GAO report addresses delays in finalizing annual RFS standards

By Erin Voegele | April 17, 2014

The U.S. Government Accountability Office has published a report on the domestic petroleum industry that addresses several issues, including the U.S. EPA’s recent failure to meet statutory deadlines to set yearly renewable fuel standard (RFS) requirements. It also analyzes the possible impacts of California’s low carbon fuel standard (LCFS).

The report, titled “Petroleum Refining: Industry’s Outlook Depends on Market Changes and Key Environmental Regulations,” was completed at the request of Congress. It examines major changes that have recently affected the industry along with the future of the industry.  

While monthly domestic crude oil production has increased more than 55 percent since 2008, the report indicates consumption of petroleum products declined by 11 percent from 2005 to 2012. The analysis outlines two key regulations that have recently impacted the refining industry: the coordinated fuel economy and greenhouse gas (GHG) vehicle emission standards developed by the EPA and U.S. Department of Transportation, and the RFS program.

Within the report, the GAO cites several stakeholders in the petroleum industry as reporting that they believe the RFS has increased compliance costs due to renewable identification number (RIN) prices, contributed to declining domestic petroleum consumption and has led to investment uncertainty due to EPA delays in issuing annual standards.  According to the report, the GAO found that the RFS could increase costs for some refiners, depending on several factors, including the actual percentages of renewable fuels required by the EPA and how the blend wall issue is addressed.

Regarding EPA’s history missing statutory RFS rulemaking deadlines, the GAO said when RFS standards are issued late, the petroleum industry has less time to plan and budget effectively. It increases uncertainty for refiners and renewable fuel producers, the report said, making it more difficult to make long-term planning decisions. According to the report, EPA officials told the GAO that there is no indication that delays have caused significant problems for refiners and noted that delays could actually make annual standards more robust since EPA then has more data on which to base decisions.

The EPA also told the GAO that delays in issuing RFS standards are largely due to the length of the regulatory development process, which includes interagency reviews and public reviews. Within the report, the GAO said EPA has indicated this review process can be time consuming because the RFS standards involve complex and controversial issues and balance competing agricultural, energy and environmental policy interests.

The report’s analysis of the California LCFS indicated the program has had only a modest impact on the petroleum industry to date, increasing fuel prices by approximately 1 cent per gallon. The program is also facing several legal challenges, which have resulted in implementation delays. While the California Air Resource Board has reported the price impact of the LCFS could range from an increase of 9 cents per gallon to a decrease of 13 cents per gallon by 2020, the GAO reported a petroleum industry analysis estimated the program could cost the refining industry an average of 70 cents per gallon by 2020.

The GAO concludes the report by noting that while the EPA has some systems in place to monitor and evaluate progress in developing regulations that would provide useful information for understanding delays in issuing the RFS, the EPA has not identified the underlying causes of those delays and has not developed a plan to address delays, and therefore, the risks of repeating delays. “EPA delays in issuing RFS standards are important because delays do not change refiners’ compliance periods accordingly and they therefore create uncertainty in the marketplace, potentially harming investment. Uncertainty among refiners, renewable fuel producers, and other market participants about how EPA will address the blend wall, which can be exacerbated by the prospect of litigation, can affect investment decisions and ultimately the availability and prices of the fuels they produce,” said the GAO in the report.

To improve the EPA’s ability to meet RFS deadlines, the GAO has recommended that they EPA assess past experiences to identify the underlying causes of delays in issuing annual RFS standards. It also recommends that the EPA develop and implement a plan to address the causes of delays and help ensure RFS annual standards are issued on time.

In response to the GAO’s findings, the EPA has issued a letter in which it notes it generally agrees with the report. However, the EPA also asserted its position that refiners experience the same RFS compliance costs regardless of whether they are fully integrated, with blending capabilities, or are merchant refiners that purchase credits for compliance. The EPA also noted that the RFS compliance deadline is set by regulations, not statute, and was extended in 2013.

A full copy of the report can be downloaded from the GAO website.