Energy Law Alert: EPA Publishes Notice of Proposed Rulemaking for the National Renewable Fuels Standard Program
10/10/2006

On Friday, September 22, 2006, the Environmental Protection Agency (EPA) published a Notice of Proposed Rulemaking (NPR) in the Federal Register outlining a comprehensive, long-term Renewable Fuel Standard (RFS) Program. Congress authorized this program as part of the Energy Policy Act of 2005 (EPACT) to increase the use of renewable fuels in motor vehicles, reduce dependence on foreign sources of petroleum, expand the market for agricultural products, and reduce certain carbon dioxide emissions.

To date, the Program has been governed by a direct final rule issued by EPA in December, 2005, which provided guidance to assist gasoline refiners, blenders and importers in collectively complying with the Program in 2006 while EPA developed the comprehensive rule now proposed. Obligated parties, who will be expected to individually comply with the proposed rule once implemented, include refiners, blenders, and importers of gasoline to be introduced into commerce in the contiguous 48 states.

A public hearing will be held in Chicago, IL on October 13, 2006. Comments on the NPR must be received on or before November 12, 2006.

The RFS Program Generally

Section 211(o) of the Clean Air Act (CAA), as amended by Section 1501 of the EPACT, requires EPA to promulgate rules for the RFS Program ensuring that gasoline sold or introduced into commerce in the contiguous 48 states contains an applicable volume of renewable fuel.¹ This volume increases incrementally, on an annual basis, from 4 billion gallons in 2006 to 7.5 billion gallons in 2012. After 2013, levels will be determined by the EPA Administrator in coordination with the Secretaries of Agriculture and Energy.²

Aside from developing compliance provisions to achieve the annual applicable volume, the EPACT also delegated authority to the EPA to issue regulations involving, among other things, the petition of a non-contiguous State or territory to be included in the Program, a credit trading regime, and certain studies. Following is a detailed summary of the major requirements and components of the RFS Program and how EPA proposes to implement it in 2007.

Who is Affected by this NPR?

• Petroleum refiners, bulk stations, terminals, and merchant wholesalers
• Ethyl alcohol manufacturers
• Fuel dealers
• Chemical and allied products merchant wholesalers
• Producers or importers of renewable fuels
• Persons or entities considering the purchase or construction of facilities refining traditional fossil fuels or producing renewable fuels for use in motor vehicles
• Exporters of renewable fuels

How will the EPACT's Annual Volumetric Standard be Satisfied and an Obligated Party's Renewable Volume Obligation be Determined?

Calculating the Applicable Percentage

To ensure the annual volume thresholds are met, EPA will publish in the Federal Register by November 30 of each year an applicable percentage representing the renewable fuel obligation that refiners, blenders, and importers must meet in the following year.³ This percentage is based on the Energy Information Administration's (EIA's) estimate of the total volume of gasoline that will be sold or introduced into commerce in the contiguous 48 states during that year. The applicable percentage reflects the portion of the total fuel sold by each obligated party over the course of the year that must be renewable to satisfy the annual volumes prescribed in the EPACT.⁴ The EPACT prohibits the EPA from imposing a per-gallon obligation on the use of renewable fuel.

Several adjustments must be made in the process of determining the applicable percentage. The EPACT requires the EPA to account for the use of renewable fuel during the prior year by exempt small refineries,⁵ but exempts these entities from RFS Program obligations through 2010. Since small refineries are exempt, the EPA proposes that their total gasoline volumes be excluded from the overall non-renewable gasoline volume used to calculate the applicable percentage. EPA rationalizes that the percentage "should be based only on the gasoline subject to the renewable volume obligation." Since the EIA does not publish separate statistics on small refiners and small refinery volumes, EPA estimates total national consumption attributable to these exempt parties to be 13.5 percent and would subtract this amount from EIA's total projections.

Contrary to the EPACT's requirement, the EPA proposes to not account for the use of renewable fuel by exempt small refineries in meeting the annual applicable volume. Accounting for it would reduce the total volume of renewable fuel required by non-exempt obligated parties and consequentially the applicable percentage for the upcoming year. EPA's rationale is that no data is available to determine the volume of renewable fuel used by small refiners and small refineries during the prior year, the amount of this use is very small, and these entities can at their option receive credits to sell to obligated parties to satisfy their renewable fuel obligation.

Finally, the percentage would be adjusted if Alaska or Hawaii decided to opt into the RFS Program.⁶

Determining an Obligated Party's Annual Renewable Volume Obligation

The applicable percentage applies to all obligated parties individually. Obligated parties include refiners, blenders who combine or blend blendstocks into finished gasoline, and importers of gasoline. An obligated party's annual Renewable Volume Obligation (RVO) is determined by multiplying obligated parties' annual non-renewable gasoline volume by the applicable percentage and then adding any deficit from the prior year.⁷ In determining an obligated party's annual non-renewable gasoline volume, EPA proposes to include all finished gasoline produced or imported, including conventional gasoline and renewable blendstocks for oxygenate blending (RBOB), and unfinished conventional blendstock for oxygenate blending (CBOB). If a blendstock is combined with another blendstock to produce a finished gasoline, RBOB or CBOB, the total volume of the blend is counted in the annual volume to determine the blender's RVO. If a blendstock is added to finished gasoline, only the amount of blendstock added would be counted. Renewable fuels blended into gasoline by any party would not be counted as "gasoline" for purposes of calculating the obligated party's total annual production volume. This is, in part, to prevent downstream blenders of renewable fuels from becoming obligated parties under the RFS and greatly increasing the complexity of the program. EPA seeks comments on this decision to exclude downstream blenders of renewable fuel.

One problem is that an obligated party's total non-renewable gasoline volume cannot be determined with certainty until the end of the year. EPA dismisses this problem under the belief that most obligated parties can determine projected production volumes with little uncertainty based on historical operations, capacity and knowledge of gasoline markets. Unexpected downtimes reducing annual output would have a commensurate reduction in the obligated party's annual RVO.

How will the Program be Implemented in 2007?

The EPA is proposing to adopt 3.71 percent as the applicable percentage for 2007 (up from 2.78 for 2006), because the final rule implementing the RFS Program will not be adopted prior to November 2006 when the applicable percentage would normally be published. Furthermore, the RVO for 2007 would only be based on volumes of gasoline produced or imported prospectively from the effective date of the final rule, with the credit program discussed below beginning at the same time. EPA examines several implementation methods and concludes this method is the most straight forward. The only risk is that the annual statutory mandate (4.7 billion gallons) would not be achieved, but as in 2006, EPA projects this level to be exceeded in 2007. Unlike in 2006,⁸ each obligated party will have an individual (as opposed to a collective) RVO based on the applicable percentage. EPA seeks comments on this method for determining compliance in 2007.

What Qualifies as "Renewable Fuel"?

Under the proposed rule, the EPA interprets the definition of renewable fuel broadly to foster the development of such fuels and reduce dependence on petroleum. Renewable fuels are defined in the EPACT as:

• Biomass: "Motor vehicle fuel that is produced from grain, starch, oilseeds, vegetable, animal, or fish materials including fats, greases, and oils, sugarcane, sugar beets, sugar components, tobacco, potatoes, or other biomass . . ."
• Biogas: "Motor vehicle fuel that . . . is natural gas produced from a biogas source, including a landfill, sewage waste treatment plant, feedlot, or other place where decaying organic material is found . . ."
• Cellulosic biomass ethanol: Ethanol "derived from lignocellulosic or hemicellulosic matter available on a renewable or recurring basis, including dedicated energy crops and trees; wood and wood residues; plants; grasses; agricultural residues; fibers; animal wastes and other waste materials . . . municipal solid waste . . . [and] any ethanol produced in facilities where animal wastes or other waste materials are digested or otherwise used to displace 90 percent or more of the fossil fuel normally used in the production of ethanol."
• Waste derived ethanol: Ethanol "derived from animal wastes . . . or municipal solid waste."
• Biodiesel: Biodiesel (mono-alkyl esters), non-ester renewable diesel, and blending components derived from renewable fuel.

Biomass and Biogas

The EPACT defines biomass as "[m]otor vehicle fuel that is produced from grain, starch, oilseeds, vegetable, animal, or fish materials including fats, greases, and oils, sugarcane, sugar beets, sugar components, tobacco, potatoes, or other biomass . . ." while biogas is defined as "[m]otor vehicle fuel that . . . is natural gas produced from a biogas source, including a landfill, sewage waste treatment plant, feedlot, or other place where decaying organic material is found."

For fuel produced from these two sources, the EPACT requires that it be "used to replace or reduce the quantity of fossil fuel present in a fuel mixture used to operate a motor vehicle." EPA is proposing to consider the fuel as qualifying under the program based on its potential to be used in vehicles. This eliminates the need to track how the gallon of fuel is eventually used, and the obligated party will receive credit toward their RVO despite its use in a non-road application. However, if a producer knows the fuel will be used in boilers or heaters, it does not fit the definition of "renewable fuel."

The above definition of renewable fuel does not require blending. Both renewable fuels blended into conventional gasoline and those used in their neat (unblended) form for use as a motor fuel would qualify for credit. Furthermore, although the RFS Program specifically concerns "gasoline sold or introduced into commerce," the EPACT definition of renewable fuel includes fuels that are not blended in gasoline. For instance, Congress specifically allowed biodiesel to count towards compliance though it does not displace or replace gasoline. The EPA proposes to allow regulated parties to demonstrate compliance based on any fuel meeting the definition of renewable fuel, even if not blended with gasoline.

Cellulosic Biomass Ethanol

Cellulosic biomass ethanol is defined by the EPACT as ethanol "derived from lignocellulosic or hemicellulosic matter available on a renewable or recurring basis, including dedicated energy crops and trees; wood and wood residues; plants; grasses; agricultural residues; fibers; animal wastes and other waste materials . . . municipal solid waste . . . [and] any ethanol produced in facilities where animal wastes or other waste materials are digested or otherwise used to displace 90 percent or more of the fossil fuel normally used in the production of ethanol."

The EPACT's definition encompasses both feedstocks for creating cellulosic biomass ethanol (e.g., rice straw, switch grass, woodchips, etc.), as well as materials that may or may not contain cellulosic materials. EPA intends to treat every gallon of ethanol made from these sources as cellulosic, with the exception set forth, below, and award it credit for 2.5 gallons. Ethanol will be considered cellulosic biomass ethanol even if no cellulosic feedstock is used provided that 90 percent of the fossil fuels used "in the production of ethanol" are displaced with energy created by using digesters or "other waste materials." Thus there are two requirements: (1) the 90 percent displacement threshold; and (2) the energy used to displace fossil fuels must come from a specific source, namely digestion of animal wastes or the use of "other waste material."

In satisfying the 90 percent displacement threshold, EPA interprets the "production of ethanol" only to include fuels consumed on-site, not energy used at phases other than at the plant (e.g., energy used to grow the feedstock and transport it to the facility). Furthermore, the 90 percent offset would only apply to fossil fuels used in the generation of thermal energy rather than electrical energy, because the method of electricity production purchased from off-site is difficult to track and electricity is used for activities unrelated to the production of ethanol. These interpretations ultimately reduce the amount of fossil fuels needing to be displaced in order for ethanol not specifically derived from lignocellulosic or hemicellulosic matter to nevertheless qualify as cellulosic biomass ethanol.

The energy used to displace fossil fuels used in the production of ethanol must be derived from either digestion of animal wastes or the use of "other waste material." EPA interprets the digestion of animal wastes to include methane made from such wastes off-site and then purchased and used at the ethanol plant to generate thermal energy. EPA also interprets "other waste material" to include the direct combustion of waste materials ("waste" does not include wood from plants or trees grown as energy crops) and the use of captured "waste" heat from a neighboring plant. Owners of plants seeking the enhanced credits via the 90 percent offset would be required to keep records of fuel use to ensure compliance. EPA seeks comments on their interpretations, including waste heat in their definition of "other waste materials," and how best to audit such fuel use.

Waste Derived Ethanol

Ethanol derived from animal waste and municipal solid waste are considered waste derived ethanol. These sources appear both in the definition of cellulosic biomass ethanol and waste derived ethanol and provide the exception mentioned above. Ethanol produced from these sources will only be considered the cellulosic biomass ethanol if it contains cellulose or hemicellulose. If not, it will be treated as waste derived ethanol.

Biodiesel

Biodiesel is defined as a fuel substitute produced from nonpetroleum renewable resources meeting the registration requirements established by the EPA under 42 U.S.C. § 7545, including biodiesel derived from animal wastes, including poultry fats and poultry wastes, and other waste materials, or municipal solid waste and sludges and oils derived the treatment of wastewater. This includes both mono-alkyl esters meeting ASTM specification D-6751 and non-esters that are intended for use in engines designed to run on conventional, petroleum-derived diesel fuel and made from the above feedstocks. EPA proposes two separate categories: (1) biodiesel (mono-alkyl esters) and (2) non-ester renewable diesel (e.g., "renewable diesel" produced by the Neste process or diesel fuel produced by processing fats and oils through a refinery hydrotreating process). Any combination would qualify for credit.

EPA also interprets the statutory definition to include "biocrudes"—biologically derived feedstocks such as fats and greases. These would qualify, even if the refined product is not eventually used as a motor vehicle fuel. To counteract this possibility, biocrudes would be given an equivalence value equal to ethanol, rather than that of biodiesel.

How will Different Renewable Fuels be Assigned Equivalence Values?

The EPACT requires every gallon of cellulosic or waste derived ethanol to count as 2.5 gallons toward the RFS requirement, but no other guidance is given as to whether other renewable fuels should be weighted differently. The EPA proposes equivalence values based on the energy content of different renewable fuels and their renewable content vis-à-vis ethanol.9 For instance, corn ethanol is weighted 1.0, biobutanol 1.3, biodiesel 1.5, and non-ester renewable diesel 1.7. The effect of this is to make every physical gallon of renewable fuel with an equivalent value greater than 1.0 count for more than one gallon for compliance purposes. The EPA is also proposing to treat biodiesel created from waste products as equal to cellulosic biomass ethanol as a way of promoting the use of waste products. It would receive a value of 2.5 through 2012. Other factors could be used such as straight volume, life cycle energy, or greenhouse gas emissions (GHG). The EPA seeks comment on these matters.

What Parties are Exempt from the Program and how can States Obtain Waivers?

As noted above, small refineries (less than 75,000 barrels) are exempt from participation through 2010. EPA proposes to extend the exclusion to small refiners, which employ an average of no more than 1,500 people (including all parents and subsidiaries) and produce less than 155,000 barrels per calendar year. Applications for exemption under these categories for 2007 must be submitted by September 1, 2007.

States may petition for a waiver of the requirements upon petition and demonstration that implementation of the RFS Program would severely harm the economy or environment of a state, a region, or the United States, or that there is inadequate domestic supply of renewable fuel. EPA's interpretation appears to be that a waiver could serve to reduce the national quantity of renewable fuel required under the program, but a waiver does not exempt obligated parties within the state from complying if they produce gasoline.

EPA does not plan to provide exemptions for general hardship due to the flexibility provided in the credit trading program, nor will it provide an exemption based on unforeseen circumstances. The latter is because any circumstance disrupting output also lowers the obligated party's RVO for the year proportionally.

How will Compliance be Monitored through a Credit Trading Regime?

Assignment and Form of Renewable Identification Numbers

The EPACT requires a credit-trading regime to allow for flexibility in complying with the RFS Program, rewarding those who over-comply with a marketable commodity, and for purposes of monitoring compliance. The EPA proposes that compliance is demonstrated through the acquisition of Renewable Identification Numbers (RINs) assigned by the producers or importers of renewable fuel to every batch. Though the EPACT is concerned with the volume of renewable fuel used in gasoline for motor vehicles, the EPA believes that mere production of renewable fuel accurately reflects volumes eventually blended into gasoline and consumed in the United States as motor vehicle fuel. The exception is renewable fuel that is exported. Exporters of renewable fuel would be required to retire their associated RINs to ensure RINs claimed for compliance accurately reflect renewable fuel consumed in the contiguous 48 states. Since Alaska, Hawaii and the territories are exempt from the RFS Program, "exporters" of renewable fuel to these states and territories would also be expected to retire the associated RINs unless these states "opt-in" to the RFS Program. Furthermore, EPA believes that a credit program tagged to the point of consumption or even blending for use in motor vehicles would significantly increase the complexity of the program. Producers would be required to use an independent auditor to conduct annual reviews.

Each RIN would consist of a 34-digit code, including the year of production, company ID, facility ID, serial batch number, code for equivalence value, a code for whether it qualifies as cellulosic biomass ethanol or waste derived ethanol, a number representing the total number of gallons in a batch, and a unique number identifying each gallon in that batch. Company and facility IDs would be assigned by EPA during a registration process. Batch RINs would be placed on product transfer documents (PTDs) associated with a batch of renewable fuel as the fuel is transferred and represent "a shorthand" for identifying all the unique RINs assigned to the batch. Gallon RINs are a second number representing each individual gallon of renewable fuel in the batch.

All gallons would have a standard-value (1-to-1) RIN that accompanies the fuel through the chain of commerce and is detached only by an obligated party, a party that converts the renewable fuel into a motor vehicle fuel or one who exports the fuel. If the fuel has an equivalence value greater than 1.0, extra-value RINs would also be generated. These are not required to be assigned to the batch, but instead may be separated by the producer and traded as an independent commodity. If extra-value RINs are assigned to the batch, the number of gallon-RINs would be greater than the actual number of gallons in the batch. Those producing renewable fuel with equivalence value of less than 1.0 would only assign standard-value RINs to a portion of the batch representing the renewable content (e.g., only 4,000 gallons out of a 10,000 gallon batch of ethyl tertiary butyl ether would receive a RIN, since ETBE's equivalence value is 0.4). Producers are required to correct batch volumes to 60°F prior to assigning the RINs to account for fluctuations in batch volumes due to extreme temperature differences using formulas proposed in the NPR.

Obligated parties must acquire sufficient RINs annually to meet their RVO. Excess RINs, acquired either by the purchase of extra-value RINs or by acquiring more renewable fuel than the obligated party's RVO, can be retained by the obligated party and used the following year or sold to another party having a RIN deficit for purposes of complying with the RFS.

Failure to Meet RVO; Carry-Forward and Duration of RINs

A party unable to satisfy their annual obligation or purchase sufficient RINs can carry the deficit forward one year. The deficit will be added to the obligated party's RVO in the subsequent year, and sufficient excess credits must be generated or purchased during that year to achieve full compliance. There are no additional penalties for a deficit carryover, but there are no provisions for a second consecutive deficit carry-over. Since the EPACT allows deficits to be carried forward and requires credits to be valid for 12 months from the time the fuel was produced, the EPA proposes that RINs would be valid for the year in which they were generated or the following calendar year. This proposal risks the preferential use of RINs that are over 12 months old or depression of future actual production and consumption of renewable fuel if significant excess RINs were generated the prior year. To prevent this, the EPA proposes to cap the use of RINs generated the prior year at 20% of the party's current year obligation. An obligated party having old RINs in excess of 20% can still sell them to others, but they could not be used for meeting that obligated party's RVO for the current year. EPA believes this is an appropriate balance between allowing sufficient RINs to be carried over to protect against supply shortfalls and ensuring actual consumption of renewable fuels. Excess RINs that are not used expire. The EPA seeks comment on this approach to the life cycle of RINs and whether the cap should be increased or decreased.

Transferring Fuel and Separating RINs

Prior to reaching an obligated party, a batch of renewable fuel may be owned or stored by any number of parties, including marketers, distributors, and terminal operators. Each transfer of custody or ownership between parties requires the transfer of the RINs associated with the batch and documentation of such transfer on the PTD. Obligated parties would be permitted to separate the RINs as soon as ownership is assumed. A blender will also have the right to separate the RIN from the batch if he actually blends the renewable fuel into finished gasoline and if the RIN had not already been separated by an obligated party. If a downstream customer owns the fuel and the blender has custody, then only the owner could separate the RIN at the time of blending. Once separated, the RIN would no longer be listed on the PTD.

It is foreseeable and likely that renewable fuels in their neat form will never be owned by an obligated party, because they may be transferred directly from a producer to a dealer. EPA proposes to allow anyone owning a renewable fuel in its neat form, with the exception of neat biodiesel (B100), to separate the RIN if it was designated by the producer for use in its neat form as a motor vehicle fuel. Biodiesel in its neat form would not be valid for compliance purposes under the RFS program. EPA requests comments on whether a biodiesel producer should be allowed to separate the RIN from the batch if it could establish that the biodiesel is specifically for use in a motor vehicle in its neat form. Once a RIN is separated from a batch, it becomes freely transferable. There are no limitations on who can hold RINs or the number of times a RIN can be transferred. The EPA intends to allow trading to be controlled by market forces and will only be involved to the extent of monitoring all RIN transfers between parties via a Central Data Exchange.

How RINs are Allocated when Splitting or Merging Batches

When batches are split, the transfer of associated RINs depends on how the RINs were generated and attached to the batch. If the batch is straight ethanol with a 1.0 equivalence value, or the producer separated and retained the excess RINs for renewable fuel with a higher equivalence value, then there is a 1-to-1 correspondence. Any split in the batch means a proportional split in the RINs. If the batch is one representing a renewable fuel with a lower or higher equivalence value (and the excess RINs are transferred with the batch), the EPA proposes to leave it to the parties' discretion on how to split the RINs provided that all RINs are allocated in some form.

EPA proposes two acceptable methods to RIN allocation: (1) proportional; and (2) one-to-one. In batch splitting with a lower equivalence value, the number of RINs assigned to a batch is already fewer than the physical gallons in that batch. After splitting the RINs would be allocated proportional to the split. For instance, a 1000 gallon parent batch with a 0.8 equivalence value would be assigned 800 RINs. If it were split at a ratio of 60-40, the RINs associated with the daughter batches would be 480 (60%) and 320 (40%), respectively. In the one-to-one method, 600 RINs would be allocated to the 600 gallons and the other 400 gallons would only receive 200 RINs, leaving 200 gallons without associated RINs. Proportional batch splitting with higher equivalence values works the same. Using the same 60-40 split on 1000 gallons of cellulosic biomass ethanol (equivalence value 2.5), the 600 gallons would receive 1500 RINs (60% of 2,500 RINs) and the 400 gallons would receive 1000 RINs (40% of the 2,500 RINs). Using the one-to-one method, the 600 gallons would be allocated 600 RINs and the 400 gallons would get the remaining 1900. The EPA seeks comment on these batch splitting protocols and any alternative protocols.

For mergers of batches with different RINs, the EPA proposes that the RINs be listed separately on the PTDs. Discretion is allowed in how the RINs would be divided in any later split of the merged batch, so long as all RINs are assigned in some manner to the daughter batches.

Tracking Compliance: Registration Obligations

Obligated parties must register with the EPA within 90 days after the publication of the final rule. Exporters must also register for purposes of ensuring RIN surrender. EPA intends to use the same forms it uses for existing fuel programs, so parties who have already registered and have a unique company (4 digit) and facility (5 digit) identification number will not be required to re-register. Only basic contact information is required. The registration requirements would be the same for producers and importers, and the EPA expects about 280 registrations in this category. Small domestic producers producing less than 10,000 gallons of renewable fuel would not be required to register, report, or keep records, but failing to do so will preclude them from producing RINs. Any other party who intends to engage in RIN ownership or transactions, but who is not an obligated party, exporter, producer, or importer, must also register. Examples include marketers, blenders, terminal operators, jobbers, etc. These parties will also be assigned a company and facility ID.

Tracking Compliance: Reporting Obligations

Obligated parties, including exporters, will be required to annually submit reports of their previous year's compliance by February 28. These reports include: (1) a demonstration of compliance, including volume of gasoline produced, imported or exported, calculation of their RVO, and any deficit carry-overs from the previous year or to the next year; (2) RIN transactional information for purposes of tracking the transfer, use, retirement and expiration of RINs; and (3) a summary of RIN activities, including total number of RINs owned, used for compliance, transferred and expired. RINs reported by each obligated party will be (1) checked to ensure they are within the two-year lifespan; (2) cross-checked with annual reports of producers generating the RIN to verify its validity; (3) cross-checked with other obligated party's annual reports to prevent double counting; and (4) carry-over RINs would be checked to ensure the 20% cap is not exceeded.

Producers and importers would also be required to submit annual reports by the same date and for the same time period. This submission includes: (1) a report reflecting the generation of RINs, identifying the batch RIN and the gallon RINs generated for each batch; (2) a RIN transaction report listing the RINs they own at the end of the period, RINs acquired from or transferred to parties, and the parties involved in the transaction; and (3) a summary of RIN activities, including total number of RINs generated, owned, transferred, and expired.

Finally, other parties owning RINs would also be required to report annually by February 28. These reports would include: (1) documentation of all RIN transactions similar to that of obligated parties; and (2) a summary of all RIN activities, including the total number of RINs owned, transferred, and expired.

All reports will be signed and submitted electronically using EPA's Central Data Exchange. The information collected will be stored in a database managed by EPA's Office of Transportation and Air Quality (OTAQ).

Tracking Compliance: Recordkeeping Obligations

Whenever a party transfers ownership of renewable fuels subject to the RFS program, the EPA proposes that certain information be included on PTDs. This information includes the name and address of both parties to the transaction, EPA-issued company and facility IDs of both parties, volume of renewable fuel transferred, its location at the time of transfer, and the batch RIN associated with the volume being transferred. Parties transacting in RINs alone must provide the transferee documents containing name and address of the parties to the transaction, the RINs associated with the transaction, and the EPA-issued company and facility IDs. Records relating to RIN transactions, including all compliance reports and PTDs, must be retained by the party for 5 years and provided to EPA's enforcement personnel in a useable format upon request.

What Acts Create Liability and What are the Penalties for such Acts?

Depending on the action and the party's obligation under the RFS Program, the following actions can subject a party to liability:

• Failure to acquire sufficient RINs to meet a party's RVO (obligated parties);
• Failure to assign a proper RIN to renewable fuel (producers and importers);
• Creating or transferring invalid RINs, regardless of the transferor's good faith belief in the RINs' validity;
• Transferring RINs that are not identified by proper RIN numbers (any party);
• Failure to comply with registration, reporting, or recordkeeping obligations when there is an affirmative duty to do so; and
• Causing another party to violate a provision or fail to comply with an affirmative requirement.

Invalid RINs would not count towards the party's RVO, and may result in a penalty. It would be a separate violation if, after deduction, the obligated party fails to meet its RVO. The EPA intends to look at a number of factors in assessing the penalty. EPA will also look first to the producer generating the invalid RIN for purposes of liability and sufficient valid RINs to offset the invalid RINs. If the producer generating the invalid RIN is insolvent or otherwise unable to fulfill the obligation, the obligated party would have to make up the deficit. The EPA proposes that all parties upstream from the point of violation are presumed liable, but seeks comment on this matter.

The penalty and injunctive provisions of Section 211(d) of the Clean Air Act apply to the RFS program. A civil fine is imposed for every day of each violation, and the amount of a party's economic benefit or savings resulting from the violation is also assessed. An obligated party's failure to acquire sufficient RINs to meet its RVO constitutes "a separate day of violation for each day the violation occurred during the annual averaging period." Recall that an obligated party can carry forward a RIN deficit for one year without being in violation. Failure to acquire sufficient RINs to cover both the obligation for the current year and the deficit from the prior year results in non-compliance. It is not entirely clear from this statement how the EPA will assess this penalty in light of the deficit carryover allowance.

EPA's Estimated Impacts of Increased Reliance on Renewable Fuels

The RFS has acted as an important catalyst to increasing the use of renewable fuels, but market forces such as the phase out of MTBE and higher petroleum prices suggest that the use of renewable fuels will far exceed the applicable volumes required by the RFS Program in any given year. The EIA estimates that up to 9.9 billion gallons could be consumed in 2012, rather than the 7.5 billion required by the program. Consequently, the EPA devotes over half of the NPR to assessing the total economic and environmental impacts of increased use of renewable fuels rather than the just the programmatic impacts. Here is a summary of estimated impacts of the increased use of renewable fuels by 2012, with 2004 used as the baseline:

Beneficial Impacts

• Reduce petroleum consumption by 2.3 to 3.9 billion gallons (1.0 to 1.6 percent of the petroleum that would otherwise be used by the transportation sector.
• Reduction of carbon monoxide (CO) emissions by 1.3 to 3.6 percent.
• Reduction of benzene emissions by 1.7 to 6.2 percent.
• Reduction in carbon dioxide (CO2) and greenhouse gas (GHG) emissions by 9 to 14 million tons (0.4 to 0.6 percent).
• Decrease of $3.5 to 5.8 billion in petroleum imports (total petroleum import expenditures in 2012 are estimated to be $698 billion).

Detrimental Impacts

• Increase the cost of a gallon of gas to consumers by between 0.3 and 1.0 cents per gallon.
• Increased Volatile Organic Compounds (VOC) and nitrous oxide (NOx) emissions by between 3.0 and 5.0 percent and 4.0 and 6.0 percent respectively in geographical areas where ethanol was not used in 2004, but nationally combined VOC + NOx emissions will increase between 0.5 and 1.0 percent.
• Increases in ambient ozone levels between 0.06 ppb and 0.2 ppb depending on geography and ethanol use in 2004 impacting the baseline.
• Potential decrease in water quality and increased salinity in farmland due to pesticides and crop conversion.

The EPA seeks comment on a voluntary labeling program to counter some of the detrimental impacts. The label would add a "G" at the end of the RIN to denote if the renewable fuel was produced with a combination of best farming practices and environmentally friendly production methods and facilities.

Submitting a Comment on the NPR

Comments on the NPR must be received by EPA on or before November 12, 2006. If you have any other questions about this update or if you would like our assistance in submitting a comment on the NPR, please contact your Stoel Rives lawyer or one of the following lawyers:

Richard L. Goldfarb at rlgoldfarb@stoel.com or (206) 386-7639

This is a publication of Stoel Rives Energy Group for the benefit and information of clients and friends. This bulletin is not legal advice or a legal opinion on specific facts or circumstances. The contents are intended for information purposes only. Copyright 2006, Stoel Rives LLP.

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¹Renewable fuels are generally defined as motor vehicle fuel produced from plant or animal material, or natural gas produced from a biogas source. This includes ethanol made from starch seeds or sugar, cellulosic biomass ethanol (derived from lignocellulosic or hemicellulosic matter such as wood, plants, grasses, fibers, etc.), waste derived ethanol (derived from animal wastes and municipal solid waste), biodiesel (mono-alkyl esters), non-ester renewable diesel, and blending components derived from renewable fuel. Both renewable fuels blended into conventional gasoline or diesel and those used in their neat (unblended) form for use as a motor fuel would qualify under the rule.

²Cellulosic biomass must compose a minimum of 250 million gallons of the applicable volume of renewable fuels for calendar year 2013 and each year thereafter.

³The EPACT supplied the applicable percentage for 2006 at 2.78 percent, which represents the 4.0 billion gallons of renewable fuel required in 2006. The direct final rule issued in December 2005 clarified that refiners, blenders, and importers are responsible parties for purposes of collectively meeting the default 2.78 percent standard. Each were not individually held to meeting this standard, but any deficit in 2006 would be carried forward to 2007. Given the phase out of MTBE, total ethanol consumption exceeded 4.0 billion gallons in 2005, so no deficit is expected in 2006.

⁴The EPA intends to use EIA's October issue of the Short-Term Energy Outlook publication to project 2007's consumption. These numbers include renewable fuel use, so the EPA intends to subtract the projected renewable fuel volume from the total gasoline volume prior to determining the applicable percentage.

⁵Small refinery is defined as a refinery for which the average aggregate daily crude oil throughput per calendar year does not exceed 75,000 gallons. Small refineries are exempt from the RFS mandate through 2010. Since they are exempt, the EPA proposes that their gasoline volumes be excluded from the overall non-renewable gasoline volume used to calculate the percentage. EPA estimates total national consumption attributable to small refiners to be 13.5 percent and would subtract this amount from EIA's total projections.

⁶The applicable percentage is expressed by the following proposed formula:

RFStdi = 100 × (RFVi – Celli)/((Gi – Ri) + (GSi – RSi) – GEi)
RFStdi = Renewable Fuel standard in year i, in percent
RFVi   =  Nationwide annual volume of renewable fuels required by EPACT
Gi      =  Amount of gasoline use projected in the 48 contiguous states, in year i, in gallons
Ri      =  Amount of renewable fuel blended into gas projected to be consumed in 48 contiguous states, in year i, in gallons
GSi    =  Amount of gasoline projected to be used in Alaska, Hawaii, or a U.S. territory in year i if the state or territory opts in
RSi    =  Amount of renewable fuel projected to be consumed in the exempted state or territory if opt in
GEi    =  Amount of gasoline projected to be produced by exempt small refineries and small refiners in year i, in gallons (through 2010 only)
Celli   =  Beginning in 2013, the amount of renewable fuel that is required to come from cellulosic sources, in year I, in gallons (250 million gallons minimum)

⁷The RVO of an individual obligated party is expressed by the following proposed formula:

RVO = STD x GV + D

RVO   =  Renewable Volume Obligation for that year (in gallons)
STD   =  The RFS applicable percentage for that year
GV     =  The non-renewable gasoline volume produced by an obligated party in that year (in gallons)
D      =  Deficit, that the obligated party may carry forward to the following year (in gallons)

⁸See supra, n. 3.

⁹The EPA calculated the equivalence values using the following formula:

EV = (RRF / REth ) x (ECRF / ECEth )

EV     =  Equivalence Value for the renewable fuel.
RRF   =  Renewable content of the renewable fuel, in percent.
REth   = Renewable content of ethanol, in percent.
ECRF  =  Energy content of the renewable fuel, in Btu per gallon (LHV).
ECEth = Energy content of ethanol, in Btu per gallon (LHV).