Retailers, marketers urge EPA to maintain point of obligation

By NATSO | February 22, 2017

As the U.S. EPA public comment period on the Renewable Fuel Standard closes today, truck stop owners' trade group, NATSO, is encouraged by the vast support to keep the current compliance structure under the RFS. NATSO, in collaboration with other industry stakeholders, has engaged a diverse group of more than 35 organizations and companies representing downstream blenders, fuel retailers, marketers and end users at the federal and state levels. These groups speak on behalf of a majority of the fuel sector, which opposes the shift.  

 “NATSO is heartened by the overwhelming number of stakeholders who are urging the EPA to keep the RFS compliance with refiners, importers and manufacturers,” said Lisa Mullings, president and CEO of NATSO. “We urge the EPA not to shift compliance onto thousands of small business fuel retailers, which would inject massive disruption into fuels markets and raise fuel prices, ultimately harming the economy and hard-working Americans.”

The RFS has been an ongoing point of contention between major players in the fuel industry. A handful of refiners and investors have petitioned the EPA to shift compliance requirements down the supply chain. Doing so would undercut the program’s efforts to sustain the use of renewable fuels in gasoline and diesel fuel. The current structure creates a strong incentive for blenders, retailers and marketers to integrate renewable fuels into the supply chain.

“The RFS is working as intended by creating stable gas prices and encouraging renewable fuels in our gas supply,” said Tim Columbus, general counsel of the National Association of Convenience Stores and SIGMA. “But if the EPA shifts compliance, it would unnecessarily complicate the program, needlessly disrupt the markets for motor fuels, and hurt consumers most.”

In addition to undermining the purpose of the program, this change would increase gas prices for consumers as downstream players’ ability to satisfy their obligations would be dictated by upstream counterparts, who have the leverage and incentive to raise prices. A recent Penn Schoen Berland (PSB) survey released earlier this year revealed that 86 percent of voters agree that a compliance shift would increase gas and diesel prices at the pump.

The change would also add significant compliance costs and burdens to freight shippers, which would ultimately raise the cost of consumer goods through higher shipping costs. For example, if the compliance changes, Class I railroads would need to expend between $112.5 million and $214 million just to acquire Renewable Identification Numbers (RINs) to comply with 2016 Renewable Volume Obligations (RVOs) – based on 2016 numbers. California’s enactment of the Low Carbon Fuel Standard is a cautionary tale. In light of the market’s experience in California, it would not be implausible for the railroads to have to pay between $260 million and $447 million more for fuel.

A diverse group of companies and associations submitted comments in support keeping the current compliance requirements.

Casey’s General Store, a convenience store chain headquartered in Iowa, with a total of 1,954 stores in 14 states throughout the Midwest, commissioned Northcoast Research to analyze its gasoline margins to address public commentary that it is making windfall RIN profits through the current RFS structure. In its comments to the EPA, Casey’s stated that the there is no explicit connection between Casey’s motor fuel profitability and RIN values. The company’s gross profit margin is a function of input costs (namely gasoline and ethanol), competitive factors, and RIN offsets. “The best ever gas margin performance at Casey’s was during the second quarter of the fiscal 2016 when it reached 24.7—yet the RIN component was only 0.9 cents,” the research concluded.

Chronister Oil Company, an independent fuel marketer and retailer that serves the central Illinois marketplace, also argued against claims that fuel retailers blend to make a profit. “We blend to reduce cost and remain competitive; the savings is passed directly to the consumer,” the company stated. “When one retailer changes the big price numbers in the sky, everyone changes their numbers as well. If one retailer has an advantage in price, it is leveraged to increase sales and take customers.”

Chronister also stated: “The petition to move the point of obligation has the retail reality all wrong: retailers pass on savings to consumers and the current RFS structure encourages the blending and consumption of renewable fuels. It does all that, and increases the choices consumers can make at the pump.”

Ethanol trade association Growth Energy commissioned Edgeworth Economics to address each of the petitioners’ arguments to change the point of obligation. Here are the conclusions:

-RIN values represent neither windfalls for blenders nor out-of-pocket costs for refiners (On the contrary, RIN values are largely passed on in the form of elevated blendstock or renewable fuel prices or discounts to finished fuel).

-Shifting the point of obligation would have no impact on the incentives to invest in biofuel infrastructure or increase blending of renewable fuels (There are nearly 650 retailers in 28 states offering E15 – a 500 percent increase over the retail availability one year ago – and we expect that number to grow significantly over the next two years).

-RIN markets are, for the most part, operating efficiently and competitively; moreover, a change in the point of obligation would have no beneficial impact on those conditions.

-Changing the point of obligation would have no impact on fraud in RIN markets.

-The petitioners’ proposal would result in an increase in the number of obligated parties and an increase in the overall administrative burden of the RFS (hundreds or even thousands of additional entities would become obligated parties).

NATSO, the trade association of America’s travel plaza and truckstop industry, representing more than 1,500 travel plazas and truckstops nationwide, argued that changing the point of obligation would hinder the program’s objective of displacing traditional fuel and replacing it with renewable substitutes to promote stable supply and prices, and:

-“…inject such massive disruption and uncertainty into fuels markets that retail fuel prices will inevitably skyrocket and the incentive for fuel marketers to integrate renewable fuels into their product lines will dissipate.” 

-“This will crush the very constituencies whose interests President Trump promised protect in order to benefit a narrow segment of the refining industry.”

-“What’s more, changing the point of obligation will impose exceedingly onerous and expensive burdens on EPA staff.”

-“As you consider the petitions to change the point of obligation under the RFS, we urge you to seek counsel from the EPA officials who have worked over the past decade to implement the program.”

As a supplement, NATSO is submitting an updated letter from the freight industry, which now includes the American Highway Users Alliance as a signatory with the Association of American Railroads, the American Short Line and Regional Railroad Association, the American Trucking Associations, and the Owner Operator Independent Drivers Association. The letter outlines the impact any changes to RFS compliance could have on end users.