Because U.S. producers of grain-derived ethanol require State tax support in addition to the Federal tax support to be competitive in the gasoline marketplace and because we operate in States which do not offer such State tax support, we have had no alternative but to look to foreign supplies of renewably derived ethanol for the initial stages of our marketing program.

In its wisdom, the Congress has made commitments to two sets of interests that may at first glance appear to be in conflict, but that in fact should be in harmony.

On the one hand, in establishing the Federal tax support for the fuel ethanol industry through 1992, the Congress stimulated an impressive new industry which responded by investing hundreds of millions of dollars in facilities to produce a high value liquid fuel and octane enhancer that substantially contributes to national agricultural, energy and environmental objectives.

On the other hand, by enacting the Caribbean Basin Economic Recovery Act [CBERA], the Congress and especially this committee also made the necessary commitment to a critically important area of the world with respect to U.S. security interests.

The CBERA was consciously designed to stimulate private sector investment in manufacturing enterprises that create employment and diversify economic activity.

To achieve this, it afforded duty free access to eligible products including ethanol through 1994. The success of this program will in the final analysis depend heavily on the extent to which private sector investors perceive Congress' determination to avoid tampering with its commitment to the CBERA.

In short, the congressional commitment to the CBERA, just like its commitment to the domestic ethanol industry, must be upheld. We acknowledge the committee's interest in addressing the legitimate issues raised by dehydration of 190-proof ethanol under the substantial transformation rulings reaffirmed by the Customs Service.

However, we also strongly believe that there is a reasonable solution to this problem which can in fact benefit both the domestic ethanol industry and our Caribbean and insular territory commitments.

I would like to submit two principles that I think could be helpful in terms of looking at a workable compromise.

First, I think it is very important to recall and remember that Congress intended the fuel ethanol industry to be national in scope. In enacting the Energy Tax Act exemption of 1978, Congress clearly intended that the program should be broad based and national in scope.

While recognizing the importance of the industry's value as a new outlet for surplus grain, the Congress also recognized that ethanol could be derived from a wide array of other renewable feedstocks including sugar.

Even more importantly, ethanol's benefits go far beyond just its agricultural dimensions. Especially now after EPA's 91-percent reduction in gasoline lead levels, the environmental and energy importance of alcohol-blended fuels for the entire United States is greater than ever before.

Clearly, motorists, consumers and breathers of air in the southeast, northeast and west coast regions of the United States are just as entitled to the benefits of high performance, environmentally benign alcohol-blended fuels as are the good citizens of the Midwest where ethanol production and sales activity are currently concentrated.

CFC's commitment to ethanol production in the United States, Virgin Islands and perhaps elsewhere in the Caribbean stems from its need to have competitively priced alcohols in its southeastern marketing region totally outside the scope of the domestic ethanol industry.

Our efforts, in fact, complement and do not conflict with the domestic industry's effort to expand the national market.

The second principle; it is very critical that Congress does not act to impose origin restrictions on full-scale fermentation facilities. We have heard some discussion in certain quarters recently of socalled origin restrictions on sugar feedstocks for full-scale fermentation produced ethanol.

While this may be a legitimate approach at some point for dehydration only operations, it is also very, very clear that such restrictions are unnecessary and unwise in the case of full scale fermentation operations.

In CFC's case, for example, the full scale fermentation facility planned for completion in St. Croix at the former Martin Marietta Alumina site at the end of this year will require roughly 300,000 tons annually of sugar feedstock to meet its minimum alcohol needs in the southeast.

Our feedstock procurement strategy is targeted toward the purchase of sugarcane juice from nearby sugar production countries such as the Dominican Republic and St. Kitts, high test molasses from countries like Guatemala and Costa Rica and perhaps even raw sugar from a broader set of suppliers, if necessary, including countries like Brazil and even the Philippines.

However, it must be emphasized that sugar is an internationally fungible commodity. While it makes eminent good sense from a business point of view for CFC to procure its sugar feedstocks from CBI region neighboring countries due to transportation_logistics and other efficiencies, if the Congress were to restrict the flexibility of our sugar procurement strategy by imposing feedstock origin restrictions, the entire St. Croix facility's economic viability would be severely compromised by potential supply constraints, drought interruptions and noncompetitive pricing.

Wherever in the world fermentation projects like ours purchase their sugar from, insular possession and CBI beneficiary countries will benefit, because the increased utilization of sugar will firm prices for all producers.

At the same time, the objective of the CBERA will have been met because of the significant private sector investment in new manufacturing activity and new jobs.

Finally, we believe that it is obvious that full-scale fermentation satisfies even the strictest substantial transformation criteria and does not deserve to be treated in the same manner as dehydration. To summarize, Mr. Chairman, CFC respectfully urges that the committee recognize the compatibility of Caribbean and insular

possession ethanol production with the domestic industry's interests as well as other important energy, environmental and geopolitical objectives.

Our Southeastern markets complement and do not compete with U.S. grain-derived ethanol Midwestern markets. Our commitment to full-scale fermentation activity is strong and we believe consistent with the committee's expressed position in the report language to H.R. 3838 last December.

Thank you very much for this opportunity.

[The prepared statement follows:]

STATEMENT OF DAVID E. HALLBERG, VICE PRESIDENT, CHEMICAL FUELS CORP.

Mr. Chairman, we greatly appreciate this opportunity to make known our views concerning the importance of Congressional support for ethanol production in the Caribbean and insular areas. We recognize that this is a complex issue that involves a myriad of agricultural, energy, environmental, and trade/geopolitical considerations.

As we described in testimony before the Trade Subcommittee on February 7, the Chemical Fuels Corporation (CFC) is the largest formulator and marketer of alcohol blended fuels in the Southeastern U.S. Because U.S. producers of grain-derived ethanol require state tax support in addition to the federal tax support to be competitive, and because CFC operates in states which do not offer such state support, we have had no alternative but to look to foreign supplies of renewably-derived ethanol for the initial stages of our marketing program.

In its wisdom, the Congress has made commitments to two sets of interests that may at first glance appear to be in conflict, but in fact should be in harmony. On the one hand, in establishing the federal tax support for the fuel ethanol industry through 1992, the Congress stimulated an impressive new industry which responded by investing hundreds of millions of dollars in facilities which produce a high value liquid fuel and octane enhancer that substantially contributes to national agricultural, energy and environmental objectives.

On the other hand, by enacting the Caribbean Basin Economic Recovery Act (CBERA), the Congress-and especially this Committee-also made the necessary commitment to a critically important area of the world with respect to U.S. security interests. The CBERA was consciously designed to stimulate private sector investment in manufacturing enterprises that create employment and diversify economic activity. To achieve this, Congress afforded duty free access to eligible productsincluding ethanol-through 1994. The success of this program will, in the final analysis, depend heavily on the extent to which private sector investors perceive Congress' determination to avoid tampering with its commitment to the CBERA. In short, the Congressional commitment to the CBERA, just like its commitment to the domestic ethanol industry, must be upheld.

CFC acknowledges the Committee's interest in addressing the legitimate issues raised by dehydration of 190 proof ethanol under the "substantial transformation" rulings reaffirmed by the Customs Service. However, we strongly believe that there is a reasonable solution to this problem which can in fact benefit both the domestic ethanol industry and our Caribbean and insular territory commitments. I would like to submit the following principles that could be helpful in formulating a workable compromise:

(1) Congress intended the fuel ethanol industry to be national in scope.-In providing the federal tax support for fuel ethanol in the Energy Tax Act of 1978, Congress clearly intended that the program be broad-based, and national in scope. While recognizing the importance of the industry's value as a new outlet for surplus grain, the Congress also recognized that ethanol could be derived from a wide array of other renewable feedstocks, including sugar.

Even more importantly, ethanol's benefits go far beyond just its agricultural dimensions. Especially now after EPA's 91 percent reduction in lead-in-gasoline levels, the environmental and energy importance of alcohol blended fuels for the entire U.S. is greater than ever before. Clearly, motorists, consumers, and breathers of air in the Southeast, Northeast, and West Coast regions of the U.S. are just as entitled to the benefits of high performance, environmentally benign alcohol blended fuels as are the good citizens of the Midwest, where ethanol production and sales activity is currently concentrated.

CFC's commitment to ethanol production in the U.S. Virgin Islands, and perhaps elsewhere in the Caribbean, stems from its need to have competitively priced alcohols in its Southeastern marketing region totally outside the scope of the domestic ethanol industry. Our efforts in fact complement, not conflict with, the domestic industry's efforts.

(2) Congress should not impose "origin restrictions" on full-scale fermentation facilities.-There has been some discussion in certain quarters of imposing "origin requirements" on sugar feedstocks for full-scale fermentation-produced ethanol. While there may be some legitimacy in such an approach for dehydration-only operations, it is clear that such restrictions are both unnecessary and unwise in the case of fullscale fermentation operations. In CFC's case, for example, the full-scale fermentation facility planned for completion in St. Croix at the end of this year will require roughly 300,000 tons annually of sugar feedstock to meet its minimum alcohol needs in the Southeast. Our feedstock procurement strategy is targeted towards the purchase of sugar cane juice from nearby sugar production countries such as the Dominican Republic and St. Kitts, high test molasses from countries like Guatemala and Costa Rica, and perhaps even raw sugar from a broader set of suppliers, if necessary, including countries like Brazil and even the Philippines.

However, it must be emphasized that sugar is an internationally fungible commodity. While it makes eminent good sense from a business point of view for CFC to procure its sugar feedstocks from CBI region neighboring countries (due to transportation logistics and other efficiencies), if the Congress were to restrict the flexibility of our sugar procurement strategy by imposing feedstock origin restrictions, the entire St. Croix facility's economic viability would be severely compromised by potential supply constraints and non-competitive pricing.

Wherever in the world fermentation projects like ours purchase their sugar from, insular possession and CBI beneficiary countries will benefit, because the increased utilization of sugar will firm prices for all producers. At the same time, the objective of the CBERA will have been met because of the significant private sector investment in new manufacturing activity and new jobs. Finally, it is obvious that fullscale fermentation satisfies even the strictest substantial transformation criteria, and does not deserve to be treated in the same manner as dehydration.

To summarize, Mr. Chairman, CFC respectfully urges that the Committee recognize the compatibility of Caribbean and insular possession ethanol production with the domestic industry's interests, as well as other important energy, environmental, and geopolitical objectives. Our Southeastern Markets complement, not compete with, U.S. grain-derived ethanol Midwestern markets. Our commitment to full-scale fermentation activity is strong, and we believe consistent with the Committee's expressed position in the report language to H.R. 3838 last December.

Thank you for this opportunity to present our views on this important issue. Mr. ANTHONY. Thank you very much, Mr. Hallberg. We now look forward to hearing from the Honorable Antonio J. Colorado.

STATEMENT OF HON. ANTONIO J. COLORADO, ADMINISTRATOR OF THE ECONOMIC DEVELOPMENT ADMINISTRATION OF THE COMMONWEALTH OF PUERTO RICO

Mr. COLORADO. Thank you, sir. My name is Antonio J. Colorado, administrator of the Economic Development Administration of the Commonwealth of Puerto Rico, and I wish to thank the subcommittee for giving me the opportunity to testify today.

The Caribbean Basin Initiative represents a breakthrough for Puerto Rico to adopt and act upon specific plans for the redirection of our economy. Puerto Rico is the center of the Caribbean Basin in terms of technology, banking and finance, transportation, communications, and economic development experience.

In addition, its affinity in the areas of language, geography and culture make Puerto Rico strategically and ideally situated to greatly expand its commercial links to the countries of the region. As a consequence, we are working with the administration to further develop the Caribbean Basin Initiative within the broad parameters of the Caribbean Basin Economic Recovery Act.

Gov. Rafael Hernández-Colón is providing the missing financial engine that is so essential to the success of the President's CBI Program. Complementary or twin plant projects, not limited to manufacturing between private sector companies in Puerto Rico and CBI countries, will be aggressively promoted by providing financing through the Government Development Bank of Puerto Rico and private financial institutions from the large pool of section 936 funds at low cost concessionary rates.

These low cost loans will serve as an attractive investment incentive. The recently approved House version on section 936 of the U.S. Internal Revenue Code would allow the use of these funds in financing worthy complementary projects between Puerto Rico and the designated CBI countries.

The Governor's 936 program will open a new window for the President's CBI strategy that will energize private sector initiatives in our region. We salute the Ways and Means Committee, as well as the Treasury Department, and, in particular, Congressman Charles Rangel, for their efforts in shaping this new 936 version. Hopefully, the U.S. Senate will view this mechanism positively when it passes judgment on section 936.

Additionally, an amendment was passed by Congress last October which permits Puerto Rico to share in the 35-percent value-added factor on products entering the U.S. duty free from Caribbean Basin countries and territories.

It is intended to insure participation by Puerto Rico's manufacturing sector in twin-planting, joint ventures, and subcontracting with counterparts in neighboring countries. It provides not only for Puerto Rican manufacturers to share in the production but also an opportunity to impart their expertise to Puerto Rico's neighbors.

As a result, Puerto Rico is now in an excellent position to assist its neighbors by sharing our economic development experience, while at the same time, sharing in the production of goods from CBI recipient countries.

This will also permit Puerto Rico to maintain, strengthen and improve the economic advances we have achieved during the past 40 years, important factors in our stability and of the national security interest of the United States in the Caribbean.

To underscore the seriousness of this commitment with the CBI, Governor Hernández-Colón has taken immediate action to show that his bold initiative works. During the President's visit to Grenada last week, the President announced that three major companies will soon establish manufacturing twin-plant facilities in that island.

It was the Governor's personal call to those companies that triggered the interest of these corporate citizens to look into Grenada as a place for their investment.

Another case in point is the $5 million investment made by Westinghouse in a production sharing facility in the Dominican Republic. Westinghouse operations in the Dominican Republic will create about 500 jobs by the first year of its operation. This move will enable Westinghouse to strengthen its competitive position.

There are other 936 companies that are already studying different alternatives to invest in other CBI countries.