EPA's Back-Door RFS Waiver?

OMAHA (DTN) -- The Environmental Protection Agency has opened its own "back-door waiver" to the Renewable Fuel Standard by granting retroactive exemptions to RFS obligations to more than a dozen small refiners, including some that are part of highly-profitable refining conglomerates.

"I smell a rat. I smell a rat," said Scott Irwin, an agricultural economist at the University of Illinois who studies the Renewable Fuel Standard.

In examining how EPA is granting exemptions to RFS obligations, Irwin said, "This is real and there are large uncertainty on the market impacts."

Reuters reported Tuesday that Andeavor, one of the country's largest refiners, got an RFS obligation exemption for three of its smaller refineries. The RFS exemption was meant to apply to small refineries producing under 75,000 barrels a day that demonstrate economic hardship. Andeavor as a company posted $1.5 billion in profits last year, Reuters reported.

Reuters reported that two sources informed the news agency of the waiver. EPA declined to confirm the report.

The fact that one of the largest, most profitable refinery companies in the country received a waiver from RFS obligations raises questions about what metric or guideline EPA is using to grant the RFS exemptions. Reuters, like DTN and the Renewable Fuels Association, has had Freedom of Information Act requests rejected by EPA seeking information on refiners being granted waivers to the RFS.

On March 22, EPA emailed DTN, stating that the agency was granting exemptions to refiners for 2016 RFS obligations. "To date, we have granted an annual exemption for 14 small refineries for calendar year 2016, and we are still evaluating 2017 petitions. We have not received 2018 petitions," the EPA spokesman stated.

EPA did not reply to questions by DTN on Tuesday about the Andeavor exemption or how many gallons of total RFS obligation for 2016 EPA has exempted from RFS obligations. There are also questions over whether refiners that were granted waivers were then able to sell unneeded renewable identification numbers (RINs) onto the market.

Since last fall, the petroleum industry has aggressively lobbied the Trump administration to relieve the RFS obligations, which require refiners to invest in biofuels or buy RIN credits through a trading platform.

Biofuel industry leaders, corn growers, oil refiners and senators from multiple states have met repeatedly with Trump administration officials at the White House to look for a so-called "win-win solution" that would lower RIN obligations without damaging biofuel demand.

Last month, EPA also settled with a bankrupt refiner, Philadelphia Energy Solutions, to grant it relief from RFS obligations.

The National Farmers Union, National Corn Growers Association and Renewable Fuels Association all issued statements Tuesday condemning EPA for granting a retroactive RIN exemption to Andeavor.

"EPA has struck again," said Bob Dinneen, president of the Renewable Fuels Association. "It appears the agency has initiated a fire sale on RFS demand. Providing a small refiner waiver to a company like Andeavor is laughable and abandons the commitment of President Trump to protect the RFS. This is an outrageous abuse of the statute."

Roger Johnson, president of the National Farmers Union, told DTN in an interview that granting the exemption to large refiners directly undercuts the RFS. Further, EPA is doing it without shedding light on who gets waivers and how many gallons of biofuels demand are impacted with each waiver, he said.

"It's a real problem," Johnson said. "You have an agency now with a great deal of suspicion around the standards they may or may not be using to grant such waivers. You have to believe if they are granting waivers based just on plant size and not company size or profitability -- that is really not following the intent of the law when it provided for these waivers."

Kevin Skunes, president of the National Corn Growers Association and a North Dakota farmer, said the Andeavor exemption shows EPA's small-refiner exemption process has no market transparency.

"We need the EPA to live up to Administrator (Scott) Pruitt's October commitment to senators to, 'act consistent with the text and spirit of the RFS,' and to do so in an 'open and transparent manner that advances the full potential of this program,'" Skunes said. "We call on the EPA to stop granting these waivers to refiners who make billions of dollars and do not face a true hardship."

Irwin said the RFS waivers could cause EPA to bring down the baseline volume of total fuel used to calculate the RFS. That would have the net effect of making it appear biofuels account for 10% of total fuel, yet EPA would be excluding gallons of petroleum produced by refiners granted waivers.

By doing the waivers retroactively, EPA is lowering the volume demands without the rulemaking process and lowering the price for renewable identification numbers because the market sees those waivers lowering the overall blend volumes moving forward.

"The market is behaving as though these waivers are going to be permanent," Irwin said. "And the EPA is not going to have to account for them in future RVO (renewable volume obligation) computations."

Irwin added that EPA may have to recognize the changes in rules for the next year's RFS rules and obligated blend volumes for refiners, though EPA may try to ignore those retroactive exemptions. "I doubt that would survive a court challenge. I think that would be knocked out very quickly," Irwin said. "But I don't doubt they are in that kind of mood in Pruitt's EPA to try a stunt like this."

Irwin joined those who question the secrecy and lack of transparency behind EPA's actions.

"There's no reason to hide this unless you are trying to use the small-refinery exemption process as a back-door waiver of the ethanol mandate," Irwin said. "Ultimately, this will be revealed by Congress and pried out of EPA and the facts will come out."

Chris Clayton can be reached at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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