USDA Stands With Ethanol on Waivers

OMAHA (DTN) -- EPA has made clear it is not considering public comments on small-refinery waivers and how they affect the Renewable Fuel Standard. But a USDA memorandum sent to EPA on Aug. 15 disputes the EPA's claim the waivers are beyond the scope of the latest RFS volumes proposal.

What's more, USDA's Office of the Chief Economist raised concerns about the EPA electing not to account for small-refinery waivers in the latest RFS blend volumes proposal for 2019.

Publicly, EPA has touted the latest RFS proposed blending volumes for 2019 as proof the agency continues to promote the expansion of biofuels production, all while detailing the number of gallons waived. In addition, the EPA stated in its proposal that there are zero requested waivers for 2019 volumes.

The public-comment period for the 2019 blend volumes ended on Aug. 17. EPA's proposed blend volumes do not factor in the roughly 2.25 billion gallons of biofuels waived in 2016 and 2017. Many commenters suggested EPA could come up with an estimate of potential small-refinery exemptions based on the waiver volumes granted for 2016-17. Instead, EPA factored in zero waiver volumes for 2019.

In a memo to the EPA, USDA's Office of Chief Economist said EPA should factor in an estimate of waived gallons in 2019 when finalizing the blend volumes for 2019.

"The USDA agrees with points in the docket, which suggest that the current methodology in projecting zero small-refinery waivers and volumes in the preliminary rule is inappropriate and results in an analytical inconsistency," the USDA memo says.

USDA added that, without such a waiver estimate, the 2019 proposal "significantly reduces the transparency of EPA operations and increases the uncertainty for market participants. Further, the USDA supports corrective suggestions for using a realistic projection of waived small-refinery volumes of gasoline and diesel production in the docket concerning these points."

The USDA memo said a "lack of a proper or correct estimate of small-refinery waivers causes an inconsistency between the EPA analysis of available supplies used in setting the RVOs (Renewable Volume Obligations), the percent standards, the costs calculated for the program, and EPA assertions that actions are 'RIN (renewable identification number) stock neutral.'"

USDA said EPA's current method leads to "overestimating costs, a failure to hit the total RVO supported by the analysis, and has resulted in a more than doubling of carry in stocks of RINs."

USDA noted that interagency comments appear to suggest using the average of the last two years of available data (2016 and 2017) to project the volumes of gasoline and diesel that will be exempted, while a later draft that includes non-zero values in these lines suggests a proposal to use the most up-to-date 2017 data as an estimate for waivers likely to be given in 2019. USDA stated either one of these methods would be better than leaving a zero figure for waivers.

"The USDA, noting that little of the data on small-refinery data is available to the public for analysis, suggests either method, conducted by the EPA, is likely to be superior to that in the proposed rule where zeros are inserted," USDA said in the memo.

A lack of public information on the number of and size of small-refinery waivers "adds volatility to the RIN markets and reduces market transparency and market efficiency, raising costs of the program," the USDA memo added.

Throughout the public-comment period, farm groups and biofuel supporters also asked EPA to account for the small-refinery waivers by reallocating any waived gallons to other larger refiners.

If EPA provides 2019 estimates of the gallons of gasoline and diesel petroleum fuels not blended with biofuels as a result of waivers, USDA said the volume would be close to 8.18 billion gallons of gasoline and 5.44 billion gallons of diesel marketed without having to blend biofuels.

Thirty-nine senators wrote EPA Acting Administrator Andrew Wheeler on Thursday largely about issues with biodiesel blends. The letter did say, however, "It is critical that EPA appropriately account for any small-refiner economic hardship exemptions that it reasonably expects to grant during the 2019 compliance year in the final rule, or EPA will not be able to fulfill its duty to ensure RVOs are met."

Wheeler said during recent testimony in Congress that the agency would be providing an online "dashboard" with more details about small-refinery waivers.

"Providing additional information, in aggregate to protect individual identities, on a periodic basis and announcing it at the same time that the interested parties are notified, would improve RIN market function," USDA said in the memo.

EPA has taken heat on how it defines "hardship" when it granted waivers. The ethanol industry and others have maintained the waivers were not designed for oil companies that report billions of dollars in profits.

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

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