EPA: 'No' on Moving RFS Point of Obligation

Agency proposes to deny requests to shift obligation downstream, but is this the end of the issue?

WASHINGTON -- Refiners and importers will likely remain obligatory parties under the Renewable Fuel Standard (RFS).

The Environmental Protection Agency (EPA) announced that it was proposing to deny requests to move the point of obligation downstream. Most of the petitions came from independent refiners or groups representing them. As obligated parties under the RFS, they are required to meet certain blending quotas each year. If they fall short, they can buy Renewable Identification Numbers (RINs), or credits representing a gallon of ethanol blended into a gallon of gasoline or diesel.

Some petitioners asked that the point shift to certain unobligated parties—in particular, large fuel retailers who blend at the rack, earning them RINs that they can then sell to obligated parties. This is as the cost of those RINs have risen in the past year as the EPA has increased its renewable fuels blending quotas, which has financially pressured independent refiners who already are seeing slim margins because of low gasoline prices.

In its proposal to deny the petitions, EPA lays out its case:

  • The current structure of the RFS program already incentivizes the production and use of renewable fuels, and petitioners have not demonstrated that moving the point of obligation would increase this use.
  • Obligated parties have several options for acquiring RINs.
  • Changing the point of obligation would increase the complexity and hamper the effectiveness of the RFS.
  • It would also restructure the fuels marketplace, and encourage the newly obligated parties to buy under contract “below the rack” instead of “above the rack” to avoid RFS compliance costs.
  • This would decrease competition among those who buy and sell fuel at the rack, which could increase retail fuel prices and refiners’ profit margins.

The EPA also was not persuaded that unobligated blenders were seeing “windfall profits” from the current system. It has opened a 60-day public comment period before it finalizes its decision.

Several fuel marketing and biofuel groups praised the EPA for its proposal.

“Since the founding of the program, SIGMA and NACS have supported the placement of the point of obligation on those entities that control the composition of petroleum products in the U.S. market,” said Timothy Columbus, counsel to the Society of Independent Gasoline Marketers of America (SIGMA) and NACS. “The associations thank EPA for recognizing the severe harm that changing the point of obligation would have on the American consumer and on the retail fuels market.”

“The current structure appropriately incentivizes marketers to blend additional biofuels and encourages the availability of higher-level ethanol blends to retailers who wish to sell them,” said Emily Skor, CEO of ethanol industry group Growth Energy.

“We are pleased that EPA recognizes that passing this burdensome requirement from one entity to another would add complexity and have negative impacts to a program that we believe is already deeply flawed,” said Frank Macchiarola, downstream group director for the American Petroleum Institute (API). The petroleum industry group, which in the past has supported moving the point of obligation, now supports a legislative fix to the RFS or ending the program.

So is the end of the efforts to move the point of obligation? Tom Kloza, global head of energy analysis for Oil Price Information Service (OPIS), Gaithersburg, Md., would argue “yes.” At the recent 2016 Winsight Outlook Leadership Conference in Scottsdale, Ariz., Kloza said the complexity of a shift downstream makes the idea unpalatable to the EPA.

“In terms of bureaucratic red tape, moving that point of obligation for RINs to the terminal level, it’s like the burden of Sisyphus,” said Kloza. “You’d have so many more parties, so many more people involved in record-keeping.”

He said, however, that “there will be some relief on RINs,” where the EPA may tweak the aggressiveness of its blending recommendations. That said, the system works.

“They do serve a purpose of getting ethanol into gasoline without an absolute mandate,” said Kloza.

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