Amicus Curiae Brief — New Energy Co. of Ind. v. Limbach

No. 87-654 FER 2S 198

ly Tue

Supreme Court of the Cinited States

Octrorner Trenw, 1987

NEW ENERGY COMPANY OF INDIANA,

Appellant,

v

JOANNE LIMBACH, TAX COMMISSIONER

OF OHIO, and SOUTH POINT ETHANOL,

Anpnellees

On Appeal From The Supreme Court Of Ohio

BRIEF OF THE STATE OF ILLINOIS

AS AMICUS CURIAF

IN SUPPORT OF APPELLEES

NEIL F. HARTIGAN

Attorney General, State of Tilinois

SHAWN W. DENNEY

ss eiteor Gener mioty ’ Tllinetsa

ROSALYN B. KAPLAN ®

MICHAEL WYNNE State of Hiinois (

ont Diteenens Ganesel } Weat Rh

TABLE OF CONTENTS

TABLE OF AUTHORITIES ....... sebeess , TT)

INTEREST OF THE STATE OF ILLINOIS . l

SUMMARY OF ARGUMENT ............. : 2

ARGUMENT

vr

l

THERE IS NO NATURAL FUNCTIONING IN

TERSTATE MARKET IN FUEL ETHANOL ..

SUBSIDIES ALSO SUSTAIN THE CORN IN

DUSTRY THAT PROVIDES THE RAW MA.

TERIAL FOR ETHANOL PRODUCTION, AND

GREATER FUEL BLEND PENETRATION IN

THE GASOLINE MARKET MAY WEAN THE

FARM SECTOR FROM SUBSIDIES ....... 4

THE PRINCIPLE OF HUGHES ve. ALENAN.

DRLA SCRAP CORP , 426 U.S. 794.1976), GAINS

ADDED RELEVANCE WHERE THE STATE

MUST LOWER THE PRICE OF THE FINISHED

(00D TO MAKE IT COMPETITIVE, IN OR.

DER TO BID UP THE PRICE OF THE RAW

MATERIAL AND THUS REDUCE STATE AND

FEDERAL PF'CE SUPPORTS ............ ll

IV

iF THE COURT DECIDES THAT PIKE ¢

BRUCE CHURCH, 397 U.S. 187 (970), IS AP.

PLICABLE TO ASTATUTE THAT SURBSIDIZES

\ GOVERNMENT CREATED COMMERCE.

vr

a

**

THEN THE TEST MUST BROADEN THE

SCOPE OF INQUIRY INTO THE EFFECT ON

ot re 13

CORCT A lg .. .ccccecccecseeuese 21

APPENDIX

Feedstock Utilization as a Percentage of Cur-

rent Ethanol Production ................ Exh. A

U.S. Ethane! Production Utilization of Grain.

ON eee Exh. B

US. Ethanol Production 1979-1985 ......... Exh. ©

Ethanol Anhydrous Capacity of Major Plants .. Exh. D

TABLE OF AUTHORITIES

Cases PAGE

Baldwin v. Seelig, 294 U.S. 527 (1934) ........ ~

Exxon v. Governor of Maryland, 437 U.S. 117

ee ce cabececcensccecccesne 16

Great Atlantic & Pacific Tea Co. v. Cottrell, 424

ee cess encncbcccessesce s

Hughes v. Alexandria Scrap Corp., 426 U.S. 794

EE Tec ake ewcsdeccccecscccoece passim

Minnesota v. Clover Leaf Creamery Co., 449 U.S.

cece ec eneccdsececcccsces 15, 16

Parker v. Brown, 317 U.S. 341 (1943) ..... 18, 19, 20

Pike v. Bruce Church, 397 U.S. 137 (1970) ....

TTT oc nes eéeeccscesccececs 4, 13, 14, 15, 17

Reeves v. Stake, 447 U.S. 429 (1980) .......... 14

Sporhase v. Nebraska ex rel. Douglas, 458 U.S. 941

SNNEEEE eas soccesccces: ee 8

Constitutional Provision

Art. 1, See. 8, cl. 3, United States Constitution .. passim

Statute

Cee as ine huwe ns dvccesscccvcce passim

No. 87-654

In THE |

Supreme Court of the United States

OcTOBER TERM, 1987

NEW ENERGY COMPANY OF INDIANA,

Appellant,

v.

JOANNE LIMBACH, TAX COMMISSIONER

OF OHIO, and SOUTH POINT ETHANOL,

A pype Ie es.

—

On Appeal From The Supreme Court Of Ohio

BRIEF OF THE STATE OF ILLINOIS

AS AMICUS CURIAE

IN SUPPORT OF APPELLEES

INTEREST OF THE STATE OF ILLINOIS

[T)he ethanol market has continued to grow, stimu-

lated especially by farmers’ economic problems. (em-

yhasis supplied)

rief of Appellant, New Energy Co., at p. 7.

The raw materials from which the overwhelming ma-

jority of domestic ethanol is distilled are corn and cereal

grain. Illinois is a major producer of these agricultural

wile,

raw materials, and is also a major producer of ethanol.

The current “farm crisis,”’ a result of the increase in the

price of materials, equipment, debt service and fuels, as

well as the concurrent decrease in the price that agricul-

tural products can muster due to large surpluses, has ad-

versely affected the farmers of Illinois and the nation.

There are two ways to solve the crisis. The first method,

governmental disincentives to production, is costly and,

though necessary, inherently abhorrent. The second meth-

od is to increase demand. Illinois prefers the latter method

and has adopted legislation similar to that reviewed in

this appeal.' Increased demand for ethanol results in in-

creased demand for farm products, since a bushel of corn

yields approximately 2.5 gallons of ethanol. The demand

for ethanol will not increase unless states like Illinois and

Ohio subsidize ethanol producers and fuel blend retailers.

The Ohio legislation, by encouraging the increased use

of ethanol fuel blends, benefits all farmers, including those

from Indiana and Illinois. Illinois therefore has a great

interest in advancing the cause of measures which expand

the market for farm products, generate farm income and

reduce the amount of price-support payments made neces-

sary by the farm crisis. Although the Ohio legislation was

in part adopted to assure a healthful environment for the

! See, Ill. Rev Stat. ch. 120, ¢ 442 (1985). In 1985 an independent

fuel blend retailer challenged the Illinois statute on Commerce

Clause grounds. The trial court upheld that challenge and a direct

appeal of that ruling is presently before the Illinois ovum Court

pursuant to its Rule 302(a). Russel! Stewart Oil Co. v. Depart

ment of Revenue, Ill. S.Ct. No. 68680, The case was argued in

November and the parties have since advised the Illinois Supreme

Court of the instant appeal. Contrary to the llant’s claim in its

jurisdictional statement, p. 13, there is no official opinion of the

Illinois Attorney General regarding the Illinois statute; the letter

to which appellants refer clearly states that it is not an official

opinion, and that letter pre-dates the enactment of the Illinois law

a ee

citizens of Ohio, and it undoubtedly furthers that interest,

the State of Illinois submits that additional vital state in-

terests are furthered by Ohio R.C. 5735.145B) and similar

legislation, such as that of Illinois.

SUMMARY OF THE ARGUMENT

In a natural economic environment, where the fate of

commerce in a particular commodity is determined by the

forces of supply and demand, the fuel ethanol industry

would not exist. The industry is the result of massive

state and federal investment in the form of loans, loan

guarantees, excise tax exemptions, sale and use tax ex-

emptions, credits and other forms of aliowances and in-

centives. Since the federal excise tax exemption for fuel

blends is insufficient to render such blends competitive

with gasoline, Congress envisioned that state subsidies

would be rlecessary to render the blends competitive. Ohio

and Illinois are among the states that subsidize their own

ethanol industry and, although they are under no obliga-

tion to do so under the Commerce Clause, they also sub-

sidize the industry of other states. In essence, the claim

of New Energy Company of Indiana is that Ohio has an

obligation to spend money on New Energy Company. The

Constitution imposes no such obligation on any state.

Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976).

The industry that provides the raw materials for ethanol

production, the corn and cereal grain industry, is also sup-

ported by massive state and federal involvement. In ad

dition to the beneficial environmental consequences from

the increased use of ethanol fuel blends, another motiva-

tion for the creation and maintenance of the ethanol in-

~~

dustry is that increased demand for ethanol will reduce

the surplus of grain, increase the market price of grain

and reduce the amount of governmental price supports

that the grain industry receives. All states, including In-

diana, benefit from the increased demand for fuel blends

which R.C. 5735.145(B) generates. Even if the reduced

participation of New Energy Company in the Ohio gaso-

line market is viewed as a burden, that burden is far out-

weigh | by the benefits to the corn and grain industry

of all states.

If the analysis of Pike v. Bruce Church, 397 U.S. 137

(1970), is applicable to legislation which subsidizes a gov-

ernment created commerce, then a major flaw in the anal-

ysis must be corrected. The scope of the Court's inquiry

into the affected commerce must not be limited to that

commerce in which the plaintiff or its industry partici-

pates. The inquiry must expand into other markets and

industries which may be affected by the legislation and

which may enjoy a substantial benefit even if the plain-

tiff does not enjoy a similar benefit. That expansion is

particularly appropriate where the plaintiff's industry is

merely a conduit for other governmental objectives in

other markets and industries. An inquiry which does not

take into account the benefits of the legislation if they

occur in an industry other than that of the plaintiff is an

unwarranted infringement of the sovereign power of the

states to act where Congress has not acted. The Ohio leg-

islation does not burden commerce. It increases the flow

of commerce in the ethanol industry and, more important.

lv, In the industry which the ethanol industry was created

to advance, the corn and cereal grain industry. The decision

of the Ohio Supreme Court upholding R.C. 5735.145(B)

should be affirmed

ARGUMENT

THERE IS NO NATURAL FUNCTIONING INTERSTATE

MARKET IN FUEL ETHANOL.

If natural economic forces of supply and demand had

free play, the fuel ethanol industry and market would not

exist. Consumers do not want ethanol fuel blends; the

federal and state governments want them. Governments

advocate the production and use of ethanol fuel blends

as a means to remedy or alleviate local and national en-

vironmental and economic ailments. Amelioration of such

ailments is not set in motion until the price of the ethanol

fuel blend is sufficiently reduced, by governmental rather

than economic forces, so that the blend is competitive with

gasoline.

The cost to the state and federal governments to start

up the process and maintain it in operation is substan-

tial. For 1985, the total cost to those states that confer

subsidies for ethanol production was $302.5 million.? The

cost to the federal government of the gasoline excise tax

exemption for ethanol fuel blends was $1,518,000,000 in

1987 and is projected at $3,291,000,000 by 1991.2 Even

with that massive federal expenditure, unless the states

also invest subsidy funds, the blends will still be priced

substantially higher than gasoline and the consumer wil!

reject them, thus thwarting beth the state and federal

objectives. So, clearly, the federal government depends

upon some sort of state expenditure, such as Ohio has

2 See Fuel Ethanol and Agriculture, An Economic Assessmen

p. lO (USDA Agricultural Economic Report No. 582, August. see)

hereinafter referred to as the “Agricultural Economic Report

* Id at p. ll

»

made and Indiana has not, to increase the amount of

ethanol produced and broaden its share of the gasoline

market.4

The ethanol industry and market were created and are

maintained by government expenditures as a means to

achieve other governmental objectives such as improving

the quality of the air we breathe, reducing the amount

of deficiency payments and other price support programs,

and reducing the amount of imported oil. The extent to

which the ethanol industry owes its existence to the pro-

grams of the state and federal governments and the cost

of creating and maintaining that industry are easily ap-

parent from a review of the federal legislation dealing

with ethanol as a means to reduce dependence on foreign

oil and to reduce the grain surplus.> Time and space lim-

4 See The Agricultural Economic Report, at page 37, which con-

cluded that “The fuel ethanol industry is not likely to survive the

next decade without large Federal and State subsidies. The price

of gasoline is not expected to again reach the high level achieved

in 1980 until well after 1995. Therefore, a subsidy in excess of

the $0.60 per gallon of ethano! provided by the Federal excise tax

exemption will be necessary for most existing ethanol plants to

continue operating. Without additional subsidies, growth in the

ethanol industry is unlikely.”” See also, New Energy Co. brief at

p. 6.

5 The Solar Energy, Research, Development, and Demonstration

Act of 1974 (P.L. 93-473) authorized research into and development

of means for “the conversion of cellulose and other organic ma-

terials. . to useful energy or fuels’; The Food and Argiculture

Act of 1977 authorized loan guarantees of up to $15 million each

for four biomass (ethanol from vegetative material) pilot plants,

administered by the FHA and the Commodity Credit Corporation;

The Energy Tax Act of 1978 (P.L. 95-618) exempted certain fuel

blends from the $.04 per gallon Federal Excise Tax on gasoline

through 1984 and provided a 10% energy investment tax credit

(EITC) for equipment used to convert biomass to alcohol; The In-

terior and Related Agencies Act of 1979 (P.L. 96-126) appropriated

$19 billion for an “Energy Security Reserve” to stimulate com-

(Footnote continued on following page)

5 continued

mercial production of alternative fuels, and earmarked 7100 million

each for product development studies and for cooperative agree-

ments to support commercial scale developments; The Crude Oil

Windfall Profit Tax Act of 1980 (P.L. 96-223) extended the $0.04

per gallon Federal excise tax exemption to 1992, extended the eli-

gibility for EITC’s to 1985, and provided an income tax credit to

blenders of $.40 per gallon of ethanol; Thc Energy Security Act

of 1980 (P.L. 96-294) provided insurance for lo: is of $1 million or

less to small scale biomass producers, provided loan guarantees

to cover 90% of the construction cost of biomass energy projects;

provided price guarantees for products of biomass energy projects,

and authorized the United States Department of Agricu.ture and

the Department of Energy to spend $600 million on biomass

energy projects; The Consolidated Farm and Rural Development

Act of 1980 (P.L. 96-438) authorized the Farmers Home Adminis-

tration to guarantee loans for icohol production; The Agricultural

Act of 1980 (P.L. 96-494) established an Alcohol Processor Grain

Reserve Program which, upon a determination by the Secretary

of Agriculture that alcohol producers cannot obtain grain at reason-

able prices, will lend grain to federally financed producers (due

to the grain surplus this provision has not been activated); The

Omnibus Reconciliation Act of 1980 (P.L. 96-499) imposed an addi-

tional duty on imports of ethyl alcohol to be uscd as fuel of 10

cents per gallon in 1981, 20 ents in 1982 and 40 cents from 1983

through 1992; The Agriculture and Food Act of 1981 (P.L. 97-98)

authorized the sale of government-owned corn below the statutory

sale prices whenever supplies are not readily available (due to the

grain surplus this provision has not been activated); The Emergency

Preparedness Act of 1982 (P.L. 97-229) authorized the establish-

ment of a Strategic Alcohol Fuel Reserve to stockpile alcohol fuel

made from government-owned corn; The Surplus Agricultural Com-

modities Disposal Act of 1982 (P.L. 97-358) amended the Agricul-

tural Act of 1949 to authorize the Secretary of Agriculture to use

surplus stocks of grain for conversion to fuel alcohol; The Surface

Transportation Assistance Act of 1982 (P.L. 97-424) raised the

federal excise tax on gasoline to $.09 per gallon but increased the

exemption for blend fuels from $.05 to $.09 per gallon, and also

increased the income tax credit to the fuel blender from $.40 to

$.50 per gallon; The Tax Reform Act of 1984 (P.L. 98-369) increased

the fuel blender’s income tax credit to $.60 per gallon and pro-

vides a $.06 per gallon of blended fuel exemption from the federal

excise tax on gasoline; The Food Security Act of 1985 (P.L. 99-198)

authorized the Secretary of Agriculture to make government-owned

commodities available for free or at a reduced cost for production

of liquid fuels; The Surface Transportation Act of 1987 (P.L. 100-

(Footnote continued on following page)

itations prohibit a similar review of state programs and

an assessment of their great expense.

In industries and markets reated or maintained solely

by virtue of state subsidies, the analysis used in prior

“reciprocity’’ cases does not work. In those cases the

statutes were “designed to neutralize the advantages

belonging to the place of origin.” Baldwin v. Seelig, 294

U.S. 511, 527 (1934). The only advantage one ethanol blend

enjoys over another is the credit, exe:nption or grant that

a state may confer. Since Indiana has chosen not to sub-

sidize ethanol, ethanol from New Energy Co. of Indiana

brings to Ohio no advantage that can be neutralized. The

common thread of Baldwin v. Seelig, 294 U.S. 511 (1934),

Great Atlantic & Pacific Tea Co. v. Cottrell, 424 U.S. 366

(1976), and Sporhase v. Nebraska ex rel. Douglas, 458 U.S.

941 (1982), is that “the state interfered with the natura/

functioning of the interstate market either through pro-

hibition or through burdensome regulation.”” Hughes v.

Alexandria Scrap Corp., 426 U.S. 794, 806 (1976) (em-

phasis supplied). There is no natural functioning interstate

market in fuel ethanol, and therefore those cases are in-

apposite.

5 continued

117) extended the excise tax exemption for blended fuel to 1993;

The Farm Disaster Assistance Act of 1987 (P.L. 100-45) required

the Secretary of Agriculture to select a seven-member panel to

conduct a study of the cost-effectiveness of ethanol production.

(The report of that Panel is referred’ to herein as the National

Advisory Panel Report).

=

Il.

SUBSIDIES ALSO SUSTAIN THE CORN INDUSTRY

THAT PROVIDES THE RAW MATERIAL FOR ETHANOL

PRODUCTION, AND GREATER FUEL BLEND PENE-

TRATION IN THE GASOLINE MARKET MAY WEAN THE

FARM SECTOR FROM SUBSIDIES.

Corn is currently, and will probably remain, the pre-

dominant ethanol feedstock, with important contributions

from several other grains and feedstocks.® Corn is the

feedstock for 85 percent of domestic ethanol production,

and other cereal grains supply an additional 3 percent of

domestic production.” In 1979, total domestic ethanol pro-

duction was only 20 million gallons, but it grew to 555

million gallons by 1985.8 From 1979 to 1985 the utiliza-

tion of grain for domestic ethanol production grew from

8 million bushels to 195 million bushels. The current level

of domestic production is at 850 million gallons per year

and is moderately estimated to reach 1.1 billion gallons

per year in 1992.1°

Ethanol production will provide benefits to the agricul-

tural sector in terms of higher prices for corn and other

feed grains, increased farm income, and savings in agri-

cultural program costs for ethanol.'! On the average, net

6 See Fuel Ethanol Cost-Effectiveness Study, xvi (National Ad-

visory Panel on Cost-Effectiveness of Fuel Ethanol Production—

Final Report to Congress and the Secretary of Agriculture, Nov.

1987), hereinafter referred to as the “National Advisory Pane!

Report”.

7 Appendix, Exhibit A, Feedstock Utilization as a Percentage of

Current Ethanol Production.

§ Appendix, Exhibit B, U.S. Ethanol Production Utilization of

Grain, 1979-1985.

% Appendix, Exhibit C, U.S. Ethanol Production 1979-1985.

10 National Advisory Panel Report at p. xviii.

1! Jd. at p. xiii.

—10—

farm income increases by $0.58 for each additional gallon

of ethanol produced, or a projected $2.2 billion between

1986-1994.!2 More importantly, governmental savings in

reduced deficiency payments to corn growers will amount

to $3.3 billion between 1986-1994, because increased use

of corn for ethanol production will lead to higher corn

prices and smaller inventories of reserves.'*

It is undoubted that the subsidy granted by R.C.

5735.14 B) encourages other states to increase the export

of ethanol to Ohio and thereby makes ethanol available

to Ohio consumers at prices that compete with gasoline.

Likewise, the subsidies of other states encourage the

export of ethanol from Ohio to those states and make

ethanol available to consumers in those states at prices

that can compete with gasoline. While Ohio may not be

subsidizing Indiana’s fuel ethanol industry in the same

manner that it subsidizes that of other states, it is sub-

sidizing Indiana’s corn growers and those of every state

regardless of the state’s policy towards fuel ethanol. In-

diana corn growers benefit on a par with corn growers

in every state from the increased demand for ethanol

blends and its consequent effect on the supply and price

of corn. Each 100 million bushel increase in the demand

for corn for ethanol production increases corn prices by

$0.02 to $0.04 per bushel.'4 Any increase in the price of

corn will lead to a decrease in the amount of deficiency

payments from the government to farmers.'®

12 Agricultural Economic Report at p. 38.

13 Agricultural Economic Report at p. 32.

'4 Agricultural Economic Report at p. 31.

‘8 The Agricultural Economic Report concluded that ethanol pro-

duction is a very costly proposition for the United States and that

its major benefit, higher net farm income, was gained at the cost

(Footnote continued on following page)

astihin

THE PRINCIPLE OF HUGHES V. ALEXANDRIA SCRAP

CORP., 426 U.S. 794 (1976), GAINS ADDED RELEVANCE

WHERE THE STATE MUST LOWER THE PRICE OF

THE FINISHED GOOD TO MAKE IT COMPETITIVE, IN

ORDER TO BID UP THE PRICE OF THE RAW MaA-

TERIAL AND THUS REDUCE STATE AND FEDERAL

PRICE SUPPORTS.

In Hughes v. Alexandria Scrap Corp., 426 U.S. 794

(1976), the Court rejected a Commerce Clause challenge

to a Maryland provision offering a bounty on ‘noperable

automobile hulks. The law placed in-state scrap processors

at an advantage over all out-of-state scrap processors. The

Court noted that “we would hesitate to hold that the

Commerce Clause forbids state action reducing or elimi-

nating a flow of a commerce dependent for its existence

upon state subsidy instead of private market forces.” /d.

at 809, n. 18. Here, the only alleged reduction of com-

merce is in the flow of ethanol from New Energy Co.

However, an increase in the flow of fuel ethanol is

15 continued

of higher consumer expenditures. Jd. at p. 38. The National Ad-

visory Panel Report concluded that “{in considering future ethanol

policy, Congress and the Federal Government should weigh all

the costs and benefits of ethanol production.”’ p. xix (emphasis sup-

plied). See, The Tradeoff Between Federal Ethanol Subsidies and

Agricultural Program Costs: An Economic Study, Prof. John Umbek,

Purdue University. A report prepared for the National Corn

Growers Association after the USDA Agricultural Economic Re-

port, and using some of the same assumptions 2s that report, con-

cluded that the USDA report set forth only minimum savings

based on some unrealistic assumptions, such as that the govern-

ment would recover 100% of its farm loan costs (p. 20), that gov-

ernment's corn storage costs were $2.65 per eshel when in reality

they are $3.15 per bushel (p. 19), and that there would be no spoil-

age or deterioration of stored grain over time, and it ignored the

effect of increased demand for corn on the government's deficiency

payments.

= =

achieved by the participation of other out-of-state pro-

ducers who can compete with gasoline in Ohio, and Ohio

producers who can also penetrate markets in other sub-

sidizing states. Moreover, the flow of surplus grain is in-

creased from a// states, including Indiana.

It is clear that New Energy Co. could not argue that

the failure of the Indiana legislature to spend any funds

is a violation of the Commerce Clause, even though In-

diana’s failure to subsidize its own ethanol industry may

disable New Energy from competing with gasoline sold

in its own home state, as well as competing with gasoline

in sister states. New Energy also could not argue that

Ohio would violate the Commerce Clause if it decided to

remove the subsidy entirely for both Ohio and out-of-state

producers, for then ethanol, regardless of its source-state,

would be unable to compete with gasoline entirely. The

concurring opinion in Hughes v. Alerandria Scrap Corp.,

supra, noted that “[uJnquestionably Maryland could ter-

minate its entire program, discontinuing subsidy payments

to Maryland operators as well as out-of-state firms, with-

out offending the Constitution.” 426 U.S. at 816. Thus,

New Energy cannot argue that Ohio violates the Com-

merce Clause because it does not subsidize all out-of-state

producers as well as its own producers; “‘{a] failure to

create that commerce would have been unobjectionable

because the Commerce Clause surely does not impose

upon the States any obligation to subsidize out-of-state

businesses.”’ /d.

As in Alexandvia Scrap, the novelty here is that New

Energy should characterize a subsidy to out-of-state busi-

ness, which a state is under no obligation to provide, ‘“‘as

a burden which the Commerce Clause was intended to

make suspect.”’ /d. at 807. Just as “(njothing in the pur-

pose animating the Commerce Clause forbids a state, in

the absence of congressional! action, from participating in

the market and exercising the right to favor its own citi-

—13—

zens over others” (id. at 810), here the concern over pro-

tective favoritism is not warranted because the Ohio stat-

ute subsidizes producers from other states as well as those

of Ohio, even if the out-of-state product has a lower pre-

subsidy price than the Ohio product. A major out-of-state

producer may, by economies of scale, be able to produce

ethanol at a sufficiently lower price than an Ohio producer

and, with the Ohio subsidy, be able to compete more ef-

fectively against gasoline in Ohio.'®

More importantly, Ohio may not be subsidizing Indiana’s

ethanol industry but it is increasing the demand for grain,

including grain from Indiana. Ohio is raicing the national

market price of grain, which may result in better prices

for Indiana corn products and in reduced deficiency pay-

ments to Indiana’s farmers, as well as to those in every

corn-growing state. Given the extent of state participa-

tion in both the ethanol industry and in the agricultural

sector, the reason for application of the principles first

established in Hughes v. Alexandria Scrap Corp., 426

U.S. 794 (1976), is more compelling here than in that case.

IV.

IF THE COURT DECIDES THAT PIKE V. BRUCE

CHURCH, 397 U.S. 137 (1970), IS APPLICABLE TO A

STATUTE THAT SUBSIDIZES A GOVERNMENT CRE-

ATED COMMERCE, THEN THE TEST MUST BROADEN

THE SCOPE OF INQUIRY INTO THE EFFECT ON

COMMERCE.

Under Pike v. Bruce Church, 397 U.S. 187 (1970), a stat-

ute evidencing a non-protectionist purpose and effect, and

promoting a legitimate state interest, will be upheld unless

16 See Appendix, Exhibit D, Ethanol Anhydrous Capacity of Major

Plants. For example, the ADM facility in Decatur, Illinois, can pro-

duce almost as much ethanol as New Energy Co. and South Point

Ethanol.

= oe

it imposes a clearly excessive burden on commerce rela-

tive to the nature of the interest advanced. /d. at 192.

The first part of the Pike test, requiring that the statute

be facially neutral, eliminates those statutes which ex-

pressly or inherently protect the in-state industry from

out-of-state competitors. A statute which subsidizes in-

dustry, particularly out-of-state industry, should not be

subject to that analysis. Justice Powell, author of Alex-

andria Scrap Corp., supra, noted in the dissent in Reeves

v. Stake, 447 U.S. 429 (1980), that:

By “protectionism,” I refer to state policies designed

to protect private economic interests within the State

from the forces of the interstate market. / would ex-

clude from this term policies relating to traditional

governmental functions, such as education, and sub-

sidy programs like the one at issue in Hughes v.

Alexandria Scrap Corp., 426 U.S. 794, 49 L.Ed.2d

220, 96 S.Ct. 2488 (1976). (emphasis supplied)

Id. at p. 447, n. 1.

While most ethanol market participants are private com-

panies (heavily backed by government loans and guaran-

tees), their participation is possible only through govern-

ment expenditure either by tax credits, refunds or exemp-

tions. A distinction between a private and a governmen-

tal function “is whether ihe activity is supported with

general tax funds, as was the case for the reprocessing

program in Alexandria Scrap or whether it is financed by

the revenue it generates.”’ /d. at p. 453, n.3. Thus,

statutes such as Ohio R.C. 5735.145(B), and Ill.Rev.Stat.

ch. 120, 4442 (1985), are not the type of statute to which

the Pike test, or at least its first requirement, applies.

Hughes v. Alexandria Scrap Corp., 426 U.S. 794 (1976);

Reeves v. Stake, 447 U.S. 429, 447, 452 (1980).!7

17 Here, R.C. 5735.14(B) expressly confers on an out-of-state com-

petitor the same subsidy that is conferred on the sole Ohio pro-

(Footnote continued on following page)

Should the Court decide, however, that the remainder

of the Pike test is applicable, that is, that the subsidy

is really ‘ta burden which the Commerce Clause was in-

tended to make suspect,” Hughes v. Alexandria Scrap

Corp., 426 U.S. at 807, and that the burden must be

weighed “in relation to the putative local benefit,’ to

determine if it is a clearly excessive burden, Pike v. Bruce

Church, 397 U.S. at 142, then the Court should not limit

the inquiry to the effect on the commerce in ethanol only.

An inquiry as to the effect of a statute upon commerce

must commence by defining the relevant commerce. The

definition, and therefore the scope of analysis, should not

be controlled by the industry to which the plaintiff be-

longs, nor by the industry which the statute expressly

addresses. Rather, the definition should take into account

the many state purposes which the statute may advance,

although it does not express them, and the many indus-

tries which touch upon the plaintiff's business or industry,

although they are not the subject of the statute. Such a

broadened inquiry is particularly appropriate where, as

here, the plaintiff's industry was created by government

as a conduit for promoting broad societal interests related

to decreasing dependence on foreign oil, reducing corn

surpluses and reducing harmful polluiants, rather than

merely to promote the ethanol industry for its own sake.

It is proper to examine industries other than the one

immediately subject to the legislation. In Minnesota v.

Clover Leaf Creamery Co., 449 U.S. 456 (1981), the stat-

ute at issue there banned the retail sale of milk in non-

17 continued

ducer. On its face, therefore, it does not demonstrate a protection-

ist purpose nor indicate that it will have a protectionist effect in

its application. In application, it is plain that ethanol from any state

that subsidizes ethanol will receive a subsidy in Ohio even if the

pre-subsidy price is lower than that of ethanol produced in Ohio.

in its effect, therefore, R.C. 5735.145(B) is not protectionist.

—lb—

returnable, non-refillable containers made of plastic. The

Court noted that:

Within Minnesota, business will presumably shift

from manufacturers of plastic nonreturnable con-

tainers to producers of paperboard cartons, refillable

bottles and plastic pouches, but there is no reason

to suspect that the gainers will be Minnesota firms,

or that the losers will be out-of-state firms. ... Pulp-

wood producers are the only Minnesota industry like-

ly to benefit significantly from the Act at the expense

of out-of-state firms.

Id. at 472-73.

Here, there is every reason to believe that the larger non-

Ohio ethanol producers will increase their participation in

Ohio.18

More importantly, in Minnesota v. Clover Leaf Cream-

ery, although the case involved the milk container indus-

try, the Court looked to the industry supplying raw ma-

terials for the container industry and concluded that the

local pulpwood industry would benefit at the expense of

out-of-state raw materials suppliers, although permissibly

so. Here, it is proper to look to the raw material source

for the ethanol industry—corn and cereal grains—and, un-

like Minnesota v. Clover Leaf Creamery, the benefit to

that industry is not limited to any state nor is a corn

18 There is also no reason to believe New Energy ‘s driven out

of the Ohio market. There are many non-fuel commercial uses for

ethanol, and there are many ways in which a fuel ethanol pro-

ducer or dealer can reduce purchasing and transportation costs.

Nothing in the Commerce Clause insulates New Energy Co. from

the economic necessity of initiative and resourcefulness, or guaran-

tees to it the current operating structure that it has. This Court

has said that it cannot “accept [the] underlying notion that the

Commerce Clause protects the particular structure or methods of

operation in a retail market.” Exxon v. Governor of Maryland,

437 U.S. 117, 127 (1987).

=) =

grower in one state favored over one in another state.

As New Energy Co. notes, South Point Ethanol of Ohio

purchases corn from Ohio and Indiana. Corn growers in

Indiana directly benefit from the increased demand for

their product from South Point Ethanol and the non-Ohio

companies that increase their penetration into the Ohio

gasoline market. Corn growers in every state benefit from

the rise in prices which accompanies the increased de-

mand. For example, the average increase in farm income

for each additional gallon of ethanol produced and mar-

keted due to R.C. 5735.145(B) will be $.58 per gallon over

the 1986-94 period;'!® and the average savings to the fed-

eral government will be $.88 per gallon over the same

period.2° If the analysis of Pike v. Bruce Church, 397 U.S.

137 (1970), is at all applicable to state created and main-

tained commerce which does not respond to natural eco-

nomic forces, then it must take into account the benefits

conferred by R.C. 5735.145(B) on all of commerce, for to

do otherwise unduly deprives sovereign states of the right

to enact economic legislation where Congress has not pre-

empted the field.

Having defined the relevant commerce, Pike requires

that the “burden” be weighed against the putative local

benefit to determine if the burden is so excessive that

it competes with the national interest furthered by the

Commerce Clause. The national interest furthered by the

negative or dormant commerce clause, that of preventing

state lines from becoming “barriers to the free flow of

both raw materials and finished goods in response to the

economic laws of supply and demand,” Hughes v. Alex-

andria Scrap Corp., 426 U.S. 794, 806 (1976), is furthered

rather than infringed by R.C. 5735.145(B) or similar laws.

19 Agricultural Economic Report at p. 38.

20 Id. at p. 34.

win

Fuel ethanol and surplus corn, by the economic laws of

supply and demand, do not flow freely in commerce. Such

trade exists and remains viable only through massive

state and federal expenditures. Illinois and Ohio, among

other states, have recognized that the state and national

interests coincide and require the expenditure of funds

to develop alternative markets for farm products in order

to resolve the farm crisis.?!

It is important “to differentiate between commerce which

flourishes in a free market and commerce which owes its

existence to a state subsidy program.”’ Hughes v. Alexan-

dria Scrap Corp., 426 U.S. 794, 815 (1976). Such a distine-

tion and concern shaped the decision in Parker v. Brown,

317 U.S. 341 (1943). In Parker, the Court upheld the raisin

marketing program provisions of the California Agricul-

tural Prorate Act against anti-trust and Commerce Clause

challenges brought by a producer and packer of raisins.

The program compelled delivery of over two-thirds of the

raisin crop to a program committee, which controlled the

marketing of the crop in order to enhance or maintain

the price by means of restraints on competition between

producers. The Court accepted at the outset that the pro-

gram had a substantial effect on interstate commerce. The

question then was whether, in the absence of congression-

al action prohibiting or regulating such transactions, the

program violated the Commerce Clause.

21 The National Advisory Panel concluded that “{ojne perspec-

tive that must not be lost as the impact of ethanol on the agri-

cultural sector is considered, is the long-term implications versus

the near-term impacts. In an era of worldwide overproduction of

grains, this excess production capacity is considered a burden to

the trade and economic policies of many countries. Nontraditional

industrial uses for grains should be viewed in the context of a

tool to increase long-term demand. An increase in the long-term

demand is the only permanent solution to the continuing high cost

of supporting the farm sector.”” National Advisory Panel Report

at p. Xix.

= SS

The Court noted that when Congress has not exercised

its powers under the Commerce Clause, and a state exer-

cises its sovereign powers by leislation that has an effect

on commerce, “the reconciliation of the power thus granted

with that reserved to the state is to be attained by the

accommodation of the competing demands of the state and

national interests involved.” Jd. at 362. The Court then

concluded that the effect of the program on national com-

merce was “‘such as to not conflict but coincide with a

policy which congress has established with respect to iy

Id. at 363. The same conclusion is warranted here and

the factors considered by the Parker Court in validating

the California program, being present here, merit valida-

tion of Ohio’s legislation.

The Court discussed the severely depressed state of the

raisin industrv, and detailed the extensive and expensive

state and federal loan, subsidy and assistance programs

designed to reduce the surplus of raisins and raise the

market price of raisins. The opinion could just as easily

have been describing the current farm crisis and the state

and federal programs it made necessary. The Court stated

that:

The history shows clearly enough that the adoption

of legislative measures to prevent the demoralization

of the industry by stabilizing the market of the raisin

crop is a matter of state as well as national concern

and, in the absence of inconsistent Congressional ac-

tion, is a problem whose solution is peculiarly within

the province of the state. . . . In comparing the rela-

tive weights of the conflicting local and national inter-

ests involved, it is significant that Congress, by its

agricultural legislation, has recognized the distressed

condition of much of the agricultural production of

the United States, and has authorized marketing pro-

cedures, substantially like the California prorate pro-

gram, for stabilizing the marketing of agricultural

preducts. . . . Hence we cannot say that the effect

—20—

of the state program on interstate commerce is one

which conflicts with Congressional policy or is such

as to preclude the state from this exercise of its re-

served power to regulate domestic agricultural pro-

duction.

317 U.S. at 367-368.

The same findings can be made here, not only as to the

corn industry but also about the ethanol industry. Ohio

R.C. 5735.145(B) serves the interests of the federal gov-

ernment and the majority of state governments by pro-

moting the common cause of making the air safer to

breathe, reducing reliance on foreign oil, and decreasing

the surplus of corn, thus raising the price of grain and

reducing the subsidies that governments must pay. Not

only is a subsidy not a “burden” such as the Commerce

Clause was intended to prohibit, but its effect on inter-

state commerce does not infringe upon or compete with

any national interest.

Absent state subsidies, such as those which Ohio, Illinois

and other states have been willing to make, there would

be no flow of ethanol in interstate commerce. Ohio R.C.

5735.145(B) increases the flow of ethanol and efficiently

achieves the penetration of blended fuels into the gasoline

market to improve the quality of the environment and

increase the demand for surplus grain. It may be that

at some time Congress will decide that a more uniform

system of furthering these goals is necessary but, until

such a decision is made, state legislation should not be

invalidated on the ground that the state must subsidize

the ethanol industry of ail states rather than subsidize

the industry of those states which provide the greatest

opportunity for market penetration prior to the expira-

tion of the federal excise tax exemption for fuel blends

in 1992. Such legislation should not be invalidated when

in fact it does subsidize the grain industry of all states,

including Indiana.

-

CONCLUSION

The State of Illinois respectfully submits that the deci-

sion of the Ohio Supreme Court should be affirmed.

Respectfully submitted,

NEIL F. HARTIGAN

Attorney General, State of Illinois

SHAWN W. DENNEY

Solicitor General, State of Illinois

State of Illinois Center

100 West Randolph Street

12th Floor

Chicago, Illinois 60601

(312) 917-3312

Counsel for Amicus Curiae

The State of Illinois

ROSALYN B. KAPLAN *

MICHAEL WYNNE

Assistant Attorneys General

State of Illinois Center

100 West Randolph Street

13th Floor

Chicago, Illinois 60601

(312) 917-6141

Of Counse! * Counsel of Record

APPENDIX

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Exhib

(Plants Larger Than 10 =m Gal./Year)

Capacity to

Locat:on Supply I.

Companv Citv/State GPY)

MAJOR ILLINOIS ETHANOL PRODUCERS

1) ADM Decatur, IL 150,000,000

2) ADM Peoria, IL 90,000,000

3) Pekin Energy Pekin, Iu 70,000,C00

4) Midwest Solvents Co. Pekin, IL 11,000,000

TOTAL ILLINOIS 321,000,000

OTHER MAJOR MIDWEST ETHANOL PRODUCERS

5S) New Energy South Bend, IN 50,000,000

6) Kentucky AG Franklin, KY 20,000,000

7) A.E. Staley Loudon, TN 40,000,000

3) ADM Cedar Rapi¢cs, IA 60,000,000

9) Grain Proc. Corp. Muscatine, IA 10,000,000

10) South Point South Point, OH 60,000,000

TOTAL REGIONAL 243,000,000

TOTAL ILLINOIS 321,000,000

TOTAL MIDWEST REGION

IL, IA, IN, OH, KY, TN) 564,000,000

MAJOR MIDWEST ETHANSL PRODUCERS

titel toenti ND 4 der

StURCE: 1935 U.S. Alcohol Fee.s Inc

? shed by: Information %esources, rncorporated,

Washinagtc7, 3.C.

Exhibit D