An Entertaining 101 on Regulatory Issues Impacting the Renewable Fuel Standard
Introducing Kayley Grant
Thanks for stopping by my blog. My name is Kayley Grant and I am the Compliance Advisor for RINAlliance. The articles posted here are dedicated to explaining the regulatory issues that affect the EPA’s Renewable Fuel Standard, as well as other related fuel industry issues. My wish is that these articles not only entertain you, but also keep you better informed.
How do I know what I’m talking about? After all, I am just a millennial and this could very well be another thing that I unceremoniously ruin. I received my Juris Doctorate from Drake University Law School in 2016. After spending some months in litigation, I realized that suing people isn’t what I wanted to do with my life. Before you ask, yes, that would have been a more convenient revelation prior to going to law school, but hey, here we are. So, I’m using my library of sarcastic comments, legal experience, and knowledge of the industry to get the stale, often misunderstood, regulatory issues out to the public at large in a more entertaining fashion.
When I’m not sitting at my computer hopelessly trying to overcome the world’s worst case of writer’s block, I enjoy spending my time outdoors or at the gym. I am an avid reader, Netflix enthusiast, and enjoy cooking (or thinking about how to cook) the things I find on Pinterest. I am a fan of the Chicago Bears, Chicago Bulls, and the Chicago Cubs…at least I have a theme? I hope you enjoy what you read here and walk away feeling a little more knowledgeable.
Providing Back-up: Certain States File Amicus Brief in Small Refiner Case Before the U.S. Supreme Court
A lawyer is the only person who writes a 21-page argument and calls it a “brief.” Sometimes, just one “brief” won’t do it. Recently, the states of Iowa, Nebraska, Illinois, Michigan, Minnesota, Oregon, South Dakota, and Virginia, (“the States”) filed a brief as amici curiae, or, as it’s better known, an “amicus brief.”
Before I go any further, let’s talk legal-ese for a moment. An amicus brief is filed by individuals or entities not party to the original case, but who have an interest in the outcome. It’s a little like saying, “hey, we know this isn’t our fight, but we care what happens here because of ‘x, y, z’.” In other words, it’s like filing a “back-up brief” on behalf of whichever side you’re trying to promote. In this case, the States are supporting the Respondents, which are the renewable fuel industry advocates.
How did we get here? As you may recall, in January of 2020, the 10th Circuit ruled on case between a few refiners and several different renewable fuel-supporting coalitions. The court determined that EPA had granted three different small refiner exemptions (SREs) to refiners who did not qualify for those exemptions. The reason the 10th Circuit case was so critical is because it reversed an earlier decision which effectively argued the exact opposite position. The 10th Circuit case was appealed, which means it went to the Supreme Court of the United States (SCOTUS) and SCOTUS granted certiorari (agreed to hear the case). SCOTUS is set to hear oral arguments from the parties on April 27.
Now that we’ve got that out of the way, let’s talk about what the States said and why this is important. To use their words directly, the States filed the following three arguments:
- Authorizing the unfettered granting of new small-refinery exemptions would gut the Renewable Fuel Standard (RFS);
- Petitioners’ [EPA] broad interpretation would cause substantial economic harm to the rural economies of many States; and
- An ineffective Renewable Fuel Standard would harm the environment and efforts to obtain energy independence
While the last argument is important, I am going to focus on the first two for the purposes of this discussion. The first argument, as you might imagine, centers around the harm the renewable fuel industry has suffered as a result of the granting of these SREs. In other words, they argued that 2016 through 2020 had been a disaster. To be honest, they’re not wrong. When EPA grants an SRE, the annual Renewable Volume Obligations (RVOs) are not re-calculated to include the exemptions. Remember, the RVOs drive the production of renewable fuels and the trading of RINs on the marketplace. To understand more about that, read Easy Peezy Lemon Squeezy: The Ins And Outs Of The Renewable Volume Obligation written by me. #shamelessplug. This means, that the gallons EPA exempted are simply taken out of the market without regard to the consequences.
To say the disregarded consequences have been dire, would be an understatement. For example, since 2017, EPA has granted 86 SREs over three compliance years. To put this more in terms of dollars and cents, the renewable fuel industry has lost an average of $2 billion per year for those three years or $6.4 billion dollars for all three years. While those numbers may be comparatively small to other industries, they are definitely more than pocket change.
The second argument centers around what happens if EPA continues to grant SREs as rampantly as they have been. Essentially, the States argue that, if EPA’s trend of granting SREs because they feel like it continues, the states will suffer irreparable economic harm. To illustrate their point, the states use some fairly alarming but convincing statistics. In October of 2019, before the advent of COVID and the “new normal,” a total of 19 ethanol plants had closed across the nation. In Iowa, for example, the renewable fuel industry accounted for nearly $4 billion of the gross domestic product for the year 2020…so even in a year where the transportation industry saw a noticeable decline, a good chunk of Iowa’s 2020 budget came from the renewable fuel industry. Additionally, the renewable fuel industry in Iowa alone is responsible for over 37,000 jobs and generates an average of $1.8 billion in income for Iowa households. I’m focusing on Iowa because I live here and I have seen these effects first-hand, but I don’t want to undermine the dire consequences these SREs have had on the other states…except for Nebraska…#iowarules.
Alright, so, the states that signed and filed the brief suffered severe consequences, but if we’re being honest, no one really cares about the “fly over states” anyways. I mean, that’s why they’re called “fly over” states right? Actually, west and east coast, you might want to care…a lot…According to the States, the renewable fuel industry is an economic imperative. In the year 2020, even with COVID and all that it has entailed, the renewable fuel industry supported more than 300,000 jobs and $18.6 billion in income for households nationwide. The States estimate that the SREs have had a devastating economic impact on the national GDP, to the tune of $34.7 billion. Again, that’s not a trillion-dollar government contract, but that’s not a small impact either.
In the more abstract, the States point out the impact these continued SREs will have on rural communities. For those of you from larger cities or states that are more densely populated, allow me to paint you a picture. Many towns within the States consist of a gas station, one or two bars, a church and soy or cornfields as far as the eye can see. That’s absolutely not an exaggeration. Ethanol and biodiesel plants and blenders of biofuels provide jobs and revenue for these rural communities. These jobs and revenue aren’t just limited to the actual plant or gas station, but to the farmers whose crops or cattle are the basis for biofuels. As the States correctly point out, these rural communities will suffer irreparable economic harm if SREs continue to be so liberally granted causing these biofuel plants and gas stations are put out of business.
So, why does it matter that the States filed the brief? It matters, if not for all of the foregoing reasons, because the States are not direct participants in the RFS. It’s one thing for a party that is directly harmed to come forward, it is another for a party with less direct harm to come forward. Things have gotten so bad that the States who have benefitted from the RFS, whether directly or indirectly, have started to notice. It has started to affect the “bottom-line” of these states’ budgets as well provided real-world harm to many rural communities located within the States.
What will SCOTUS do? Great question. Both the Respondents and the States have made persuasive arguments, but sometimes that’s not enough and also, the Petitioners (the refiner side) have also made persuasive arguments. One thing is for certain, April 27 cannot come soon enough!
Brief for Iowa et al., p. 8-14, HollyFrontier Cheyenne Refining et al., v. Renewable Fuels Association et al., Nos. 20-472 (2021).
 Id. at 7.
 Id. at 11.
 Id. at 12.
 Id. at 12.
 Id. at 13.
Winds of Change: EPA Announces Support of 10th Circuit Decision
The winds of change are blowing directly at EPA….and causing the agency to shift in a completely opposite direction. At the risk of speaking too soon, it looks like EPA might be returning to a pre-2016 narrower read of the regulations with respect to small refinery exemptions (SREs).
Recently , EPA announced that after “careful consideration of the 2020 decision of the U.S. Court of Appeals for the Tenth Circuit in Renewable Fuels Association et al. v. EPA, 948 F.3d 1206 (“Decision”), EPA supports that court’s interpretation of the renewable fuel standard (RFS) small-refinery provisions.” EPA’s announcement follows the decision of the United States Supreme Court to grant certiorari to hear the appeal of the 10th Circuit’s opinion.
In January of 2020, the 10th Circuit ruled on three different small refinery exemptions. Associated refineries to Wynnewood Refining and HollyFrontier were granted SREs for the years 2013 to 2016. However, each refinery had either not met the burden of being a small refinery as defined by the regulations or had failed to apply for an exemption but had applied for an extension of an exemption that had never existed. The 10th Circuit held that, since the refineries did not meet the requirements of the regulations, the SREs that had been granted should be withdrawn.
To qualify for an SREs, the applying refinery had to have a throughput of less than 75,000 barrels per day (in other words, be “small”) and had to show an undue hardship. SREs were granted as a blanket exemption under the first iteration of the Renewable Fuel Standard (RFS). Beginning in 2013 any small refinery that had received an exemption would have to apply for an extension of that exemption on an annual basis. Failure to apply or denial of an application for an SRE would forever revoke a refinery’s ability to receive an SRE in the future. For more information read Becoming the Outcast: the “What” Portion of The Small Refiner Exemption, written by yours truly.
One of the most shocking things about EPA’s recent announcement is just how completely out of character it is for the agency. Over the past 4 years, EPA has been granting SREs like it’s their job…even when it’s not. For example, in the years 2013-2015, EPA granted 7 to 8 SREs a year. However, in the year 2016, the EPA granted 19 SREs, nearly as many as the past three years combined. Since 2016, the number of SREs granted has only increased, causing an outcry in the renewable fuel industry. Between SREs, and COVID considerations, participants in the renewable fuel standard have suffered everything from falling fuel demand to dropping RIN prices. For the past four years, EPA seems to have been doing everything it can to give small refineries an advantage that other members of the renewable fuel industry simply don’t have.
So why the 180-degree turn? Great question. It could be that the United States Supreme Court is set to publish their opinion in June on the appeal of the decision of the 10th Circuit. Being called out by the Supreme Court doesn’t seem like a position that you want to be in. It could also be that the incoming Biden administration is slowly changing the landscape of EPA. It could be that EPA has finally gotten tired of being admonished by participants of the renewable fuel industry. Whatever the reason, this return to a more consistent regulatory analysis is a welcome change.
Will this shift toward a narrower reading of the regulations continue? If I had a crystal ball, I could definitively tell you…and be worth a lot more money. As you might expect, the Supreme Court decision might be the most decisive factor when determining the future course of EPA action. Depending on what the Court decides, EPA might become “stuck” in a position where it no longer has the flexibility to grant SREs with quite so much heedlessness. However, that also assumes that the Supreme Court will rule in favor of the 10th Circuit’s decision, and there is no guarantee that will happen.
Is EPA a little late to the party with their announcement? It’s been over a year since the 10th Circuit decision was published which would make it seem like EPA should have jumped on this bandwagon a long time ago. It might be important to note that EPA rarely does anything quickly, and is bound by additional factors, such as court decisions and administrative precedent. This might make EPA a little slower to the “we should really do what the regs say here” train. But I guess better late than never, right? Hopefully, this trend toward a more consistent read of the regulations continues, and the participants of the renewable fuel industry can go back to enjoying just a modicum of predictability.
The Man with the Plan: Biden’s Pick for EPA Administrator Wants a More Thorough Review of Biofuels Policies
Sometimes, the only thing you need is Stan, the man with the plan…or in this case, Michael Regan. The Biden Administration’s pick to lead the Environmental Protection Agency (EPA) plans to sit down with general counsel to go over the biofuels policy with respect to Small Refiner Exemptions (SREs).
As many of you know, each new presidential administration is able to pick its own administrators. The head of the EPA, otherwise known as the EPA Administrator, is one such position. The person picked for this position is typically someone who can best enable the incoming administration’s environmental policy. As the biofuels industry is painfully aware, EPA’s treatment of certain biofuels policies, such as SREs, can vary greatly from administration to administration as well as from administrator to administrator.
Before we get too much farther into discussing Regan’s plan, it might be worth it to give you a couple of quick reminders. First, at the beginning of January 2020, the 10th Circuit overturned the EPA’s decision to grant SREs to three different refineries based on various reason. These reasons included that the refinery had never been granted an exemption but had applied for and been granted an extension, or the exemption had lapsed because an extension had not been filed for in consecutive years. The refineries affected by this decision had appealed to the Supreme Court and that decision is expected to be published this June.
The second thing you’ll probably want to remember is how an SRE works. To be brief, an SRE may be granted to a refiner who may not be able to meet the compliance obligation created due to the refiner’s business activities. The EPA has various sets of criteria when determining whether to grant an SRE as well as certain regulatory timelines that must be met. Over the past few years, the biofuels industry has experienced EPA’s rampant granting of SREs which has undermined the biofuels industry as well as become problematic for industry stakeholders. To complicate matters, the courts have not been consistent on the outcome anytime a party had challenged EPA’s rulings on SREs. Between the inconsistencies with EPA and the courts, biofuels participants have found navigating this ever-changing landscape to be beyond difficult.
So who is this Michael Regan and what’s his plan? Regan was the former head of North Carolina’s environmental regulator. According to a statement made by Mr. Regan during a hearing on his nomination, the one thing he knows is that he has to sit down with legal counsel. Ewww. Lawyers. It takes one to know one, am I right? To be more precise, Regan is quoted as saying, “[t]he one thing I know I have to do is consult with our general counsel, understand where we are in the legal process, and also understand what options do we have to continue conversations.” When asked if he would wait to see what the Supreme Court would do, Regan is quoted as saying that’s “one way to go.” Yes Regan, it sure is. Regan also noted the importance of transparency and communication surrounding SREs as well as a commitment to following the law.
Great, so his plan is to talk to some lawyers and be clear. Awesome. Actually, after these past years’ turmoil, greater transparency, and a return to a closer read of the regulations would be refreshing. Hopefully, this means that the Biden Administration’s EPA will at least give us a more consistent biofuels policy. It is encouraging that Mr. Regan is taking steps to be guided by informed people for determining the direction of the current court case. Time will be the best teller of whether Regan is able to achieve a more stable biofuels policy.
Hulk Smash! The Importance of the Valero v. Sundive Lawsuit on the RIN Market
Sometimes, thing don’t happen the way that they should, and it makes others very angry. Valero Energy Corporation (“Valero”) is just a tiny bit mad at Sundive Commodity Group (“Sundive”). So mad, in fact, that Valero is suing Sundive over Sundive’s inability to procure RINs for Valero, forcing Valero to pay over $10 million more for RINs to meet their compliance obligation. #hulksmash
So what actually happened in this case? Valero had about 100 contracts with Sundive for the purpose of securing RINs to meet Valero’s compliance obligation. Valero alleges, through the terms and conditions of these contracts, Sundive was supposed to secure roughly 106 million RINs. The lawsuit alleges, in September of 2020, Sundive failed to deliver 21.6 million RINs to Valero. The lawsuit also alleges that Sundive failed to deliver 8 million RINs in October and 4 million RINs in November. The lawsuit alleges that, due to Sundive’s multiple breaches of contract, Valero had to spend about $10.1 million more to secure the same number of RINs. In other words, if Sundive had done what they had promised, Valero would not have had to spend as much money for the same thing.
As a quick refresher, obligated parties and exporters are required to retire RINs to meet any compliance obligation that they incur over the course of a compliance year. This means, an importer of nonrenewable fuel, a refiner, and an exporter of renewable fuel, by virtue of the fact of their business activities create an obligation, will need RINs to satisfy that obligation. The obligation that these types of businesses incur can be satisfied multiple ways, but the most common way is for these businesses to purchase and retire RINs against their obligation. For more details, read Easy Peezy Lemon Squeezy: The Ins and Outs of the Renewable Volume Obligation, written by yours truly.
So why does this matter? This is two corporations entering into one of the most boring types of lawsuits (at least, in my opinion) and in the end, it all basically comes down to money, like almost everything else. Or does it? In many ways the RIN market mimics the stock market. One RIN could be considered the equivalent to a share of stock, both being an intangible value that are able to be traded among wiling participants. However, one unique thing about the RIN market is that it is based on a compliance need rather than an investment interest. This means, that holder of a RIN has two options, based on their position in the Renewable Fuel Standard (RFS). One option is to retire against their obligation if appropriate, the other is to trade to an obligated party. The trading angle is where this lawsuit gets a little interesting.
Around the time the lawsuit was filed, the prices of RINs started to increase. There are many factors that go into RINs increasing, but one such factor was this lawsuit. Valero, being a large player, had entered the market in a different way. This means, RFS participants could be more competitive with the price of their RINs. As I alluded to earlier, RINs are a compliance need rather than an investment interest. The significance of this being, due to the fact that RINs are an instrument of the regulation, procuring RINs for an obligated party is mandatory as opposed to a stock investment which is generally optional. When a large player enters the RIN market with this type of need, the rules of supply and demand begin to more keenly take effect.
Wait, wait just one minute. Doesn’t that mean that RIN owners without obligations, such as traders and blenders can hold obligated parties “hostage” on the market, giving a more competitive market advantage. Well no, actually, not really. If you notice, the facts are that Valero would have had to procure these RINs either way. Had the contracts been performed, Sundive would have sold Valero RINs at a certain price as decided upon between the parties. Many obligated parties have similar arrangements, creating more flexibility in day-to-day operations and allowing for more control over their expenses. The point of this lawsuit isn’t to demonstrate that Valero has additional options besides being “forced” to play the market. Strategic partnerships among obligated parties are common and often times happen as a mechanism of avoiding having to guess at the RIN market.
Will Valero be successful in their lawsuit? Maybe. They certainly seem to have a claim. Does this mean the RIN market will respond to the continuation of this suit? Maybe, but also maybe not. As I stated above, there are several factors and variables in the RIN market, this lawsuit just so happened to be the most prominent at the time. Will Valero be less angry? Welllll…how angry would you be if you were out over $10.1 million? If it were me, I’d have adopted the Hulk as my mascot by now. Time will tell if Valero is successful in their suit.
Swing and a Miss! EPA Misses Statutory Deadline for Renewable Volume Obligations
Sometimes, it’s perfectly acceptable to be late. You stopped for coffee on your way to work and the line was long, but you needed your morning cup of joe so that people won’t mind it when you speak to them. You’re late, but for a worthy cause. Other times, people completely lose their minds when you’re even the tiniest bit late. EPA currently knows a little bit about this.
By November 30 of any compliance year, EPA is supposed to have released the finalized rule for the Renewable Volume Obligations (RVOs) for the upcoming compliance year. The proposed rule for the RVOs usually comes out in the spring so that the rule can be finalized by the statutory deadline. Yet, even though the RVOs were delivered to the OMB mid-May, the OMB still lists the review of the proposed rule as ongoing, nearly seven months later. Setting RVOs by November 30 is required by statute. However, this year, that deadline came and went, and EPA said…nothing.
Now, to be fair to EPA, this year has been nothing short of interesting, to say the least. Between the global pandemic, small refiner waivers, and an election year, EPA has had their hands full. It would also be unfair to say that delays in the year 2020 are unexpected…just like vaccines and stay-at-home orders. At a visit to Wisconsin last August, Administrator Wheeler stated that he expected to release the RVOs, but he was uncertain as to when that might happen. Administrator Wheeler mentioned that [EPA] was “facing some unusual challenges.” In Administrator Wheeler’s own words, since releasing the 2021 RVOs to the OMB last May, “[t]he entire landscape has changed.”
Ok, so EPA is late pulling together a finalized rule, big deal. Actually, that’s the point, it is a big deal. RVOs serve as a representation of the number of gallons of renewable fuel that need to replace, gallon for gallon, nonrenewable fuel. If you are an obligated party, the RVOs serve as either a representation of the number of gallons that you need to blend to replace the number of nonrenewable fuel gallons that you are responsible for putting on the market or you need to buy RINs to retire against that obligation. If you’re lost as to what this means, please read: Easy Peezy Lemon Squeezy: the Ins and Outs of the Renewable Volume Obligation, written by yours truly.
More to the point, the RVOs drive everything from production of renewable fuel to blending of renewable fuel, to the generation (creation) of RINs. When EPA significantly alters the RVOs, the entire renewable fuel industry is affected, this includes when EPA is late releasing the one thing that serves as a major drive for the industry. Now, I know I am making this sound like the only reason producers and blenders of renewable fuel do their jobs is because of the RVOs and the Renewable Fuel Standard (RFS). It is worthwhile to note that, while those two things are major contributors, they are not the only factors in this decision. However, the industry likes to know what EPA is expecting for the upcoming compliance year, and the RVOs are an excellent benchmark for the industry.
So, how upset is the general public? With everything else going on, they can’t be that mad, right? Well, not to be too emphatic, but RFS participants are about one more fight away from a Taylor Swift-style break up with EPA. They are never ever getting back together. Producers of renewable fuel, specifically ethanol, have faced multiple hardships this year, everything from falling demand due to less travel, to waived gallons from Small Refiner Waivers. Ethanol plants across the nation have either ratcheted down production due to falling demand or have switched to making medical-grade hand sanitizer in the wake of COVID-19. While clean hands are great and all, hand sanitizer doesn’t quite replace the high demand of gallons produced for the transportation market. Further, failing to release the RVOs on time creates greater market uncertainty for RFS participants in a market already not known for stability.
Blenders of renewable fuel have not had an easy 2020 year either. Blenders drive the RFS by blending renewable fuel to replace, gallon for gallon, nonrenewable fuel on the transportation market. Blenders of renewable fuel are also responsible for ensuring RINs flow from the producer to the obligated party. By blending the fuel, renewable fuel blenders allow the RIN to become separated from the gallon of renewable fuel and ultimately traded to an obligated party. The RVOs give blenders an idea of how many gallons, and thereby, how many RINs the market might expect to see. Blenders of renewable fuel have also faced decreases in production of blended fuel due to a decrease of demand and potential supply shortages. Further, like producers, blenders of renewable fuel count on the RVOs as a measure of market certainty. Without finalized RVOs, blenders of renewable fuel may not be aware of how many RINs they will be responsible for getting to market.
Will EPA have a rule soon? Great question. In his statement last August, Administrator Wheeler promised RFS participants that while RVOs will not be released on time, they won’t be two years late. I don’t know about you, but I don’t feel reassured by that statement. But I guess, better late than never, right?
Sinclair v. EPA: When the RFS Looks Like an Existential Crisis
Have you ever taken a moment to think: how did I even get here? This is probably what EPA thinks on a daily basis: how did we get here? Last month, I wrote on the 10th Circuit case where EPA was held accountable for granting small refiner exemptions to entities that didn’t necessarily qualify for the waiver. To be able to have such broad authority, EPA had to get it from somewhere: meet Sinclair v. EPA (2017).
To be fair to you guys, I kind of put the chicken before the egg last month by talking about the 10th Circuit case first. Keep in mind, I’m a lawyer, not an existential crisis counselor. The reason that the 10th Circuit case was so important (besides the obvious), is because of the Sinclair case. Wait, what’s the Sinclair case? I’m so glad you asked…
Before you read any further, just as a friendly reminder, to be a small refinery, you had to be “small” (have a throughput of less than 75,000 barrels per day) and you had to be able to show that compliance with the regulations would result in a “disproportionate economic hardship.” Under the first iteration of the Renewable Fuel Standard (RFS 1), small refineries could petition EPA for an exemption to the requirements of the RFS through the year 2011. Following the year 2011, small refineries meeting the requisite qualifications could file for an extension of that exemption through the year 2013.
In 2017, Sinclair Refining brought a case before the 10th Circuit. Yes, the same exact circuit that we talked about last month. Sinclair had two small refineries in the state of Wyoming. Sinclair had timely filed and had been granted a small refiner exemption under RFS 1. Sinclair also petitioned EPA for an extension of the original exemption through the year 2013, claiming an economic disproportionate hardship if Sinclair had to comply with the requirements of RFS1. EPA denied this petition and then Sinclair timely filed for a review of that petition with the 10th Circuit. I know this seems like a lot of rigamarole, but you have to understand how we got here.
In the 10th Circuit case, Sinclair argued that there “can be no disproportionate economic hardship unless compliance with the RFS Program is so costly that it will eventually force a small refinery to shut down” and that EPA’s interpretation would cause a threat to the viability of an operation, which was outside the scope of EPA’s authority. Essentially, Sinclair argue that, while a hardship can be burdensome, EPA’s interpretation as requiring a threat to a refinery’s long-term viability was nonsensical with the requirements of the RFS.
In a stunning blow to the RFS, the 10th Circuit granted Sinclair’s petition for review and overturned EPA’s decision to deny Sinclair’s exemption. While there were many issues the 10th Circuit considered, the court’s decision ultimately hinged on the meaning of “disproportionate economic hardship.” The court concluded that “[a]s a matter of common sense, an experience that causes hardship is less burdensome than an experience that threatens ones very existence.” The court went on to say that EPA’s analysis of the Department of Energy’s study as well as other factors was “…morph[ed] into a single question: a threat of closure inquiry” while the EPA was supposed to “…take the holistic evaluation as required by Congress…”
So, why does this matter? I mean it’s just one case in one circuit. It must be an isolated incident that is unlikely to be repeated. Except, that’s not at all how that went. Due to the fact that this case changed the way EPA analyzed Small Refiner Exemption petitions, EPA was able to grant these petitions much more readily than in previous years and have an easy justification for doing so. As we’ve all seen, the over-abundance of the granting of these petitions has led to a fundamental undermining of the RFS. This is also why the 10th Circuit case from last January was such a big deal. By deciding the January case in the way that it did, the 10th Circuit essentially put an “outer limits” on the acceptable way EPA is supposed to grant Small Refiner Exemptions. Does this mean that the RFS will stopped being undermined by Small Refiner Exemptions and enjoy the same rippling effect as this past 10th Circuit case? Maybe. The RFS can be a tricky place and can be influenced by a variety of factors, court decisions being just one of those many factors. So, what does this all mean in the grand scheme of things? It’s like I told you at the beginning, I’m a lawyer, not an existential crisis counselor.
Preventing Headaches and Heartbreaks: the 10th Circuit Court Decision on Small Refinery Exemptions
There are somethings that just should not be repeated: headaches, heartbreaks…global pandemics, the year 2020…too soon? The 10 Circuit Court case that happened earlier this year is not one of those things.
**DISCLAIMER** If you do not know what a small refinery exemption is or you do not understand what an RVO is, you will not understand this article. There are several articles on this page to help you understand those concepts. Read those articles first and then come back to this one. It’s a good time, I promise.
Sometimes, it’s ok to skip over the facts….just like candidates running for president do. However, just like when it comes time to vote, the facts are really important for you to know. What had happened was, a group of renewable fuel groups (“Biofuels Group”) brought suit against the EPA for granting small refinery exemptions to small refineries who did not meet the qualifications for an exemption. More specifically, the Biofuels Group brought suit against the EPA for granting the following refineries small refinery exemptions:
- Holly Frontier Cheyenne, LLC (“Cheyenne”): Cheyenne had been granted an exemption for the year 2012 but had not petitioned for an extension of the exemption for the years 2013 and 2014. However, in 2017 Cheyenne petitioned for an exemption for the compliance year 2016. The Department of Energy (“DOE”) recommended to EPA that Cheyenne should not be a granted an exemption. EPA, however, granted an exemption for the compliance year 2016 in full.
- Holly Frontier Woods Cross Refining, LLC (“Woods Cross”): Woods Cross had never petitioned nor been granted a small refinery exemption for any year. However, in the year 2017, Woods Cross petitioned EPA for an exemption for the compliance year 2016. Woods Cross did not identify as having a disproportionate economic hardship, a requirement to be granted an exemption. DOE recommended the EPA grant Woods Cross a partial exemption, but EPA, in its wisdom, granted a full exemption.
- Wynnewood Refining Company, LLC (“Wynnewood”): Wynnewood had been granted a blanket exemption for the year 2011 and 2012. However, Wynnewood had not received an exemption since the year 2012. Wynnewood petitioned EPA for an exemption in 2017 for the compliance year 2016. The DOE, noting that Wynnewood’s compliance would “not appear…to threaten the refinery’s economic viability,” recommended a partial exemption. EPA, nonetheless, granted Wynnewood a full exemption for the year 2016.
Why do you care about those facts? Before I answer that, there are a few things you need to keep in mind. As a reminder, for a small refinery exemption to be granted the petitioning refinery needs to be: (1) small (with a through put of less than 75,000 barrels per day) and (2) needs to show that compliance with RFS requirements would result in a disproportionate economic hardship. Additionally, a small refinery does not qualify for an exemption if, after the year 2012, the refinery has not petitioned for an exemption on an annual basis. Now, go back and read the facts again. Note how none of the named refineries had experienced a disproportionate economic hardship nor had they petitioned consistently for an exemption….so in other words, they didn’t qualify for an exemption.
In reviewing this case, the 10th Circuit was overwhelming clear with their sentiments on EPA’s actions. In the court’s own sassy words: “[t]hese ordinary definitions of ‘extension,’ along with common sense, dictate that the subject of an extension must be in existence before it can be extended.” In other words, you can’t grant an extension of something that never existed. The court concluded their sentiments by saying: “[g]ranting extensions of exemptions based at least in part on hardships not caused by RFS compliance was outside the scope of the EPA’s statutory authority.”
Now, back to why you should care about this. In order for EPA to grant full exemptions to any of the named refineries, EPA would have had to blatantly disregard the regulations. While EPA is allowed the authority to grant or deny petitions for small refinery exemptions as they see fit, in doing so, EPA is not allowed to completely disregard the regulations. As the court’s conclusions clearly noted: you can’t just make up the rules. While this is one case in one circuit, the hope is that this will have implications on EPA’s future actions. Perhaps, this decision will keep EPA from having headaches and handing out heart breaks to participants in the renewable fuel standard.
Much Ado About Something: Why Everyone is Yelling About SRE’s
There are some things that people do, and we just fail to understand why. Putting pineapple on pizza or thinking pickles with peanut butter is a good idea, for instance. Sometimes, granting an entity a Small Refiner Exemption (SRE) can be a lot like that. It’s a little weird and a bit strange. In this month’s article, I am going to talk, somewhat briefly, about the “why” portion of SRE’s and, more importantly, what’s all the yelling about?
As I’ve discussed in a previous article, to receive a small refiner exemption, you had to be a small refiner and you had to show a disproportionate economic hardship. There are a few more details you should know, to get those, read Becoming the Outcast: The “What” Portion of the Small Refiner Exemption. You will also want to have a good grasp on the Renewable Volume Obligations (RVOs) and the Renewable Fuel Standard (RFS) before you continue to read. I figured I’d get the disclaimers out of the way from the start.
So, why all the yelling? We have to start somewhere, so let’s start with what happens to the RIN market when a large number of SRE’s are granted. When an entity is granted an SRE, a portion of the RIN market that would have otherwise been there has been excused. For example, if Small Refiner A applies for and is granted an SRE, it will not need to find RINs to fulfill their obligation. Small Refiner A’s compliance obligation for the applied year has been excused and Small Refiner A will not be held to that obligation. When this is done for a single entity or even a handful of entities, the effect is barely noticeable on the RIN market. It’s basically a single ripple in the large sea of the RIN market. However, when this happens in larger numbers, the effect is more like a tidal wave.
Before we get into talking about how demand affects the RIN market, there’s a couple of things that you need to keep in mind. First, the RIN market is not like the stock market. The RIN market is developed off of a compliance obligation, rather than an investment interest. This means, the thing that drives the market is a regulatory operation rather than an economical consideration. Second, EPA has sole authority in granting or denying an SRE. This means EPA decisions drive the RIN market similarly to the way rumors drive the stock market.
Traditionally, EPA was extremely selective in the number of SREs granted. For example, in 2013, EPA received 29 SRE petitions but only granted 8 of them. EPA granted 8 petitions in 2014 and 7 petitions in 2015. However, in 2016, EPA began granting SREs in much larger numbers. To put this in perspective, in 2016, the EPA granted 19 SREs. These numbers continued to increase with 35 SREs granted in 2017 and 31 granted in 2018. If you would like to take a look at the data for yourself, EPA makes publicly available the number of SREs granted for a given compliance year, as well as other public data.
As you may have noticed by the numbers, EPA seemed to be deliberately less selective in the number of SREs that they granted. Part of this is due to a court case that changed the way EPA evaluated how SREs petitions are analyzed. I’m not going to touch on that case in this article, but I might do so in the future. #suspense. The significance of EPA granting this number of SREs, is the way it affected the RIN market. Again, the RIN market is driven by the compliance obligation, not an investment interest. When EPA exempted tens of thousands of gallons, it essentially took away a portion of the demand, which drove RIN prices down.
Why is RIN prices being driven down a bad thing? This gets really complicated very quickly. Whether RIN prices being driven down is a bad thing is also entirely dependent on the position of the RFS market participant. For blenders of renewable fuel, the entities that allow RINs to flow from the point of generation to retirement, significant decreases in RIN prices make a blending operation less economically feasible. By making blending less economical, blenders will probably not blend as much fuel, which means there will be less RINs available to go to market.
Driving down RIN prices also can be economical harmful to producers of renewable fuel. Producers of renewable fuel look at the RIN market as a indication of demand. For example, if all obligated parties everywhere needed RINs to retire against their obligation, producers would have to ramp up the manufacturing of renewable fuel to meet those needs. If gallons creating an obligation are excused, then the demand for RINs is down, which means the demand for gallons of renewable fuel to blend could also be down.
Now, let’s point out a couple of obvious things. First, in the previous two paragraphs I’m assuming RINs are the only reason blenders blend and producers make renewable fuel, and that’s simply not true. Any well run fuel business probably has multiple revenue streams. The examples of what happens when RIN prices are down are feasible results and have been shown to happen, but are by no means the only reason a blender no longer blends or a producer ratches down production. Second, I’m inherently biased. I work with blenders of all shapes and sizes on a regular basis and I know the trials and tribulations they encounter. From my perspective, RIN prices being driven down is always going to be inherently bad, but you should know there are other sectors of the RIN market, such as refiners, that would not agree with me. The SRE saga is far from over. Just recently, EPA denied all “gap” SRE petitions, which was not an expected move for the renewable fuels industry. Will EPA continue to grant SREs in such large numbers? Your guess is as good as mine
Becoming the Outcast: The “What” Portion of the Small Refiner Exemption
What do car wrecks, hangnails, and Small Refinery Exemptions (SRE) have in common? Nobody likes them. Well, ok, if you’re a participant in the Renewable Fuel Standard (RFS) and not a small refinery, you might not like SREs very much. But why, though? If you’re new to the RFS and you don’t have a good grasp of the industry, you might find all the hulabaloo a bit much. There is a lot that could be said about SREs, but for the moment, let’s discuss what they are first.
There are two pieces to SRE’s. For the first piece, to even be able to apply for the exemption, you have to be a small refinery. A small refinery is defined by the regulations as: “a refinery for which the average aggregate daily crude oil throughput (as determined by dividing the aggregate throughput for the calendar year by the number of days in the calendar year) does not exceed 75,000 barrels.” That’s kind of a mouthful, right? Once you break it down, it’s actually pretty simple. The term throughput means the amount of crude oil that is refined into a consumable product such as gasoline, diesel, or jet fuel. Essentially, if you break down the definition, to be considered “small,” a refinery cannot produce (refine) more than 75,000 barrels worth of gasoline, diesel, or jet fuel for any given year. Makes it a lot easier to understand when you break it down, huh?
Now, the second piece is the exemption portion . As the name might imply, the exemption is an exception to the requirement of Obligated Parties (OPs) to have to fulfil their Renewable Volume Obligations (RVOs) by retiring RINs. If you don’t understand what any of that means, read Easy Peezy Lemon Squeezy: The Regulatory Purpose of the RVOs, written by yours truly. While that is absolutely a shameless plug for you to read my articles, it is also a good way for you to understand the exemption portion this equation. If you don’t understand that portion, the rest of this article might be a little abstract.
To fully understand what an SRE is, you need to understand a bit of regulatory history. It’s not as boring as it sounds, I promise. When the first version of the RFS was put into practice (RFS1), small refiners were exempt from the regulatory requirements of the RFS. As long as you were a small refinery in the calendar year 2004, the small refinery could apply for an exemption from the requirements from the time of application (which had to be submitted by August 31, 2007) until December 31, 2010. In addition to the initial exemption, the small refinery could petition the EPA Administrator for an extension of that exemption for an additional 2 years. To qualify for the extension, the small refinery had to prove that compliance with the requirements of the RFS would result in an “disproportional economic hardship.” I get it, you want to know what that means, but that’s a longer discussion than you might be prepared for, so for the moment, lets get back to history.
When RFS2 began, many small refiners were still struggling from the RVO requirements of the RFS. To ensure that they would be able to maintain their RVOs in the future, RFS 2 reiterated SREs. Essentially, the regulations gave SREs a bit of a remix by changing the dates, but that’s about all that changed. Any small refinery that had applied for an SRE had to prove that they were a small refinery for the calendar year 2006, instead of 2004. Again, the small refinery could apply for an extension of the exemption for an additional 2 years as long as it could show a “disproportionate economic hardship.” The EPA Administrator, whether the petition was for an original exemption under RFS 1 or RFS 2 could take no longer than 90 days to issue a decision on the petition. If the EPA Administrator granted the petition, the small refiner was granted an exemption to the RVO requirement and would not have to fulfill their obligation. If the Administrator denied the petition, the small refiner was on the hook for their compliance obligation.
All good things have to come to an end. For small refiners, that ending was on December 31, 2012. By that date, all original exemptions and initial extensions would have run. However, the small refiner could still get around the RVOs. Beginning in 2013, small refiners had to petition for an extension of the exemption every year. Keep in mind, this means the small refiner had to have been granted an exemption in the first place. Following the December 31, 2012 deadline, if the small refiner had let an extension from previous compliance years lapse or had never applied for an SRE in the first place, the small refiner could not petition for an extension for an SRE. This changed the landscape a bit on SREs for small refiners. Since RVOs are determined on an annual basis, the small refiner had to know much more quickly than in previous years whether or not they could meet their RVOs. The current SRE is more of an extension of the original exemption under RFS 1. Admittedly, this is more a question of schematics, but the application can be important in the current discussion surrounding SREs in the renewable fuel industry. I’ll write more on that at another time. I know, I know, the suspense is killing you!
So, to recap, the SRE is an exemption to the RVO requirements of the RFS. To be eligible for an SRE, the refiner had to be considered a small refiner and had to petition for an exemption by the appropriate compliance deadline. Exactly! See? That wasn’t so bad!
Save Your Receipts! The Inside Scoop on Product Transfer Documents
Do you ever go into a store and completely forget your grocery list? You walk out with a 9-foot receipt and items that you probably didn’t need. Or is that just me? Anyway, that 9-foot receipt is basically what the renewable fuel industry would call a Product Transfer Document (PTD). It works a lot like a receipt for a RIN transaction, and it’s required by the regulations. #bonus.
Unlike my shopping experiences, a PTD can fit on a single page. Convenient, right? Every PTD is required to contain the following information:
- The name and address of the transferor and transferee
- The transferor’s and transferee’s EPA company registration numbers
- The volume of renewable fuel that is being transferred, if any
- The date of the transfer
- The quantity of RINs being traded
- The D code of the RINs
- The RIN status (Assigned or Separated)
- The RIN generation year
- The associated reason for the sell or buy transaction (e.g., standard trade or remedial action).
It looks a lot like the kind of information contained on receipt, doesn’t it? If you keep in mind that a PTD and a receipt have a lot in common, it becomes a lot easier to identify. Why might a PTD be difficult to spot? The regulations do not have a required format for PTDs, so companies can provide that information in a manner that is the most convenient for them. Sometimes it is far more useful to know what information you’re looking for rather than where to look for it.
So, if you were to look for a PTD, where should you look for it? …great question. Many companies include the information found on a PTD within their invoice. The RIN information, such as how many RINs are being transferred, whether the RINs are assigned or separated, and the RIN year, can be found in various spots on the invoice. In other cases, companies abandon the treasure hunt and simply include an additional page with the invoice, clearly labeled Product Transfer Document. It’s really nice when that happens. Want to see a picture of what you’re looking for? Or how about this one? #picsoritdoesntcount.
Great. So I’ve got this document that may or may not be labeled PTD and yeah… Is it actually necessary to keep? Here’s the point where you want to pay really close attention: Do. Not. Discard. PTDs. Why? Well, for two reasons. First, the regulations say that you must keep all PTDs for at least 5 years. Second, because when it comes time to complete an annual attest engagement, your company’s auditors are going to want to see those. What happens if you lost them or can’t find them? The PTD police come to get you. #kidding. A PTD is evidence that a transaction occurred. If you lose a PTD or can’t find one, reach out to your supplier sooner rather than later. They should have a copy of it. Ensuring that you have all your PTDs before attest engagement season will make your compliance work a lot easier.
The Biofuels Trilogy: Renewable Volume Obligations, RINs and the Renewable Fuel Standard
All the good things come in threes: the Three Amigos, the Hunger Games trilogy, three-for-one specials. I’m sure there’s more but, you get the picture. When the Renewable Fuel Standard (RFS) mandated the requirement of obligated parties to fulfill their obligation by retiring RINs, it created a market where RINs can be bought and sold among RFS participants. Driving this market are the annually-set Renewable Volume Obligations (RVOs), which can increase an obligated party’s need for RINs.
In case you have no idea what that means, an obligated party incurs an obligation from the type of business activity they perform. If you’re still lost, read my prior article Easy Peezy Lemon Squeezy: The Ins and Outs of the Renewable Fuel Standard. #shamelessplug. Keep in mind, RINs aren’t magical beings that mysteriously get traded, they’re created (generated) and attached to gallons of renewable fuel. Once the gallon of renewable fuel has been blended, the attached RIN is deattached from the gallon and is free to be traded. Now, the stuff that’s coming up is going to focus on the RFS, RVOs and RINs from a market angle, but it will be an overview, so you don’t need a degree in economics to understand it.
Ok, the first thing you need to understand is a little background. Don’t groan, I promise not to make this like your high school history class. When the RFS was first established by the Energy Policy Act (EPACT) in 2005, it brought with it a new market opportunity – that of the RIN trade. In many ways, the RIN trade appeared to act similarly to the stock market by allowing RFS participants to trade an intangible credit. The biggest obvious difference between the two is that the stock market gives the investor a market share in a company and a RIN is a component of a compliance requirement.
To be clear, this market differs from a commodities market, because the existence of the market itself is based on the production and blending of renewable fuel. RINs are, more or less, a representation of how many gallons are blended to be transportation fuel. I don’t want you to get the impression that RINs are spontaneously formed and then traded. RINs don’t just suddenly appear out of nowhere, and if they do, they’re probably fraudulent.
Speaking of fraudulent, it was pretty easy to manipulate and scam the RIN market in the beginning. My favorite story is of a small blending operation in New England. The owner never blended fuel, but flooded the market with fraudulent RINs, made millions of dollars, and then disappeared with his family to Argentina to live a life of luxury. #lifeplan. While that story is one of my favorites, there are dozens more just like it. After more instances like this popping up, the federal government decided that maybe something should be done and passed the Energy Independence and Security Act (EISA) in 2007. After EISA, RIN market security was greatly improved and there are only rare instances of invalid RINs.
So, what’s the second thing that you need to know? It’s that I’m awesome…and that, as a consequence of how the RFS was created, the RVOs drive RIN prices and RIN demand. While the RVOs dictate how many gallons of renewable fuel need to be blended to make transportation fuel, they also dictate how many RINs an obligated party will need to satisfy their obligation. Predictably, the higher the RVOs are set, the more RINs will be needed by an obligated party. It is this sort of push and pull that drives the RIN market. When RVOs are raised, obligated parties have more of a need for RINs and the RIN market will adjust to that demand.
Now, let‘s be clear about a couple of things. First, production will adjust to meet demand, meaning lower RVOs could mean less RINs on the market. Producers and blenders of renewable fuel will adjust their yearly targets to reflect the fact that the RVOs have decreased which means there is less of a regulatory need or demand for renewable fuel and, as a consequence, RINs. Less demand means the RIN prices will see a decline in value. It is possible that those type of RINs, we’ll call them “excess” RINs, hold value in the next compliance year if an obligated party uses prior year RINs, but that also assumes the RVOs are not re-lowered. It’s like the quarterback tradition for the Chicago Bears. The next one could be better than the last…or not. Second, as long as the RFS continues to exist, the need for RINs will also continue to exist. RINs are a compliance necessity, rather than a business interest. This means a RIN market is more of a “sure thing.” Keep in mind, the RFS is a creation of the federal legislature and as a consequence, the RFS is subject to policy decisions and measures. However, unless the RFS disappears, RINs will still need to be obtained by obligated parties, and compliance measures will still need to be observed.
Will the RIN market react to things like rumors and federal policy changes? Absolutely. Afterall, the RIN market is still a market. There are companies that trade based on those rumors and federal policy changes. The trading habits that typically follow the stock market or a commodities market are certainly mimicked on the RIN market. However, there are also companies that procure RINs solely on the basis of a compliance need. In this way, the RIN market is a beast unto itself inherently existing as a commodities market or a compliance need, depending on the participant.
The RIN market also requires that all regulatory components be present. The RFS cannot exist, from the standpoint of procedure, without the mechanisms of RINs to make it work. The RVOs can’t be satisfied if the RINs don’t exist and RINs wouldn’t exist if the RFS didn’t create the RVOs. Having one without the others would be like eating popcorn without butter and salt: completely pointless. The RFS, RVOs, and RINs have to exist in a threesome to create the RIN market.
Its just like I told you at the beginning: all good things come in threes.
Easy Peezy Lemon Squeezy: The Ins and Outs of the Renewable Volume Obligation
After reading the title to this article, I suppose you’re expecting to see a lot of regulatory and legal hieroglyphics. Plot twist. I’m going to explain the regulatory purpose of the Renewable Volume Obligation (RVO) in a way that makes sense and can include you in the industry conversation like the cool kid you are. #trendworthy.
So what is the RVO and why should you care? Overall, the Renewable Volume Obligation is the volume of renewable fuel, in gallons, that must be blended to produce transportation fuel. On an individual level, the RVO is the regulatory duty (obligation) an importer or refiner of nonrenewable fuel (e.g., gasoline, diesel) incurs as a result of their day-to-day business activities. By mandating this obligation, the federal government is attempting to disincentivize the continued refining and use of fossil fuels (nonrenewable fuels, such as gasoline and diesel), to be made into transportation fuel. Refiners and importers, as a result of their day-to-day business activities, go against the federal government’s wishes and, as a result, have to pay for it. The businesses that incur an obligation are called, predictably, obligated parties. Makes a lot of sense, right? An obligated party incurs…wait for it…an obligation. See? This isn’t that hard.
By now you’re thinking that an obligation needs satisfied right? Right. EPA only requires the very small sacrifice of your first born. Totally joking, EPA is not in the business of taking other people’s children. In order to incentivize the production and blending of renewable fuels, the federal government requires that the obligated party (remember, that’s the company that incurred the obligation) to replace, gallon for gallon, the volume of nonrenewable transportation fuel with renewable transportation fuel. The way this works is an obligated party has to obtain intangible credits called Renewable Identification Numbers (or RINs) and retire (essentially, count against) their incurred obligation. There are, very generally, two different approaches to accomplishing this regulatory requirement: (1) a business can produce and blend renewable fuel, separate the RIN and retire it, keeping the entire operation to themselves or (2) purchase the RINs on an individual basis and retire them, without engaging in any actual blending of renewable fuel.
You’re wondering what a RIN is, aren’t you? A RIN is an intangible credit that is attached to a gallon of renewable fuel. While you can’t touch or see a RIN, think of it like a sticker on the side of the gallon. Once that gallon of renewable fuel is blended with gas or diesel to be used for transportation fuel, the RIN is detached, or separated, from the gallon of renewable fuel (like peeling the sticker off the side of the gallon). As you might expect, the regulations refer to a RIN that is no longer attached to a gallon of renewable fuel as a separated RIN. The separated RIN can then be traded among blenders and obligated parties, until it is used to retire against an obligation. You can do this, I promise! At least that’s what my parents keep telling me about remaining gainfully employed and out of their basement. #millenialproblems.
So to recap, an obligated party incurs an obligation that has to be satisfied. The only way to satisfy that obligation is to retire the things called RINs against that obligation. RINs can be traded among different participants but only once they have been separated from the gallons of renewable fuel. Now you’re cooking with gas! …or biodiesel…