EPA: Blend Wall a 'Reality'

Refiners see vindication in Environmental Protection Agency's ethanol volume-cut proposal


WASHINGTON -- In a leaked proposal that would significantly scale back biofuel blending requirements next year, the U.S. Environmental Protection Agency (EPA) said the "blend wall"--the 10% threshold of ethanol-mixed gasoline that is at the crux of the lobbying war--is an "important reality."

The EPA may be handing oil refiners the biggest win of a long battle to beat back the seemingly inexorable rise of ethanol fuel, Reuters said.

The EPA's rationale for a cut in the volume of ethanol that must be blended echoes an argument the oil industry has been making for months: the U.S. fuel chain cannot absorb more ethanol. Few retailers are able to sell ethanol blends beyond the 10% maximum, or willing to take the legal risk that comes with it, they argue.

Proponents of biofuels have argued for years that the blend wall is largely a fiction constructed by an oil industry that doesn't want to cede any more share of a shrinking U.S. gasoline market.

If approved, the proposed cut in the biofuel mandate in 2014 to 15.21 billion gallons from 18.15 billion would mark an historic retreat from the ambitious 2007 Renewable Fuel Standard (RFS) law that charted a path toward ever-greater use of clean, home-grown fuel, which the biofuel industry counts on to underpin bank loans and new factories.

Even though the EPA proposal has not been publicly released or approved by the White House, both sides are gearing up to shift the fight over the future of the country's fuel supply to a new venue: the courts. Last week, two U.S. oil industry groups sued the EPA over its 2013 biofuel targets. On Thursday, their opponents appeared to signal a likely challenge to the 2014 rule.

"Let me be clear: any plan to roll back the targets ... under the guise of addressing the blend wall would be patently unlawful," Bob Dinneen, president of the Renewable Fuels Association (RFA), told the news agency. The RFA has previously argued that Congress need not amend the 2007 law because the EPA has enough flexibility under the law to make changes to reflect market realities. The agency is now exercising some of that discretion, but certainly not as proponents would like.

The law has run up against an unexpected reversal in U.S. gasoline use, an emboldened oil industry saddled with soaring ethanol credit costs and differences over what kind of fuel can be safely used in today's cars, the report said.

The EPA has ruled that gasoline blended with as much as 15% ethanol (E15) is safe for use in cars made after the 2001 model year. But most car warranties only cover use of up to 10% ethanol, or E10. And most gas stations don't sell anything more than E10 due to a lack of infrastructure to distribute higher blends or concerns over liability if motorists use the wrong pump.

The mechanism for the EPA's proposed rollback is an escape hatch called a "general waiver" that Congress built into the 2007 law. This can be used to reduce the volumes in two cases: if enforcing the law were to cause economic hardship; or if it were simply not feasible due to "inadequate domestic supply."

This year, with the blend wall concerns forcing a jump of almost 2,800% in the cost of credits used to enforce the ethanol mandate, the agency itself is proposing for the first time to use a waiver, citing a lack of usable fuel.

Ethanol supply is certainly not the problem. Bouncing back from last year's drought, the corn industry is looking at a record crop this year.

Instead, the agency appears to be viewing the blend wall as a factor: "We interpret the term 'inadequate domestic supply' as it is used under the general waiver authority to include consideration of factors that affect consumption of renewable fuel," the agency wrote in the proposed rules.

"It's a very loose interpretation of the criteria," Dave Juday, a commodity market analyst in Washington, D.C., told Reuters. "I would not be surprised if it was challenged."

Regardless, according to an August 26 draft proposal seen by Reuters, the waiver has enabled the EPA to cut the amount of corn-based ethanol that would be required in 2014 to 13 billion gallons. That is about 6% less than this year and well short of the 14.4 billion gallons required under the 2007 law, but it is in line with a waiver request from two oil groups to cap the ethanol volume at 9.7%, about 12.88 billion gallons.

An EPA spokesperson was not able to comment to the news agency on the proposal. The White House Office of Management & Budget (OMB) must sign off on the EPA's rules before they are released for public comment. It is expected to do so only after the end of the partial government shutdown, said the report.