By RICK OLIVO

The Daily Press

Monday, March 19th, 2007 11:24:13 AM

Park Falls - The failure of Park Falls' Flambeau River Biorefinery to obtain federal grant funding earlier this month for a revolutionary cellulosic ethanol project was described as "disappointing" by Flambeau Papers owner William "Butch" Johnson, but it won't halt plans to build one of the first plants of its kind in the United States.

The plant, to be operated using papermaking byproducts from the Flambeau Papers mill, may be delayed by up to a year, but company officials are still firmly committed to the ethanol production facility, said Ben Thorp, President of Flambeau River Biorefinery.

Johnson said despite the decision by the Department of Energy to award up to $385 million to six other cellulosic ethanol operations around the country, Flambeau River would press on. His son, Bill Johnson, said the firm would explore alternative funding through the U.S. Department of Agriculture and would keep communications open with the Department of Energy (DOE) to be in position to take advantage of any funding that might become available in the future.

Thorp said that Flambeau River finished in the ninth position among the 15 finalists.

"We understand that there were 44 original submissions, and they weeded that down to a cut of 30 and a cut of 15. We made both of those cuts," said Thorp. "Ninth out of 44 is very good; the bad news we didn't get funded."

Thorp said DOE had sent the firm a 10-page letter explaining the reasons for the decision.

"They did recognize what we thought were strengths. They were very objective, and in the document they noted some weaknesses," he said.

Thorp said some of the weaknesses were in responses made in the application process.

One of the problems, said Thorp, was failing to make clear what the Flambeau paper mill intended to do with the 300 tons of pulp a day that the mill would produce but not use themselves.

"It's open market pulp, and we're in that business, and we understand that," Thorp said. "They know we are in that business and they know we know that, but because we didn't specifically have a letter in there documenting how we were going to do that, they said that was a weakness."

In fact, Thorp said the mill has an agreement with CellMark Papers to purchase the remaining pulp.

"If we were to do it again, we could respond better," he said. "There were a couple of very structural things that we can fix. Our goal is to take that very objective feedback and to go back and strengthen our proposal.

Thorp said he believed there would be additional cellulosic ethanol grants as well as loan guarantee programs Flambeau River could apply to.

"The loan guarantee may actually be better," Thorp observed. "In the grant guarantee, there is always a bunch of things that you are required to agree to, that may or may not be in the best interests of the project. One of the things that I have seen on historical grants is that they only guarantee year-to-year funding. The company signing the contract understands this and behaves accordingly. If you call a contractor and order a $216 million project, and you only get $30 million of it done the first year, and they say there is no money for next year, and you stop construction, then you just killed the project. There is less certainty with a grant than with a loan guarantee. With a loan guarantee you have to get all of that decided up front and you have a known path forward. It's much more predictable."

Failure to get the DOE grant will delay the project for perhaps a year, Thorp said. However, he said the firm was still committed to undertaking the project.

"Absolutely; no question about that," he said.

As a sign of that determination, Flambeau River has entered into a memorandum of understanding with American Process Inc. of Atlanta to provide project management and engineering services for the project. The agreement calls for building the Flambeau River Biorefinery as the first U.S.-based pulp mill to produce cellulosic ethanol. It will be designed to produce 20 million gallons of ethanol a year from spent pulping liquor. The new refinery, as designed, will have a positive impact on the environment, displacing 140,000 tons of carbon dioxide a year from the atmosphere. Once in operation it will increase employment in the Park Falls area by about 100 people.

Thorp noted that at a projected production cost of 57 cents a gallon to produce, cellulosic ethanol would cost about half of what ethanol made from corn would cost. Moreover, because the feed stock for the ethanol is a byproduct from the papermaking process, it would not have the effect of affecting the availability of food grains.

"Not only do we have cellulosic ethanol, we have low-cost cellulosic ethanol," he said. "That's going to attract a lot of interest in this process."

Thorp said the next step for the company was to review the DOE critique and "make all the fixes" in the project.

"That's going to take a few months," he said.

He said the company was also working with members of Congress, exploring loan guarantee programs within the DOE.

"By the time we finish fixing our proposal, these things will be coming out of Congress, and we will look to see which ones we can apply to, and we will apply to them," he said. "Meanwhile we are talking to an enormous number of people; we get inquiries about investment in this project all the time. We may, as we go down the path, fine enough investors that we might be able to do this without any federal help. I don't think so, but I don't want to close that door, either."

Whatever the case, Thorp noted the near-certainty of increasing energy costs means a bright future for cellulosic ethanol.

"There are a large number of people who are forecasting that energy prices are going to go much higher than the official government forecasts," he said. "If that happens, ethanol has just got to take off."