Washington (Platts)--16Nov2012/336 pm EST/2036 GMT

The US Environmental Protection Agency on Friday rejected 10 state governors' petitions to temporarily relax the Renewable Fuel Standard in response to the severe Midwestern drought.

The agency found it "highly unlikely" that temporarily waiving the policy would have a significant impact on ethanol production or demand and therefore would have little or no impact on corn, food or fuel prices.

"We analyzed 500 scenarios, and in 89% of them we see no impacts from the RFS program at all," EPA said.

The worst US drought in half a century stunted this year's corn harvest, the chief feedstock for US ethanol makers.

The governors of Arkansas, Delaware, Georgia, Maryland, New Mexico, North Carolina, Texas, Utah, Virginia and Wyoming -- six Republicans and four Democrats -- filed formal petitions asking EPA to put the ethanol mandate on hold this year and possibly next year.

The farm-state governors argued the policy has compounded the drought's harm to livestock producers, as it increased competition for corn and made animal feed costs soar.

The Clean Air Act sets a high standard for relaxing the RFS, a policy that requires refiners to blend an increasing amount of renewable fuels into US gasoline and diesel supplies.

Just as EPA concluded when Republican Texas Governor Rick Perry sought a similar waiver in 2008, the agency did not find that keeping the ethanol mandate in place would severely harm the economy.

"We recognize that this year's drought has created hardship in some sectors of the economy, particularly for livestock producers," said Gina McCarthy, assistant administrator for EPA's Office of Air and Radiation.

"But our extensive analysis makes clear that congressional requirements for a waiver have not been met and that waiving the RFS will have little, if any, impact," she added.

Nearly 30,000 individuals and interest groups submitted comments on the governors' waiver requests. Most analysts put very low odds on EPA relaxing the ethanol mandate.

Beyond the public feedback, EPA considered models of the impact a waiver might have on ethanol use, corn prices and food prices. It also looked at the market for Renewable Identification Numbers (RINs), credits refiners use to prove compliance with the policy every February.

Among the 500 scenarios EPA ran -- including 11% of them that had the RFS influencing corn and other markets -- it said the average price impact for corn was 7 cents/bushel, a difference of less than 1%.

EPA said refiners and other obligated parties have the option of meeting up to 20% of their RFS requirement with RINs from the previous year.

The agency projected -- based on current RINs stockpiles -- that refiners would be able to roll over 2 billion to 3 billion 2012-vintage credits into the 2013 compliance period. It added that 3.5 billion 2011-vintage credits are available to use for 2012 compliance, and refiners have a strong incentive to use those first because they are set to expire.

Based on those factors, EPA estimated that refiners would roll over at least 2 billion RINs generated this year into the 2013 compliance year, rejecting opponents' arguments that the program lacks flexibility.

The ruling also briefly touched on refiners' assertion that massive penalties loom when they run into the so-called blendwall and max out ethanol content in the gasoline pool at 10%, the highest concentration allowed for most non-flex-fuel vehicles.

EPA said the ethanol industry has worked to introduce 15% ethanol blends (E15) into the market, while US automakers have increased production of cars capable of running on even higher ethanol blends.

A coalition of livestock, poultry and dairy groups that pushed the governors to seek the waiver expressed "extreme disappointment" in EPA's decision.

"We are extremely frustrated and discouraged that EPA chose to ignore the clear economic argument from tens of thousands of family farmers and livestock and poultry producers that the food-to-fuel policy is causing and will cause severe harm to regions in which those farmers and producers operate," the livestock groups said.

Ethanol trade group Growth Energy said EPA's analysis confirms that the food and fuel markets are working.

"Today's decision confirms what we knew all along -- the petitioners were wrong in their belief that the RFS caused the economic harm," Growth Energy CEO Tom Buis said in a statement.

The Renewable Fuels Association, another key voice for the ethanol industry in Washington, said EPA's finding demonstrates the flexibility inherent in the RFS program.

"The RFS is working as designed," RFA President Bob Dinneen said. "The flexibility that is built into the RFS allows the marketplace to ration demand, not the government."

Dinneen said ethanol producers responded to the drought by curtailing output by 12%, which he called a more significant response than other corn users made.

Refiner lobbyist American Fuel and Petrochemical Manufacturers said the ethanol policy remains flawed, despite EPA's findings. President Charlie Drevna pointed to a report by the International Energy Agency that projected surging US output of liquid fuels.

"The original intent of the RFS was to wean the country from a dependence on oil, especially foreign, amid erroneous concerns that we would soon deplete the domestic oil supply," Drevna said. "Just five years later, the United States is on track to surpass Saudi Arabia in oil production by 2020, effectively rendering RFS obsolete. We have the capability of being energy self-reliant, but only if excessive and ineffective mandates are repealed. At stake are jobs, economic growth and a stable national security."

The RFS requires refiners to blend 13.2 billion gallons of corn-based ethanol into the nation's gasoline supply this year and 13.8 billion gallons in 2013.

--Meghan Gordon, meghan_gordon@platts.com --Edited by Katharine Fraser, katharine_fraser@platts.com; Keiron Greenhalgh, keiron_greenhalgh@platts.com