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WRAPUP 2-US Ag Sec, producers confident on ethanol hike
* Growth says expects all EPA E15 decisions by end of year
* E15 could be ready early next year if EPA approves
* EPA met with Growth Energy and said testing is on track
* Agriculture Secretary says expects decision by mid Oct (Adds details on potential barriers to E15 sales, larger corn planting requirements, paragraphs 16, 17, 24)
By Timothy Gardner and Charles Abbott
WASHINGTON, Sept 17 (Reuters) - U.S regulators are likely to approve a higher blend of ethanol in U.S. gasoline shortly, an ethanol producers group and the top U.S. agriculture official each said on Friday, and the new fuel mix could be selling at the pump by next spring.
Ethanol companies and corn traders are anxiously awaiting a decision from the Environmental Protection Agency -- expected within weeks -- for a waiver to allow cars built in 2007 and after to burn regular gasoline blended with ethanol levels of 15 percent, a fuel that would be known as E15.
The ethanol blend level now is 10 percent.
While proponents have long argued that American automobiles can handle the higher blend without significant damage to the engine, the decision to move to E15 has been delayed twice to allow for more testing.
Growth Energy, an industry group representing a coalition of ethanol producers that petitioned for the higher rate, also said it anticipated a positive outcome.
"We expect that within a few months after the announcement E15 will be available," said a spokeswoman for Growth Energy days after meeting on the issue with EPA chief Lisa Jackson.
The higher blends could be available by March or April of next year assuming the EPA makes two approvals for use of E15 in 2001 cars and newer models by the end of the year, the spokeswoman said.
Agriculture Secretary Tom Vilsack told reporters that he expected the EPA to approve higher blends for some cars by early-to-mid October, in line with a target that the agency gave several months ago.
"I expect that they will see that E15 is an appropriate fuel for some vehicles. I don't know if they will necessarily say it is appropriate for all vehicles, but for some vehicles which will help us expand the market," he said.
EPA PLANS SEPARATE DECISION ON NEWER, OLDER CARS
Approval of the new fuel could help producers such as Archer Daniels Midland (ADM.N), oil refiner Valero Energy Corp (VLO.N), and private company Poet, the biggest U.S. ethanol producer, and potentially give fresh legs to a rally in U.S. corn futures Cc1, which have surged more than 55 percent in three months.
Ethanol produced in the United States is predominantly distilled from corn.
Jackson, the EPA chief, told Growth this week that the first phase of higher blend testing on cars, which the Department of Energy is conducting, is on schedule and should be completed by the end of September.
Jackson said the EPA should decide shortly afterward whether to allow E15 in 2007- and later-model cars.
Testing on vehicles built between 2001 and 2006 is on track to be completed by the end of November, Jackson said. "At which point we expect to make a decision on a waiver that would cover 2001 to 2006 model year vehicles." she told Growth.
The EPA would not give further guidance on Friday on the timing of the tests.
There may be legal was well as practical obstacles to bringing higher blends to gas stations, said analyst Mark McMinimy of Washington Research Group.
"A lawsuit challenging the waiver is expected and the likelihood is that retailers will be reluctant to offer E15 initially given the cost of installing storage/dispensing equipment and concern about the possibility of consumer litigation over misfueling," said McMinimy.
The auto industry has urged the government to conduct full tests for E15 because it is worried that the fuel could corrode fuel lines and damage engines.
But ethanol producers are suffering from a glut of the fuel and say they need approval for the higher blends to help draw down supply. They say the oversupply has been created by government mandates, first issued when George W. Bush was president, that require increasing amounts of ethanol to be blended in the overall fuel supply.
The Renewable Fuel Standard requires energy companies to blend 15 billion gallons of corn-based fuel a year into the gasoline supply by 2015, up from 12 billion gallons this year.
A delay in the decision could slow the ethanol industry's recovery from the recession and a subsequent shakeout of distillers.
Corn prices have zoomed in recent weeks, with futures prices topping $5 a bushel on Friday for the first time since early October 2008. The rally has been fueled by USDA forecasts of tighter supplies and demand for grain to offset drought losses in Russia.
Some 36 percent of this year's corn crop is expected to go to fuel ethanol production. Vilsack said E15 would not harm U.S. grain or food supplies because new feedstocks, such as woody biomass and perennial grasses, are being developed.
Larger corn plantings will be needed in 2011, said McMinimy of Washington Research Group -- about 3 percent more than this year's 87.9 million acres (35.6 million ha) to rebuild stocks. (Additional reporting by Tom Doggett; Editing by David Gregorio)
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