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Refiners' lawsuits seek change in US biofuels mandate's point of obligation

Washington (Platts)--12 Feb 2016 610 pm EST/2310 GMT


Independent refiners are taking their campaign to change the way the Renewable Fuel Standard is administered to court, asking federal judges to shift the responsibility for complying with the US biofuel mandate to blenders.

Valero on Friday filed two petitions with the US Court of Appeals for the District of Columbia, joining Monroe Energy, which filed its own petition late last month, seeking the change, saying that it could be a win-win for their industry and biofuels producers, who are often at odds over the RFS.

Valero also filed a third petition with the US Environmental Protection Agency, which administers the RFS.

"The current structure of the RFS hampers the growth of renewable fuels into the US fuels market because the obligation is not placed at the natural compliance point," Valero said in a fact sheet. "Moving the point of obligation to the title holder of the fuel above the terminal rack -- the primary point of compliance -- will incentivize the type of infrastructure investment necessary to achieve greater penetration for renewable fuels."

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Under the RFS, which requires an annually increasing amount of biofuels to be blended into the US transportation fuel pool, refiners are obligated to obtain credits, called RINs, that are generated for every gallon of biofuels produced, either by blending the biofuels themselves or by buying the credits on the open market.

Refiners, particularly those without blending capabilities, have long complained that the cost of complying with the mandate is an unfair burden, particularly when US consumers have not demonstrated sufficient demand for ethanol blends above 10%.

Biofuels makers have accused refiners of refusing to invest in blending capacity to incorporate higher ethanol blends and have said the cost of RINs is designed to incentivize such investments.

Valero, Monroe Energy and other refiners have pressed the EPA to make the change in the point of compliance, but so far the agency, which could not immediately be reached for comment, has not budged.

By filing their petitions with the US Court of Appeals, the refiners are hoping that the legal system will force a change.

BLENDERS OPPOSED

Biofuels industry sources are divided, with some saying the RFS is working fine in its existing format and others saying they were indifferent to the proposal, though one noted that any such change would require the EPA to monitor compliance from thousands of gasoline marketers, compared to the approximately 140 US refineries.

Refiners are likewise split on the issue.

"Those refiners long on credits hate the proposal," one source said, as some have booked profits in RINs trading in their quarterly earnings reports.

Blenders, meanwhile, are vehemently opposed to changing the point of obligation. Paige Anderson, a spokeswoman with the National Association of Convenience Stores, said refiners and fuel importers control how transportation fuels are introduced into the retail market and should remain the obligated parties in the RFS.

Blenders' "ability to meet their obligations would be dictated by their upstream counterparts, who would then have significant leverage and incentive to raise prices, which could ultimately result in an anti-competitive environment that would lead to increased retail prices of motor fuel," she said.

Valero could not be reached for comment, though it said in its fact sheet that parties engaged in downstream blending at the retail level would not become obligated parties under its proposal.

OTHER LAWSUITS

Valero's petitions with the US Court of Appeals specifically challenge the EPA's biofuels mandates in 2007, 2010 and 2015.

The refiner says the EPA had the authority to move the point of obligation in its 2015 mandate, and that conditions have changed in the fuel market to compel an invalidation of the 2007 and 2010 mandates, on grounds that the agency should have changed the point of obligation.

Valero's petition with the EPA asks the agency to administratively make the change.

"Despite today's filings, Valero remains hopeful that it can continue working with EPA to resolve these concerns in a constructive way that will further the goals of the agency under the RFS program," it said.

The refiner has backed efforts in Congress to reform the RFS, calling it a broken rule.

Valero's petitions bring to five the number of lawsuits filed in the US Court of Appeals aimed at the EPA's most recent RFS rule, which sets the mandates for 2014-2016.

Besides Valero and Monroe Energy, oil industry trade groups American Fuel and Petrochemical Manufacturers and the American Petroleum Institute have filed their own lawsuits seeking to have the RFS invalidated.

Seven biofuels groups, meanwhile, have filed suit saying that the EPA illegally lowered the mandates for those years below the levels set by Congress when it created the RFS in 2005 and expanded it in 2007.

The RFS' statutory requirements in the Clean Air Act call for 18.15 billion gallons of biofuels in 2014 to be blended with the US transportation fuel pool, 20.5 billion gallons in 2015 and 22.25 billion gallons in 2016.

By comparison, the EPA's final rule, issued on November 30, will require 16.28 billion gallons of biofuels in 2014, 16.93 billion gallons in 2015, and 18.11 billion gallons in 2016.

--Herman Wang, herman.wang@platts.com
--Edited by Derek Sands, derek.sands@platts.com

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