in reformulated gas until we get to the complex model, which will look at the tailpipe as well as evaporative emissions.

Well, then we changed governments. The EPA has since come out with the tentative implementation of the Bush regulations. The industry will offer comments and after about 60 days the EPA will go back and write the final regulations.

So now you are waiting for the EPA to decide to what extent ethanol will be allowed to participate in the Clean Air Act. Why is the issue so difficult? What do you expect in the way of help from the Clinton administration?

Fuel technology is an evolutionary process. When Congress passed the Clean Air Act there really wasn’t much data to support it. Now that data is coming in, the EPA has produced more models of what urban airsheds are like. The more data that comes in, the better ethanol looks. In fact, ethanol significantly improves the air in the EPA’s most current modeling.

How we are going to end up on this thing, I don’t know; but I do know that Clinton was part of the Governor’s Ethanol Coalition and Al Gore has historically supported ethanol. When Clinton gave his State of the Union address, he talked about a BTU tax except for biomass fuels that are renewable – that’s what we are. My belief is that this administration has perhaps more of an understanding of the importance and value of biomass fuels than the prior administration, and that they will work with us to see that we play a meaningful role in reformulated gasoline. You’ve got to be optimistic in this business.

How big of a role has the oil industry played in limiting the prospects of widespread ethanol use?

It’s a huge role. Clearly we are competitive to them. In a traditional blend, such as you see at most of your gas stations in Illinois, ethanol is ten percent of the gasoline. That means ten percent less oil. Historically the oil companies have controlled the pipeline from underneath the ground right into the customers’ cars. Now they are buying from another supplier – the ethanol industry.

MTBE (ether), which the oil industry supports, is derived from natural gas and a petroleum process. The oil industry favors it over ethanol for obvious reasons. When we went into negotiations with the EPA, the oil companies came through with reams of data. They spent millions of dollars on it. The ethanol industry isn’t big enough to spend millions. So the EPA was presented with one set of data which was very much favorable to the oil companies. We don’t have sufficient volumes of data to counteract that.

The oil companies have the clout to cause us a lot of difficulty. The chairman of Atlantic Richfield Oil Company was President Bush’s west coast fundraiser. You read about what ADM and the Andreas’ contribute to political campaigns; it’s a drop in the bucket compared to what the oil companies contribute. You read about the strength of the ethanol industry; we spend a fraction of what the American Petroleum Industry spends. The oil industry is a formidable foe. We would like to see Clinton change the environment to where the oil companies realize the importance of working with us. Then, I think they could be a very supportive ally.

Pekin Energy Company was originally a joint venture with an oil company, Texaco. How has that developed?

The partnership has worked very well. Early on, however, Texaco stopped marketing in this part of the Midwest. Originally, they had envisioned taking most of the ethanol from our plants; shortly after the plant opened, they took very little. So we began our own marketing effort. They have been supportive of us, but they are obviously betwixt and between when they go to American Petroleum Industry meetings, because they are the only major with an ethanol interest. We have had our difficulties with them but we’ve had a lot of support from them, and this past year was the first year they became a major customer. They do a lot of marketing on the west coast and they bought a lot of product from us for use in Washington and Oregon. They were quite pleased with the results of marketing that blend.

As current chairman of the Renewable Fuels Association, what are your thoughts on U.S. energy self-sufficiency and the benefits of ethanol development to the U.S. economy?

The U.S. will never be energy self-sufficient. It is not the purpose of ethanol to make us energy self-sufficient. Ethanol is a domestic fuel and as such as tremendous economic value to our country. If you buy a gallon of gasoline, most of that money goes abroad – primarily to the people who pump it out of the ground – very little goes for the manufacturing process. If you buy a gallon of ethanol, that goes back to the farmers. That spurs the whole U.S. economy.

Pekin Energy Company brings over $100 million annually back into this economy. We buy Illinois coal; we buy Illinois corn; we use local contractors; we pay our people here and they spend their money here. The trucks that haul corn into our plant stop at the local Dairy Queen. And this happens at every ethanol facility. That’s a lot different than what happens when you buy a gallon of gasoline and most of the money goes to Saudi Arabia. It’s important to this country that we build a domestic renewable fuels industry. We are at a billion gallons a year now; that’s not small, but gasoline use in this country is over 100 billion gallons annually.

This year, farmers will not plant 7-10 percent of their land, so ethanol is not taking anything from the food supply. One of the great things about ethanol production is that we use the starch out of the corn and return the protein back to animal feed. We sell of 200,000 tons per year of animal feed to Europe; we sell a 60 percent protein animal feed to chicken producers and for dog and cat food; and the germ goes up to Chicago where they make Mazola corn oil. We take the starch our and the rest goes back to the food supply.

Ethanol is good economically and environmentally. Concerning the greenhouse effect, carbon dioxide is emitted in the combustion process, but when corn is planted, it takes the carbon dioxide back out of the air. With fossil fuel, it’s a one-way trip.

There are currently fleets of government cars that burn a fuel blend of 85 percent ethanol. Given that technology exists to burn higher ethanol blends or pure ethanol, why couldn’t we all be driving ethanol-burning cars by the end of the decade?

It’s a matter of size. The ethanol industry produces one billion gallons annually and the country burns 110 billion gallons. We could not grow the ethanol industry a hundred times within that period of time. It would be reasonable to expect this industry to grow by a factor of three or four to become perhaps a four billion gallon industry by the year 2000.

The technology to burn more ethanol is available. Every car in Brazil has ethanol in its tank. Forty percent of them use 100 percent ethanol; the other 60 percent use a 22 percent ethanol blend. It’s just a matter of scale. Brazil has that scale for its volume of cars – we don’t.

The Energy Security Act passed in 1992 requires cities to develop clean, low emitting vehicle fleets. Ethanol is perfect for that. Instead of having to get ethanol in every gas station on the highway, I think we can get ethanol into these clean air fleets, like the Peoria buses, where they only have one fueling point. That way we don’t have to be in every gas station in America.

What has to happen for the ethanol industry to grow faster, to vastly increase ethanol use in the U.S.?

We have to have a meaningful market out there, which means that we need to be in reformulated gasoline. As I mentioned earlier, somewhere between 60 and 80 percent of all fuel will be reformulated gas. That would promote the continued building of ethanol facilities. As we build the industry, more fleets will be able to use ethanol, and that will continue to spur the ethanol industry. The concern I have with fleet usage is that we don’t know the market impact yet; we don’t know what kind of price people are willing to pay for their fuel, and you need a price to support new construction. If there is favorable implementation of fleet fuels and ethanol in reformulated gas, you will se a lot of building in the ethanol industry.

Where do expansion plans at Pekin Energy stand today?

We are looking at a couple of projects. We will probably not announce any expansion until we have a real market position in reformulated gasoline, and I’m hoping that will be resolved this summer. I think the Clinton administration wants to see it resolved, because you see press announcements about biomass fuels and ethanol. The sooner that’s announced, the sooner you’ll see new construction in this industry. And that construction is going to be in the Midwest.

Why should the government subsidize ethanol?

Well, the Arabs subsidize oil. They do it from a price standpoint. This country now imports over half of its petroleum base fuel. If we had to go out and drill new wells in this country, ethanol would probably not need a subsidy. What the pricing mechanism has done is stop new drilling in the United States. Either this country can just stand by and watch more and more of its energy requirements move overseas, or it can subsidize energy requirements domestically. One way would be to have an import fee on oil. That would probably spur new drilling in this country as well as new ethanol facilities. Otherwise, we’re just letting the tail wag the dog.

Why do we allow ourselves as a nation to be so dependent on foreign oil?

We don’t have a good energy policy in this country. People are used to having cheap fuel – a little over a buck for a gallon of gasoline. When you go to Europe, you pay $3. We don’t have strong conservation policies and we don’t have anything moving us toward self-sufficiency. That’s just the way we are.

Ethanol as an industry is only ten or eleven years old. It is not the only industry in the U.S. getting support, and it is not unreasonable to use tax policy to develop an industry that is good for this country. The oil industry had support through their first forty years. Oil companies have received mammoth amounts of support – some estimates say $60 billion – through depletion allowances, investment tax credits and other incentives. We did it for the oil companies; not it is time to do it for the ethanol companies.

What other ethanol-related technologies are being developed?

There is continuous work on technologies. The government has funded some; the University of Illinois is going work on ethanol technology. We will see incremental changes. The use of cellulose will change ethanol production. I visited a company a week ago that has a process for making ethanol out of newspaper. That won’t take away from corn-based ethanol; it will add to the supply of ethanol and that’s good. There is a tremendous amount of biotechnology being worked on now, using bacteria and enzymes to convert things to ethanol. It’s an evolving technology. I don’t think you’ll see a massive cost change, but I think you will see more sources of raw materials to turn into ethanol.

Give us your vision for ethanol into the year 2000 and beyond.

I see continued U.S. focus on developing biomass and renewable fuels. That will come in the form of incentives and requirements for clean-burning fuels in the marketplace. I see ethanol production doubling and possibly tripling in size by the year 2000. The use of corn in ethanol production will increase, but I also see other materials like newspapers and waste products being used in ethanol production. This will mean more and more ethanol production facilities around the country. Some will be small, and some will be large like Pekin Energy and ADM.

How effective a link exists between ethanol producers and the agricultural community in lobbying for ethanol use?

It’s very effective. The Corn Growers’ Association has done a tremendous job of supporting the growth of ethanol, and for valid reasons. The U.S. corn crop this year is nine billion bushels. Ethanol uses a little over 400 million bushels of that – roughly 5 percent. The other uses for corn include animal feed, corn sweeteners and exports. None of these areas are growing. The potential for ethanol to grow is huge. Ethanol is only one billion gallons in a 100 billion gallon market. It is environmentally clean compared to petroleum-based fuel. As farmers increase their crop, they need a market for it. Otherwise they are going to be 100 percent dependent on government support, and they don’t want that. In real terms, corn prices have gown down since the mid-forties. So farmers support ethanol.

The subsidy that ethanol gets, which is a market incentive, is repaid two to one in the farm program. For every federal dollar spent in the ethanol program, two dollars are saved in the farm program. So although ethanol gets direct support from the government, it is a profitable support, whereas most supports tend to be losers.

Pekin Energy is primarily known for ethanol production, but your process produces co-products as well. Tell us about the process and the co-products business.

We are a wet miller. The corn is soaked, ground, and separated into its components. The basic components are the fiber, the glutton (yellow-colored high protein), the germ (about 50 percent oil), and the starch. What we do is take the starch, treat it will enzymes which converts the starch to sugar. Then we feed it to yeast which converts the sugar to ethanol. The glutton we separate and sell as chicken feed, and for production of dog and cat food. The germ foes to Chicago where it is made into Mazola corn oil. The fiber goes to Europe for a 21 percent protein animal feed. We use the entire kernel. Anything that gets out of it that we don’t catch goes over to our waste treatment plant which converts any carbohydrate left into gas which is then used in our dryers.

We take every piece of that corn and convert it. We take the no-protein starch out of the corn and return the entire protein back to the food market. We sell ethanol which can be used in vinegar manufacturing and chemical manufacturing as well as ethanol that is used with fuel. In the past we have sold ethanol that has gone to Japan for making drinks – potable alcohol.

What are your general observations on operating an ethanol manufacturing company in central Illinois?

The state of Illinois has been tremendously supportive. Gov. Edgar is chairman of the Governors’ Ethanol Coalition. He has absolutely taken this battle to the White House to see that Illinois ethanol manufacturers are treated fairly. I have nothing but praise for the state. The local area governments have also tended to generally be very helpful. It’s been a very position environment.

We are in an excellent part of the world, logistically. We are in the corn belt. We have the Illinois River, which allows us to ship product to Decatur, Alabama, for lower cost than we can ship to Decatur, Illinois. You put it on the river and it’s almost free – it’s just wonderful. We have the Burlington Northern and the Union Pacific competing for our business going to the west coast. Going to the Southwest we have the Santa Fe and the Southern Pacific competing, so we have good rail rates.

How has the Pekin Energy Company found the central Illinois labor climate?

I moved out here in 1986 and I wasn’t sure what to expect. I found a very enthusiastic, hard-working, talented group of people. They have made Pekin Energy. We have grown and are number two in the industry. We’ve been successful and will continue to be successful, primarily because of the people here.

Our people belong to OCAW (Oil, Chemical and Atomic Workers). They are excellent. They have helped us fight some of the political battles in ethanol production. They have helped make this plant one of the most efficient in the industry. What you read about Peoria is the UAW billboard that says “War Zone.” You don’t read about some of the other companies that are doing some tremendous things.

Outsiders’ perceptions of the Peoria area are not always favorable, in part due to a tough labor reputation. How do you view the Peoria area as a place to live and do business?

One of the things I have always found curious is the strange reputation Peoria has. I was at Newark airport trying to catch an early flight back to Peoria when a woman at the airport asked, “Why would anyone want to get to Peoria early?”…Since I’ve moved to central Illinois, people have often asked me, “Did you mind coming to Peoria?” There is just so much to be positive about here, yet people tend to want to look at the negatives. I don’t understand why. It’s a nice, relaxed lifestyle. We have a nice house overlooking the beautiful Illinois River. People work hard here. I think it’s remarkable. This area has so much to offer and yet people denigrate themselves. They should be saying, “We are lucky to be here; we can just do wonderful things!” But often they don’t. At this plant we try to do that.

Obviously the labor battle at Caterpillar is an example. The company and the union should be involved in a win-win situation. And they’re not. Why? The employees are clearly making good money. Cat clearly has a world leadership position. They ought to both be out there just thrilled with what’s happening. And they’re not. I don’t understand it. If anything were to change to improve this area, that would be it. We need to approach life with a win-win attitude instead of a confrontational attitude. IBI