Moving RFS Obligation Would Cut Biofuel Use, Raise Fuel Prices: NATSO

August 12, 2016

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by Jeff Barber (OpisNet.com) Shifting the point of obligation under the Renewable Fuel Standard (RFS) from fuel refiners and importers to blenders would reduce competition at the rack and lead to lower renewable fuel use and higher retail prices, an official with NATSO, a trade group that represents travel plazas and truck stops, said in an interview this week.

David Fialkov, NATSO's vice president for government relations, defended the current system against efforts by a number of obligated parties - mostly merchant refiners - to move responsibility for complying with the RFS - either by blending biofuels or purchasing Renewable Identification Numbers (RINs) - to fuel marketers.

"Refiners and importers are obligated parties under the RFS to ensure that renewable fuels are integrated into the nation's fuel supply. The current policy creates a strong incentive for fuel marketers to blend renewable fuels into the fuel supply while lowering the price at the pump for consumers," Fialkov said. "Changing the point of obligation would have the opposite effect of discouraging fuel marketers from integrating renewable fuels into the fuel supply while simultaneously raising prices at the pump."

Valero Energy, the country's largest refiner and third-largest ethanol producer, earlier this summer petitioned the Environmental Protection Agency to begin a rulemaking to change the point of obligation to fuel marketers above the rack, also known as position holders. And last week, the American Fuel and Petrochemical Manufacturers (AFPM) formally asked EPA to change the obligation, arguing, among other things, that the current system is worsening RFS implementation and compliance issues and improperly enriching a number of non- obligated parties.

AFPM's petition came after a number of merchant refiners, including CVR Refining and HollyFrontier, used the release of their second-quarter financial results to argue that rising RFS compliance costs were weighing on their bottom lines and, according to CVR, threatening to "bring small merchant refiners to the brink of bankruptcy."

Fialkov, however, said the current system is doing exactly what the RFS was intended to do - increase the amount of renewable fuels in the U.S. transportation sector.

The current point of obligation "creates a mechanism through the RIN that allow marketers and retailers to sell diesel or gasoline blended with biofuels to the end user at a price lower than competitors who do not engage in blending activity."

Despite the fact that they are selling fuel for a lower price, the marketers and retailers by leveraging RINs are able to make more money than companies that do not blend, according to Fialkov.

Shifting the obligation to position holders above the rack would upset those blending economics by changing RINs from a profit center to a cost. And that, Fialkov said, would force more marketers to escape the obligation by acquiring fuel below the rack, reducing competition above it.

Fialkov said this has already happened in California, where regulators have made position holders obligated parties under the Low Carbon Fuel Standard, a decision he said has led to less competition and higher retail prices.

In comments submitted to EPA last month, NATSO said that if position holders were to become obligated parties, "there would inevitably be a decrease in the number of position holders. Indeed, marketers would be incentivized to acquire fuel 'below the rack' in order to avoid RFS obligations. The cost of fuel acquired above the rack would increase because to do so would entail RFS obligations. This cost increase would be passed down to all fuel purchased below the rack, including ultimately consumers in the form of higher prices at the pump."

Freed of any obligation under the RFS, refiners would be able to raise prices for fuel amenable to blending with renewable fuels. "Indeed, they know that if their customers were obligated parties, [those customers] would be required to purchase these specialty blendstocks and therefore willing (required) to pay a premium for them. The resulting price increase will be passed down to consumer via higher prices at the pump," the organization told the agency.

The higher price for "specialty blendstocks," NATSO added, would increase the cost of renewable fuel blends, leading consumers to "gravitate toward less- expensive, unblended petroleum-based fuel products that the RFS was designed to displace."

Fialkov has little sympathy for merchant refiners hit by rising RFS compliance costs. "Undoubtedly, some merchant refiners are not as competitive as other, more-integrated refiners, but that tends to be the result of business decisions they made after the RFS was already in place and the consequences were very predictable.

"Now that RIN prices have gone up, they suddenly don't look like good business decisions and they are acting like they are victims who are not responsible for their current predicament."

The RFS, he continued, was designed to create economic incentives for companies to integrate renewable fuels into the fuel supply. "I think what we are hearing are entities who have not figured out a way to incorporate renewable fuels into their business models as effectively as some of their competitors and are now talking as if this is unfair. In fact, what we are seeing is the RFS doing exactly what it was designed to do."

Fialkov also dismissed as a "distracting fiction" arguments that changing the RFS obligation would give marketers an incentive to build out infrastructure to increase the amount of renewable fuels sold to consumers. "Retailers will only spend money on infrastructure to sell fuels they are confident their customers want to buy."

Under the current structure, he said there is already a "huge monetary incentive" to sell more E15 and E85, but retailers are not doing so because of a lack of customer demand, infrastructure compatibility concerns and high costs. "The moment it becomes clear customers want more E15 or E85, the investment will be there."

NATSO joins a number of other parties opposing a change in the point of obligation, including the Renewable Fuel Association, the Society of Independent Gasoline Marketers and the National Association for Convenience & Fuel Retailing. READ MORE and MORE (Politico's Morning Energy) and MORE (Ethanol Producer Magazine)

Excerpt from Politico's Morning Energy: REFINERS TO API: PLEASE DON’T LET US BE MISUNDERSTOOD: The American Fuel & Petrochemical Manufacturers read American Petroleum Institute CEO Jack Gerard’s Monday letter urging EPA to reject their petition to move the point of obligation under the Renewable Fuels Standard, and they have a bone to pick. AFPM President Chet Thompson told ME that his group and API are on the same page in believing that “Congress should immediately repeal the failed RFS program.”

However, Thompson said, the oil and gas industry’s main lobbying group “clearly misunderstand the specifics of our administrative petition to move the point of obligation in the meantime. Where we propose moving the point of obligation would not increase the burden on any small entities nor the number of obligated parties. To the contrary, our proposal would reduce the number of obligated parties and make the program far more equitable.” READ MORE

Excerpt from Ethanol Producer Magazine: Fialkov stressed that it is important to remember that the entities seeking to shift the renewable identification number (RIN) compliance burden away from refiners have spent considerable resources in recent years to repeal the RFS. “Now, suddenly, they claim to have discovered the secret to making it more effective,” he continued. “Their claims today that they have identified an effective way to improve the efficiency and functionality of the program should be greeted with suspicion.”

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On Aug. 4, the American Fuel & Petrochemical Manufacturers filed a petition for rulemaking with the U.S. EPA, asking the agency to move the point of obligation under the RFS to the owner of hydrocarbons at the rack, which is the same point where fuel excise taxes are collected.

Valero Energy Corp. has also asked the EPA to redefine obligated party under the RFS. On June 13, Valero issued a petition to U.S. EPA Administrator Gina McCarthy asking the agency to redefine obligated party under the RFS. In February, Valero made a similar request.

On June 22, the House Energy and Commerce Committee’s Energy and Power Subcommitteeheld a hearing on the renewable fuel standard (RFS). During the hearing, Janet McCabe, acting assistant administrator at the U.S. EPA, was asked a variety of questions related to RFS regulation, rulemaking and program implementation, including questions related to RFS obligated parties and the potential to redefine the point of regulation under the program.

She noted that the issue of point of obligation is currently being addressed by the agency, noting that several petitions have been summited in support of changing the point of obligation from refiners to other parties. While McCabe was unable to offer a timeline for EPA’s response to those petitions, she did indicate that EPA believes it would have the authority to make changes to the point of obligation via rulemaking. READ MORE