Some said the decision also could unlock funding for an expansion of ethanol production using corn and sugar.

But it may not be the death knell some predicted for the controversial fuel additive MTBE, which would be replaced by ethanol.

Ethanol and MTBE are oxygenates that make gasoline burn more cleanly and reduce pollution. But in California, MTBE is being phased-out because of concern that it pollutes ground water. Several Northeast states have also moved to ban it.

Ethanol is subsidized by the U.S. government through an excise tax exemption worth 5.3 cents a gallon at the pump.

ADM STOCK UP

The stock of the No. 1 ethanol producer ADM finished up 2.26 percent at $14, while another big producer High Plains Corporation HIPC.O, finished up 12 percent at $4.81. But the stock of the second-biggest producer of ethanol, Tulsa, Oklahoma-based Williams Companies (NYSE:WMB - news) was instead focused on news the Justice Department was examining whether the company violated antitrust laws, and its stock fell 2.5 percent to $36.97 a share.

``We've been hoping this decision would come,'' said Leonard Teitelbaum, equity analyst at Merrill Lynch in New York. ``It won't affect this year's earnings for ADM, but our estimates were based on the assumption it would happen.''

Teitelbaum said he is enthusiastic about ADM stock and expects it to rise significantly. ADM gets less than 10 percent of total revenues from ethanol but it accounts for a higher percentage of earnings, ADM spokesman Larry Cunningham said.

While the National Corn Growers Association does not expect a short-term boost to corn prices, it said that the decision could boost prices 10 to 15 cents a bushel over time. Corn prices are just under $2 a bushel on the Chicago Board of Trade for July delivery.

Corn industry groups estimated that it will take about 580 million gallons of ethanol to meet California demand by 2003.

MORE CORN DEMAND

``That means about 230 million bushels of corn will be needed annually to meet the California demand,'' said Stewart Reeve, spokesman for the National Corn Growers Association. ``The additional corn grind will boost corn prices by 10 to 15 cents per bushel.''

The ethanol industry can currently produce more than two billion gallons per year, said Monte Shaw, spokesman for the Renewable Fuels Association.

ADM produces about half that at 850 million gallons of ethanol in the U.S. during calendar year 2000, and an estimated 900 million gallons during 2001.

There are 34 existing ethanol plants that are undergoing expansions, eight new plants under construction and ground breaking is scheduled more than 40 plants.

``By the end of 2003, U.S. annual ethanol production capacity is expected to increase by 1.5 billion gallons per year to reach 3.5 billion gallons,'' Shaw said.

The decision also could help sugar. The U.S. Agriculture Department said on May 31 that it was selling 100,000 tonnes of refined sugar to ethanol producers. The agency estimated the sale would help produce a minimum of 15 million gallons of additional fuel and would help boost domestic sugar prices which are at levels not seen in decades.

``When USDA announced it was selling sugar to ethanol producers, we figured in the long run it would have to have some upward impact on sugar prices,'' said Joseph Terrell, spokesman for the American Sugar alliance of producers.

Shaw said there are projects in places such as Louisiana that would use sugarbeets as an ethanol source and the decision might unlock funding for them.

WHAT ABOUT MTBE?

The boost to ethanol is not necessarily bad news for MTBE or methyl tertiary butyl ether, industry experts said.

"In the Northeast, New Hampshire wants to immediately withdraw from the federal reformulated gasoline (RFG) program instead of the scheduled 2004 exit because of MTBE contaminated water. It wants to replace RFG made with MTBE with an alternative fuel that meets the federal specifications without using either oxygenate.

Ironically, with such new demand for ethanol from California, supplies may be less available to the Northeast which has high costs to transport ethanol from the Midwest, and that would push up gas prices in the east, analysts said.

``Since there will be a lot less ability to switch to ethanol, as the demand in California will absorb all available supplies, MTBE will have to be used for the foreseeable future,'' one trader added.

Even if the ban on MTBE continues in California, and the additive is eventually phased out in the northeast, MTBE plants can be converted to produce other low Reid Vapor Pressure (rvp) products, said another industry source. He cited an agreement by Noble Americas Corp. to build an isooctane plant in Saudi Arabia which would export the super-clean CARB and reformulated gasoline blendstock.

``Even if it's the death of MTBE, it's not the death of MTBE producers,'' the industry source added.

Major MTBE producing companies ended mixed on the New York Stock Exchange on Tuesday. Valero Energy (NYSE:VLO - news) was up $1.27 at $44.71, El Paso (NYSE:EPG - news) down $0.89 at $58.31 cents a share, Enron Corp. (NYSE:ENE - news) down $0.63 at $50.37 a share, and Texaco (NYSE:TX - news) up $0.10 to $73.

There also is a lively debate about whether ethanol or MTBE is the cleaner burning fuel.

``Ethanol has a lot of problems with it that may have been lost in the (EPA) deliberations. MTBE is good for air, bad for water,'' said New Hampshire Department of Environmental Services Director of Air Research Ken Colburn.

He said ethanol is more volatile, which means it evaporates more quickly, and those emissions go in the air and help form ozone smog."

``If California has to use it, it will put extra demand on the market place. The bottom line is under ethanol we'd be paying more for a dirtier gasoline. There's three issues -- water, air and pocketbook -- and ethanol loses on at least two,'' said Colburn.