Two years later, that company is an ethanol empire. And Jones is the most influential champion for the fuel in the state, using his political connections and 21 years of Sacramento experience to shape policies that are dramatically boosting California's thirst for ethanol -- stemming the state's dependence on gasoline, but at a cost of millions in taxpayer subsidies.
The story of how this third-generation Central Valley farmer and former lawmaker has turned corn into cash shows the way politics and the push for profit are combining to drive California's fuel future.
"Bill Jones is like a hurricane moving through the state of California," said UC Berkeley professor Tad Pazek, a civil engineer and national ethanol expert. "It's actually amazing that he has pushed so many things through and made so many gains with ethanol. He can say anything to promote his business -- and people believe him."
That's a concern, Pazek and other experts agree, because what to believe about ethanol, particularly corn ethanol, is a matter of much debate. Ethanol has its supporters and has gained a national foothold, especially among those looking for a "made in America" alternative fuel to replace foreign oil. But many engineers, economists and environmentalists see more problems than solutions with ethanol and are especially concerned that California is not looking closely enough at the trade-offs.
Instead, key state leaders are listening to Jones, who secured his biggest victory earlier this year when he and his company led a successful fight that pushed the state to adopt a new fuel mixture that will nearly double the amount of ethanol added to California's standard gasoline. Ethanol, which currently comprises 6 percent of the average fill-up, will reach 10 percent to meet recently adopted air quality standards.
Jones is poised to profit. By 2010, Pacific Ethanol is set to produce 420 million gallons from his plants in California, Idaho, Oregon and Canada. At these volumes, annual government subsidies alone will total at least $250 million. That's on top of millions in profit, and his company's fortunes may be boosted further by a $16 million tax break he's seeking from the state to build two more plants in California.
As Pacific Ethanol's board chairman and director, Jones gets an annual compensation package worth more than $330,000, significantly more than what he earned as a state official, although it is still a modest amount by Silicon Valley standards. Since the company went public a year ago he has sold 720,000 of his shares (about 2 percent of the company's stock) for $15 million. He retains 4 percent of Pacific Ethanol.
The company's growth has been fast-paced.
Pacific Ethanol didn't exist five years ago and began producing fuel only last year when it posted its first profit of $3.8 million. It is the largest producer and marketer of ethanol in California and is poised, with the proposed addition of two new plants, to remain one of the biggest producers for some time to come.
Yet Jones had been watching ethanol -- even eyeing the perfect spot for his first plant in Madera -- for more than a decade.
During the 1970s energy crisis, he listened to President Carter, who became the first high-profile politician to pitch the fuel. Jones felt a natural alliance with the former peanut farmer.
The timing wasn't right then, especially in California, where the primary source of the fuel, corn, would have been hauled in from out of state.
Jones would win six elections to the state Assembly and two to become secretary of state before the moment arrived.
It came in 2003, the year oil companies in California faced a mandatory ban of a critical fuel additive, MTBE, because it polluted groundwater. MTBE added oxygen to the fuel mix, making it burn hotter and cleaner.
The only known replacement was ethanol. Soon, all gasoline sold in the state contained 6 percent of the new additive. Similar scenarios played out across the country.
Jones was ready to move.
He founded Pacific Ethanol and bought a bankrupt grain plant -- located on 137 acres with railroad lines that could haul in the corn -- at a courthouse auction in Fresno. California had rapidly become the biggest consumer of ethanol in the nation, using 900 million gallons annually, but only 5 percent of it was being produced inside the state.
Corn continues to be a key source for ethanol because it can easily be converted to sugar and fermented into alcohol. Environmentalists, however, are pushing for ethanol from agricultural waste and byproducts, such as wood chips and rice straw, which can produce an energy content three times higher than corn ethanol with fewer greenhouse gases.
Jones defends his product.
"Corn is clean," said Jones, standing in his trademark Wrangler jeans near the railroad tracks of his Madera plant. "We not only produce ethanol, we produce corn feed for cattle. Where's the cattle? In California."
In 2004, a year after opening its doors, Pacific Ethanol embarked on its most important and potentially lucrative mission -- an intensive lobbying effort with state bureaucrats to get California to increase the percentage of ethanol used in gasoline.
Six percent assured some level of success, but Jones wanted to expand the market, and the obvious way was to get California to do what some other states had done: allow a 10 percent ethanol blend in standard gasoline.
But he had a problem. Although 6 percent ethanol helps gas burn more cleanly, at 10 percent the levels of smog-producing nitrogen oxide in fuel exhaust jump considerably, state tests showed. That caused it to fall out of compliance with California's tough air quality laws.
Determined to prove that E10 -- the name for the 10 percent ethanol blend -- could be clean, Pacific Ethanol offered dozens of reports, memos and public testimony, repeatedly questioning the state's test results.
"They accused of us cooking the books," said Catherine Witherspoon, who was the chief executive officer of the California Air Resources Board at the time. "There was nonstop pressure from Bill Jones and the ethanol lobby. We were constantly being harassed, and it was clear they were not going to let up until they got their way."
But amid that battle, Pacific Ethanol secured a smaller but important victory on another front. State officials decided in 2005 to pursue a small pilot project to use alternative fuel vehicles that can run on mostly ethanol, a blend called E85.
Jones heard about the proposed project and immediately began calling, asking for the business. What resulted was an exclusive deal in which Pacific Ethanol won state business without having to face competition.
The deal was criticized internally by state lawyers.
"It raises serious questions about the fairness in the procurement process and equal access to government," General Services attorney Steve McGee said in a Dec. 5, 2005, e-mail.
Jones said he doesn't believe he was given special treatment. However, with the number of ethanol companies growing from three to a dozen since that time, he thinks it would be "improper if we met today."
Witherspoon said no one ever asked whether other ethanol companies should be invited to the table. The interest of the Air Resources Board, she said, was "to shift the pressure" away from the fight it was having with Jones over E10.
They hoped giving Pacific Ethanol an exclusive deal on the small alternative fuel project, which involved 50 cars and pickups, would temporarily appease Jones and his partners.
The deal helped launch Pacific Ethanol's production, but Jones kept his eyes fixed on E10.
Jones had reason to be encouraged. That same year, 2005, the federal government passed a law requiring that national consumption of biofuels, such as ethanol, double by 2012.
Jones used the new law to apply more pressure on California -- and also attract investors, who were further enticed by a federal subsidy of 51 cents per gallon on ethanol.
In late 2005, Pacific Ethanol became the first California company to attract a venture capitalist investment in ethanol. And it wasn't just any venture capitalist. Through an investment firm he owns, Microsoft founder Bill Gates pumped in $84 million.
With Gates and the federal government on board, Jones was about to see his fortune change in California.
First, Gov. Arnold Schwarzenegger issued an executive order setting a goal that 40 percent of biofuels, such as ethanol, should be produced in California by 2020.
Government and Gates also made Pacific Ethanol hot on Wall Street. The company's stock jumped from an average of $9 to $14 a share to its highest price of $42.30 during this time. (Today, with a glut of ethanol on the market, the stock is trading at closer to $7 per share, and Pacific Ethanol has reported that Gates may sell some of his shares. Company officials say ethanol stock has always been volatile and demand for ethanol has only grown.)
The surge in stock prices was followed by Schwarzenegger's release of the state's Bioenergy Action Plan, which called for massive increases in ethanol production and consumption. This past month, the California Energy Commission recommended that 30 to 60 ethanol plants be constructed to meet the state's goals.
When Schwarzenegger announced the details of the bioenergy plan, he did so at a news conference at Pacific Ethanol, with Jones at his side.
"I just got a terrific tour of Pacific Ethanol, and it's really spectacular and I want to congratulate all of you for this great, great business, which, of course, will produce 40 million gallons every year," Schwarzenegger said. "This is fantastic. ... This is another perfect example of how a healthy environment and a healthy economy can go hand in hand."
During the news conference, Schwarzenegger said that he and Jones often had discussed the role of ethanol in California. A film of the tour is posted on the governor's Web site, http://gov.ca.gov/index.php/press-release/1685.
Soon after, Jones and Pacific Ethanol got the best news yet.
The Air Resources Board determined that by reducing sulfur levels during the refining process, E10 burned as clean as gasoline once did with the MTBE additive.
In June, the board approved the new formula and proposed policies that would mandate new fuel emissions standards by 2012 -- a move that will nearly double the state's ethanol consumption, because the oil industry and state officials agreed that E10 is how they will meet the new requirements.
Jones said he is seeking a more aggressive timetable.
"We are pushing for it to be done within a year," he said. "This is the fastest way to offset our dependence on foreign oil. There's no reason for a long delay."
Oil refiners, however, say they don't believe they can make the changes necessary to produce E10 that quickly. They also argue that the real deadline is 2010, because there are expensive penalties that will kick in if they aren't meeting the new standard.
Pacific Ethanol has already had success with E10 elsewhere. This year, the Oregon Legislature passed a law requiring that a 10 percent blend be sold in the state.
The law also had a built-in trigger that Pacific Ethanol helped shape and then capitalized on. For the 10 percent mandate to take effect, a biofuel production plant had to be built in the state that would generate at least 40 million gallons.
In October, Pacific Ethanol opened the first ethanol plant in Oregon, with a production capacity of 40 million gallons.
"It might look like it happened magically, but there was a lot of planning involved," said Tom Koehler, vice president for public policy at Pacific Ethanol. "We assumed some risk by being the first to build in Oregon."
Pacific Ethanol also persuaded the Oregon government to help with construction costs. By declaring part of its facility a waste treatment plant, the company was able to secure tax breaks worth more than $6 million.
To qualify for the tax breaks, the waste material must be "useless, unwanted" under federal law. In fact, the treatment removes moisture from the corn byproduct that can then be sold to ranchers and dairy farmers as feed.
The corn feed, Jones said, accounts for 25 percent to 35 percent of Pacific Ethanol's profit.
"When you start adding it up, these ethanol plants are getting money from everywhere. Some of the funding is very clever. None of it is reported to a single place. You have to scratch around to find it," said Ronald Steenblik, director of research for the Global Research Institute, which studies fuel incentives in the ethanol and oil industries.
Pacific Ethanol is now applying for the same waste treatment financing in California for plants it wants to build in Stockton and the Imperial Valley. In the state, it will amount to a tax break of as much as $16 million.
No other ethanol company has tried to get such funding in California.
Two weeks ago, the staff of the California Debt Limitation Committee -- which decides who gets tax-free industrial bonds in the state -- recommended against the funding because of concerns about corn ethanol. Pacific Ethanol appealed, and the state reversed itself, with the condition that the company eventually produces ethanol from something cleaner than corn.
Jones also has a powerful ally who has previously supported Pacific Ethanol's efforts to grow in California: Schwarzenegger. The three-member committee comprises the governor, state Treasurer Bill Lockyer and state Controller John Chiang.
The committee is scheduled to vote on Pacific Ethanol's proposal on Wednesday
Jones is sensitive to comments by proponents and critics that he has a leg up because of his political connections. He says he simply has a good product.
"No one person can move a complex bureaucracy," Jones said. "I have a much easier time selling ethanol than I ever had selling myself as a political candidate."
MediaNews staff writer Jack Davis contributed to this story. Reach Kimberly Kindy at email@example.com or 916-325-4314.
THE MATHEMATICS OF ETHANOL