EPA proposes to deny change in RFS point of obligation

By Erin Voegele | November 10, 2016

On Nov. 10, the U.S. EPA proposed to deny several petitions requesting the agency redefine the point of obligation under the renewable fuel standard (RFS). A 60-day public comment period on the decision is scheduled to be opened soon.

On June 13, Valero Energy Corp. issued a petition to U.S. EPA Administrator Gina McCarthy asking the agency to redefine obligated party as “the entity that holds title to the gasoline or diesel fuel, immediately prior to the sale from the bulk transfer/terminal system…to a wholesaler, retailer or ultimate consumer.” Refiners and importers are currently considered obligated parties under the RFS. Valero also made a similar request in February.

The American Fuel & Petrochemical Manufacturers also recently filed a petition for rulemaking with the U.S. EPA, asking the agency to move the point of obligation under the renewable fuel standard (RFS) to the owner of hydrocarbons at the rack, which is the same point where fuel excise taxes are collected. That petition was filed on Aug. 4.

Following filing of the petitions, the National Association of Truck Stop Operators issued a statement opposing efforts to move the point of obligation. The group said changing the point of obligation would discourage fuel marketers from integrating renewable fuels into fuel supply and increase prices at the pump. The American Petroleum Institute has also spoken out against moving the point of obligation, instead calling for repeals or significant reform of the RFS.

In its proposed denial of the petitions, the EPA said it believes the current structure of the RFS program is working to incentivize the production, distribution and use of renewable transportation fuels in the U.S. while providing obligated parties with various options for acquiring renewable identification numbers (RINs) needed to comply with RFS standards. In addition, the agency said it does not believe that the petitioners have demonstrated that changing the point of obligation is likely to result in the increased use of renewable fuels. The EPA also noted that changing the point of obligation would not address two of the primary issues that are inhibiting the growth in the supply of renewable fuels, specifically the challenges associated with commercializing cellulosic biofuel technologies and the marketplace dynamics that inhibit greater use of fuels containing higher levels of ethanol.

According to the EPA, changing the point of obligation could disrupt investments reasonably made by participants in the fuels industry in reliance of the regulatory structure that is already in place. The agency also indicated that any programmatic advantages of to making such a change to the RFS would need to be certain and substantial in light of expects impacts on the program.

“While we do not anticipate a benefit from changing the point of obligation, we do believe that such a change would significantly increase the complexity of the RFS program, which could negatively impact its effectiveness,” the EPA said. “In the short term we believe that initiating a rulemaking process to reconsider or change the point of obligation could work to counter the program’s goals by causing significant confusion and uncertainty in the fuels marketplace. Such a dynamic would likely cause delays to the investments necessary to expand the supply of renewable fuels in the United States, particularly investments in cellulosic biofuels, the category of renewable fuels from which much the majority of the statutory volume increases in future years is expected.”

In addition, the agency said changing the point of obligation could cause restructuring in the fuel marketplace, as newly obligated parties alter their business practices to purchase fuel under contract “below the rack” instead of “above the rack” to avoid the overhead compliance costs of obligated parties under the RFS. “We believe these changes would have no beneficial impact on the RFS program or renewable fuel volumes and would decrease competition among parties that buy and sell transportation fuels at the rack, potentially increasing fuel prices for consumers and profit margins for refiners, especially those not involved in fuel marketing,” the EPA said. “EPA is also not persuaded, based on our analysis of available data, including that supplied by petitioners, by their arguments that they are disadvantaged compared to integrated refiners in terms of their costs of compliance, nor that other stakeholders such as unobligated blenders are receiving windfall profits.”

Growth Energy has spoken out in support of EPA’s proposal to maintain the current point of obligation. “The EPA has made the correct decision in proposing to deny this petition,” said Emily Skor, CEO of Growth Energy. “The RFS is working and refiners have had over 11 years to comply with it. The current structure appropriately incentivizes marketers to blend additional biofuels, and encourages the availability of higher-level ethanol blends to retailers who wish to sell them. The bottom line is that the current point of obligation encourages consumer choice and cost savings at the pump, and any change would undermine the intent of the RFS and reward those parties who have refused to comply with the intent of the law.”

“Growth Energy looks forward to providing substantive comments as to why the point of obligation should remain as is,” Skor added.

The Renewable Fuels Association also said it supports the EPA’s decision. “RFA supports EPA's proposed denial of the petition,” said Bob Dinneen, president and CEO of the RFA. “We also support EPA's decision to solicit input from the public on this issue, as any discussion related to changing the structure of the RFS should be open, transparent, and informed by sound analysis.”

The API also issued a statement in support of the EPA’s action, reiterating its position that the RFS should be reformed, while the AFPM has applauded the agency’s decision to seek public comments. Valero did not immediately respond to a request for comment from Ethanol Producer Magazine.

A 60-day public comment period is set to open on the EPA’s proposed denial following its publication in the Federal Register. A prepublication version of the proposal can be downloaded from the EPA website.