Washington (Platts)--15Aug2012/416 pm EDT/2016 GMT

The US Environmental Protection Agency expects to propose a regulatory fix by the end of the year aimed at restoring the market for renewable fuel credits after three fraud cases shut out all but the largest biodiesel producers.

Gina McCarthy, assistant administrator for EPA's Office of Air and Radiation, told a Democrat in the House of Representatives on Tuesday that the agency hoped to have the solution in place by early 2013.

The proposal would contain elements pushed by the oil industry, notably an "affirmative defense" policy that would afford refiners some protection when they discover invalid or fraudulent renewable identification numbers (RINs) on their books despite their best efforts to verify them beforehand.

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"This best effort would be demonstrated by purchasing RINs that have been validated through an independent third-party auditor executing an EPA-approved Quality Assurance Program," McCarthy wrote to Representative Gene Green of Texas. "The affirmative defense would ensure that refiners and other program participants who meet the conditions of the affirmative defense will not face civil penalties."

EPA has declared invalid 140 million RINs representing about 930,000 gallons of biodiesel. Oil companies use the credits to demonstrate compliance with the Renewable Fuel Standard, which requires them to blend a certain amount of ethanol, biodiesel and advanced biofuels into US motor fuel supplies every year.

"We understand that many in industry are seeking a resolution to these market uncertainties before making purchasing decisions for RINs in the new year," McCarthy wrote. "To that end, on an expedited basis, the EPA expects to issue a proposal before the end of 2012, with a final action as soon as possible in 2013."

McCarthy said any new elements of the program, including third-party auditors, would be voluntary.

"Early indications from the industry are that obligated parties prefer the option of buying validated RINs from small producers and keeping the existing program for RINs purchased from the largest, most well-established producers," she wrote.

For months, EPA has been talking with refiners, the National Biodiesel Board and other industry players about regulatory changes that might return liquidity to the biodiesel RINs market.

Since the first fraud case became public last autumn, refiners have opted to buy credits from biofuel giants that have balance sheets big enough to refund any invalid RINs.

Stephen Brown, vice president of government affairs for refiner Tesoro, said that trend continues more than a year later.

"Frankly, because there's no other alternative, we can only buy from biodiesel producers [for which] we have some degree of certainty that their RINs are valid, that their feedstocks are legitimate, that in the event that their RINs turn out not to be valid, we can get replacement RINs that will be valid," Brown said.

"That really falls to the largest of the biodiesel producers," he added. "So this delay in getting some kind of rule across the finish line is unfortunately putting a real and substantial financial squeeze on the independent biodiesel producers -- the vast majority of which I'm sure are completely honest and aboveboard."

The bogus credits identified by EPA were sold by Clean Green Fuel of Perry Hall, Maryland, Absolute Fuels of Lubbock, Texas, and Green Diesel of Houston.

A federal jury in Baltimore convicted Rodney Hailey, owner of Clean Green Fuel, in June of fraud, money laundering and violating the Clean Air Act by selling $9.1 million in credits without producing a drop of biodiesel.

A grand jury in Texas last week indicted Absolute Fuels owner Jeffrey Gunselman on similar fraud charges, accusing him of selling $42 million in fake credits.

No charges have been filed against Green Diesel or CEO Philip Rivkin.

The fraud cases continue to rattle the markets for biodiesel and RINs, as traders suspect more fake credits could be circulating. A House committee investigating the issue said in May that the 140 million invalid RINs might double as more cases emerge.

--Meghan Gordon, meghan_gordon@platts.com
--Edited by Lisa Miller, lisa_miller@platts.com

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