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1099 NEW YORK AVENUE NW SUITE 900 WASHINGTON,
DC 20001-4412
January 27, 2014
The Hon. Gina McCarthy
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, N.W.
Washington, DC 20460
via email and certified mail)
EPA Docket Center
United States Environmental Protection Agency
EPA West Building, Room 3334
1301 Constitution Ave. NW
Washington, DC 20460
via hand delivery)
.J E N N E R B L O C K t tP
David W DeBruin
Tel 202
639-6015
Fax 202 639-6066
ddebru n@jen
ner. com
Re:
Petition to Revise the Renewable Fuel Standard Regulations
Dear Administrator McCarthy:
Monroe Energy LLC ( Monroe ) respectfully submits this petition, pursuant to
Olijato
Chapter o the Navajo Tribe v Train,
515 F.2d 654, 666 (D.C. Cir. 1975), concerning 40 C.F.R.
80.1406(a)(1 . That regulation makes refiners and importers of gasoline or diesel fuel
obligated parties for the purpose
of
compliance with the Renewable Fuel Standard ( RFS ), 42
U.S.C. 7545(0).
In
EPA's Notice for Proposed Rulemaking ( NPRM ) for the 2014 RFS
requirement,
see
EPA, Proposed Rule, 2014 Standards for the Renewable Fuel Standard
Program, 78 Fed. Reg. 71,732 (Nov. 29, 2013) ( 2014 NPRM ), EPA proposed a new
methodology for setting annual RFS volume requirements in 2014 and future years, because
the supply of renewable fuels made available to consumers will no longer be adequate to meet
the statutory volume requirements. EPA should simultaneously shift the obligation from refiners
and importers to blenders, as it said it would consider doing
in
circumstances such as those that
exist now. Indeed, if EPA adopts the methodology it has proposed for setting the volume
requirements, rather than an
alternative such as Monroe has proposed
in
its comments
on
the
proposed rule, the existing regulation making refiners and importers obligated parties could no
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longer be defended as a reasonable exercise
of
EPA's discretion. That regulation would need
to be revised to impose the compliance obligation
on
blenders.
As discussed in detail below, EPA acknowledged in 2010 that the rationale that originally
justified imposing the compliance obligation on refiners and importers was no longer valid.
EPA, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program,
75 Fed. Reg. 14,670, 14,722 (Mar. 26, 2010) ( 2010 Rule ). Yet when the agency last
examined the issue in 2010, it chose to leave its rule unchanged, because it found no pressing
reason to alter course. However, the agency pledged to revisit the issue if the RIN market did
not operate as intended, with resulting high prices for obligated parties.
EPA recognized at the time that high RIN prices could result if the market approached
the blendwall, and that high prices can affect refiners and importers differently depending
on
whether they are affiliated with blenders. Refiners and importers affiliated with blenders can
obtain most, if not all, of the RINs they need for compliance without incurring any cash cost,
simply by receiving those RINs from their affiliated blenders. Refiners and importers without
blending capabilities, by contrast, must acquire RINs on a secondary market, and they incur
significant cash costs to do so. A differential impact
on
obligated parties is inconsistent with a
fundamental purpose of RINs, which is to allow refiners and importers to comply with the RFS
requirements regardless
of
whether they themselves blend fuel or are affiliated with blenders.
RINs are intended to be a competitively neutral means of compliance.
The statutory obligation is now above the blendwall. The methodology EPA has
proposed to address that problem
in
the 2014 NPRM does not prevent high RIN prices that
have a disparate impact
on
refiners without affiliated blending capabilities. As Monroe's
comments in response to the 2014 NPRM explain in detail, EPA's proposed methodology still
sets the annual volume requirements too high, leaving an insufficient margin for error and
creating incentives for parties with access to RINs to horde them for potential use the following
year. As a result,
6
RIN prices remain far above their historical level and reflect speculation
rather than market fundamentals. Since EPA released the 2014 NPRM, the price for 6 RINS
generally has been above 30 cents per RIN. The historical average, prior to 2013, was about 2
Monroe believes that this O ijato petition may not be ripe until the publication o f a final 2014 rule. The
new grounds that would give rise to Monroe's right to seek judicial review of 40 C.F.R. § 80.1406(a)(1
,
s 42 U.S.C.
§
7607(b)(1 , and that trigger Monroe's obligation to file a petition with the agency pursuant
to
Olijato
before seeking judicial review, will not arise unless and until EPA adopts its proposed
methodology (or a different methodology that also results
in
disproportionate harm to refiners that are
unaffiliated with blenders)
in
a final rule. Nevertheless, out of
an
abundance of caution, Monroe files this
petition now, within 60 days
of
the publication
of
the 2014 NPRM.
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cents. Market fundamentals have not changed so dramatically as to explain a fifteen-fold
increase in RIN prices.
If EPA finalizes the methodology for setting annual RFS requirements that it proposes in
the 2014 NPRM, thus allowing high RIN prices to persist and differentially burdening one
subgroup
of
refiners, it will no longer be defensible to continue to impose the compliance
obligation
on
refiners and importers. There is no policy rationale for disproportionately
burdening a subclass
of
obligated parties, and it would be arbitrary and capricious to continue to
impose the compliance obligation on refiners and importers
in
such circumstances.
Accordingly, if the methodology proposed
in
the 2014 NPRM is adopted, EPA would need to
revise its regulations to make blenders, rather than refiners and importers, responsible for
compliance with the RFS requirements. Shifting the compliance obligation downstream to
blenders would prevent any skewing
of
the refining market resulting from high RIN prices. It
would also advance the overall purpose
of
the RFS program, by imposing the obligation on
entities that directly affect whether compliance
is
achieved and thereby more directly aligning
parties' incentives with Congress's goals.
I.
The RFS Statute Requires That EPA Impose the Compliance Obligation on
Refiners, Importers, or Blenders As Appropriate.
Congress directed EPA to impose
an
RFS compliance obligation
on
refineries,
blenders, and importers, as appropriate. 42 U.S.C. §7545(o)(3)(B)(ii)(I). EPA has interpreted
the phrase as appropriate,
id.
to give the agency discretion to determine the parties
on
which
the compliance obligation should be imposed. See EPA, Regulation
of
Fuels and Fuel
Additives: Renewable Fuel Standard Program, 72 Fed. Reg. 23,900, 23,925-27 (May
1
2007)
( 2007 Rule ). That discretion, however, is not unbounded. The word appropriate means
suitable for a particular ... condition ... ; fitting.
Am. Heritage Dictionary o the English
Language
88 (4th ed. 2000). Thus, by using the phrase as appropriate, Congress meant to
underscore that EPA must select the parties
on
whom to impose the compliance obligation
in
a
manner that fits the overall purposes of the statutory scheme. Cf
Chem. Mfrs. Ass n
v
EPA,
217 F.3d 861, 866-67 (D.C. Cir. 2000) (holding that regulations must be consistent with the
purpose of the Clean Air Act).
II. EPA Has Acknowledged That There Is No Current Justification For Imposing the
Compliance Obligation on Refiners and Importers Rather Than Blenders, and
Pledged to Revisit Its Regulation in the Circumstances That Now Exist.
In
2007, when it promulgated rules governing the first RFS program, EPA decided to
impose the compliance obligation on refiners and importers, but not blenders. It did so largely
for administrative convenience, 2007 Rule, 72 Fed. Reg. at 23,923- even as it acknowledged
that refiners and importers do not generally produce or blend renewable fuels at their facilities,
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id
at 23,937, and thus would need to rely
on
the actions of third parties, such as blenders and
ultimate consumers, to satisfy the RFS requirement. See id ( [T]he actions needed for
compliance largely center on the production, distribution, and use of a product by parties other
than refiners and importers. ).
One could question the rationality of requiring one industry to demonstrate, under threat
of signif icant penalties, that another industry has used a certain amount of renewable fuel. See
Am. Petroleum Inst.
v
EPA 706 F.3d 474, 480 (D.C. Cir. 2013) (criticizing regulatory scheme
that applies the pressure to one industry (the refiners) when it
is
another ... that enjoys the
requisite expertise,
plant, capital and ultimate opportunity for profit. ). Nevertheless, the
administrative considerations identified by EPA at least amounted to some kind of justification.
In
2010, however, EPA determined, in its rulemaking implementing the second version
of the RFS program, that the rationale ... for placing the obligation on just the upstream refiners
and importers is no longer valid. 2010 Rule, 75 Fed. Reg. at 14,722. Logic dictated that
blenders, who were the ones using renewable fuel and separating the RINs that could be used
to demonstrate compliance, should bear the compliance obligation. Nevertheless, EPA chose
to adhere to its prior policy and continue to place the compliance obligation solely on refiners
and importers. It did so in order to prevent any possible disruption [of] the RFS program during
the transition from RFS1 to RFS2. Id EPA pledged, however, that it would continue to
evaluate the functionality of the RIN market, and that it would consider revisiting its decision
to impose the compliance obligation
on
refiners and importers if it determine[d] that the RIN
market
is
not operating as intended, driving up prices for obligated parties and fuel prices for
consumers.
Id
Ill. Continuing to Impose the Compliance Obligation Refiners and Importers Is
Arbitrary and Capricious
In
Light of the Methodology for Setting Annual RFS
Requirements Proposed in the 2014 NPRM.
A
The Purpose of the RIN System Was to Facilitate Compliance
by
Refiners
and Importers in a Competitively Neutral Manner Regardless of Whether
Refiners and Importers Themselves Blended Fuel.
For a number of years, the RIN system allowed all refiners and importers equally to
demonstrate compliance, regardless
of
whether they themselves blended any renewable fuels
or instead relied upon third parties to do so. As EPA described it the RIN system was intended
to preserv[e] the natural market forces and blending practices that will keep renewable fuel
costs to a minimum, 2007 Rule, 72 Fed. Reg. at 23,929, and to allow current blending
practices to continue wherein some refiners purchase a significant amount of renewable fuel for
blending into their gasoline while others do little or none.
Id
The RIN system thus provid[ed]
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a means for all refiners to economically comply with the standard.
Id
at 23,929-30. Indeed,
until January 2013,
6
RINs traded for just a few pennies each.
Beginning in January 2013,
6
RIN prices spiked, at one point rising to more than
1
each, and they have remained volatile. As EPA acknowledged, the price spike was largely due
to the approaching
E10 blendwall: RFS statutory volume requirements continue to increase
year-on-year, and have outstripped the economy's ability to absorb renewable fuel.
ee
EPA,
Regulation
o
Fuels and Fuel Additives: 2013 Renewable Fuel Standards, 78 Fed. Reg. 49,794,
49,822 (Aug. 15, 2013) ( 2013 Rule ) ( We recognize that the approaching E10 blendwall and
the related anticipation of future scarcity o RINs
in
the context o currently high feedstock prices
is the primary driver for these price increases. ). In these circumstances, the RIN market no
longer functions properly.
Specifically, high and volatile RIN prices disproportionately disadvantage one subgroup
o
refiners and importers: those who lack any blending capability of their own and who must
acquire RINs on the secondary market
in
order to demonstrate compliance with the RFS
requirements. Whereas refiners who have their own blending capabilities, or are affiliated with
blenders, can obtain the RINs needed for compliance without incurring any cash cost, refiners
without any affiliated blending capabilities are forced to incur significant cash costs to obtain the
RINs they needed. In these circumstances, the RIN system no longer serves its purpose of
preserving the natural market forces and permitting current blending practices to continue
wherein some refiners purchase a significant amount
o
renewable fuel for blending into their
gasoline while others do little or none, thus providing a means for all refiners to economically
comply with the standard. 2007 Rule, 72 Fed. Reg. at 23,929-30. To the contrary, the RIN
system severely penalizes those refiners who happen to lack any blending capability
o
their
own, and bestows a competitive advantage on those refiners who happen to be affiliated with
blenders.
Although the RIN market became dysfunctional early
in
2013, EPA pledged,
in
the 2013
Rule, to address the problem
in
its rulemaking for 2014 (which, by the time the 2013 final Rule
was issued, would be scheduled to begin within a matter of a couple of months). Specifically,
EPA acknowledged in the 2013 Rule that it does not currently foresee a scenario in which the
market could consume enough ethanol sold in blends greater than E 10, and/or produce
sufficient volumes
o
non-ethanol biofuels (biodiesel, renewable diesel, biogas, etc.), to meet the
volumes
o
total renewable fuel and advanced biofuel stated
in
the statute. 2013 Rule, 78 Fed.
Reg. at 49,823. EPA, however, indicated its intention to address that problem in its 2014
rulemaking by lowering the statutory volume requirements to levels that would be reasonably
attainable:
Given these challenges, EPA anticipates that in the 2014
proposed rule, we will propose adjustments to the 2014 volume
requirements, including to both the advanced biofuel and total
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renewable fuel categories. We expect that
in
preparing the 2014
proposed rule, we will estimate the available supply
o
cellulosic
and advanced biofuel, assess the E10 blendwall and current
infrastructure and market-based limitations to the consumption of
ethanol in gasoline-ethanol blends above E10, and then propose
to establish volume requirements that are reasonably attainable in
light
o
these considerations and others as appropriate.
Id EPA's promise to chart a reasonable path forward that appropriately addresses the
blendwall and other constraints, id., left open the possibility that the market distortions of 2013
were temporary and would be resolved going forward by EPA's 2014 rulemaking. See id at
49,822. Thus, although it was arbitrary and capricious for EPA not to have reduced the
statutory volume requirements
in
2013 - as Monroe has argued before the D.C. Circuit,
see
Docket No. 13-1265 - the 2013 Rule suggested that any market dysfunction would be limited to
the 2013 year, and in subsequent years EPA would use its discretion to reduce statutory volume
requirements to avoid such distortions.
B The 2014 NPRM Proposes a Methodology for Setting Annual RFS
Requirements That Has Resulted and Will Result in Elevated RIN Prices.
In
the 2014 NPRM, EPA for the first time proposed a methodology that would guide it
in
setting annual volume requirements below those imposed by the statute - not only for 2014, but
also for 2015 and for the years following. See 2014 NPRM, 78 Fed. Reg. at 71, 734 ( we would
intend this framework to apply not just to 2014, but to later years as well. ).
However, as explained fully
in
Monroe's comments to the 2014 NPRM, the methodology
proposed by EPA fails adequately to address the problem
o
high RIN prices that impose a
differential burden on certain obligated parties. If adopted, the methodology proposed by EPA
in
the 2014 NPRM will entrench for the future a system
in
which RINs impose
an
onerous
financial burden for those refiners and importers who remain unaffiliated with blenders. That
is
because EPA's proposed methodology sets a volume requirement that remains too high, basing
it on overly optimistic predictions and ignoring the incentives EPA itself has created for parties
with ready access to
RINs to horde them as insurance against future uncertainty.
In the 2014 NPRM, EPA seeks to project the volume of ethanol that could reasonably
be
onsumed
as E10 and higher ethanol blends, and would add to that the volume of all non
ethanol renewable fuels that could reasonably be expected to be available. 2014 NPRM, 78
Fed. Reg. at 71738 (emphasis added). But EPA's projections are, as the agency itself
acknowledges, inherently uncertain - they reflect probabilistic predictions that may not be borne
out in reality - and, as a result, the amount of ethanol that could actually be consumed and the
amount of other renewable fuels that actually is available may well vary significantly below
EPA's projections. Parties with access to RINs are able to hedge that risk by banking extra
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RINs; but that means a tighter supply of RINs (and thus higher prices) for those refiners and
importers who must purchase them
on
the secondary market.
The clearest evidence of this
s
the market's reaction since EPA released the 2014
NPRM. The price for 6 ethanol RINs jumped from approximately 20 cents per RIN to
approximately 30 cents per RIN n the weeks following EPA's publication of the 2014 NPRM,
and the price remains at approximately 30 cents per RIN - far above the historical level of
approximately 2 cents per RIN and far above the level that would exist if the price were driven
by market fundamentals rather than speculation. Thus, refiners unaffiliated with blenders
continue to face high cash costs to obtain the RINs they need for compliance.
C
If EPA Adopts the Methodology Proposed
in
the 2014 NPRM, It Would No
Longer Be Appropriate to Impose the Compliance Obligation on Refiners
and Importers.
If EPA finalizes the methodology proposed n the 2014 NPRM - despite the persistence
o
high RIN prices and the resulting competitive disadvantage for obligated parties who must
incur cash costs to purchase their RINs on the secondary market - EPA would be required to
revisit its decision to make refiners and importers, rather than blenders, the obligated parties.
As EPA recognized n 2010, the rationale for imposing the obligation on refiners and importers
no longer
s
valid, and, unlike n 2010, doing so now creates market dysfunction and competitive
injury to refiners and importers who must rely on others to blend renewable fuel. The RIN
system was never meant to penalize refiners or importers simply because they lacked their own
blending capabilities; to the contrary, the RIN system was intended to facilitate compliance by all
refiners and importers regardless of whether they had their own blending capabilities.
Had EPA proposed a methodology for reducing statutory volume requirements that
would on a going forward basis ensure that the market remained sufficiently far from the
blendwall to restore the market to its historic functioning, there would be no need for EPA to
reassess its choice of obligated parties. But because EPA's proposed policy sets volume
requirements at levels that inject significant uncertainty
n
the RIN market, resulting
n
high
prices and competitive injury that is inconsistent with the purpose
o
the RIN system, it would be
arbitrary and capricious for EPA to continue to treat refiners and importers as the appropriate
parties responsible for compliance. See 42 U.S.C. 7545(o)(3)(B)(ii)(I).
EPA has never articulated any rationale for a regulatory scheme that would impose
differential burdens on refiners depending upon whether they are affiliated with blenders;
indeed, those differential burdens simply cannot be squared with the purpose
o
the RIN
system, which was to ensure that the means to demonstrate compliance will be readily
available even for those obligated parties [who do] not have access to renewable fuels or the
ability to blend them, and so must use credits to comply. 2007 Rule, 72 Fed. Reg. at 23,904; id
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Air
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Christopher Grundler
Director Office
o
Transportation and Air Quality
Environmental Protection Agency
William Jefferson Clinton Building
1200 Pennsylvania Avenue N W
Mail Code: 6401A
Washington DC 20460
via email and certified mail)
Bill Charmley
Acting Director Assessment and Standards Division
Office o Transportation and Air Quality
via email)
Byron Bunker
Director Compliance Division
Office o Transportation and Air Quality
via email)
Karl Simon
Director Transportation and Climate Division
Office o Transportation and Air Quality
via email)