Valero Energy Corp. might shut down its 195,000 bpd refinery in Memphis if Tennessee state lawmakers advance a bill into law that would require refiners and product suppliers to provide unblended gasoline and diesel fuel to the state in order for wholesalers to blend ethanol and biodiesel into the fuel, a company spokesman told DTN.

The spokesman, Bill Day, said Valero sent a letter May 4 to Tennessee Gov. Phil Bredesen saying the proposal to require the refinery to allow “our wholesale customers to blend ethanol into gasoline made at the refinery” would require capital expenditures of between $130 million and $150 million.

“Coupled with the current economic downturn, this makes no economic sense for the refinery, and the expenditure would cause Valero to seriously consider closing the plant,” said Day. ”As you probably know, there is ongoing speculation about which refineries might close due to weak demand, high costs, and geographic or regulatory disadvantages.”

He added that in order to make gasoline on demand for wholesalers to do their own blending, the Memphis refinery would need to have separate storage and pipeline systems for ethanol-blended fuels and conventional unblended fuels.

Day said the letter to the governor explains the burdensome consequences of compliance with the proposed legislation, including the fact that Valero would have to construct six new 75,000 bbl storage tanks plus containment dikes and over four miles of interconnecting piping.

The Memphis refinery would also need six new transfer pumps, a new electrical substation, a new operations building for instrumentation and controls infrastructure, over three miles of interconnecting conduit and wiring, and control modifications at the truck rack.

In addition, Valero would have to buy renewable fuel credits, known as Renewable Identification Numbers or RINs, to make up for the lack of blended fuels, he said. Under federal law, obligated parties, which include refiners, can buy RIN credits in lieu of ethanol to comply with the federal Renewable Fuel Standards.

“This poorly conceived proposal puts the interest of a few suppliers ahead of the interest of a regional producer of gasoline, diesel and jet fuel,” Day said.

Lydia Lenker, press secretary for the governor’s office, acknowledged receipt of Valero’s letter, but said, “As a standard practice, Governor Bredesen does not offer comment on bills that are still making their way through the legislative process.”

Day said Valero is now working with state officials to try to modify the bill, but hasn’t made any final decisions yet on whether to close the Memphis plant.

“We’re hopeful that the state will come to understand the full consequences of this proposal on the refinery, consumers and the state’s economy,” he added.

The Memphis refinery employs hundreds of workers, so Valero’s threat to shut the plant raises the stakes for Tennessee lawmakers.

The bill has passed the state Senate and state House committee on commerce. It’s now scheduled for discussions before the House Finance committee before it goes before the House floor for a final vote some time later this month.

The bill was sought by the Tennessee Fuel and Convenience Store Association, which represents wholesalers who buy gasoline and diesel from refineries and deliver it to retailers.

Emily LeRoy, a spokeswoman for the association, told DTN that legislators will now have to weigh competing economic interests between the wholesalers and Valero and other suppliers.

She suggested Valero was trying to use its economic might to intimidate the legislature into abandoning the bill despite the fact that the legislation draws support not only from wholesalers but also from the two biodiesel plants in the state.

“What Valero wants to do is to bring ethanol from Midwest plants which it recently bought so it can blend it here and corner this market,” she said. “The Legislature can’t allow one company to monopolize the market to the detriment of others.”

LeRoy said wholesalers controlled the blending market until the middle of last year when Valero started blending ethanol into its own gasoline.

By blending themselves, Valero and other gasoline suppliers are able to capture a federal fuel tax subsidy, which was reduced from 51cts gallon to 45cts on Jan. 1. Additionally, suppliers are collecting RIN credits that obligated parties—refiners, importers and blenders—under the RFS must report to the Environmental Protection Agency quarterly and annually to show compliance with the RFS.

As a result, wholesalers said they have seen their margins shrink, and so they are unable to benefit from the 45cts a gallon tax credit for blenders.