Proposed Denial of Petitions for
Rulemaking to Change the RFS
Point of Obligation
£% United States
Environmental Protect
Agency
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Proposed Denial of Petitions for
Rulemaking to Change the RFS
Point of Obligation
Assessment and Standards Division
Office of Transportation and Air Quality
U.S. Environmental Protection Agency
United States
Environmental Protection
^1 Agency
EPA-420-D-16-004
November 2016
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Proposed Denial of Petitions for Rulemaking to Change the RFS Point of Obligation
November 10, 2016
Executive Summary
The Environmental Protection Agency (EPA) has received several petitions requesting that EPA
initiate a rulemaking process to reconsider or change the regulations identifying refiners and
importers of gasoline and diesel fuel as the entities responsible for complying with the annual
percentage standards adopted under the Renewable Fuel Standard (RFS) program.1 This "point
of obligation" for the RFS program was established through a notice-and-comment rulemaking
in 2010 based on the statutory direction in Section 21 l(o)(3)(B)(ii)(I) and (C) of the Clean Air
Act (CAA) to impose the renewable fuel obligation on "refineries, blenders and importers, as
appropriate," while also "preventing] the imposition of redundant obligations."
The petitioners all seek to have the point of obligation shifted from refiners and importers, but
differ somewhat in their suggestions for alternatives. Some request that EPA shift the point of
obligation from refiners and importers to those parties that blend renewable fuel into
transportation fuel. Others suggest that it be shifted to those parties that hold title to the gasoline
or diesel fuel immediately prior to the sale of these fuels at the terminal (these parties are
commonly called the position holders), or to "blenders and distributors". All petitioners argue,
among other things, that shifting the point of obligation to parties downstream of refiners and
importers in the fuel distribution system would align compliance responsibilities with the parties
best positioned to make decisions on how much renewable fuel is blended into the transportation
fuel supply in the United States. Some of the petitioners further claim that changing the point of
obligation would result in an increase in the production, distribution, and use of renewable fuels
in the United States and would reduce the cost of transportation fuel to consumers.
After careful consideration of all relevant information available to EPA on the issue, including
information submitted by petitioners, available fuels market data, and information gathered by
EPA from multiple market participants and interested parties, EPA is proposing to deny requests
to initiate a rulemaking process to reconsider or change the regulations at 40 CFR 80.1406.
However, as an initial step, EPA believes it appropriate to open a public comment process on the
requests for reconsideration or change to the point of obligation in the RFS program.
In this document, we present our rationale for proposing to deny the requests to initiate a
rulemaking process to reconsider or change the regulations. We believe that the current structure
of the RFS program is working to incentivize the production, distribution, and use of renewable
transportation fuels in the United States, while providing obligated parties a number of options
for acquiring the RINs they need to comply with the RFS standards. We do not believe that the
petitioners have demonstrated that changing the point of obligation would likely result in
increased use of renewable fuels. Changing the point of obligation would not address challenges
associated with commercializing cellulosic biofuel technologies and the marketplace dynamics
that inhibit the greater use of fuels containing higher levels of ethanol, two of the primary issues
1 The current regulations can be found at 40 CFR 80.1406.
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that inhibit the rate of growth in the supply of renewable fuels today. Changing the point of
obligation could also disrupt investments reasonably made by participants in the fuels industry in
reliance on the regulatory structure the agency established in 2007 and confirmed in 2010. Any
programmatic advantages to making such a change would need to be certain and substantial in
light of the expected impacts on the program, discussed in more detail below. While we do not
anticipate a benefit from changing the point of obligation, we do believe that such a change
would significantly increase the complexity of the RFS program, which could negatively impact
its effectiveness. In the short term we believe that initiating a rulemaking process to reconsider
or change the point of obligation could work to counter the program's goals by causing
significant confusion and uncertainty in the fuels marketplace. Such a dynamic would likely
cause delays to the investments necessary to expand the supply of renewable fuels in the United
States, particularly investments in cellulosic biofuels, the category of renewable fuels from
which much the majority of the statutory volume increases in future years is expected.
In addition, changing the point of obligation could cause restructuring of the fuels marketplace
as newly obligated parties alter their business practices to purchase fuel under contract "below
the rack" instead of "above the rack" to avoid the overhead compliance costs associated with
being an obligated party under the RFS program. We believe these changes would have no
beneficial impact on the RFS program or renewable fuel volumes and would decrease
competition among parties that buy and sell transportation fuels at the rack, potentially
increasing fuel prices for consumers and profit margins for refiners, especially those not involved
in fuel marketing. EPA is also not persuaded, based on our analysis of available data, including
that supplied by petitioners, by their arguments that they are disadvantaged compared to
integrated refiners in terms of their costs of compliance, nor that other stakeholders such as
unobligated blenders are receiving windfall profits.
In light of the considerable public interest in this matter, EPA is requesting comment on the
petitions and our proposed denial of the requests to initiate a rulemaking process to reconsider or
to change the RFS point of obligation.
There has already been considerable interest expressed in these requests across a wide variety of
stakeholders and EPA has already received a substantial amount of input, including policy
arguments and data-based comments. We have had in person meetings with numerous
stakeholders as well.
We believe that the public comment process we are initiating with this document will benefit
from making EPA's initial thinking on the issues available to the public. EPA will consider the
comments we receive carefully.
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Table of Contents
I. Introduction 5
A. Relevant Parties in the Fuel Market 7
B. Overview of RFS Obligations and Compliance 8
C. Statutory and Regulatory History of the Point of Obligation 9
II. The Current Program Structure Appears to Be Working to Achieve the Goals of the RFS
Program 12
A. RINs are Providing an Incentive for Increasing Renewable Fuel Production, Distribution,
and Use 13
B. Current RIN Prices Are Not Indicative of a Dysfunctional RIN Market, Nor Are They
Increasing the Cost of Gasoline (E10) to Consumers 14
C. The Current Regulations do not Appear to Disproportionately Impact Merchant Refiners or
Provide Windfall Profits for Unobligated Blenders 16
D. EPA Has Not Seen Evidence That High RIN Prices Have or Will Force Merchant
Refiners to Decrease Production or Increase Exports of Obligated Fuels 21
E. A Relatively Small Number of Obligated Parties is Generally Advantageous 22
F. The Current Program Structure Does Not Require Market Repositioning to Achieve
Compliance 24
III. Changing the Point of Obligation in the RFS Program Is Not Expected to Result in the
Increased Production, Distribution, and Use of Renewable Fuels 25
A. The Proposed Changes to the Point of Obligation May Be Outside EPA's Statutory
Authority 26
B. Renewable Fuel Production, Distribution, and Use Does Not Appear to Be Significantly
Limited By Blending Infrastructure 27
C. Changing the Point of Obligation Is Not Expected to Significantly Impact the Retail
Pricing of Fuel Blends with High Renewable Content 29
D. Changing the Point of Obligation Is Not Expected to Significantly Impact the Availability
to Consumers of Fuel Blends With Higher Renewable Content 34
E. The RFS Program Continues to Create a Significant Incentive for Parties to Invest in the
Infrastructure Necessary to Enable Growth in the Use of Renewable Fuels 36
F. Changing the Point of Obligation Would Not Be Expected to Increase Cellulosic Biofuel
Production 37
IV. Changing the Point of Obligation Would Significantly Increase the Complexity of the RFS
Program 37
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A. The Number of Obligated Parties Would Likely Increase if the Point of Obligation was
shifted to "Position Holders" or "Blenders" 39
B. The Potential for Noncompliance would Likely Increase if the Point of Obligation is
Changed 42
C. EPA Would Need to Address Carry-Over RINs and RIN Deficits 44
D. Changing the Point of Obligation Would Require Significant Changes to EMTS and Other
Electronic Systems 45
V. Changing the Point of Obligation Could Cause Significant Market Disruption 46
A. Market Participants Have Made Significant Decisions on the Basis of the Existing
Regulations 46
B. If the Point of Obligation is Changed, Parties Would be Expected To Reposition
Themselves to Avoid RFS Obligations 47
VI. Conclusion 49
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I. Introduction
On March 26, 2010, the Environmental Protection Agency ("EPA") issued a final rule (the
"RFS2 Rule")2 establishing regulatory amendments to the renewable fuel standards ("RFS")
program regulations to reflect statutory amendments to Section 21 l(o) of the Clean Air Act
("CAA" or "the Act") enacted as part of the Energy Independence and Security Act of 2007.
These amended regulations included 40 CFR 80.1406, imposing the obligation for compliance
with the RFS annual standards on refiners and importers of gasoline and diesel fuel.3 These
entities are referred to in the RFS regulations as "obligated parties." Beginning in 2014, some
obligated parties and other stakeholders have questioned whether 40 CFR 80.1406 should be
amended, and a number of them have filed formal petitions for reconsideration or revision of the
definition of "obligated party" in 40 CFR 80.1406, or petitions for rulemaking to amend the
provision.4 Those parties filing petitions for reconsideration also initiated legal challenges of the
2010 rule, alleging that new grounds have arisen enabling them to do so notwithstanding
expiration of the 60-day time period generally provided under CAA 307(d) for challenges to
CAA rules.5 These suits have been stayed pending final action by EPA on the administrative
petitions for reconsideration.
It appears that the petitions for reconsideration of 40 CFR 80.1406 do not meet the statutory
criteria for such petitions set forth in CAA 307(d)(7)(B).6 However, we will treat all petitions
suggesting a change in the RFS point of obligation as petitions for a rulemaking to accomplish
the change(s) requested, and we are initiating a public comment process to aid us in evaluating
2 75 Fed. Reg. 14,670.
3 In imposing the fundamental RFS compliance obligation on refines and importers, the 2010 rule simply continued
the practice established under the original RFS program regulations adopted in 2007, See 72 Fed. Reg. 23900
(adopting 40 CFR 80.1106). However the 2010 rule broadened the number of regulatory parties somewhat to reflect
the new EISA requirement imposing blending requirements on diesel fuel, in addition to gasoline, that is used as
transportation fuel.
4 On January 27, 2014, Monroe Energy LCC ("Monroe") filed a "petition to revise" 40 CFR 80.1406 to change the
RFS point of obligation, and on January 28, 2016, Monroe filed a "petition for reconsideration" of the regulation.
On February 11, 2016, Alon Refining Krotz Springs, Inc.; American Refining Group, Inc.; Calumet Specialty
Products Partners, L.P.; Lion Oil Company; Ergon-West Virginia, Inc.; Hunt Refining Company; Placid Refining
Company LLC; U.S. Oil & Refining Company (the "Small Refinery Owners Ad Hoc Coalition" or "Coalition")
filed a petition for reconsideration of 40 CFR 80.1406. On February 12, 2016, Valero Energy Corporation and its
subsidiaries ("Valero") filed a "petition to reconsider and revise" the rule. On June 13, 2016, Valero submitted a
petition for rulemaking to change the definition of "obligated party." On August 4, 2016, the American Fuel and
Petrochemical Manufacturers (" AFPM') filed a petition for rulemaking to change the definition of "obligated
party." On September 2, 2016, Holly Frontier also filed a petition for rulemaking to change the definition of
"obligated party." These parties are collectively referred to herein as "the Petitioners."
5 See Monroe Energy LLC v. EPA, #14-1014. (D.C.Cir. 2014); Monroe Energy LLC v. EPA, #16-1032. (D.C.Cir.
2016); Alon Refining Krotz Springs, Inc. et al v. EPA. #16-1052. (D.C.Cir. 2016); Valero Energy Cooperation v.
EPA, #16-1055 (D.C.Cir. 2016).
6 Petitioners had an opportunity to submit comments on the point of obligation in both the 2007 and 2010
rulemakings when the current approach was adopted. The possible impact of this decision on incentivizing growth
in renewable fuel use, including incentivizing growth after the clearly anticipated widespread use of ethanol at E10
levels, could have been raised in comments on those rules. Furthermore, to the extent the petitions are based on
grounds arising more than 60 days after promulgation of the rule, such grounds are not a proper basis for a petition
for reconsideration under CAA 307(d)(7)(B).
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the issue.7 This evaluation will be used as a basis for a consolidated response to all petitions
(however styled) and other requests we have received that seek a change in the RFS point of
obligation. For the reasons stated herein, we are proposing to deny all requests to change the
current regulation, and we seek public comment on this proposed denial.
In considering the petitions to change the point of obligation in the RFS program, EPA has
reviewed the large amount of information submitted by the petitioners and has met with them
and other interested parties on numerous occasions. EPA has also met, and heard from, other
participants in the RFS program, including other obligated parties, manufacturers of renewable
fuel, and fuel retailers, who are opposed to revising the regulations. This is a very controversial
issue that raises complex questions about the appropriate structure of the RFS program. The
various parties present a wide range of different information and analyses, and offer different
interpretations of the same information and analyses. We lay out our assessment of the
information in this document.
EPA's primary consideration here is whether or not the requested change would improve the
effectiveness of the program to achieve Congress's goals, which are to increase energy security
and reduce emissions of air pollutants contributing to climate change by requiring increasing
percentages of the nation's transportation fuel be made from renewable fuels. Each of the
individual elements discussed in the analysis below, such as the number and nature of the parties
that would become obligated if EPA were to grant the petitioners' requests, are considered in
light of how each of these elements are expected to contribute towards or detract from the overall
effectiveness of the program. As described in more detail below, we believe that changing the
point of obligation as proposed by petitioners and other stakeholders would likely significantly
increase the number of obligated parties in the RFS program. Many of these newly obligated
parties would be smaller companies, many of whom may be unfamiliar with the requirements of
obligated parties under the RFS program. The administrative compliance burden of RFS
obligations would also represent a proportionally greater burden to these smaller companies than
they currently do for refiners and importers of gasoline and diesel who employ engineers,
traders, accountants, attorneys, and auditors to demonstrate and verify compliance. It would also
increase the burden associated with administering the RFS program, and would likely inhibit
EPA's enforcement abilities while at the same time opening up new opportunities for additional
types of fraudulent behavior in a program that has already seen instances of fraud. Additionally,
while petitioners generally claim that changing the point of obligation would result in the
increased production, distribution, and use of renewable fuels in the United States, we believe
that changing the point of obligation would at best result in a negligible increase in the
production, distribution, and use of renewable fuels in the United States, and would more likely
result in a decrease in the production, distribution, and use of these fuels, particularly in the near
term. EPA is also not persuaded, based on our analysis of available data, including that supplied
by petitioners, by their arguments that they are disadvantaged compared to integrated refiners in
terms of their costs of compliance, nor that other stakeholders are receiving windfall profits.
7 We take no position at this time on whether petitions associated with judicial challenges to the RFS2 rule satisfy
the criterion in CAA 307(b)(1) that they be "based solely on grounds arising after" the 60-day period following
notice of promulgation of CAA rules, or whether the petitions for review were filled within 60 days after new
grounds arose. We intend to consider the substance of the administrative petitions filed with the Agency whether or
not the criteria specified in CAA 307(b)(1) for late challenges to Agency rules are satisfied.
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Finally, changing the point of obligation would do nothing to incentivize the research,
development, and commercialization of cellulosic biofuel technologies critical for the growth of
the RFS program in future years. Each of these issues is discussed in greater detail below. In
light of the considerable public interest in this matter, EPA will provide an opportunity for a 60-
day period following issuance of this proposal for the submission of public comments, and will
review these comments before taking a final action. We welcome comment on all aspects of our
analysis and discussion, and particularly welcome the submission of data to support commenters'
statements.
A. Relevant Parties in the Fuel Market
Gasoline and diesel fuel are produced at domestic refineries or imported to the United States.
There are a wide variety of paths and associated business models by which fuel reaches
consumers. Refineries distribute some of the fuel they produce by truck directly from the
refinery's loading rack. Refineries generally distribute their remaining production through
pipeline, barge, or rail, in which case the fuel goes through one or more distribution terminals.
This fuel may be sold by the refinery when it leaves the "refinery gate" or at a location
downstream from the refinery on its distribution path. All transportation fuel moves through the
"rack." The "rack" refers to the truck loading facility at a distribution terminal or refinery.
Generally, wholesale purchasers, marketers or distributors receive fuel at the refinery or terminal
rack and distribute that fuel to end users or retailers.8 These parties may purchase fuel upstream
of the terminal rack (e.g., directly from the refinery) and handle the logistics of fuel distribution
themselves. They may instead purchase fuel at product terminals (either above or below the
rack), relying on the refiner or other entity to handle all of the logistics and blending
requirements, generally under contract. A "rack seller" is a party who owns fuel immediately
before "the rack." The Internal Revenue Service collects excise tax from rack sellers, and refers
to them as "position holders." While these terms can be used interchangeably, we have elected
in this document to refer to these parties as "position holders.
Some refiners are involved in fuel distribution, blending, and/or marketing as well as refining,
and these entities are referred to as "integrated refiners." In contrast, "merchant refiners" are
those that market only a small portion the fuels they refine (and in some cases do not market any
fuel), often selling the fuel to other parties at the refinery gate for distribution and marketing.
Most refiners do both, marketing only a portion of their refined products. Choices on which
market segments to participate in and to what degree continually evolve over time in the
industry, as profits among the various market segments likewise vary considerably over time.
"Downstream blenders" refers to parties who blend renewable fuel into gasoline or diesel fuel
after the fuel has left the refinery. Downstream blending may occur at fuel terminals, bulk
storage facilities, and at retail stations; in addition, renewable fuel can be "splash blended" into
trucks. Blending of renewable fuel can also occur at the refinery, and this is often referred to as
8 Fuel marketers generally refers to parties that sell fuel to distributors or end users at the rack. Fuel wholesalers
refers to parties that buy fuel in bulk, generally above the rack, and sell this fuel to retail station owners or end users,
or distribute the fuel to retail stations they own. Fuel distributers refers to parties that transport fuel from the rack
(either at terminals or refineries) to retail stations. Many different parties, including refiners, can operate as
marketers, wholesales, and/or distributers depending on market conditions.
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"upstream blending." The term "blender" can also be used to describe parties that combine non-
renewable blendstocks downstream of the petroleum refinery to create finished gasoline.
B. Overview of RFS Obligations and Compliance
Each year, to ensure that required volumes of renewable fuel are met, EPA calculates and
establishes percentage standards based on the volume targets established in the CAA (which are
adjusted by EPA as appropriate using its waiver authorities), and projections from the
Department of Energy of gasoline and diesel consumption for the coming year. To comply,
obligated parties can purchase and blend the requisite volumes of renewable fuels into the
petroleum derived transportation fuels they produce. However, to allow the market to function
more efficiently and avoid market disruption, in implementing the statutorily-required credit
program, and assist obligated parties in meeting their individual renewable fuel volume
obligations ("RVOs"), EPA established, through a transparent public rulemaking process, a
system for the generation and use of Renewable Identification Numbers ("RINs"). RINs are
effectively credits that are generated upon production of qualifying renewable fuel and ultimately
used by obligated parties for compliance. Renewable fuel producers generate and assign RINs to
the renewable fuel they produce, and the RINs specify by a "D-code" the renewable fuel
category applicable to the fuel, as determined by the feedstock used, fuel type produced and
GHG emissions of the fuel, among other characteristics.9 The assigned RINs accompany the fuel
sold by renewable fuel producers, and can only be separated from the fuel by a subsequent owner
of the fuel who is an obligated party or a renewable fuel blender. Once separated, the RINs can
be freely traded as a separate commodity from the renewable fuel. Obligated parties accumulate
RINs over the course of the year, either by buying renewable fuel with assigned RINs that they
separate and retain for compliance, or by buying RINs that others have separated on the open
market.
The annual RVOs for a given obligated party are calculated by multiplying the obligated party's
total annual production and import of gasoline and diesel fuel by the four annual percent
standards.10 Each obligated party must obtain sufficient RINs of each category to demonstrate
compliance with its individual RVOs for the four annual standards. Compliance is accomplished
on an annual average basis, through a single annual compliance report to EPA identifying the
RINs acquired and retired for that year's compliance. Thus, compliance under the RFS program
requires the obligated parties to understand how to calculate their individual obligations based on
9 There are 5 different D-Codes for RINs in the RFS program. D3 RINs can be generated for cellulosic biofuel,
which must be produced from cellulosic biomass and achieve a GHG reduction of at least 60%. D4 RINs can be
generated for biomass-based diesel (including both biodiesel and renewable diesel) and must achieve a GHG
reduction of at least 50%. D5 RINs can be generated for advanced biofuels, which are any renewable fuel that
achieves a GHG reduction of at least 50%. D6 RINs can be generated for conventional renewable fuels (primarily
corn ethanol) and must achieve a GHG reduction of at least 20%, unless the production facility is grandfathered. D7
RINs can be generated for cellulosic diesel, which is any fuel that meets the requirements for both cellulosic biofuel
and biomass-based diesel.
10 There are separate, but nested, standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and
renewable fuel.
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the four standards, and then to plan for their annual compliance demonstration through RIN
acquisition, through trading or through blending, over the course of the year. There are also
associated registration, reporting and recordkeeping requirements.
C. Statutory and Regulatory History of the Point of Obligation
On July 29, 2005, Congress passed the Energy Policy Act of 2005, amending the Clean Air Act
to create a statutory obligation for the use of renewable fuel in gasoline. The statute envisioned
EPA adoption of annual percentage standards designed to increase renewable fuel use over time,
and specified that the obligation for compliance with those standards would fall on "refineries,
blenders, and importers, as appropriate." PL 109-58 August 8, 2005 and CAA
21 l(o)(3)(B)(ii)(I). Although the program was expanded to apply to diesel fuel and otherwise
significantly modified in 2007 through the Energy and Independence Security Act ("EISA"), this
component of the statute remained unchanged. In enacting EISA, Congress stated that the goals
of the statute include moving the United States toward "greater energy independence and
security," and increasing "production of clean renewable fuels."11 The amended statute
established greenhouse gas emission reduction requirements for qualifying renewable fuels, and
increasing annual renewable fuel volume targets to be achieved through application of annual
percentage standards by EPA that also take into account the expected consumption of gasoline
and diesel fuel. The statute required EPA to establish a regulatory program, and specified that the
program must include a number of program flexibilities, including a credit program for those
who over-comply with the annual standards, and a temporary exemption for small refineries
(through 2010) that could be extended by EPA on a case-by-case basis upon demonstration by a
small refinery of disproportionate economic hardship.
On September 22, 2006, EPA published a proposed rule to establish the regulatory framework to
implement the RFS program. EPA proposed that obligated parties responsible for compliance
with the annual percentage standards would be parties producing or importing gasoline: i.e.,
refiners and importers. EPA specified that those blenders who only added renewable fuel to
gasoline would not be obligated parties.12 EPA noted that there were approximately 1,200
ethanol blenders, as compared to 100-200 refiners and importers and stated that adding these
ethanol blenders as obligated parties would "greatly expand the number of regulated parties and
increase the complexity of the RFS program beyond that which is necessary to carry out the
renewable fuels mandate under the Act."13
EPA received comments supportive of EPA's proposed definition of obligated parties from the
Society of Independent Gasoline Marketers of American and the National Association of
Convenience Stores (SIGMA/NACS), ExxonMobil, Baker Commodities, Griffin Industries,
11 Energy Independence and Security Act of 2007, PL 110-140, December 19, 2007.
12 71 Fed. Reg. 55552, 55573-4. Blenders who produce gasoline through combining blendstocks are considered
refiners under EPA regulations and would therefore be obligated parties.
13 Id. at 55573.
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Methanol Institute (MI), and API. EPA did not receive any comments suggesting a different
approach.14
On May 1, 2007, EPA published a final rule establishing the regulatory RFS program. This rule,
generally referred to as "RFS1", finalized the proposed definition of "obligated party" as refiners
and importers of gasoline.15
Soon after establishing the final RFS1 regulations, Congress substantially amended the RFS
program through the Energy Independence and Security Act of 2007.16 Notably, Congress did
not alter the provision specifying that compliance with the RFS percentage standards would be
the responsibility of "refineries, blenders and importers, as appropriate." Congress did, however,
expand the program to cover diesel fuels, increased the categories of renewable fuels to four, and
specified additional environmental attributes for qualifying fuels, including required reductions
in lifecycle greenhouse gas emissions.
On May 26, 2009, EPA proposed amendments to the RFS program regulations to reflect the
significant statutory changes enacted as part of EISA.17 EPA proposed to retain the same
approach to the RFS point of obligation as had been used in RFS1, but to expand it to include
diesel producers and importers as obligated parties, consistent with EISA's addition of diesel fuel
as an obligated fuel. EPA also solicited comment on two possible alternatives: (1) making
blenders who add oxygenate to RBOB and CBOB obligated parties with respect to those fuels
rather than the refiners and importers of RBOB and CBOB,18 and (2) moving the point of
obligation for all gasoline and diesel to parties who supply finished transportation fuels to retail
outlets or wholesale purchaser-consumer facilities. In raising these issues for public comment,
EPA noted that the approach adopted under RFS1 was based on an expectation that there would
be an excess of RINs at low cost, and that they would be freely traded between parties needing
them such that obligated parties would have ample opportunity to acquire them. EPA also
explained that in adopting the approach under RFS1 EPA had found that the designation of
ethanol blenders as obligated parties would have greatly expanded the number of regulated
parties and increased the complexity of the program beyond that which was necessary to carry
out the fuels mandate required by the program. EPA questioned whether, with the expanded
mandates required under EISA, parties with excess RINs would tend to retain them for future
compliance rather than sell them freely, and also hypothesized that most or all blenders would be
regulated as RIN holders under the new program and questioned whether also making them
14 SIGMA/NACS commented that in the final rule EPA should clearly distinguish between "blenders" and
"oxygenate blenders" to avoid confusion or misinterpretation as to which parties have renewable volume
obligations, and also urged EPA to clarify that blending biodiesel into diesel fuel is not considered a "blender"
which has an RVO. In response to this comment, EPA pointed to its regulations which clearly only placed the
obligation on refiners and importers that produce gasoline or import gasoline, including the limited subset of
blenders who blend petroleum blendstocks into finished gasoline. Regulation of Fuel and Fuel Additives:
Renewable Fuel Standard Program Summary and Analysis of Comments. EPA420-R-07-006, 2-13—2-14.
15 72 Fed. Reg. 23900.
16 Energy Independence and Security Act of 2007, PL 110-140, December 19, 2007.
17 74 Fed. Reg. 24904.
18 Conventional blendstock for oxygenate blending (CBOB) and reformulated blendstock for oxygenate blending
(RBOB) are produced by refineries and can be blended with 10% ethanol to produced finished conventional and
reformulated gasoline respectively.
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responsible for compliance with the percentage standards would be only a small additional
burden. EPA indicated that under the expanded program, there might be disparities in the ability
of merchant and integrated refiners to acquire RINs. As a result of these considerations,
although proposing to retain the definition of obligated party (refiners and importers) from RFS1,
EPA also solicited comment on whether a change in that definition might be appropriate, and
would more evenly align a party's access to RINs with that party's obligations under the RFS2
program.19
On March 26, 2010, EPA issued a final rule establishing the amended RFS program structure
reflecting the EISA amendments.20 EPA summarized the comments it had received on the point
of obligation issue, noting that some refiners favored a change from the proposed approach of
retaining the obligation on refiners and importers, while others did not. In contrast to the RFS1
proposal, EPA received many differing comments from interested stakeholders on this issue.
Several parties suggested that blenders or other downstream parties should become obligated
parties because they control blending and that without such a change refiners and importers
would find it difficult to acquire RINs. Still others suggested that the obligation should be placed
on parties who supply finished transportation fuels. Downstream blenders and other downstream
parties, as well as renewable fuel producers and some members of the petroleum industry,
generally opposed a change, citing the burden such a change would pose to small businesses, and
the added unnecessary complexity it would add to the RFS program. EPA concluded that the
concerns expressed in the NPRM and in comments suggesting a change in the definition of
obligated party, did not, on balance, warrant a change, stating:
We continue to believe that the market will provide opportunities for parties who
are in need of RINs to acquire them from parties who have excess. Refiners who
market considerably less gasoline or diesel than they produce can establish
contracts with splash blenders to purchase RINs. Such refiners can also purchase
ethanol from producers directly, separate the RINs and then sell the ethanol without
RINs to blenders. Since the RFS program is based upon ownership of RINs rather
than custody of volume, refiners need never take custody of the ethanol in order to
separate RINs from volumes that they own. Moreover, a change in the designation
of obligated parties would result in a significant change in the number of obligated
parties and the movement of RINs, changes that could disrupt the operation of the
RFS program during the transition from RFS1 to RFS2.21
Nevertheless, because concerns over the liquidity of the RIN market still existed at the time,
EPA also stated that "[w]e will continue to evaluate the functionality of the RIN market [and]
[sjhould we determine that the RIN market is not operating as intended, driving up prices for
obligated parties and fuel prices for consumers, we will consider revisiting this provision in
future regulatory efforts."22
19 74 Fed Reg 24904, 24963.
20 75 Fed. Reg. 14,670.
21 75 Fed. Reg. 14,670.
22 Id.
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EPA promulgated 40 CFR 80.1406 stating that "[a]n obligated party is any refiner that produces
gasoline or diesel fuel within the 48 contiguous states or Hawaii, or any importer that imports
gasoline or diesel fuel into the 48 contiguous states or Hawaii during a compliance period."
As mentioned above, in requesting that EPA reconsider the point of obligation for the RFS
program, petitioners claim that the justifications given by EPA in the final 2007 and 2010 rules
that placed the point of obligation on the refiners and importers of gasoline and diesel are no
longer valid. For the reasons described below, we disagree.
In establishing the RFS program, Congress put in place a policy to effect a substantial
transformation in the fuels market; stakeholders on all sides have strongly held views on whether
and how that transformation should occur. However, nearly all stakeholders have communicated
to EPA about the desire for greater certainty and stability in the RFS program. As discussed
further below, EPA believes that a change in the point of obligation would be a substantial
disruption that has the potential to undermine the success of the RFS program simply as a result
of increasing instability and uncertainty in programmatic obligations, and therefore the
proponents of such a change bear the burden of demonstrating that the benefits are sufficiently
large and likely that the disruption associated with such a transition would be worthwhile.
II. The Current Program Structure Appears to Be Working to Achieve the Goals of the RFS
Program
In their petitions requesting that EPA change the point of obligation in the RFS program, the
petitioners discuss several perceived shortcomings of the RFS program. The petitioners
generally attribute these shortcomings, in whole or in part, to EPA's decision to place the point
of obligation on the refiners and importers of gasoline and diesel fuel, rather than parties
downstream of the refiners and importers. These claimed shortcomings include, among others,
the failure of the RFS program to achieve the statutory volumes of renewable fuel (requiring the
use of EPA's waiver authorities) and higher than anticipated RIN prices leading to higher fuel
prices for consumers, negative impacts on merchant refiners, and windfall profits for unobligated
blenders of renewable fuel. The petitioners conclude that the RIN market, and by extension the
RFS program, is not operating as intended, and therefore EPA should re-visit the point of
obligation in the RFS program.
After reviewing the information submitted by the petitioners, along with additional information
gathered by EPA, we disagree with a number of the factual assertions and arguments put forward
by the petitioners, and do not agree with their policy arguments that changing the point of
obligation would enhance the effectiveness of the RFS program to achieve Congress's goals.
Evidence suggests that despite the necessary use of EPA's waiver authorities in recent years, the
RIN market, and the RFS program as a whole, are generally working to increase supplies of
renewable fuel, albeit at a pace slower than Congress established, and that a change in the point
of obligation is not likely to enhance the achievement of the program's goals. The RFS program
is providing a significant incentive for the continued growth in the production, distribution, and
use of renewable fuels in the transportation fuel market in the United States, and changing the
point of obligation would not enhance that incentive. With the exception of cellulosic biofuels,
renewable fuel production and use in the United States have increased significantly, and are
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projected to reach 99.3% of the statutory volume for non-cellulosic biofuels in 2016. RIN prices
themselves have not resulted in higher transportation fuel prices for consumers or
disproportionate harm for merchant refiners.23 Finally, there is no evidence that merchant
refiners have resorted to the extreme measures suggested by the petitioners, such as decreasing
fuel production or exporting the fuel they produce,24 in an effort to minimize their RFS
obligations. We believe that RINs are currently available to meet compliance needs, and we see
no reason to indicate that this dynamic will change in the future.
A. RINs are Providing an Incentive for Increasing Renewable Fuel Production,
Distribution, and Use
Since the adoption of the current RFS regulations in 2010, the RFS program has provided a
significant incentive for growth in the production, distribution, and use of renewable
transportation fuels in the United States. While some commenters cited EPA's use of our waiver
authorities to reduce the required volumes of renewable fuel in 2014-2016, as well as our
proposed use of similar authorities with respect to required volumes for 2017, as evidence that
the RFS program is not working effectively to achieve its stated goals, we believe that the RFS
program has been generally successful at achieving these goals. As discussed in more detail in
Section III below, we do not believe that changing the point of obligation would result in an
increase in the production, distribution, or use of renewable fuels. Based on data collected
through the EPA Moderated Transaction System (EMTS),25 the production and import of
renewable transportation fuel in the United States has increased from approximately 7 billion
ethanol-equivalent gallons in 2010 to almost 18 billion ethanol-equivalent gallons in 2015, the
most recent year for which data are available. This represents an increase of over 150% in just
five years. While there are many factors that have contributed to the growth of renewable
transportation fuel production and imports in the United States in recent years, including federal
and state tax credits for certain types of renewable fuels and federal grants and loan guarantees
for advanced biofuel production facilities, many stakeholders have regularly cited the RFS
program as a primary reason for making investments in both the production and distribution of
renewable fuels.26
Despite these successes, in our recent final rule establishing annual RFS percentage standards for
2014-2016, EPA exercised the statutory waiver authorities to reduce the required renewable fuel
23 While RIN prices are expected to impact the price of fuels with relatively greater or lesser renewable content
(increasing the price of fuels with low renewable content such as E0 or B0 and decreasing the price of fuels with
high renewable content such as E85 or B20), on balance they are not expected to increase the total cost of fuel to
consumers.
24 While gasoline and diesel exports have increased in recent years we believe that these increases are attributable to
favorable crude oil and natural gas prices in the United States relative to the rest of the world, rather than an effort to
avoid RIN costs. We note that despite these higher export volumes, the supply of gasoline and diesel to the United
States has not changed (see Section II.D below).
25 RIN generation data are available publicly at https://www.epa.gov/fuels-registration-reporting-and-compliance-
help/public-data-renewable-fuel-standard.
26 For example, see comments on the proposed RFS standards for 2017 from the National Biodiesel Board (EPA-
HQ-OAR-2016-0004-2904) and Dana Gustafson of Marquis Energy (EPA-HQ-OAR-2016-0004-3498) and a Letter
fromRaceTrac to Administrator McCarthy, received August 17, 2016.
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volumes from those specified in the statute due in part to an anticipated inadequate domestic
supply of qualifying renewable transportation fuels.27 The shortfall in the supply of renewable
fuels, as compared to the statutory volume targets, is primarily a result of lower than expected
production of cellulosic biofuels due to the challenges experienced with the development and
commercialization of cellulosic biofuel production technologies, as well as challenges associated
with increasing the supply of renewable fuel to consumers associated with distribution and use of
renewable fuels. The petitioners generally focused on the limitations to the distribution and use
of renewable fuels, claiming that changing the point of obligation would address these
limitations and allow for greater volumes of renewable fuels to be used. They did not address
the impacts that such a change would be likely to have on the production of cellulosic biofuels.
The expected production and use of cellulosic biofuel in 2016, however, is just 5.4% of the
statutory volume (i.e., 230 million ethanol-equivalent gallons expected production compared to a
statutory volume of 4.25 billion gallons), while the expected production and use of non-
cellulosic renewable transportation fuels in 2016 is 99.3% of the volume envisioned by Congress
in EISA.28 Required biodiesel volumes for 2016 are 90% greater than the statutory prescribed
minimum volume, and for 2017 the required volume is 100% greater than the statutory
minimum.29 The RFS program, operating under the existing regulations, has been demonstrably
effective at making significant progress towards achieving the statutory goals, and in some cases
exceeding these goals. The challenges to further growth in the commercial scale production of
cellulosic biofuels and the infrastructure necessary to facilitate additional biofuel use are not
related to the point of obligation under the RFS program, but rather are the result of research,
development, and production challenges described in detail in the final rule establishing the
standards for 2014-2016 and in the proposed rule to establish standards for 2017.30 Beyond
2016, over 85% of the growth in the statutory RFS volumes is intended to be cellulosic biofuel.
With their access to capital and expertise in developing and commercializing fuel production on
a large scale, we believe the current obligated parties are better positioned to address the ongoing
challenges of commercializing cellulosic biofuel production than downstream parties. Changing
the point of obligation of the RFS program would do nothing to address the significant
challenges associated with the commercialization of cellulosic biofuel, nor would it be expected
to benefit the production, distribution, and use of non-cellulosic transportation fuel in the United
States, as detailed further below.31
B. Current RIN Prices Are Not Indicative of a Dysfunctional RIN Market, Nor Are
They Increasing the Cost of Gasoline (E10) to Consumers
27 For a full discussion of EPA's waiver authorities see the Final Rule establishing the 2014-2016 RFS standards (80
FR 77,420, Dec. 14, 2015).
28 The statutory volumes for total renewable fuel and cellulosic biofuel in 2016 are 22.25 and 4.25 billion gallons
respectively, with a difference of 18 billion gallons that may be satisfied by non-cellulosic biofuels. The volumes
established by EPA in our December 2015 final rule for 2016 for total renewable fuel and cellulosic biofuel are
18.11 and 0.23 billion gallons respectively, with a difference of 17.88 billion gallons that may be satisfied by non-
cellulosic biofuels.
29 Compare CAA 21 l(o)(2)(B)(v)(l billion gallon minimum) with 75 FR at 77496, Table III.D.5-1 (specifying
volume requirements of 1.9 and 2.0 billion gallons for 2016 and 2017).
30 80 FR 77,420 (Dec., 14, 2015) and 81 FR 34778 (May 31, 2016).
31 As discussed in more detail in Section III.C below, changing the point of obligation is also not expected to impact
the market dynamics currently limiting the distribution and use of E85.
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One of the issues cited by the petitioners as evidence that the RIN market, and more generally
the existing RFS regulations, are not operating as intended is the current price of RINs, which
some petitioners have characterized as being indicative of a dysfunctional RIN market. While a
low RIN price may be perceived as advantageous, especially to parties with obligations to
acquire RINs, the RFS program was designed to effect a fundamental change in the fuels
marketplace. The incentives provided by the price of RINs is the mechanism used to effect this
change, and therefore RIN prices that effect the intended change are beneficial to program
success rather than an indication of dysfunction. As discussed in a memorandum prepared in
support of the proposed RFS annual standards for 2014-2016, EPA does not believe that the D6
RIN prices32 observed in recent years are indicative of a dysfunctional RIN market.33 Rather,
there are structural reasons why D6 RIN prices increased. In 2013 the required volumes under
EPA's RFS standards exceeded levels that could met via the relatively simple blending of 10%
ethanol into gasoline (in addition to the blending of other biofuels such as biodiesel). Increased
demand for RINs (due to higher standards), and the comparative difficulty of increasing the
supply of RINs through the blending of ethanol at levels beyond 10% (or alternatively the
purchase of more expensive non-ethanol renewable fuels) drove D6 RIN prices higher. Fuels
such as biodiesel and E85 require a greater financial incentive to be offered at attractive prices to
consumers, and the RFS program was designed to provide this incentive. Rather than reflecting
a dysfunctional RIN market, higher RIN prices simply reflect the increasing cost of supplying
additional renewable fuels to the marketplace through higher level ethanol blends and/or non-
ethanol renewable fuels along with the increasing demand for RINs that results from higher RFS
standards.34 In other words, higher RIN prices reflect the greater degree of difficulty (and cost)
of getting ever-greater volumes of renewable fuel into the transportation fuel pool - the explicit
goal or the RFS program.35
EPA does not believe that changing the point of obligation would significantly impact the
economics of selling E85 or non-ethanol renewable fuels, nor would it significantly impact the
supply of available RINs (for reasons discussed below). We therefore do not believe that
changing the point of obligation is likely to result in the lower D6 RIN prices observed in 2012
or earlier. The price of RINs will continue to vary in the marketplace in response to a variety of
32 Renewable fuel producers generate different types of RINs, depending on a number of factors including the
feedstocks and production processes they use to produce renewable fuels, the type of fuel they produce, and the
GHG reductions for these fuels relative to the gasoline and diesel fuel they replace. D6 RINs are generated for
conventional biofuel, the vast majority of which is corn ethanol, with some additional D6 RINs being generated for
biodiesel from grandfathered facilities and other fuels. Prior to 2013, D6 RIN prices were generally less than 5 cents
per RIN. D6 RIN prices rose significantly in 2013, and have remained higher than the prices observed prior to 2013.
33 See "A Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their Effect," Dallas Burkholder,
Office of Transportation and Air Quality, US EPA, May 14, 2015, and Letter from API to EPA Administrator
McCarthy, August 18, 2016.
34 Uncertainty, whether related to the level of the RFS standards for any given year or the RFS program as a whole,
can further serve to increase the volatility of RIN prices in the market. Some volatility may be inevitable, but
excessive volatility may, as discussed further below, increasing uncertainty related to the RFS program could be one
likely outcome of changing the point of obligation.
35 We note that RIN prices are influenced by a variety of factors, including underlying commodity market prices
such as corn, ethanol, oil, and gasoline prices. Another factor influencing their price, as described, is the level of the
standard and the ease with which higher-level ethanol blends can be produced and used in the market.
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factors. A return to the D6 RIN prices observed in 2012 would only be expected in the near term
if the required volumes of renewable fuel were dramatically reduced to volumes that do not
exceed those which can be satisfied by blending ethanol into gasoline to produce E10 blends.
One petitioner also implies that higher RIN prices lead to higher fuel prices for consumers.36
When D6 RIN prices first rose substantially in 2013, attention turned to whether and how such
RIN price increases affect consumer fuel prices. EPA assessed this issue using available data
and concluded that while increasing RFS standards may increase transportation fuel prices if
renewable fuels are more expensive than the petroleum fuels they replace on an energy-
equivalent basis, RIN prices themselves were not expected to have a significant impact on retail
fuel prices.37 External, non-EPA assessments similarly concluded that increased RIN prices had
not had a significant impact on retail gasoline (E10) prices.38 When RIN prices rise, the price of
the petroleum blendstocks produced by refineries also rise to cover the increased RIN costs, in
much the same way as they would rise in response to higher crude oil prices. The effective price
of renewable fuels (the price of the renewable fuel with attached RIN minus the RIN price),
however, decreases as RIN prices increase. When renewable fuels are blended into petroleum
fuels these two price impacts generally offset one another for fuel blends such as E10 with a
renewable content approximately equal to the required renewable fuel percentage standard.
Higher RIN prices also generally result in higher prices for fuels with lower renewable content
(such as E0 or petroleum diesel) and lower prices for fuels with higher renewable content (such
as E85 or B20). The cost of the RIN therefore serves as a cross-subsidy, reducing the price of
renewable fuels and increasing the price of petroleum based fuels in transportation fuel blends,
thus incentivizing increased blending of renewable fuels into the transportation fuel pool. In this
way the RINs also help provide a price signal to consumers to help achieve the Congressional
goals of greater renewable fuel production and use. Fuels with higher renewable content are
relatively cheaper to consumers, while fuels with lower renewable content are relatively more
expensive. The higher the RIN prices are, the more significant the potential price discounts for
fuels with higher renewable content. This retail price discount for fuels with a relatively high
renewable content is enabled by higher prices for fuel blends with little or no renewable fuel
content.
C. The Current Regulations do not Appear to Disproportionately Impact Merchant
Refiners or Provide Windfall Profits for Unobligated Blenders
In requesting that EPA change the point of obligation petitioners claim that the current point of
obligation negatively impacts refiners that do not blend renewable fuels and/or do not sell fuel at
the rack. They generally claim that this negative impact is due to these refiners incurring a high
cost for RINs purchased to comply with their RFS obligations. They contrast this with what they
say is the situation facing integrated refiners, whom they state are acquiring RINs for free by
36 Valero Petition for Rulemaking, June 13, 2016. Page 18.
37 "A Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their Effect," Dallas Burkholder, Office
of Transportation and Air Quality, US EPA. May 14, 2015.
38 Knittel, Christopher R., Ben S. Meiselman, and James H. Stock. The Passthrough of RIN Prices to Wholesale and
Retail Fuels Under the Renewable Fuel Standard. Working Paper 21343. NBER Working Paper Series. Available
online .
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blending renewable fuels. Petitioners also argue that unobligated fuel blenders (such as large
retail fuel chains or fuel distributers and refiners that market more fuel at the rack than they
refine) are selling excess RINs and generating windfall profits. Several other parties have
submitted documents to EPA disputing these claims.39
We have assessed the data available on this issue and believe that the data do not support the
petitioners' arguments. We believe that merchant refiners are generally not uniquely adversely
impacted (relative to integrated refiners).40
To understand why this is the case, we must consider the fundamental argument about cost
disparities that petitioners and merchant refiners present to EPA. Merchant refiners argue that
due to their position in the market as refiners with little or no blending and/or sales of fuel at the
rack, their sole RFS compliance option is to purchase unattached RINs (that is, RINs that have
already been separated from renewable fuel). Merchant refiners typically purchase these RINs on
the market and retire them for compliance purposes; a large merchant refiner can spend
considerable sums to purchase these RINs, and they typically point to these sums as an
expenditure that represents a net cost to the company.41 Some merchant refiners then argue that
their integrated refiner competitors, by contrast, do not face such costs, arguing that integrated
refiners acquire RINs "for free" when they purchase renewable fuel with an attached RIN. They
argue that this dynamic results in a fundamental inequity between two types of RFS obligated
parties: those that pay large sums to acquire RINs on the open market, and those that obtain RINs
"for free." Moving the point of obligation, petitioners argue, would help address this inequity. To
understand why this argument is flawed, it is helpful to examine the underlying market dynamics
in more detail.
It is indeed the case that merchant refiners generally acquire the RINs necessary for compliance
with their RFS obligations by purchasing separated RINs, rather than purchasing renewable fuel
with assigned RINs. Because of this, merchant refiners are therefore able to directly track the
costs associated with acquiring the RINs they need for compliance and cite these costs in their
financial and accounting statements. When RIN prices are relatively high these apparent costs
can be significant, especially for merchant refiners that refine large volumes of obligated fuels.
Less obviously apparent, however, is the impact of the RFS program on the market price for the
petroleum blendstocks that merchant refiners sell. As discussed further below, all refiners and
importers of gasoline and diesel fuel incur costs to comply with RFS obligations. This is true
whether the refiners and importers acquire RINs by blending renewable fuels or purchasing
separated RINs - meaning no fundamental inequity exists. Moreover, because all refiners and
importers have RFS obligations in proportion to the fuels they produce or import, they all have
similar costs of compliance related to the RFS program, and they all seek to recover those costs
39 See Letter from RaceTrac to Administrator McCarthy, August 17, 2016; Letter from QuikTrip to Administrator
McCarthy, August 17, 2016; Presentation from Murphy USA to EPA, August 16, 2016.
40 Our reasons for not believing that merchant refiners are uniquely impacted by the RFS program are summarized
below. For further detail see "A Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their Effect,"
Dallas Burkholder, Office of Transportation and Air Quality, US EPA. May 14, 2015.
41 For example, see comments from CVR Energy on the 2017 RFS standards proposed rule (EPA-HQ-OAR-2016-
0004-0213).
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through the pricing of their product. Stated another way: merchant refiners can indeed expend
significant funds to purchase RINs needed to demonstrate compliance with the RFS program, but
the cost is offset by a corresponding increase in the price of the fuel they sell. That market price
reflects the cost of RINs. The same dynamic applies to both merchant and integrated refiners.
In their petition, Valero, while generally acknowledging their efforts to recover RIN costs
through higher prices for their petroleum blendstocks,42 nevertheless claims that the RFS
program leaves them at a disadvantage relative to integrated refiners. They argue that while both
merchant and integrated refiners receive higher prices for their petroleum blendstocks as a result
of the RFS obligations, merchant refiners must use this additional income to purchase RINs for
compliance while integrated refiners acquire the RINs they need for compliance "for free" by
blending renewable fuels.43 This argument is illogical as it simply ignores the cost that
integrated refiners pay to acquire RINs.
Unlike merchant refiners, integrated refiners generally acquire most of their RINs by purchasing
renewable fuel with attached RINs. After blending the renewable fuel with petroleum
blendstocks to produce finished transportation fuel, integrated refiners separate the RINs and
keep them to demonstrate compliance, or in some cases sell excess RINs to other obligated
parties.
While the integrated refiners generally do not purchase RINs directly, it is not the case that they
acquire these RINs for free. They no more receive the RIN for free than one receives an engine
for free when purchasing a car. In examining wholesale prices for gasoline blendstocks, ethanol,
and blended E10, EPA found that the listed prices for blended E10 were consistently lower than
the price that would be expected based on the selling prices of the component fuels.44 In other
words if we were to ignore the RIN revenue, parties that produce E10 by blending gasoline
blendstocks with ethanol would be losing money on every gallon of E10 they produce. A gallon
of E10 is generally produced by blending 0.9 gallons of gasoline blendstock (usually CBOB or
RBOB) with 0.1 gallons of ethanol. The listed price for E10, however, was lower than the price
of 0.9 gallons of gasoline blendstock plus 0.1 gallons of ethanol. Thus integrated refiners are
selling blended E10 for a lower price than they could receive for the component fuels (petroleum
blendstock and ethanol) to acquire the RINs that can be separated and retained if they sell
blended E10. Integrated refiners therefore experience the cost of acquiring RINs when they sell
blended fuels for a lower price than the blend components, while merchant refiners experience
RIN costs when they purchase separated RINs. In each case there is a cost to the refiners to
acquire RINs, and in each case they recover this cost through higher petroleum blendstock
prices. In a presentation to EPA, Murphy USA discussed this market reality, stating that the RIN
prices supported a negative "spot-to-rack margin."45 They are purchasing petroleum blendstocks
from refiners for a higher price than they can recover for this product when sold at the rack as
42 For example, see Valero Petition for Rulemaking, June 13, 2016. Page 18. In more recent communications with
EPA Valero has questioned the ability for merchant refiners to recover the full cost of the RIN through the price of
their petroleum blendstocks under current market conditions.
43 For example, see Valero Petition for Rulemaking, June 13, 2016. Page 16.
44 "A Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their Effect," Dallas Burkholder, Office
of Transportation and Air Quality, US EPA. May 14, 2015.
45 See Presentation from Murphy USA to EPA, August 16, 2016.
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blended E10 but maintaining profitability through RIN sales. This observed market practice
supports the findings by EPA and other parties that despite the higher prices of petroleum
blendstocks resulting from higher RIN prices, the costs of transportation fuel to consumers have
not increased as Valero has claimed.46
While EPA continues to believe that refiners, including merchant refiners, are generally able to
recover the cost of RINs through the prices they receive for the petroleum blendstocks they sell,
we also acknowledge that there are many diverse factors that impact each individual refiner's
profitability and their ability to recover their full cost of production (including crude oil costs,
labor costs, capital costs, regulatory and compliance costs, etc.). These factors include, but are
not limited to, the refinery's location, their access to various types of crude oil, the local demand
and competition for refined products. In recent years a number of factors have led to an
oversupply of refined gasoline and diesel in the United States. In such a market we would expect
significant pressure on refining margins as the supply of refined products outpaces demand and
refiners compete with one another to find markets for their products (potentially including
exports) and maintain market share. These market conditions are expected to result in reduced
profit margins for refiners, and in some cases refiners may struggle to remain profitable. In
evaluating whether or not to change the point of obligation, however, it is important to consider
whether these challenges are caused by the current point of obligation in the RFS program
(rather than more broad market conditions), and whether changing the point of obligation would
be expected to address these challenges. Based on the information discussed above, we do not
believe the challenges faced by some refiners in the current market are the direct result of their
designation as obligated parties in the RFS program.
EPA also examined claims made by the petitioners that unobligated blenders were reporting
windfall profits by selling RINs. The petitioners primarily supported these claims by referencing
the financial statements of companies that acquire RINs by blending renewable fuels and who
sell these RINs to obligated parties, but are not obligated parties themselves.47 EPA does not
believe that the information presented by the petitioners substantiates their claims that
unobligated blenders are generating windfall profits from RIN sales. First, we note that the fact
that companies report income for RIN sales does not indicate that these companies are receiving
a windfall from the RFS program. This is equivalent to claiming a company's reported sales are
equivalent to their profits, while ignoring their expenses to acquire the good sold. While it is
true that for companies such as Murphy USA who sell a significant number of RINs their
"revenues are impacted by [their] ability to generate revenues from activities such as blending
bulk fuel with ethanol and bio-diesel to capture and subsequently sell Renewable Identification
Numbers,"48 this does not mean that these companies receive a windfall profit from RIN sales.
Such an assessment ignores costs that the company realized in order to acquire these RINs, such
as lower fuel margins than would have been realized if the party did not blend renewable fuels
46 "a Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their Effect," Dallas Burkholder, Office
of Transportation and Air Quality, US EPA. May 14, 2015 and Knittel, Christopher R., Ben S. Meiselman, and
James H. Stock. The Passthrough of RIN Prices to Wholesale and Retail Fuels Under the Renewable Fuel Standard.
Working Paper 21343. NBER Working Paper Series. Available online .
47 The parties most commonly cited by the petitioners are Murphy USA and Casey's General Stores.
48 Murphy USA, Inc., U.S. SEC Form 10-K for the financial year ended December 31, 2015.
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and any investments in infrastructure that the company has made to enable them to blend
renewable fuels and distribute these fuel blends. Statements from Murphy USA cited in the
AFPM petition to support AFPM's claim that non-obligated blenders are realizing windfall
profits from RIN sales in fact support EPA's views of the market. In a recent earnings call the
President of Murphy USA stated "if you add the combination of the gross margin from product
supply and wholesale and the RINs and divide over the total retail gallons sold, you actually see
a fairly consistent incremental $0,025 per gallon over the past two years."49 In other words,
overall fuel supply margins (including RIN sales) have been relatively consistent despite the
significant increase in RIN prices. This supports EPA's view that RIN costs and revenues must
be viewed in combination with other product supply and wholesaling margins.
EPA recognizes that there are many factors that affect the profitability of participants in the fuels
market, and disagrees that the available information supports a conclusion that RIN revenues are
leading to windfall profits. In 2014 and 2015 Murphy USA reported RIN sale revenues of $93
million and $118 million respectively. If this income represented windfall profit we would
expect that the net income of Murphy USA would be approximately $100 million per year higher
than it was prior to the significant increase in RIN prices in 2013. In fact, while Murphy USA's
profits in 2014 and 2015 of $244 million and $176 million50 were significantly higher than in
2012 ($84 million), they were significantly less than net profits in 2011 ($324 million).51
Further, statements from Casey's General Stores and Murphy USA contradict the notion that
RIN sales represent windfall profits for unobligated blenders. Murphy USA reported that in the
third quarter of 2014 income received from RIN sales offset negative product supply and
wholesale margins.52 This statement is in line with statements from Murphy USA cited above
and EPA's view of the market explained in the preceding paragraph, that companies which blend
renewable fuels with petroleum blendstocks to produce finished transportation fuel must
purchase petroleum blendstocks at a higher price that reflects the cost of the RIN, and sell
blended transportation fuel at a lower price that reflects their ability to separate and sell the RINs
associated with the renewable fuel, to offer finished fuel at a competitive price. In effect, these
parties sell the finished transportation fuel at a loss (or a much smaller margin than would be
sustainable in a market without RIN obligations) in order to obtain RINs. In their annual report
filed in June 2015, Casey's General Stores directly stated that their general pricing practice is to
price to their competition,53 a practice EPA has repeatedly stated we expect is the general
practice in competitive markets. We believe this competitive pricing behavior is incompatible
with the windfall profits suggested by the petitioners.
49 Transcript of Murphy USA First Quarter Earnings Call, Andrew Clyde, President, Murphy USA, Thompson
Reuters (Feb. 4, 2016). Citation from AFPM's petition for rulemaking, August 4, 2016. (page 15).
50 Murphy USA net profit numbers for 2014 and 2015 from Murphy USA, Inc., U.S. SEC Form 10-K for the
financial year ended December 31, 2015.
51 Murphy USA net profit numbers for 2011 and 2012 from Murphy USA, Inc., U.S. SEC Form 10-K for the
financial year ended December 31, 2013.
52Murphy USA Inc. Reports Third Quarter 2014 Results. Yahoo! Finance, November 5, 2014. Available online
.
53 Casey's General Stores, Inc., Annual Report (Form 10-K) (June 26, 2015).
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EPA also examined the available data to assess whether or not obligated parties that acquire
RINs by purchasing separated RINs, rather than blending renewable fuels, are able to recover the
cost of these RINs in the price of the petroleum blendstocks they sell. In their petition, Valero
acknowledges this ability for refiners to recover the cost of acquiring RINs through higher prices
for gasoline and diesel they produce than would be the case with lower RIN prices.54 Empirical
data also support this argument. Data clearly show higher market prices for RFS-obligated fuels
(gasoline and diesel blendstocks sold for use in the United States) when compared to those of
unobligated fuels that are very similar (such as gasoline and diesel sold for export, or heating oil
and jet fuel).55 Before accounting for any potential RIN price impacts, one would expect
obligated and unobligated fuels to have very similar market prices because of their very similar
fuel properties. Gasoline is nearly identical whether used domestically or sold for export, and
heating oil and diesel are very similar save the fact that diesel fuel carries a RIN obligation.
However, in recent years, as RIN prices have become elevated, data show a gap opening up
between the price of domestic gasoline and exported gasoline, and between the price of diesel
and heating oil. The price of the obligated fuels is higher and the gap corresponds, for the most
part, with RIN prices. Obligated parties - whether they are merchant refiners or integrated—are
charging more for domestic gasoline and diesel to ensure they recoup the costs associated with
RIN prices. So while a merchant refiner is directly paying for the RINs they buy on the market,
they are passing that cost along in the form of higher wholesale gasoline prices.
We believe that it is unlikely that any party, including both unobligated blenders and integrated
refiners, would be able to realize windfall profits from RIN sales in the highly competitive fuel
sales markets in the United States. Because we believe the cost of RINs is recovered by all
obligated parties, whether they purchase separated RINs or acquire RINs along with renewable
fuels they produce or purchase, we do not believe increased prices for RINs lead to competitive
imbalances among different obligated parties, as suggested by petitioners.56
D. EPA Has Not Seen Evidence That High RIN Prices Have or Will Force Merchant
Refiners to Decrease Production or Increase Exports of Obligated Fuels
In their petition, Valero suggested that if EPA does not change the point of obligation of the RFS
program it could lead to obligated parties, particularly merchant refiners, decreasing their
production of obligated fuels or increasing their exports of refined products in an effort to
minimize the RFS obligations. This is not a new idea, as obligated parties have been suggesting
that this could be a potential outcome of increasing RFS standards since the beginning of the
program. Despite these warnings, and even with increasing vehicle fuel efficiency in the United
States in previous years, the significant increase in both the RFS standards and RIN prices have
not resulted in obligated parties taking these actions, as seen in the following graph. Were high
54 Valero Petition for Rulemaking, June 13, 2016. Page 18.
55 See "A Preliminary Assessment of RIN Market Dynamics, RIN Prices, and Their Effect," Dallas Burkholder,
Office of Transportation and Air Quality, US EPA. May 14, 2015 and Letter from QuikTrip to Administrator
McCarthy, August 17, 2016.
56 We also note that profitability for parties that blend renewable fuels is not necessarily an undesirable result of the
RFS program, as long as this profitability is not at odds with the general goals of increased renewable fuel supply in
the United States.
21
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RIN prices to have this effect, one would expect to see a drop in fuel supply beginning in 2013,
when RIN prices spiked.
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The lack of any impact on finished gasoline and diesel supply to the United States is not
surprising, since as was discussed in Section III.B.2 above, data reviewed by EPA show that
obligated parties are generally receiving higher prices for fuels they produce that are subject to
an RFS obligation (gasoline and diesel fuel sold for use in the United States), which offsets the
cost of compliance with the RFS program. By contrast, if they export the gasoline and diesel
fuel, they would not receive the higher value resulting from the compliance costs associated with
the RFS program. Companies make decisions about which market segments to participate in for
a variety of reasons, but we believe the demand for transportation fuel in the United States is
strong enough that refineries and importers will continue to meet demand on a competitive basis,
even if participating in the market incurs RFS obligations.
E. A Relatively Small Number of Obligated Parties is Generally Advantageous
In the 2007 RFS1 rule, EPA indicated that it considered it preferable to place the point of
obligation on a smaller number of refiners and importers rather than on a larger number of
downstream blenders. This is primarily because placing the obligation on a smaller number of
parties with significant assets generally results in a more efficient, and therefore more effective
program. In the proposed RFS2 rule we noted that blenders would likely be regulated as RIN
holders under the expanded program, and questioned whether also making them obligated parties
would significantly increase their regulatory burden. After considering comments, we chose in
the final RFS2 rule to maintain the RFS1 approach, noting, among other reasons, that changing
the point of obligation to include blenders could lead to disruption of the program in the
transition of RFS1 to RFS2. We have evaluated this issue anew in light of additional experience
22
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implementing the program. Under the current system, it is renewable fuel producers who
generate RINs, and it is the refiners and importers of gasoline and diesel fuel who must use them
to demonstrate compliance. Obligated parties have an incentive to ensure the validity of the
RINs they purchase, since if they are subsequently found to be invalid, the obligated parties may
face civil penalties as well as an obligation to purchase and retire an equal volume of substitute
valid RINs. While EPA is engaged in compliance and enforcement activities to ensure the
validity of RINs in the marketplace, the sheer volume of RINs and RIN transactions makes it
critical to also leverage the participation of obligated parties in policing the RIN market. In
practice, the "buyer beware" RFS program relies considerably on the ability and commitment of
obligated parties to assess the validity of RINs and each obligated party depends on the ability of
the other obligated parties to assure credible RINs since the RINs can be, and often are, separated
from the renewable fuel for which they were generated. In addition, refiners have significant
compliance requirements related to environmental, safety, and health concerns, and the expertise
they have developed in maintaining compliance contributes to the success of the RFS program.
Refiners and importers generally have greater resources that enable them to provide oversight of
the RIN generators to help ensure that the RINs being traded in the marketplace are valid. They
have invested significantly since the finalization of the RFS regulations to develop compliance
processes and expertise in these markets. Changing the point of obligation would potentially
disrupt the systems developed by these parties, and would require that newly obligated parties
make the necessary investments to enable compliance with their new RFS obligations. This
could take a significant amount of time and represent a significant financial burden to the new
obligated parties, especially as we expect that many would be smaller companies with fewer
resources than the existing obligated parties.
In contrast, we believe that many position holders and blenders are relatively small entities
without the personnel or expertise available to fill the role currently played by obligated parties
in policing the validity of the RINs in the market. While it is possible that they would develop
this expertise over time, the relatively small size of many of these entities may mean that the
important market-policing function currently performed by obligated parties could be largely
compromised by changing the point of obligation. This result is more likely considering that the
current obligated parties tend to have larger assets that could be put at risk from non-compliance,
and therefore take compliance with the RFS very seriously. Placing the RFS compliance
obligations on refiners and importers also reduces the overall cost associated with the RFS
program, as these parties benefit from economies of scale and can better spread the costs
associated with RIN acquisition and oversight over greater quantities of RINs.
In addition to these benefits to the program, a smaller number of obligated parties significantly
decreases EPA's resource requirements associated with the administration of the RFS program.
It reduces the number of annual compliance reports that must be reviewed by EPA each year,
and reduces the complexity associated with determining the volumes of non-renewable fuel for
which each obligated party is responsible. This allows for more effective implementation and
enforcement of the RFS program. In addition, we believe it is preferable to place the RFS
23
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obligation on larger companies with greater resources who are better positioned to comply with
the RFS standards.
We note that if we had compelling evidence in front of us that placing the RFS obligation on a
larger number of renewable fuel blenders or position holders would increase the production,
distribution, and use of renewable fuels, then a potentially higher number of obligated parties on
its own would not be a reason to retain the current point of obligation. In light of the reasons
discussed above, however, and because we don't think shifting the point of obligation would lead
to higher renewable fuel production and use, we believe that placing the obligation on a smaller
number of refiners and importers is preferable.
F. The Current Program Structure Does Not Require Market Repositioning to
Achieve Compliance
One of the petitions EPA received requesting a change in the point of obligation in the RFS
program took issue with language in previously published EPA documents suggesting that one
potential avenue for obligated parties to acquire RINs is the purchase or construction of
downstream blending assets. The petitioner emphasized the challenges associated with the
acquisition of such assets. They further claimed that this suggestion reflects a lack of
understanding of the complexities of the fuel market, and implicitly suggests that investment in
blending infrastructure is the only solution for merchant refiners to comply with the RFS.
EPA strongly disagrees with the petitioner's assessments of EPA's previous statements. In the
document referenced by the petitioner, EPA notes that the acquisition of downstream assets is
merely one option open to obligated parties who seek an alternative to purchasing separated
RINs necessary for compliance. The fact that ownership of positions at terminals and access to
pipeline capacity57 has continually changed over time suggests that similar changes are possible
in the future, if parties were motivated to pursue these options. Most importantly, however, EPA
disagrees with the statement that our suggestion that acquiring downstream assets as one possible
option open to obligated parties implies that ownership of these assets, as well as ownership of
hydrocarbon at the time when renewable fuel is blended (generally at the rack), is the only option
for acquiring the RINs needed for compliance with the RFS obligations. EPA created the RIN
system in accordance with Congressional direction to allow for the generation and use of credits
in the RFS program.58 Purchasing separated RINs remains an option available for all parties to
acquire the RINs that are needed by obligated parties. The active market for RINs, which
includes a significant stock of carryover RINs, demonstrates that RINs are available to parties
who wish to purchase them. We firmly believe that the RIN market is capably fulfilling this
intended purpose of creating an avenue for obligated parties to comply with their RFS
obligations by purchasing RINs, rather than requiring the acquisition of distribution and blending
infrastructure and/or ownership of petroleum fuels at the rack. In this way, the RIN market
enables compliance with RFS obligation without disrupting the fuels marketplace. Rather than a
57 While the ownership of positions at terminals and pipeline capacity are not necessary to enable ownership of
gasoline or diesel blendstocks at the rack, ownership of these assets is one way for obligated parties to retain
ownership of petroleum blendstock to the rack, where it can be blended with renewable fuels.
58 See CAA 211(o)(5).
24
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necessity, the acquisition of downstream infrastructure to enable direct access to RINs through
the blending of renewable fuels at the rack remains one of several options. Parties may also
purchase separated RINs in the RIN market, enter into contracts with other parties that blend
renewable fuels to obtain RINs, and purchase renewable fuel with attached RINs, separate the
RINs, and resell the renewable fuel without RINs in order to acquire the RINs needed to comply
with the RFS standards.
III. Changing the Point of Obligation in the RFS Program Is Not Expected to Result in the
Increased Production, Distribution, and Use of Renewable Fuels
We have discussed in the previous section several significant concerns about the impact
changing the point of obligation would have on the RFS program. Given these concerns, and our
overall obligation to implement the RFS program in a way that most fully achieves Congress's
goal of increasing renewable fuel use, the evidence that changing the point of obligation would
substantially benefit the program should be compelling to support a change. As we discuss in this
section, it is not.
In their petitions submitted to EPA requesting a change to the point of obligation in the RFS
program the petitioners claim that changing the point of obligation could result in greater
production, distribution, and use of renewable fuels in the United States. The petitioners suggest
that changing the point of obligation could therefore reduce or even eliminate the need for EPA
to exercise our waiver authorities. The petitioners generally offer only theoretical arguments to
support these claims. In this section we describe our evaluation of petitioners' claims that
changing the point of obligation would increase the production, distribution, and use of
renewable transportation fuels in the United States.
The use of EPA's waiver authorities to reduce the required volume obligations from the statutory
levels in recent years is primarily the result of the delay in the commercialization of cellulosic
biofuels and subsequent shortfall in cellulosic biofuel production volumes relative to the
statutory requirements. In addition to the shortfall in cellulosic biofuel production, EPA also
noted challenges associated with increasing the supply of renewable fuel to consumers associated
with distribution and use of renewable fuels, particularly ethanol and biodiesel in its rule
establishing the RFS standards for 2014-2016 and its proposed rule for 2017. In their petitions,
the parties requesting that EPA change the point of obligation did not address how changing the
point of obligation might impact the shortfall in cellulosic biofuel production, but instead
narrowly focus on the impacts on the distribution and use of renewable fuels, particularly ethanol
and biodiesel that they believe would result from changing the point of obligation. The
petitioners argue that changing the point of obligation could increase the supply of renewable
fuel to consumers by increasing the blending infrastructure for renewable fuels, improving the
retail pricing of fuel blends with higher renewable fuel content relative to those with lower
renewable fuel content, and increasing the availability of transportation fuels with higher level
blends of renewable fuels at the retail level. After reviewing the petition submissions, other
available data and letters opposing changing the point of obligation from companies and
associations involved in the renewable fuel production, fuel distribution and renewable fuel
25
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blending industries,59 we believe that the benefits to renewable fuel blending claimed by the
petitioners are highly unlikely to occur, as explained below. Notably, while we have received
comments from large renewable fuel producers60 and associations representing renewable fuel
producers61 opposing changing the point of obligation, no renewable fuel producers or
associations have expressed any support for changing the point of obligation to date. Contrary to
the petitioners' claims, EPA believes that the production, distribution, and use of renewable
transportation fuels is unlikely to be positively impacted by changing the point of obligation in
the RFS program.
Before assessing the potential impacts on renewable fuel production, distribution, and use in the
subsections that follow we first address EPA's statutory authority to place the point of obligation
on various suggested parties.
A. The Proposed Changes to the Point of Obligation May Be Outside EPA's
Statutory Authority
In its petition for reconsideration, the Coalition recommends that EPA move the point of
obligation to "blenders and distributors" without addressing EPA's authority to do so consistent
with CAA 21 l(o)(3). See Coalition Petition, p. 14. In its petition, the Coalition cites text from
CAA 21 l(o)(2)(A)(iii) indicating that the regulations EPA establishes to implement the RFS
program "shall contain compliance provisions applicable to refineries, blenders, distributors, and
importers, as appropriate." The Coalition suggests that including "distributors" in this list of
entities regarding which compliance provisions may be established would authorize EPA to
establish the point of obligation for compliance with the RFS annual standards on distributors.
However, the Act includes a different provision specifically identifying the parties that may be
required to comply with the annual percentage standards. CAA 21 l(o)(3) describes the
requirement for EPA to establish annual standards under the Act, and provides that "[t]he
renewable fuel obligation . . . shall ... be applicable to refineries, blenders, and importers, as
appropriate."62 Distributors are excluded from this list. Reading these two provisions together, it
is unclear whether EPA has authority under the Act to establish the point of obligation for the
percentage standards on distributors, and this provides an additional reason we propose to deny
this aspect of the Coalition's petition.63
59 See Presentation from Murphy USA to EPA, August 16, 2016; Letter from RaceTrac to Administrator McCarthy,
August 17, 2016; Letter from QuikTrip to Administrator McCarthy, August 17, 2016; Letter from Tim Columbus to
Administrator McCarthy, August 15, 2016; Letter from Pilot Flying J to Administrator McCarthy, August 16, 2016;
Letter from SIGMA and RFA to Congressmen Whitfield and Rush, June 30, 2016.
60 Comments from REG on the proposed RFS standards for 2017 and the biomass based diesel standard for 2018
(EPA-HQ-OAR-2016-0004-3477).
61 Letter from SIGMA and RFA to Congressmen Whitfield and Rush, June 30, 2016.
62 CAA211(o)(3)(B)(ii)(I).
63 We believe that moving the point of obligation to distributors in addition to, or in the alternative to, blenders and
position holders, would result in imposition of the obligation on a large number of new parties, including small
businesses. As discussed in Sections II.E. and IV, we believe that this would be a generally undesirable result,
unless it could clearly be demonstrated that such a change would result in the increased production, distribution and
use of renewable fuels. However, for the same reasons discussed in Sections III.B.-E., we do not believe that this
would be the case.
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In its petition for reconsideration and petition for rulemaking, Valero suggests that the point of
obligation be placed on position holders.64 Valero explains that position holders may or may not
be blenders, but they argue that because all position holders could be blenders, EPA has the
authority to impose the point of obligation on them. They propose that the "obligation [would
attach] whether a party actually blends or not," and explains that their proposed definition of
obligated party "does not even make actual blending critical."65 It is unclear whether EPA has
statutory authority to place the point of obligation on position holders who are not in fact
refiners, importers, or blenders. Nevertheless, we have evaluated the merits of Valero's proposal,
as described below, and believe that the merits do not support its adoption.
B. Renewable Fuel Production, Distribution, and Use Does Not Appear to Be
Significantly Limited By Blending Infrastructure
One of the ways that the petitioners claim renewable fuel production, distribution, and use could
be positively impacted by changing the point of obligation in the RFS program is by increasing
the incentive for the installation and expansion of renewable fuel blending infrastructure,
especially at terminals. The petitioners claim that the current point of obligation results in a
number of position holders and/or renewable fuel blenders that are either "naturally long on
RINs" (because they market more fuel than they refine or import) or are not obligated parties
under the RFS program. According to the petitioners, these parties have an incentive to oppose
the installation and expansion of infrastructure needed to increase the blending of renewable
fuels into transportation fuel in an effort to restrict RIN availability and drive up RIN prices.
EPA spoke with several terminal owners/operators to assess the current status of renewable fuel
blending infrastructure at terminals.66 Currently all, or nearly all, terminals contain the necessary
infrastructure for the onsite storage and blending ethanol with gasoline. This infrastructure is
generally used to blend petroleum blendstocks with 10% ethanol by volume to produce a
finished E10 blend. Some terminals have invested in additional infrastructure, such as additional
ethanol storage capacity and/or larger capacity lines and nozzles, to more readily accommodate
the production of fuel blends that contain a higher proportion of ethanol, such as E85. Even
without this additional infrastructure, however, all of the terminal owners/operators
communicated to EPA that they were capable of producing fuel blends that contain a higher
proportion of ethanol with their existing equipment. They also expressed a willingness to make
the relatively modest changes necessary to accommodate faster loading times67 if the existing
infrastructure resulted in loading delays for trucks at the rack.
64 In its petition, Valero uses the term "rack sellers" to represent those parties who own fuel above the rack. As
mentioned above, we have chosen instead to use the term "position holders" to describe these parties.
65 Valero Petition for Rulemaking, June 13, 2016.
66 See Magellan Meeting Notes, December 16, 2015; Independent Fuel Terminal Owners Association meeting notes,
January 8, 2016; Kinder Morgan meeting notes, January 22, 2016.
67 Because most ethanol blending infrastructure is currently designed to produce E10 blends, producing higher level
blends using the existing infrastructure can require longer loading times.
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Biodiesel blending infrastructure at terminals is less universal than ethanol blending
infrastructure. While we were unable to determine precisely what percentage of terminals have
biodiesel blending infrastructure, the terminal owners/operators generally communicated that
they were willing to install biodiesel blending infrastructure at terminals in situations where
biodiesel is available and they could reasonably expect a return on these investments.68 A
review of publicly available information from OPIS suggests that approximately half of all
terminals list prices for biodiesel and/or biodiesel blends.69 This may in fact under-estimate the
actual availability of biodiesel blends at terminals as diesel fuel containing up to 5% biodiesel is
not required to be labeled as a biodiesel blend.70 In situations where biodiesel blending
infrastructure is not present at terminals, other parties have invested in alternative blending
infrastructure to produce biodiesel blends downstream of terminals, further increasing the
availability of biodiesel blends. Similarly, "jobbers" may take diesel fuel from bulk terminals
and blend it with biodiesel before subsequent distribution, providing another opportunity for
biodiesel blending.71 Furthermore, several large truck stop chains, driven by a desire to offer
their customers lower priced biodiesel blends, have invested in infrastructure at retail locations to
provide biodiesel blends for that location, and in some cases at other nearby retail stations.72 In
these cases it is unclear what impact, if any, changing the point of obligation would have on the
availability of biodiesel blends as the current regulations appear to be providing a substantial
incentive for parties to invest in biodiesel infrastructure, both at terminals and at other
downstream locations. As noted earlier, the required volume of biomass based diesel for 2017 is
100% greater than the statutory minimum volume. To the extent that renewable fuel use may be
currently constrained by insufficient blending infrastructure we do not believe that changing the
point of obligation would result in the additional investments claimed by the petitioners, as many
of the parties that would become obligated if the petitioners' requests were granted are already
investing in blending infrastructure. While EPA continues to believe that there may be parts of
the country that have limited or no access to biodiesel or biodiesel blends, this is generally the
result of the higher expense and logistical complications associated with transporting biodiesel or
biodiesel blends long distances to areas with little or no local biodiesel production, rather than an
inability or unwillingness to invest in the necessary blending infrastructure, either at or
downstream of the terminals. Furthermore, such cases continue to decline as a result of the
continuing investment in biodiesel distribution infrastructure.
Based on the above information, it appears that renewable fuels and renewable fuel blends are
currently widely available across the United States. Ethanol is available at all or nearly all
terminals and while much of the blending infrastructure may not currently be optimized to
produce higher level ethanol blends, it is capable of doing so. Biodiesel blending infrastructure
is more varied, with many terminals having blending infrastructure on-site, some receiving pre-
blended biodiesel, and others having access to downstream blending infrastructure. Where
biodiesel blending infrastructure does not exist we believe it is primarily the result of the higher
68 Magellan Meeting Notes, December 16, 2015.
69 See OPIS Rack City List (http://www.opisnet.eom/resonrces/rackcode.aspx#biodiesel'). Approximation made by
comparing the number of cities for which OPIS lists gasoline and diesel prices to the number of cities for which
OPIS lists biodiesel prices.
70 See ASTM D 975.
71 See National Biodiesel Board comments on 2017 Annual Standards Rule; Attachment 6 (EPA-HQ-OAR-2016-
0004-2904).
72 Ibid.
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expense associated with transporting biodiesel to locations with limited or no local biodiesel
production.
In any case, no parties we spoke with (other than the petitioners) listed the lack of proper
incentives to expand blending infrastructure as a factor limiting the blending of renewable fuels
into transportation fuel. Given the observed sufficiency of blending infrastructure it does not
appear that changing the point of obligation would result in increased use of renewable fuels in
the United States as a result of additional blending infrastructure.
C. Changing the Point of Obligation Is Not Expected to Significantly Impact the
Retail Pricing of Fuel Blends with High Renewable Content
One of the factors affecting the expansion of renewable fuel blending in the United States,
identified both by EPA and the parties requesting a change to the point of obligation, is the retail
pricing of fuel blends that contain higher concentrations of renewable fuel, such as E85. This is
primarily an issue for fuels blended with ethanol. Biodiesel blends tend to be offered at a
discount to petroleum based diesel fuel and this discount, which is significantly enabled by the
value of the RINs associated with the biodiesel and the biodiesel blenders' tax credit, is regularly
large enough to offset the very small impacts that biodiesel blends have on fuel economy.
Retailers have often noted the ability to offer biodiesel blends at a discount to petroleum diesel
fuel, and the consumer demand for lower priced biodiesel blends, as a primary reason for
offering these fuels for retail sale.73 The relatively high degree of competition among diesel fuel
retailers and favorable pricing for biodiesel blends, together with the RFS mandates, are
contributing to increasing demand for biodiesel blends and growth in biodiesel production,
distribution, and use well beyond the statutory volumes.
The current retail availability and pricing for E85, however, is significantly different. E85 is
currently offered for sale at approximately 3100 stations across the United States (approximately
2% of all retail fuel stations).74 The low energy density of E85, relative to E10, means that
consumers must purchase a significantly greater volume of E85 than E10, and refill their fuel
tanks more frequently, to travel the same distance. While individual stations have offered E85 at
a price that more than accounts for the difference in energy density between E85 and E10, this
favorable pricing has not been seen for sustained time periods at a nationwide level.75 This is
despite the fact that in 2015 the relative prices of gasoline blendstocks, ethanol, and D6 RINs, as
well as the limited wholesale E85 pricing information available, suggested that E85 could be
offered at a price discount greater than the energy content difference between E85 and E10.76 In
a supporting document for the final rule establishing the RFS percentage standards for 2014-
2016 EPA examined the potential for higher RFS standards, and the higher RIN prices that
73 Letter from Pilot Flying J to Administrator McCarthy, August 16, 2016.
74 E85 station count from the U.S. Department of Energy Alternative Fuels Data Center Alternative Fueling Station
Locator. Available online at http://www.afdc.energy.gov/locator/stations/
75 See E85 pricing information available at E85prices.com. E85 generally requires a minimum 22% price discount
relative to E10 to be an equal cost fuel for consumers on a cost per mile traveled basis.
76 See discussion in the final rule establishing the RFS standards for 2014-2016 (80 FR 77,420, Dec., 14, 2015).
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would likely be the result, to incentivize lower E85 retail prices and higher sales volumes.77 In
this document we concluded that a lack of competition among E85 retail stations limited the
ability for RIN prices to effectively impact retail E85 prices, ultimately limiting the ability of the
RFS standards to incentivize a significantly greater supply of E85 to consumers in the near term.
In their requests to change the point of obligation of the RFS program, the petitioners argue that
if EPA changed the point of obligation the RFS standards would have a greater ability to impact
the retail price of E85 and incentivize greater use of this fuel. We find no basis for the claim that
changing the point of obligation would have the results suggested by the petitioners. Rather we
believe changing the point of obligation would be unlikely to impact the retail pricing of E85.
We believe the primary factors inhibiting the RFS program from significantly increasing the
supply of E85 to consumers are the limited number of retail stations selling E85 and the relative
pricing of E85 versus E10. Further, we believe that the generally poor pricing of E85 at retail is
not due to the poor pricing of E85 at the wholesale level, but is instead the result of the non-
competitive retail market for E85. This non-competitive market often results in an E85 pricing
strategy by retail stations that seeks to maximize fuel margins through withholding RIN value
leading to greater profitability, rather than a strategy that seeks to maximize sales volumes
through lower retail prices by passing a greater portion of the RIN value through to consumers.
Changing the point of obligation to renewable fuel blenders or position holders at the rack is not
expected to affect these underlying market fundamentals at retail stations.
One of the arguments made by the petitioners for changing the point of obligation in the RFS
program is that the current point of obligation creates a dis-incentive for parties with excess
RINs (parties that sell more gasoline and diesel fuel at the rack than they refine or import and un-
obligated blenders) to increase the use of renewable fuels by offering fuel blends with high
renewable content at attractive pricing. They argue that because these parties profit from selling
RINs they are incentivized to keep the RIN prices as high as possible by restricting the blending
of additional renewable fuel and/or pricing fuels with higher renewable content such as E85 at
levels that are unattractive to consumers, thereby restricting the supply of RINs. According to
the petitioners, if EPA were to change the point of obligation in such a way that RFS obligations
were proportional to the volume of gasoline and diesel fuel that a party blends with renewable
fuel and/or sells at the rack, rather than the volume of gasoline and diesel a party refines or
imports, these parties would have a greater incentive to pass the RIN value through to retail
station owners, who would then pass the value on to E85 consumers, ultimately reducing the
retail price of E85 and increasing E85 sales.
EPA believes this argument is flawed. Because parties that blend renewable fuels or sell fuel at
the rack cannot dictate the retail price of the fuels they sell (unless they also own the retail
stations), changing the point of obligation of the RFS program would only be expected to
directly impact the wholesale pricing of fuels such as El 5 and E85, and could only impact the
retail pricing of these fuels indirectly. While some of the parties that would become obligated if
EPA were to change the point of obligation according to the petitions we have received (the
blenders or position holders) own retail stations, many do not. Parties that do not own retail
stations, or own very few, primarily impact the retail price of E85, or any fuel, through the prices
77 "An Assessment of the Impact of RIN Prices on the Retail Price of E85," Dallas Burkholder, Office of
Transportation and Air Quality, US EPA. November 2015.
30
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at which they offer the fuel at the wholesale level. Wholesale pricing data for E85 are currently
very limited. However, what information is available, such as the wholesale E85 pricing
published by the Iowa Renewable Fuels Association, shows that in Iowa the wholesale price of
E85 already largely reflects the discount enabled by the RIN value associated with this fuel (See
Figures 2 and 3 below for wholesale pricing for E85 and E10 in Iowa). This is consistent with
letters EPA has received from fuel blenders who told EPA that it is their practice to price all the
fuel they sell at the wholesale level, including E85, at a level that reflects the discount enabled by
the RIN value in an effort to offer competitively priced fuel.78 The petitioners did not provide
any information that would suggest that a significant portion of the RIN value was being
withheld by the wholesale providers of E85. If the RIN value is already being largely reflected
in the wholesale price of E85, changing the point of obligation to parties that determine the
wholesale pricing of E85 would not be expected to result in improved pricing of E85 at the
wholesale level.
Even if changing the point of obligation as requested by the petitioners were to result in
improved pricing of E85 at the wholesale level, we believe it is highly uncertain that this would
result in improved pricing at the retail level. If pricing for E85 at retail stations does not
improve, the constraint on E85 supply to consumers attributable to retail pricing will not be
remedied, hindering the likelihood that sales volumes of E85 will increase significantly. The
majority of retail stations (56.6%) are owned by parties who own only a single store.79 These
parties rarely, if ever, blend their own fuel or purchase fuel above the rack and therefore will not
become obligated parties even if the point of obligation is changed as requested by the
petitioners. They would therefore have no more of an incentive to offer E85 at discounted
pricing than they do currently. Information reviewed by EPA for the state of Iowa shows that
even in situations where E85 is available at a significant discount to E10 at the wholesale level,
the retail pricing of E85 does not reflect this discount.
The data on wholesale and retail pricing of E85 in Iowa, shown in Figures 2 and 3 below,
strongly suggest that the relatively small observed discount for E85 relative to E10 at the retail
level is not a result of there being a small discount between these fuels at the wholesale level,
and would not necessarily be expected to be improved by changing the point of obligation. It is
worth noting that the average retail price discount for E85 relative to E10 in Iowa was very
similar to the national average retail price discount, even with the significantly larger price
discount for E85 relative to E10 at the wholesale level in Iowa (See Figure 3 below). The
average retail price discount for E85 was less than the discount needed to make up for the lower
energy content per gallon of E85 relative to E10 (approximately 22%) during much of this time
period. If the wholesale E85 pricing data collected in Iowa are representative of the wholesale
pricing for E85 nationwide, which we believe is likely, then the wholesale prices for E85 already
reflect the majority of the RIN value and there is very little to no additional RIN value to be
passed through at the wholesale level. Even if the nationwide wholesale E85 pricing generally
does not reflect the RIN value, and changing the point of obligation could improve the pricing of
E85 at wholesale, the data collected from Iowa suggest that significant discounts at the wholesale
level would not necessarily be expected to be passed on to the retail level. The available data
78 See Letter from Tim Columbus to Administrator McCarthy, August 15, 2016; Letter from QuikTrip to
Administrator McCarthy, August 17, 2016; Letter from RaceTrac to Administrator McCarthy, August 17, 2016.
79 http://www.nacsonline.co m/YourBusiness/FuelsReports/GasPrices_2013/Pages/WhoSellsGas.aspx
31
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further support the view that changing the point of obligation in the RFS program is unlikely to
result in a greater portion of the RIN value being reflected in the wholesale price of E85, and
ultimately the retail price of E85, and will not be an effective mechanism for increasing E85
sales volumes.
Figure 2
Observed vs. Theoretical E85 Wholesale Price
$2.00
Si.so
$1.60
$1.40
$1.20
$1.00
$0.80
- ES5 Whoh
> Wholesali
* Wholesal
'assthrough
dgh
E85 and E10 wholesale prices are the average price of all wholesale sellers reported by the Iowa Renewable Fuel
Association (Available online at http://iowarfa.org/retaiIer-center/iowa-whoIesale-e85-price-Iisting-servicesA
Ethanol price from Agricultural Marketing Resource Center (http://www.agnirc.org/renewable-
energy/ethanol/midwest-ethanol-cash-prices-basis-data-and-charts-for-selected-statesA
RIN Prices from OPIS and Argus
Wholesale prices with 100% and 0% passthrough calculated using E10 and ethanol prices from the above sources
and assuming the effective ethanol price is discounted by 100% and 0% of the RIN value respectively
32
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Figure 3
E85 Pricing: Iowa Wholesale and Retail Price and National Retail Price Averages
* Nationsi Retail ESS Discount to- E10
E85 and E10 wholesale prices are the average price of all wholesale sellers reported by the Iowa Renewable Fuel
Association (Available online at http://iowar.fa.org/re' , ervices/)
National and Iowa E10 and E85 average prices (used to calculated the national and Iowa discounts for E85 relative
to E10) obtained from E85prices.com
Further, the petitioners rely on a faulty assumption when they argue that un-obligated blenders
are incentivized to restrict RIN availability (by restricting renewable fuel blending) in an effort to
keep RIN prices high. They assume that the overall price of RINs could be significantly reduced
as a result of the increase in the supply of RINs that they claim would result from a greater
proportion of the discount enabled by the RIN value being reflected in the retail price of E85.80
The petitioners provide no evidence to support this argument. EPA estimates that total E85 sales
were approximately 150 million gallons in 2014. In our final rule establishing the RVOs for
2014-2016 EPA estimated, based on available E85 price and sales volume data, that even if E85
were to be sold at retail at a 50% discount to E10 on a nationwide level, a discount more than
twice the current national average, E85 sales would be expected to be just under 300 million
gallons.81
Even if we assume an optimistic scenario, that if parties that are able to acquire excess RINs with
the current point of obligation were able to double E85 sales to 300 million gallons per year by
passing through a greater proportion of the RIN value, this would represent an opportunity to
generate an additional 110 million RINs per year,82 or less than one percent of the total number
of RINs projected to be generated in 2016. We believe this number provides a perspective on the
likelihood that the additional RINs that might be able to be generated by additional sales of E85
80 In this section EPA has primarily focused on E85, rather than other ethanol blends such as E15 or E30. This is in
response to the petitions we have received, which generally focus on E85. Further, there is much more market
experience with E85, relative to E15 or E30, better allowing for the types of analyses shown here.
81 80 FR 77,420 (Dec., 14, 2015).
82 An additional 150 million gallons of E85 contain approximately 110 million gallons of ethanol (assuming an
average ethanol content of 74% for E85) and would therefore generate approximately 110 million RINs.
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would significantly reduce the overall price of RINs. Petitioners provided no information to
support the claim that additional RINs would depress the overall price, and we believe it would
be unlikely, as the required volumes would still be above the E10 blendwall, and over time any
additional renewable volume potential would be reflected in EPA's annual required volumes.
Also, if any additional RINs supplied to the market through increased sales volumes of E85 are
not expected to significantly reduce the market price of RINs, then any parties that profit from
E85 and/or RIN sales would maximize their profit by selling as much E85 (and the associated
RINs) as possible. This appears to be the case in the current market place; parties currently
separating RINs in excess of their RFS obligations are seeking to acquire as many RINs as
possible as long as the cost of doing so is less than the value they can recover through the sale of
the RIN. Although EPA does not believe that RIN sales by un-obligated blenders lead to
windfall profits, to the extent petitioners believe otherwise their own logic would suggest that
these parties should be currently be incentivized to undertake efforts to increase the sale of
renewable fuel blends to increase the number of RINs sold at a profit. If this were the case,
changing the point of obligation to blenders could therefore reduce such sales, since blenders
would retain RINs for compliance, thereby removing an incentive for them to increase renewable
fuel sales and profits.
In summary, EPA does not find the arguments made by the petitioners compelling, as they do not
address what we believe to be the fundamental challenges to significantly increasing the use of
renewable fuels in the near term. EPA sees no evidence that changing the point of obligation
would result in greater availability or price discounts for biodiesel blends. On the other hand,
supply of E85 to consumers is currently inhibited by the number of retail stations selling E85, the
geographic distribution of these stations, and the relative pricing of E85 versus E10 at the retail
level. For the reasons discussed in this section, EPA finds no evidence to support the position
that changing the point of obligation would address the relative pricing of E85 versus E10. In
the next section we discuss why EPA does not believe that data support the position that
changing the point of obligation would increase the availability of E85 at retail stations.
D. Changing the Point of Obligation Is Not Expected to Significantly Impact the
Availability to Consumers of Fuel Blends With Higher Renewable Content
In requesting that EPA change the point of obligation in the RFS program, some parties argue
that this would result in an increase in the number of retail stations offering higher level blends
of renewable fuel such as E85. They generally argue that the renewable fuel blenders and/or
position holders have greater influence over the decisions made by the retail station owners,
either through direct ownership or through contractual relationships. If EPA were to place the
point of obligation on the blenders or position holders, the petitioners argue, they would use their
influence with their retail partners to increase the number of stations offering fuel blends such as
E85 in an effort to increase their access to the RINs needed for compliance.
While this argument is generally consistent with the principle that the closer the point of
regulation is to the party whose behavior the regulation is intended to impact (in this case the
retail station owner) the more effective the regulation is, in this case it ignores the complicated
relationships that exist in the fuels marketplace as well as observations from the current
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marketers of E85. Currently less than 0.5% of all fueling stations are owned by a major oil
company, while approximately 50% are branded stations, selling fuel under the brand of a
refiner.83 It is unlikely that blenders and position holders would be more effective at
encouraging retail stations to offer E85 than the refiners and importers of gasoline and diesel fuel
who are affiliated with these stations. This is especially true for the nearly 60% of retail stations
owned by single-store owners who are likely to face difficulties raising the capital required to
install the equipment necessary to enable the sale of these fuels.84
EPA also assessed the current affiliation of stations selling E85. We found that of the
approximately 3100 stations selling E85 in the United States at the end of 2015, approximately
24%) of them were branded stations (stations affiliated with a refiner) despite the fact that
approximately 50% of all retail fuel stations are branded. Conversely, approximately 38% of all
stations selling E85 were affiliated with a large retail chain, 27% appeared to be parties that
owned only a few stations or a single retail station, and the remaining 10% were private stations
or stations owned by a federal, state, or local organization.85 Large retail chains and other
unbranded stations are not currently obligated parties.86 These data appear to contradict claims
that moving the point of obligation in the RFS program would result in a greater number of
stations selling fuels with higher levels of renewable fuel, such as E85. If it were the case that an
RFS obligation made a party more effective in encouraging their affiliated retail stations to offer
fuels containing higher levels of renewable fuel such as E85 we would expect that the stations
affiliated with parties with an obligation under the current RFS regulations would have
proportionally more stations offering E85 than parties who are not affiliated with a party with an
RFS obligation. Instead, we find that while 50% of all retail fuel stations are branded (affiliated
with a refiner), only 24% of all stations that sell E85 are branded stations. While large retail
chains often directly own retail stations, thus giving them control of the fuel offerings at the
stations they own, the fact that a significantly higher proportion of these stations offer E85
relative to branded stations suggests that the current point of obligation provides significant
incentives for these stations to offer E85 under the right market conditions.
Table 1
Retail Fuel Stations and E85 Stations by Affiliation
Branded Stations
(affiliated with refiners)
Unbranded Stations (not
affiliated with refiner)
Private Stations
All Retail Fuel
Stations
50%
50%
Unknown
E85 Retail Stations
24%
66%
10%
Furthermore, while only 50% of all retail fuel stations are not affiliated with refiners, 76% of all
E85 stations are not affiliated with refiners. An unbranded station is therefore approximately 3
83 http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_2013/Pages/WhoSellsGas.aspx
84 Ibid.
85 E85 station ownership throughout this paragraph is from EPA assessment of data from AFDC on stations offering
E85 for sale. Data retrieved on 12/29/2016.
86 Large retail chains could become obligated parties if the point of obligation were changed to the renewable fuel
blender and/or the position holder. These parties may purchase fuel above or below the rack depending on the
logistics and economics of fuel purchasing at various locations.
35
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times more likely to offer E85 for sale than a branded station (Unbranded stations are
approximately 2.5 times more likely to offer E85 than branded stations if we exclude
consideration of private stations).87 Parties requesting a change in the point of obligation in the
RFS program have claimed that such a change would result in an increasing number of retail
stations offering E85 for sale. The data does not bear this out, as E85 is offered for sale at a
significantly higher rate at unbranded retail fuel stations relative to retail fuel stations that are
affiliated with obligated parties. There is no evidence to suggest that the point of obligation is a
significant factor in a retail station's decision whether or not to offer E85.
E. The RFS Program Continues to Create a Significant Incentive for Parties to Invest
in the Infrastructure Necessary to Enable Growth in the Use of Renewable Fuels
We believe that the RFS as currently structured provides significant incentives for further growth
in the use of these fuels and, as discussed elsewhere, we do not believe that the incentives for
renewable fuel production, distribution, and use would be greater if we were to change the point
of obligation. The value of the RIN that is generated when renewable fuels are produced allows
fuel blends that contain renewable fuels to be sold at lower prices than would otherwise be
possible in the absence of the RFS program. Terminal owners and operators, as well as parties
that blend renewable fuels downstream of terminals, are already incentivized to invest in
blending infrastructure in an effort to offer their customers the lowest cost fuels possible.
Retailers are similarly incentivized to invest in the equipment necessary to offer renewable fuel
blends to enable them to offer the widest range of fuel choices. In cases where a lack of
competition may inhibit the full value of the RIN from being reflected in the retail price of the
fuel, the RIN value can instead provide higher profit margins to the retail station owner to offset
their investment in expanding renewable fuel infrastructure. This may ultimately result in more
competing retail stations investing in the equipment necessary to offer E85, and with the
increased competition retail prices for E85 would be expected to decrease (relative to E10) over
time.
Despite the incentives provided by the RFS program, in the most recent rule establishing annual
renewable volume obligations EPA determined it was necessary to exercise our waiver authority
due to an inadequate domestic supply of renewable fuel. The primary factors contributing to this
inadequate domestic supply of renewable fuels, such as low production volumes of cellulosic
biofuel and a limited number of stations offering E85 for sale at prices competitive with E10 on
an energy equivalent basis, are unlikely to be addressed by changing the point of obligation in
the RFS program.
87 Some parties have used this information to argue that refiners are actively discouraging the installation of E85
infrastructure at their branded stations in an effort to discourage renewable fuel penetration. In examining the data
from AFDC, however, EPA notes that the majority of the E85 stations at unbranded fuel retail station are owned by
large companies, rather than single store owners. We believe that the greater access to capital that the stations
owned by large companies have relative to single store owners is likely to be a larger factor in the higher rate of
adoption of E85 infrastructure at unbranded stations than any influence by refiners or the RFS point of obligation.
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F. Changing the Point of Obligation Would Not Be Expected to Increase Cellulosic
Biofuel Production
While there continue to be challenges related to the distribution and use of renewable fuels in the
United States, the largest single challenge to meeting the RFS program's statutory volumes is the
shortfall in cellulosic biofuel production. As noted above, we expect that in 2016 the supply of
non-cellulosic biofuels in the United States will be 99.3% of volume envisioned by Congress in
EISA, while the supply of cellulosic biofuel will be only 5.4% of the statutory volume for these
fuels. The importance of cellulosic biofuels to achieving the overall goals of the RFS program
only increases in future years, as over 85% of the growth in the statutory volumes from 2016 to
2022 is expected to come from cellulosic biofuel. Changing the point of obligation would not be
expected to address the current research, development, and commercialization challenges that
will need to be overcome to enable the production of significant volumes of cellulosic biofuel in
future years. Instead, changing the point of obligation from refiners, who have significant
financial resources and experience in commercializing new fuel production technologies on a
large scale, to smaller downstream parties may negatively impact the ability of the cellulosic
biofuels industry overcome these challenges to the degree that it reduces the incentive of the
refiners to participate in the commercialization of cellulosic biofuels. Additionally, we believe
that the uncertainty surrounding the RFS program that would likely result from a change in the
point of obligation would discourage potential investors from investing in new cellulosic biofuel
production technologies and commercial scale production facilities at a time when many
cellulosic technologies are nearing commercial-scale production.
IV. Changing the Point of Obligation Would Significantly Increase the Complexity of the
RFS Program
In order to minimize the number of regulated parties and reduce programmatic complexity, EPA
in the RFS1 regulations placed the RFS point of obligation on the relatively small number of
refiners and importers rather than on the relatively large number of downstream blenders. We
noted then that the designation of downstream ethanol blenders as obligated parties would have
unnecessarily greatly expanded the number of regulated parties and increased the complexity of
the RFS program.88 The same is true now. For example, consider the current point of obligation:
refiners and importers. Identifying on a continuing basis those entities who produce or import
gasoline and diesel fuel is relatively straightforward, as their businesses tend to operate from
fixed physical locations that change infrequently, and ownership of the companies and assets
also change relatively infrequently. In addition, identification and tracking of these entities is
facilitated by our regulation of them under other (non-RFS) regulatory programs. However, the
situation "downstream" of refiners and importers becomes much more complicated. There are a
wide variety and large number of market participants, business practices, and contract
mechanisms downstream of refiners and importers and the parties, practices, and ownerships
among entities downstream of refiners and importers are much more variable over time. All of
these factors would make imposition of the RFS point of obligation on some subset (e.g.
88 72 Fed. Reg. at 23923.
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blenders or position holders) of parties downstream of refiners and importers substantially more
complex than the current system.
In the RFS2 proposal, we requested comment on whether EPA should move the obligation
downstream of refineries and importers to those parties who blend and supply finished
transportation fuels to retail outlets or to wholesale purchaser-consumer facilities. In response to
the proposal, stakeholders differed significantly. A few refiners, including Valero, expressed
support for moving the obligations to downstream parties, while other refiners preferred to
maintain the current approach. Blenders and other downstream parties generally expressed
opposition to a change, citing the additional burden of demonstrating compliance with the
standards, especially for small businesses. They also pointed to the need to implement new
systems for determining and reporting compliance, the short lead time for doing so, and the
fewer resources that smaller downstream companies have to manage such work in comparison to
much larger entities such as refiners. We considered the comments received and concluded based
upon the comments and information available to us that it was appropriate to maintain refiners
and importers of gasoline and diesel as obligated parties under the amended RFS2 program. In
explaining our reasoning, we noted that changing the point of obligation would likely result in
significant increase in the number of obligated parties under the program.
Several of the petitions received by EPA cite text from the 2010 Final Rule acknowledging that
one of the initial justifications given for placing the obligation on refiners and importers of
gasoline and diesel, rather than on parties that are "downstream" of the refineries, was a desire to
minimize the number of regulated parties in the RFS program.89 As EPA stated in the 2010 Final
Rule and Summary and Analysis of Comments, as a matter of regulatory design and
implementation, it is desirable both to limit the number of obligated parties, and to limit
burdening small businesses.90 These considerations favored placing the point of obligation on
the limited number of refiners and importers, rather than the larger number of blenders.
Additionally, as EPA projected in the proposed RFS2 rule, virtually all downstream blenders are
currently subject to RFS registration, recordkeeping and reporting requirements associated with
their role as RIN owners. EPA asked in that proposal whether, in light of this fact, it would be
difficult administratively to move the obligation to these parties. The petitioners generally argue
that moving the point of obligation to downstream parties would not be difficult. However,
while it is likely the case that all, or nearly all downstream blenders are now regulated parties
under the RFS program due to the increased blending of renewable fuels required by the RFS
program,91 the majority of these downstream parties are not refiners or importers and therefore
are currently not obligated parties under the RFS program. There is a significant distinction
between being a "regulated party" and being an "obligated party" under the RFS program.
89 75 Fed. Reg. 14721 (March 26, 2010).
90 Id, RFS2 Summary and Analysis of Comments, at 3-216.
91 Downstream blenders who blend renewable fuel into transportation fuel are subject to our recordkeeping and
reporting requirements under 40 CFR 80.1451 and 80.1454. They must register with the EPA under 80.1450. Small
blenders can also shift the compliance burdens if they qualify under 40 CFR 80.1440. In contrast, obligated parties
must purchase the appropriate number of RINs in the market, practicing due diligence to ensure their validity, file
annual compliance reports demonstrating compliance, and maintain records to that effect.
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A. The Number of Obligated Parties Would Likely Increase if the Point of
Obligation was shifted to "Position Holders" or "Blenders"
Valero proposes to change the point of obligation to positions holders and argues that doing so
would actually reduce the number of obligated parties as compared to the number of obligated
party refiners and importers that exist today. Valero provided EPA with an analysis to support
their argument. Valero argues that this proposed change will be relatively easy to implement
because the number of obligated parties will remain relatively the same. But as discussed in more
detail below, we believe that Valero's suggested change would result in a significant increase in
the number of obligated parties. More importantly, we believe that the type of parties Valero
seeks to shift the point of obligation to, and their experience level and available resources
indicate that implementing Valero's proposed change would result in a less effective RFS
program that would be more difficult for EPA to implement and enforce.
As discussed above, EPA believes that all else being equal, placing the point of obligation on a
smaller number of relatively large obligated parties is preferable to placing it on a larger number
of relatively small entities. This approach facilitates program effectiveness by limiting the
number of entities EPA must interact with to provide guidance and to ensure compliance, and it
also places the burden on the larger, more sophisticated entities that are more likely to have the
personnel and systems in place to enable compliance. Valero presented an argument that shifting
the point of obligation would reduce the number of obligated parties relative to today's number,
and provided an analysis to support that claim.
We have reviewed Valero's analysis, and we believe it to be flawed, due principally to their
reliance on an incomplete data set (obtained from the Oil Price Information Service (OPIS)).
Valero's analysis attempts to quantify the number of obligated parties under their proposed
change by identifying the entities who supply gasoline and diesel fuel for sale at wholesale rack
terminals that post "wholesale rack prices"92 for gasoline and diesel fuels at all terminals in the
United States.93 They cross-referenced OPIS wholesale rack list with a list of the parties
registered with EPA under Title 40 CFR. Part 80 to check if these parties were the same.94 Based
on this approach, Valero found that roughly 100 entities showed up both as regulated parties
92 Wholesale rack price is the price at which gasoline or diesel is sold to wholesalers, typically at a terminal or truck
rack. The rack price could include the cost of the gas itself, as well as transportation, overhead and profit costs,
among other factors such as whether the fuel is branded or unbranded. The price can vary from terminal to terminal
and depends on the cost of crude and related refining costs.
93 In Valero's July 13, 2016 Petition for Rulemaking, they compiled a the list of "rack sellers" from five sources, as
of April 2016: (1) OPIS Terminal Price Posting; (2) OPIS Active Supplier List; (3) Valero's Market research on bulk
and rack activity; (4) Review of federal excise tax forms (637S) obtained by Valero; and (5) Market information
received in the course of discussing the RFS issues with others in the business.
94EPA publishes a list of all companies and facilities registered to participate in EPA's Fuel Programs under 40 CFR
Part 80 that includes gasoline, diesel fuel and RFS programs. The list can be located at https://www.epa.gov/fuels-
registration-reporting-and-compliance-help/registered-companies-and-facilities-fuel-programs.
39
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under EPA's RFS program and as suppliers of wholesale rack price data to OPIS.95 They
assumed that this approach identified the full list of parties that would be regulated as obligated
parties if the point of obligation were shifted to position holders.
EPA independently contacted OPIS, who could not provide independent verification of Valero"s
estimate and further cautioned that using their client list of who posts wholesale rack price to
estimate a count of position holders would likely be an underestimation because their client list
only represents those parties who publicly report fuel prices at terminals (and not parties that sell
fuel at the rack without publicly posting prices or who purchase fuel above the rack for their own
use rather than for resale).96 OPIS provided EPA their client list of conventional gasoline
suppliers who are rack sellers. There were 77 suppliers on this list. This list does not include
suppliers of reformulated gasoline or diesel.97The information from OPIS confirms that their
client list should not be used as the sole source of information to account for all potential parties
that sell fuel at the rack, and that could become potential obligated parties if the point of
obligation were moved. Further, Valero's count does not include many parties that purchase fuel
above the rack, but do not offer this fuel for re-sale at the rack. For example, there are hundreds
of end users (e.g., railroads, delivery truck fleets), big store chains (e.g., Costco, Walmart), or
retailers (e.g., Sheets, WaWa, Costco, Quiktrip) that purchase bulk fuel from refiners for use in
their own fleets, or for sale at retail that would not be posting wholesale rack price and therefore
would not be counted in the OPIS rack seller list. There are many other smaller parties such as
fuel retailers and traders that also purchase fuel from refiners for one-off transactions. Each of
these parties would become obligated parties if the obligation was placed on position holders, but
would not be captured in Valero's count because their data source is OPIS rack sellers. Based on
this, EPA believes Valero's estimated count of potential obligated parties under their proposed
change is incomplete, and significantly underestimates the true count
In addition to assessing the OPIS data relied on by Valero, EPA conducted further analysis to
determine how the number of obligated parties under the RFS program might change were we to
shift the point of obligation as Valero proposes. For example, we reached out to a number of
terminal operators and terminal associations, whom we believe are in a good position to
understand the type and number of parties that sell, buy and blend fuel at the terminal rack since
they either own/operate a terminal, or have members within their association that do.98 These
parties' estimates of the likely number of position holders ranged from 350 to over 1,000."
These parties stated that none of them would likely have comprehensive data to formulate an
accurate count due to anti-trust regulations. The fact that the terminal operators/associations
95 Using this approach Valero found very few parties that posted wholesale rack prices who were not registered
under Title 40 CFR Part 80.
96 See memo to the docket, titled "Emails and Data from OPIS."
97 See memo to the docket, titled "Emails and Data from OPIS."98 See Magellan Meeting Notes, December 16,
2015; Independent Fuel Terminal Owners Association meeting notes, January 8, 2016; Kinder Morgan meeting
notes, January 22, 2016.
98 See Magellan Meeting Notes, December 16, 2015; Independent Fuel Terminal Owners Association meeting notes,
January 8, 2016; Kinder Morgan meeting notes, January 22, 2016.
99 Ibid
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estimate a much higher count than Valero's estimate of position holders indicates that Valero has
significantly underestimated the total count. Both the potentially large number of position
holders, and the potential variability from year to year in the parties performing these functions,
suggests that they are not ideal entities, from a program implementation standpoint, on whom to
place the point of obligation, and that relying on these parties to meet their compliance
obligations could undermine the effectiveness of the RFS program.100
Similarly, Monroe proposes to move the point of obligation downstream from refiners and
importers to "blenders." Monroe does not provide data to support their argument that shifting the
obligation to blenders would not create an administrative burden, but refers to Valero's
preliminary analysis suggesting that the number of obligated parties may decrease depending on
how EPA exercises its discretion to shift the obligation away from refiners and importers.101
EPA has not been able to identify an independent data source that provides a reliable estimate of
the number of renewable fuel blenders and so we attempted to formulate an estimate of blenders
based on data that are available to us through registrations and reported information under EPA's
Part 79 and 80 fuels and fuel additives programs.
For gasoline, this data set includes parties who have registered as one or more business activities
that include gasoline refiners, gasoline importers, oxygenate blenders, oxygenate producers,
oxygenate importers, certified denaturant producers, certified denaturant importers and pentane
producers/importers. From this data set, we estimate there are over 1,100 facilities registered as
oxygenate blenders for reformulated gasoline. This count does not include entities that blend
renewable fuels into conventional gasoline or diesel fuel,102 nor does it include entities that are
not oxygenate blenders who are pentane blenders, butane blenders, transmix blenders, and other
entities that have blending pumps that allow for on-site blending downstream of the terminals.
Such parties could also be considered fuel "blenders" under a broad interpretation of the term.
This count also does not include facilities that blend biodiesel103 at terminals or at locations
downstream of terminals, or facilities who currently may not be required to register under Part 79
or 80 fuels programs but who would be newly required to do so under the petitioners' proposed
change. Due to the complexity of how parties register and report refining and blending
operations, and due to the lack of available data from industry and other agencies, EPA is unable
to provide a total count of blenders at this time.104 However, based on our preliminary analysis,
we believe that the number of blenders is substantially larger than the number of
refiners/importers currently obligated under the RFS.
100 In addition to program implementation concerns, we also note that parties who may or may not be obligated
parties in any given year are unlikely to make the types of investments in the growth of renewable fuel infrastructure
that EPA, and petitioners, seek.
101 Monroe 2016 Petition at 14.
102 Unless these parties also blend oxygenates into reformulated gasoline.
103 EPA does not have reliable data from which to estimate the number of diesel blenders. One reason for the
paucity of data is that biodiesel blenders are not required to report if they blend 5% or less into diesel.
104 Our difficulty in identifying a number of blenders is one indication of the challenge that we would face if we
were to attempt to shift the point of obligation to "blenders." The shifting nature of these parties and would create
difficulty in assessing who the obligated parties may be.
41
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For the 2013 compliance year, there were a total of 142 obligated parties (refiners and importers
of gasoline and diesel) registered under the RFS program. Valero claims the number of obligated
parties would be reduced to about 100 obligated parties under their proposed change to shift the
obligation to position holders. EPA's data set shows there are over 1,100 facilities registered as
reformulated gasoline oxygenate blenders (without the additional count of biodiesel blenders,
and blenders of ethanol into CBOB), which appears to disprove Monroe's claims that the
existing count of obligated parties would not increase (or possibly decrease), if the point of
obligation was shifted to blenders. As discussed above, it is very difficult to obtain a
comprehensive list of all position holders and blenders. Based on the facts before us, EPA
believes shifting the obligation to either the position holder or to blenders would likely
significantly increase the number of obligated parties and would result in a significant increase in
administrative burden for EPA to implement and enforce the RFS program. As discussed further
below, the administrative burden on EPA could be more acute than the larger numbers alone
would suggest, in light of the different type of parties that could be regulated, and possible
challenges they may face complying with RES program requirements.
B. The Potential for Noncompliance would Likely Increase if the Point of Obligation
is Changed
Currently, many of the obligated parties are large entities with sufficient resources, staff,
expertise and tools to comply with registration, reporting and recordkeeping requirements under
the RFS program. EPA is concerned that moving the point of obligation as proposed by the
petitioners could bring in many small entities that may not have the resources or expertise to
comply. To investigate the possibility that parties without RFS expertise would be newly
regulated, we were able to locate a selection of states' public list of parties registered to sell fuel
at the rack (and which of these parties had reported taxable gallons) and to cross reference these
lists against EPA's Title 40 CFR Part 80 registered list. In the state of California alone, during
the reported period of March 2016, there were 147 registered parties105, of which 37 parties
reported taxable gallons.106 Of those 37 parties, we determined that 25 (65%) were not registered
under the RFS program.107 A second check with Ohio's public list for fuel excise tax provided
similar results. For Ohio during the reported period of February 2016, there were 215 parties
that reported taxable gallons, of which 198 (93%) were not registered under the RFS/fuels
program.108 The high percentage of businesses on California's and Ohio's list of position holders
that are not currently registered under the RFS/fuels program indicates that a great many position
105 Each of the 147 registered parties are potential position holders (or rack sellers), however only the 37 parties that
reported taxable gallons operated as position holders in March 2016.
106 In California, the motor vehicle fuel tax is imposed upon each gallon of fuel entered, or removed from a refinery
or terminal rack in this state. https://www.boe.ca.gov/sptaxprog/reports/Mar-16_MVF_Distribution_Report.pdf
107 In Ohio, an excise tax applies to all dealers of motor vehicle fuel on the use, distribution or sale within Ohio of
fuel used to generate power for the operation of motor vehicles. Motor vehicle fuel wholesale dealers remit the tax.
https://www.epa.gov/fuels-registration-reporting-and-compliance-help/registered-companies-and-facilities-fuel-
programs.
108 http://www.tax.ohio.gov/excise/motor_fuel/motor_fuel_dealers.aspx
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holders are not renewable fuel blenders, and also suggests that these parties may have little
practical experience with or understanding of the RFS program. The addition of a number of
small entities with relatively less regulatory experience and expertise, could lead to increased
overall noncompliance with RFS requirements. Overall, this could be seen as increasing the
burden on the entities due to an influx of more parties (many of which may be small businesses)
that have little or no familiarity with the RFS program and it would likely also increase the
administrative burden on EPA to help educate these entities to help them comply, and to ensure
their compliance.
Further, in any rulemaking to modify the RFS point of obligation, EPA would need to consider
impacts to small entities, as it did in its prior rulemakings. Congress itself considered the relief
appropriate for small refineries that are obligated parties, exempting them through 2010 and then
allowing for an extension of their exemption if warranted by a DOE study or through EPA's
review of small refinery petitions alleging that their compliance would result in disproportionate
economic hardship. EPA used its discretion in the 2010 RFS2 rule to extend similar relief to the
few additional small refiners that did not qualify as small refineries. EPA convened a Panel
under the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) to consider
whether additional relief to small refiners or refineries was warranted. Were we to propose
changing the point of obligation, we would need to ensure that small businesses were aware of
this proposed change and potential impact to their business by re-engaging in the SBREFA
process. Since the statute contains no specific provisions providing relief for small entities that
are position holders or blenders, EPA's analysis in considering the need for, and fashioning
appropriate relief would potentially be more complex. The SBREFA process includes a number
of steps and would take some time to implement properly. For example, before beginning the
formal SBREFA process, EPA would need to engage in outreach with entities that would
potentially be affected by the proposed change and provide the small businesses with an early
opportunity to ask questions and discuss their concerns with the upcoming rulemaking.
Furthermore, we reasonably expect that there would be strong interest from some stakeholders to
exempt small businesses from RFS obligations. If exempted, these parties could have a
(potentially significant) financial advantage over parties that do have RFS obligations and this
dynamic could result in an increasing number of small businesses entering this market.
Regardless of the outcome of the SBREFA process, it is clear that the RFS market would
experience significant uncertainty in such a transition.
We expect there would be more non-compliance if we changed the point of obligation because
blenders and position holders are likely to have less experience and less resources to be able to
comply with the registration, reporting and recordkeeping requirements under the national RFS
program. Further, we believe the number of obligated parties would dramatically increase, which
would place greater strain on limited resources to ensure compliance and conduct program
oversight. While current obligated parties typically have significant assets that could potentially
be used to pay civil penalties and to purchase RINs to replace any determined to be fraudulent it
is reasonable to assume that position holders and blenders have relatively fewer tangible assets or
real property. It is possible that companies with few tangible assets could violate the RFS
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standards, make a quick profit, and shut down or leave the country without being brought to
justice for their actions. Even if we were able to locate these parties and prevailed in the civil or
criminal proceedings, these parties could file for bankruptcy and never have to purchase
replacement RINs or pay penalties associated with noncompliance. This could lead to less
renewable fuel use than intended, and could unfairly disadvantage other obligated parties that
meet their RFS obligations. The increased potential for EPA to not be able to ensure through
enforcement actions that the RIN system is made whole for any noncompliance would negatively
impact the integrity of the RFS program, and introduce more uncertainty into the RIN market.
C. EPA Would Need to Address Carry-Over RINs and RIN Deficits
The current RFS regulations allow parties to satisfy up to 20% of any given RVO with RINs
generated in the previous year, effectively allowing parties to "carry over" a limited number of
RINs for use towards satisfying their compliance obligations the following year. Similarly,
obligated parties that have an insufficient number of RINs to demonstrate compliance at the
compliance deadline may carry forward the deficit into the following year without penalty,
provided they satisfy both their deficit and full RVO the following year. Compliance data
submitted to EPA suggests that in aggregate parties carried over approximately 1.8 billion 2013
RINs into 2014. Since EPA established the 2014 and 2015 standards equal to the number of
RINs generated in these years we expect that a similar number of carry over RINs will be
available for use in 2016. While much smaller in magnitude, a number of parties also carried
forward deficits from 2013 into 2014.
If EPA changed the point of obligation to the fuel blenders or position holders we would also
impact the RVOs for obligated parties in future years relative to what they would have
reasonably anticipated under the existing point of obligation. In some cases these changes could
be significant. Refiners and importers with significantly lower RVOs under the new point of
obligation may find themselves in possession of significantly more RINs, including carryover
RINs, than they desire or can use. Conversely, parties with a significantly higher RVO under the
new point of obligation may find themselves with lower balances than they would desire to
protect themselves against shortfalls in RIN availability or RIN price volatility. Unlike the
current situation, where the number of carryover RINs held by an obligated party is primarily the
result of the decisions made by that party under a consistent regulatory structure, the change in
the size of each obligated party's RIN holdings relative to its obligations under the RFS program
would be the result in a change in the definition of the obligated parties many years after the
point of obligation was established through a notice and comment rulemaking.
The tradable nature of the RINs in the RFS program would help to mitigate these potential
negative impacts. Parties with excess RINs could recover some or all of the costs associated
with acquiring these RINs, or potentially make a profit, by selling them to newly obligated
parties or those who desire to acquire a bank of carryover RINs to protect themselves from future
RIN shortfalls or market volatility. The ability for parties that possess excess carryover RINs to
recover the cost of the RINs they hold by selling them to other parties, however, will be largely
impacted by the effect changing the point of obligation has on the price of RINs. If, as some of
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the petitioners have suggested, as a feasible or desirable outcome of changing the point of
obligation the price of RINs were to fall dramatically, then this change could have a significant
negative financial impact on parties that find themselves in the possession of excess RINs due to
a change in the point of obligation. Allowing sufficient notice and lead time for any change in
the point of obligation could allow parties impacted by the change sufficient time to purchase or
sell the RINs needed to better align their RIN holdings with their RFS obligations, but price
impacts could be realized quickly after announcing the change to the point of obligation. Even
if, as EPA believes, changing the point of obligation provides no benefit to the overall supply of
renewable fuel used as transportation fuel, and therefore no reduction in the price of RINs,
significant market volatility could result, and steps to mitigate market volatility (e.g. providing
significant lead time) would likely be in tension with the objectives for changing the point of
obligation.
D. Changing the Point of Obligation Would Require Significant Changes to EMTS
and Other Electronic Systems
A change in the point of obligation would necessitate changes to the Agency's registration and
reporting systems. This would result in adding complexity and stress to already complex
systems. It could potentially lead to degradation in service and reduced availability to all system
users. For any given compliance year since 2010, between 1,300 - 1,500 parties participate in
the RFS program as renewable fuel producers, RIN owners or obligated parties. Currently,
EMTS averages about 23,000 transactions daily.
As discussed previously, shifting the point of obligation downstream could result in 1,100 or
more obligated parties in EMTS. This could result in an increase in EMTS transactions
(transfers, separations and retirements) as RINs change hands between a greater number of
obligated parties, without any increase to the total number of RINs in the system. The
OTAQReg registration system would need to be modified to reflect the new definition of
obligated party, and both existing blenders and new participants would need to register/re-
register. Rights and access controls to EMTS would need to be revised to ensure proper
reporting and oversight of RIN transactions.
In addition to changes to reflect the additional numbers and roles of registrants in EMTS,
changing the point of obligation may require additional functionality for EMTS to take account
of changes in business practices and additional potential for non-compliance, including avoiding
compliance obligations, failure to identify as an obligated party, or not understanding RFS
requirements. EPA may find that the additional potential for non-compliance requires additional
reporting of information not currently tracked in EMTS, such as accounting movements of
physical volumes of gasoline and diesel fuel between potential obligated parties similar to a
designate-and-track system to ensure that RFS obligations are assigned to the proper parties.
Such a system would include additional reporting by parties such as refiners, marketers, and
blenders to ensure RFS goals are being met. Ancillary reports such as quarterly and annual
compliance reports submitted to CDX and annual attest engagements would also increase in
volume and complexity.
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V. Changing the Point of Obligation Could Cause Significant Market Disruption
In the petitions EPA has received requesting a change to the point of obligation in the RFS
program, the petitioners generally characterize their proposed changes to the point of obligation
as minor or simple. EPA disagrees with these characterizations and believes that changing the
point of obligation would be a significant change for the RFS program, and would likely lead to
significant changes in the fuels marketplace more generally.
A. Market Participants Have Made Significant Decisions on the Basis of the Existing
Regulations
When EPA first instituted the RFS program in 2007, and again when EPA significantly revised
the RFS regulations in 2010 in response to the EISA amendments EPA requested and received
many comments related to the point of obligation of the RFS program. These comments were
carefully considered and EPA specifically sought the input of the refining industry. The decision
to place the point of obligation on refiners and importers in 2007, and to uphold that decision in
2010, was made with the support of much of the refining industry.
Since then all parties regulated in the RFS program have made significant investments and
decisions about their participation in the program and their position in the market on the basis of
the existing regulations, including the definition of obligated parties. Some parties sought to
increase their access to RINs acquired by blending renewable fuels by expanding their presence
at terminals where renewable fuels are blended, or investing in blending infrastructure
downstream of terminals. Other parties entered into contracts to purchase renewable fuel with
attached RINs and/or separated RINS to satisfy their own needs or for re-sale to obligated
parties, while yet others became major renewable fuel suppliers as well. Each year obligated
parties decided how to best satisfy current and future RIN obligations, including whether or not
to carry over RIN deficits or excess RINs into future years.
Each of these decisions was made with the expectation that each party's RFS obligation in future
years would continue to be proportional to the volume of gasoline and diesel fuel they refine or
import, as is the case under the current RFS regulations. If EPA were to change the point of
obligation as requested by the petitioners, RFS obligations would instead be proportional to the
volume of gasoline or diesel fuel that parties blend with renewable fuel, or the volume of
gasoline and diesel fuel sold by parties immediately above the rack. This would substantially
impact the relative size of many parties' RFS obligations and would very likely result in efforts
to reposition themselves in the marketplace, either by renegotiating contracts or even seeking to
buy or sell assets associated with the blending of renewable fuels. If changing the point of
obligation of the RFS program were reasonably likely to result in a significant increase in the
amount of renewable fuel that was produced, distributed, and used in the United States relative to
the current point of obligation such a change may be justified; however since any increase in
renewable fuel production, distribution, and use that results from changing the point of
obligation is likely to be minimal at best, these impacts are important to consider.
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B. If the Point of Obligation is Changed, Parties Would be Expected To Reposition
Themselves to Avoid RFS Obligations
One of the desired outcomes of changing the point of obligation in the RFS program expressed
by the petitioners is to shift the obligation to renewable fuel blenders or position holders that
have access to RINs through the blending of renewable fuels. While assessing these petitions
EPA received letters from a number of independent fuel marketers and parties that owned a large
number of retail fueling stations.109 These parties are generally not currently obligated parties
(because they do not typically refine gasoline or diesel fuel, however on occasion some import
gasoline and/or diesel fuel), but would likely become obligated parties if EPA changed the point
of obligation as requested by the petitioners as they blend renewable fuels and/or are position
holders at terminals. In addition to questioning many of the benefits of changing the point of
obligation claimed by the petitioners, these parties stated that if EPA changed the point of
obligation they would likely adjust their business practices in an effort to avoid becoming
obligated parties, either by purchasing fuels already blended with transportation fuel and/or
purchasing fuel below the rack.110
In their letters to EPA, these parties acknowledged that by moving below the rack they may give
up a number of advantages that contribute to their profitability, such as the ability to purchase
fuel in bulk at a slight discount, the ability to better control their fuel supply, and advantages
related to the collection of taxes. Nevertheless, these parties stated that the costs associated with
becoming obligated parties, primarily the costs associated with developing expertise necessary to
manage their new RFS obligations and the documentation requirements, may very well outweigh
any benefits currently experienced in their position as renewable fuel blenders and/or position
holders. In their arguments these parties referenced their experience with California's LCFS
program, which allows compliance obligations to be passed on to the position holders. They
stated that this has resulted in less competitive markets at the rack, as many parties sought to
purchase fuel below the rack, rather than above the rack, to avoid LCFS obligations. They
claimed that this would be especially true for the many small entities currently engaged in the
gasoline and diesel fuel spot markets. EPA primarily spoke to larger businesses that are
currently blenders of renewable fuels and/or position holders, however any overhead costs
associated with being an obligated party would likely be proportionally more significant for
small businesses.
If parties that would become obligated parties for the first time if EPA were to change the point
of obligation as requested by the petitioners react as they have claimed in discussions with EPA,
by adjusting their business practices to avoid becoming obligated parties under the new
definition, this would significantly impact the expected results of such a change. Some of the
concerns raised by EPA, such as the large number of new parties that would become obligated
parties under the new definition and the relatively small nature of these parties, would be
109 See Letter from Tim Columbus to Administrator McCarthy, August 15, 2016; Letter from RaceTrac to
Administrator McCarthy, August 17, 2016; Letter from QuikTrip to Administrator McCarthy, August 17, 2016;
Letter from Pilot Flying J to Administrator McCarthy, August 16, 2016.
110 Ibid.
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mitigated, as these parties likely would adjust their businesses to avoid becoming obligated
parties under the new definition. However, many of the benefits the petitioners claim would
result from changing the point of obligation would also be significantly reduced. These benefits
are dependent on the change in the definition of obligated parties reallocating the RFS obligation
among the various participants in the fuels marketplace.
While it is uncertain which parties would ultimately have increased obligations if EPA were to
change the point of obligation as requested by the petitioners, it is possible that as independent
fuel marketers and retail station owners exit their current market positions as renewable fuel
blenders and position holders, the current obligated parties (the refiners and importers of gasoline
and diesel fuel), would take up these positions in an effort to find consumers for the fuel they
produce and import. If this were to happen, the end result of this significant market restructuring
would be that the RFS obligations would not substantially change from what they are under the
current definition of obligated parties. Refiners and importers would likely take on terminal
positions and the role of blending renewable fuels abandoned by the parties who currently satisfy
these roles in the market. Ultimately we believe that the RFS obligations may not be
substantially different in this scenario than they are today, and if this were the case the benefits
claimed by the petitioners would not be realized. During the time period when EPA went
through the rulemaking process to change the point of obligation, however, and as the fuels
marketplace adjusted to the realities of the change in the point of obligation there would be
significant market uncertainty and potential turmoil. To the degree that EPA invests significant
agency resources to enable the change in the point of obligation and fuels industry participants
withhold significant investment decisions until EPA's final decision and the fallout from the
decision are known, this could have a significant negative impact on achieving the goals of the
RFS program.
While changing the point of obligation in the RFS program would be unlikely to better achieve
the goals of the RFS program, especially if many of the fuel blenders, independent marketers,
and retail station owners change their business practices to avoid becoming obligated parties,
these changes could have broader negative impacts in the fuels marketplace. If the independent
marketers and retail station owners cease to be position holders, we believe the market positions
they vacate are likely to be taken up by existing refiners. This could start to reverse the fuel
industry's transition over the last decade to move away from the integrated model in which
refiners di sin vested from downstream infrastructure at wholesale and retail. The integrated
model has previously caused concerns regarding price impacts and manipulation in the market.
We believe that changing the point of obligation could provide an incentive for a shift in control
to a relatively few large parties upstream and remove choices and flexibilities that downstream
businesses have negotiated over the years in order to hold a position in what is currently a highly
competitive fuels market. Changing the point of obligation as requested by the petitioners could
result in greater market concentration in certain markets. For example, if independent marketers
and retailers give up their positions at terminals in an effort to avoid becoming obligated parties
it is possible that some terminals could become dominated by a small number of refiners, or in an
extreme situation a single refiner. This reduction in competition could result in higher fuel prices
for the retail stations that purchase fuel from these terminals, and ultimately for their consumers.
The absence of independent marketer and retail station owners at terminals may also negatively
impact the ability for retail station owners to purchase fuel on the spot market, instead forcing
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them to rely on longer term contracts with refiners to a greater degree. This would further limit
the retailers' options to purchase the lowest cost fuel. These are just examples of the negative
impacts that could result from broader market restructuring if EPA were to change the point of
obligation of the RFS program as requested by the petitioners.
VI. Conclusion
Congress authorized EPA to require "refiners, importers, and blenders, as appropriate" to be
obligated parties in the RFS program.111 After reviewing the petitions EPA has received
requesting changes to the point of obligation in the RFS program, assessing the relevant data
available to EPA, and speaking with numerous other parties that would likely be impacted by the
requested change, EPA does not believe there is a sufficient basis to support changing the point
of obligation at this time. We believe that the parties requesting this change significantly
underestimate the scope and impacts of the changes that would result from the number and
nature of additional parties that would become obligated parties if the point of obligation were
changed. Most importantly, we do not believe the petitioners have presented sufficient evidence
that the changes they have requested would result in additional production, distribution, and use
of renewable fuels as transportation fuel in the United States. If anything we believe it could
negatively impact renewable fuel volumes, especially during the substantial transition that would
be required. EPA has evaluated the functionality of the RIN market and believes that the RIN
program provides a generally efficient and equitable means for all obligated parties to meet their
compliance obligations, and that the shortfalls in renewable fuels to date are attributable to
broader market forces that would be unaffected by merely changing the point of obligation.
Finally, we believe that it is likely that if the changes requested by the petitioners were made,
many of the parties that would become obligated parties as a result of the change in the definition
of obligated parties would reposition themselves in an effort to avoid or minimize their
obligations under the RFS program. Such market repositioning would likely minimize any long
term impacts of the proposed change on the production, distribution, and use of renewable fuel,
but may also have far-reaching negative consequences across the fuels marketplace, and increase
fuel prices for consumers. In these circumstances, EPA believes the point of obligation should
be retained to promote stability and regulatory certainty, and because the program is more likely
to succeed with the current set of obligated parties.
Nevertheless, we remain committed to the long term success of the RFS program. To this end,
we desire to give full consideration to regulatory changes that may enhance the ability for the
RFS program to achieve the goals of greater production, distribution, and use of renewable fuels
as transportation fuel in the United States. We are therefore opening a docket to formally receive
comments on the petitions submitted to EPA to change the point of obligation in the RFS
program from the refiners and importers of gasoline and diesel fuel to other parties, such as
blenders or position holders of these fuels. This docket will remain open for 60 days. Following
the close of the comment period, EPA will review the comments we have received and determine
whether or not to proceed with a proposed rule to change the point of obligation in the RFS
program. EPA specifically requests comments that address whether or not changing the point of
obligation in the RFS program would be likely to significantly increase the production,
111 CAA Section 21 l(o)(3)(B)(ii)(I).
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distribution, and use of renewable fuels as transportation fuel in the United States, as well as any
data that can substantiate such claims. We also seek comment on any of the issues discussed
here, including EPA's authority to place the point of obligation on distributors and position
holders; the significance of limiting the number and nature of obligated parties; the number of
parties that are currently blenders or position holders; the extent to which blenders and position
holders may be small businesses for whom designation as an obligated party would be
particularly burdensome; whether it is likely that renewable fuel blenders and/or position holders
would reposition themselves in the market to avoid RFS obligations and the likely impact of
such repositioning; the significance of transitional issues and potential regulatory uncertainty that
would result from changing the point of obligation; and the extent to which a change in the point
of obligation could lead to unintended market changes or consequences.
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