Denial of Petitions for Rulemaking to
Change the RFS Point of Obligation
£% United States
Environmental Protect
Agency
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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-R-17-008
November 2017
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Executive Summary
The Environmental Protection Agency (EPA) has received several petitions requesting that the
EPA initiate a rulemaking process to reconsider or change 40 CFR 80.1406 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. 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."
This statutory provision also allows EPA to modify the point of obligation if the designated
parties are no longer appropriate. While evaluating petitions on the RFS point of obligation, EPA
also evaluated whether the current obligated parties remain the appropriate obligated parties
under CAA 21 l(o)(3)(B)(ii)(I). EPA has concluded that it is appropriate to retain the current
regulatory requirement designating refiners and importers as the parties responsible for
compliance with RFS standards because we again believe refiners and importers are the
appropriate obligated parties.
In their initial petitions, the petitioners all asked to have the point of obligation shifted from
refiners and importers, but they differed somewhat in their suggestions for alternatives. Some
requested that the EPA shift the point of obligation from refiners and importers to those parties
that blend renewable fuel into transportation fuel. Others suggested 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 argued, 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 claimed 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.
On November 10, 2016, the EPA published a proposed denial of requests to initiate a
rulemaking process to reconsider or change the regulations at 40 CFR 80.1406. See Proposed
Denial of Petitions for Rulemaking to Change the RFS Point of Obligation, EPA-HQ-OAR-
2016-0544, hereinafter "proposed denial." The EPA solicited comment from interested
stakeholders on the proposed denial. Acting on the request of stakeholders, the EPA extended the
public comment period to February 22, 2017. The EPA received over 18,000 comments
submitted to the docket. The EPA's response to significant and relevant comments is provided
within this document. Notwithstanding the different suggestions for shifting the point of
obligation that were expressed in the initial petitions, in their comments, all petitioners suggested
that the definition of "obligated party" in 40 CFR 80.1406 should be changed to put the
obligation for compliance with the RFS percentage standards on "position holders."1
1 The Small Refiners Coalition and others, in comment, argued in the alternative that the point of obligation could be
placed on blenders if the EPA lacks the authority to place the point of obligation on "position holders."
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The Administrator is today denying all petitions seeking initiation of a rulemaking process to
change the definition of obligated party under the RFS program. Our conclusion reflects
consideration of the alleged benefits that Petitioners and some commenters have suggested
would ensue from a change in the point of obligation, as well as negative impacts that the EPA
believes would result from such a change. In our judgment, it does not appear that the record
before the Agency indicates that a change in the point of obligation would result in net overall
benefits to the program. In addition, however, we believe that changing the point of obligation at
this time would be very disruptive to the program, and likely the fuels marketplace as well,
undermining long settled expectations and the program stability and certainty that are critical to
both short- and long-term success of the program. Thus, even if there were some marginal net
benefits to changing the point of obligation, we believe that the disruptive effects of a change at
this time would still warrant denial.
As discussed in more detail below, 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. Based
on the information currently available to the EPA, changing the point of obligation would not
address challenges associated with commercializing cellulosic biofuel technologies and the
marketplace dynamics that inhibit the increase of fuels containing higher levels of ethanol, two
of the primary issues that limit the rate of growth in the supply of renewable fuels today. 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. EPA is also not persuaded, based on our analysis of available data,
including that supplied by petitioners and commenters, by arguments that merchant refiners2 are
disadvantaged under the current regulations in comparison to integrated refiners in terms of their
costs of compliance, nor that other stakeholders such as unobligated blenders are receiving
windfall profits. Finally, EPA does not interpret the Clean Air Act as authorizing it to place the
point of obligation on distributors or on those "position holders" who are neither refiners not
blenders. For all of these reasons, as further described below, EPA is denying the petitions for
reconsideration.
The point of obligation has been placed on refiners and importers since inception of the RFS
regulatory program, in 2007. We also believe that in considering whether to embark on a
rulemaking exercise to change the regulations, that it is appropriate for EPA to take into
consideration the consequences of enacting a change at this time. In the short term we believe
that initiating a rulemaking process to reconsider or change the point of obligation would work
counter to the program's goals by causing significant upheaval 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, and strand past investments, 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.
2 Merchant refiners are those that market only a minority of 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.
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In addition, changing the point of obligation could 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. It could also lead to restructuring of the fuels marketplace as
newly obligated parties alter their business practices to avoid compliance obligations. For
example, if the point of obligation were changed to "position holders," we believe that parties
who previously were "position holders" may choose to instead 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.
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Table of Contents
I. Introduction 6
A. Relevant Parties in the Fuel Market 9
B. Overview of RFS Obligations and Compliance 10
C. Statutory and Regulatory History of the Point of Obligation 11
II. The Current Program Structure Appears to Be Working to Achieve the Goals of the RFS
Program 15
A. RINs are Providing an Incentive for Increasing Renewable Fuel Production, Distribution,
and Use 16
B. Current RIN Prices Are Not Indicative of a Dysfunctional RIN Market 18
C. The Current Regulations do not Appear to Disproportionately Impact Merchant Refiners
or Provide Windfall Profits for Unobligated Blenders 21
D. The Current Regulations Do Not Appear to Negatively Impact Small Retailers 31
E. The EPA Has Not Seen Evidence That High RIN Prices Have or Will Force Refiners to
Decrease Production or Increase Exports 33
F. A Relatively Small Number of Obligated Parties is Generally Advantageous 35
G. The Current Program Structure Does Not Require Market Repositioning to Achieve
Compliance 37
H. The Current RIN Market Does Not Appear to be Subject to Significant Manipulation, and
a Change in the Point of Obligation will not Reduce Fraud 38
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 41
A. Some of the Proposed Changes to the Point of Obligation Are Inconsistent with the CAA
43
B. Renewable Fuel Production, Distribution, and Use Does Not Appear to Be Significantly
Limited by Blending Infrastructure 45
C. Changing the Point of Obligation Is Not Expected to Significantly Impact the Retail
Pricing of Fuel Blends with High Renewable Content 50
D. Changing the Point of Obligation Is Not Expected to Significantly Impact the Availability
to Consumers of Fuel Blends with Higher Renewable Content 56
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 60
F. Changing the Point of Obligation Would Not Be Expected to Increase Cellulosic Biofuel
Production 61
G. Changing the Point of Obligation Would Not Be Expected to Increase Energy Security. 63
IV. Changing the Point of Obligation Would Significantly Increase the Complexity of the RFS
Program 68
A. The Number of Obligated Parties Would Increase if the Point of Obligation was shifted to
"Position Holders" or "Blenders" 69
B. The Potential for Noncompliance May Increase if the Point of Obligation is Changed ... 74
C. The EPA Would Need to Establish Transition Provisions 77
D. Changing the Point of Obligation Would Require Significant Changes to EMTS and Other
Electronic Systems 78
V. Changing the Point of Obligation Could Cause Significant Market Disruption 79
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A. Market Participants Have Made Significant Decisions on the Basis of the Existing
Regulations 79
B. If the Point of Obligation is Changed, Parties Would Be Expected to Reposition
Themselves to Avoid or Minimize RFS Obligations 80
VI. Other Comments 83
VII. Conclusion 84
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I. Introduction
On March 26, 2010, the Environmental Protection Agency ("EPA") issued a final rule (the
"RFS2 Rule")3 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.4 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.5 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(b) for challenges to
CAA rules.6 These suits have been stayed pending final action by the EPA on the administrative
petitions for reconsideration.
Some petitioners7 that challenged the rule establishing RFS standards for 2014, 2015 and 2016,
alleged both that the EPA had a duty to annually reconsider the appropriate obligated parties
under the RFS program and that it was required to do so in response to comments suggesting that
it could potentially avoid or minimize its exercise of the inadequate domestic supply waiver
authority if it did so. In a recent ruling in that litigation, the United States Court of Appeals for
the District of Columbia Circuit declined to rule on the matter, and instead indicated that the
EPA could address the matter either in the context of a remand of the 2014-2016 rule ordered on
3 75 Fed. Reg. 14670.
4 In imposing the fundamental RFS compliance obligation on refiners 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.
5 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."
6 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 Corperation v.
EPA, #16-1055 (D.C.Cir. 2016).
7 Petitioners Valero Energy Corporation, Alon Refining Krotz Spring, Inc., et al., Monroe Energy LLC, and
American Fuel and Petrochemical Manufacturers raised arguments related to the RFS point of obligation in their
challenges to EPA's rule setting the RFS percentage standards for 2014, 2015, and 2016.
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other grounds, or in response to the administrative petitions.8 As noted above, the EPA is
denying the petitions seeking a change in the definition of "obligated parties." The EPA also is
re-affirming that the existing regulation applies in all years going forward unless and until it is
revised. The EPA does not agree with the petitioners in the ACE case that the statute requires
annual reconsideration of the matter and, although the EPA has the discretion under the statute to
undertake such annual reevaluations, the EPA declines to do so since we believe the lack of
certainty that would be associated with such an approach would undermine success in the
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program. '
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).11 However, for purposes of this
decision document, 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.12 This evaluation provides
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 denying all
requests to initiate a rulemaking to change the current regulation.
In considering the petitions to change the point of obligation in the RFS program, the EPA has
reviewed the large amount of information submitted by the petitioners and has met with those
who requested meetings and other interested parties. The 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. The EPA
received over 18,000 comments submitted on its proposed denial, and has reviewed and
considered the information submitted. Many of these comments were part of mass comment
campaigns, and contained similar messages; however, the EPA received approximately 350
unique comments. See Docket EPA-HQ-OAR-2016-0544. Many commenters presented similar
arguments to those put forth by petitioners in their initial requests for reconsideration or
rulemaking. EPA also received many comments supporting EPA's proposed denial. Where
significant new arguments or information were presented in comments, the EPA has addressed
8 See Americans for Clean Energy v. Environmental Protection Agency, 864 F.3d 691 (D.C. Cir. 2017) ("ACE").
9 The EPA interprets the CAA to allow the designation or redesignation of "appropriate" obligated parties to occur
at any time, as the phrase "as appropriate" is broad and confers significant discretion. While the statute specifies that
the percentage standards must be applicable to refineries, importers, or blenders as appropriate, it does not say that
EPA must annual reevaluate the matter.
10 Nevertheless, the EPA could consider changes to the definition of "obligated party" in the future, based on
significant new facts or analysis. Given the time pressure associated with its annual standards rulemakings, EPA
expects that any such consideration would not occur in the context of those rulemakings.
11 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).
12 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 have considered 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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those within this document. EPA also received a number of comments on the RFS point of
obligation in response to its proposed 2018 RFS requirements.13 EPA has reviewed those
comments, and where appropriate, addressed them within this document.
Who should be designated an "obligated party" under the RFS program is an issue that has
generated significant debate, especially in the last few years, and one that raises complex
questions about the appropriate structure of the RFS program. The various parties have
presented a wide range of different information and analyses, and some have offered different
interpretations of the same information and analyses. The EPA's primary consideration here is
whether or not the requested change(s) would improve the effectiveness of the program to
achieve Congress's goals, which are to increase energy security and reduce emissions of air
pollutants by requiring that increasing volumes of the nation's transportation fuel be comprised
of 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 the 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. EPA also has
considered the impact of the current regulatory structure, and the proposed alternatives on the
groups that would be regulated under these options, with the objective of determining whether
the current or alternative options may be more equitable or the burdens more facilely borne.
CAA 21 l(o)(3)(B)(ii)(I) provides that the annual renewable fuel obligations shall "be applicable
to refineries, blenders, and importers, as appropriate." The use of the term "appropriate" in
determining the obligated parties provides significant discretion conferred upon EPA. See
Michigan v. EPA, 135 S. Ct. 2699, 2707 (2015) (explaining that "'appropriate' is the classic
broad and all-encompassing term" and "leaves agencies with flexibility"). EPA has discretion
not only in determining when to modify the definition, but also under what circumstances. After
consideration of the information currently before EPA, and as discussed in this document, EPA
continues to believe that the point of obligation is appropriately placed on refiners and importers
of transportation fuel. As expressed in Section II below, EPA believes the current designation of
obligated parties is working to achieve the goals of the RFS program.
Additionally, EPA evaluated the impact of a possible change to the definition of "obligated
party" on consumers, including potential impacts on fuel prices. As described in more detail
below, changing the point of obligation as proposed by petitioners and other stakeholders would
significantly increase the number of obligated parties in the RFS program. Many of these newly
obligated parties would be smaller companies or those that do not regularly conduct business in
the RIN market, who are likely to be unfamiliar with the requirements of obligated parties under
the RFS program. The administrative compliance burden of the RFS obligations would likely be
proportionally greater for these smaller companies than current obligated parties (relatively
larger refiners and importers of gasoline and diesel) who typically employ engineers, traders,
accountants, attorneys, and auditors to demonstrate and verify compliance with the RFS and
other regulatory programs. It would also increase EPA's burden in administering and enforcing
the RFS program 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.
13 See Docket EPA-HQ-OAR-2017-0091.
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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, petitioners
and commenters have failed to provide data that confirms these claims. We continue to 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. The EPA is also not
persuaded, based on the record before us, by arguments that, under the current regulatory
structure, merchant refiners are disadvantaged compared to integrated refiners in terms of their
costs of compliance, nor that other stakeholders are receiving windfall profits. The costs of the
RFS program are apportioned to all refiners and importers as a function of their production
volume and generally are passed on to consumers. Finally, we believe that 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.
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 from the
"refinery gate" through pipeline, barge, or rail, to 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 produced in the United States moves through the
"rack."14 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.15 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. It defines
rack sellers at the refinery rack as "refiners" and rack sellers at the terminal rack as "position
holders." For simplicity, we have elected in this document to refer to all parties the IRS
considers to be refiners or position holders as "position holders." All subsequent references to
"refiners" in this document are to parties that refine petroleum products, whether or not they are
rack sellers.
14 For fuel imported into the United States, transportation fuel can move through a rack, or is tracked through
registration as an "entrant."
15 The term "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, wholesalers, and/or distributers depending on market conditions, and the terms overlap
considerably.
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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 a minority of 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 engage in both practices: market a portion of their refined products, and sell fuel to other
parties to distribute and market. 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
"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 the EPA calculates and establishes percentage standards for renewable fuel based on
the volume targets established in the CAA (which are adjusted by the EPA as appropriate using
its waiver authorities), and projections from the Energy Information Administration (ElA) 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 or import. However, to allow the market to function more efficiently and
avoid market disruption, in implementing the statutorily-required credit program, and to assist
obligated parties in meeting their individual renewable fuel volume obligations ("RVOs"), the
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
to demonstrate compliance. Renewable fuel producers and importers generate and assign RINs to
the renewable fuel they produce or import, 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.16 The assigned RINs accompany the
fuel sold by renewable fuel producers and importers, and can only be separated from the fuel by
16 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 (other
than ethanol derived from corn starch) that achieves a GHG reduction of at least 50%. D6 RINs can be generated
for conventional renewable fuels (primarily corn ethanol) that achieve a GHG reduction of at least 20%, or for fuel
within the established annual baseline volume from grandfathered production facilities. D7 RINs can be generated
for cellulosic diesel, which is any fuel that meets the requirements for both cellulosic biofuel and biomass-based
diesel.
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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.17 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 the 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
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 ("EPAct"), 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).
On September 22, 2006, the EPA published a proposed rule to establish the regulatory
framework to implement the RFS program. The 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. The EPA specified that those blenders who only added
renewable fuel to gasoline would not be obligated parties.18 The EPA noted that there were
approximately 1,200 ethanol blenders, as compared to 100-200 refiners and importers and stated
that making ethanol blenders 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."19
The EPA received comments supportive of the EPA's proposed definition of obligated parties
from the Society of Independent Gasoline Marketers of American and the National Association
17 There are separate, but nested, standards for cellulosic biofuel, biomass-based diesel, advanced biofuel, and
renewable fuel.
18 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.
19 Ibid at 55573.
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of Convenience Stores (SIGMA/NACS), ExxonMobil, Baker Commodities, Griffin Industries,
Methanol Institute (MI), and the American Petroleum Institute (API). The EPA did not receive
any comments suggesting a different approach.20
On May 1, 2007, the 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.21 The program was expanded to apply to diesel fuel and
otherwise significantly modified in 2007 through the Energy Independence and Security Act
("EISA"), 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." 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."22 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 for four categories of
renewable fuel by the EPA that also take into account the expected consumption of gasoline and
diesel fuel. As was the case with EPAct, the amended statute required the 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.
The statute also specifically required a temporary exemption for small refineries (through 2010)
that could be extended by the EPA either based on the results of a Department of Energy (DOE)
study on impacts of the program on small refineries to be completed by December 31, 2008, or
on a case-by-case basis upon demonstration by a small refinery of disproportionate economic
hardship.
On May 26, 2009, the EPA proposed amendments to the RFS program regulations to reflect the
significant statutory changes enacted as part of EISA.23 The 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. The 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,24 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,
20 SIGMA/NACS commented that in the final rule the 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 the EPA to clarify that a party blending biodiesel into diesel fuel would not be
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 or import gasoline, including the limited
subset of blenders who blend petroleum (i.e. non-renewable) 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.
21 72 Fed. Reg. 23900.
22 Energy Independence and Security Act of 2007, PL 110-140, December 19, 2007.
23 74 Fed. Reg. 24904.
24 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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the 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. The
EPA also explained that in adopting the approach under RFS1, the 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. The 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 responsible for compliance with the percentage standards could involve only a small
additional burden. The EPA indicated that under the expanded program, there might be
disparities in the ability of various obligated parties to acquire RINs. As a result of these
considerations, and in light of the more complicated obligations required under RFS2, although
proposing to retain the definition of obligated party (refiners and importers) from RFS1, the 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.25
On March 26, 2010, the EPA issued a final rule establishing the amended RFS program structure
reflecting the EISA amendments.26 The 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. The 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
25 74 Fed. Reg. 24904, 24963.
26 75 Fed. Reg. 14670.
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parties and the movement of RINs, changes that could disrupt the operation of the
RFS program during the transition from RFS1 to RFS2.27
Nevertheless, because concerns over the liquidity of the RIN market still existed at the time, the
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."28
The 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 the EPA reconsider the point of obligation for the RFS
program, petitioners claim that the justifications given by the 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. After providing notice and opportunity for comment, and after careful review
and consideration of the comments received, we disagree that a change to the RFS point of
obligation is warranted, for the reasons described below.29
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 the EPA about the desire for greater certainty and stability in the RFS program. As discussed
further below, the 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.
Several commenters referenced the statutory directive that the EPA "ensure that transportation
fuel. . . contains at least the applicable volume" of renewable fuel as evidence that EPA should
modify the obligation if it is "hindering growth." As discussed below in Section II., Petitioners
only provided theoretical arguments that when evaluated provide no firm basis to conclude that a
change in the point of obligation would lead to increased volumes of renewable fuel. In contrast,
we continue to believe that the disruption to the program by changing the point of obligation
would actually reduce renewable fuel volumes and that long term positive impacts, if any, would
be negligible. This belief is supported in part by the fact that the shortfall at this point is
exclusively in cellulosic biofuels, and a change to the point of obligation is unlikely to impact
cellulosic biofuel production. For this reason, and as further discussed below, we do not believe
27 75 Fed. Reg. 14670.
28 Ibid.
29 Valero, in comment, suggested that EPA set an improper burden for petitioners in evaluating the petitions. They
stated that they provided sufficient robust evidence to justify a change in the point of obligation. Valero specifically
cited to work completed by NERA, SMU, Ron Minsk, Doug Parker, Commander Kirk Lippold, Charles River
Associates, and Joe Jobe. EPA has evaluated these analyses and has concluded that they do not provide sufficient
justification for a change in the point of obligation. An analysis of each of these reports is presented below in the
following sections: II.B., II.C., II.E., II.H., III.B, III.C, III. D, III.G.
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that a change in the point of obligation would have the positive effect suggested by Commenters,
and we do not believe that the current point of obligation is "hindering growth."
The CAA dictates that the point of obligation should be placed on refineries, importers, or
blenders as appropriate. EPA has considered the petitions and comments submitted and finds, for
the reasons stated herein, that refiners and importers remain the appropriate parties.
II. The Current Program Structure Appears to Be Working to Achieve the Goals of the RFS
Program
Petitioners and some commenters discuss several perceived shortcomings of the RFS program.
The petitioners generally attribute these shortcomings, in whole or in part, to the 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 the EPA should re-visit
the point of obligation in the RFS program.
After reviewing the information submitted by the petitioners and commenters, along with
additional information gathered by the EPA, we disagree with a number of the 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 envisioned, 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 projected to meet or exceed the statutory volumes for non-cellulosic
biofuels in 2017. RIN prices themselves have not resulted in appreciably higher transportation
fuel prices for consumers or disproportionate harm for merchant refiners.30 Finally, the record
does not support claims that merchant refiners have resorted to the extreme measures suggested
by the petitioners, such as decreasing fuel production or exporting the fuel they produce,31 in an
30 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 BO 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.
31 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. To date EPA has not been provided with evidence that demonstrates that merchant refiners
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effort to minimize their RFS obligations. RINs are currently available to meet compliance needs,
and we see no reason to indicate that this dynamic will change in the future.32
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 the
cellulosic and inadequate domestic supply waiver authorities to reduce the required volumes of
renewable fuel in 2014-2016, as well as our May 31, 2016 proposal to use similar authorities
with respect to establishing the renewable fuel standards 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. First, EPA did not rely on the general
waiver authority under a finding of inadequate domestic supply in the final 2017 rule, meaning
that all reductions in the final rule use only the cellulosic waiver authority in 21 l(o)(7)(D) and
are attributable to a shortfall in cellulosic biofuel production.33 EPA has proposed a similar
approach with respect to the 2018 RFS standards.34 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 beyond what is already happening based on
current market incentives. Based on data collected through the EPA Moderated Transaction
System (EMTS),35 the production and import of renewable transportation fuel in the United
States has increased from approximately 7 billion ethanol-equivalent gallons in 2010 to
approximately 18.6 billion ethanol-equivalent gallons in 2016, the most recent year for which
complete data are available. This represents an increase of over 165% in just six years.
Importantly, EPA found no basis for reductions to the advanced and total renewable fuel
requirements in 2017 beyond the reductions made under the cellulosic waiver authority due to
the projected shortfall in cellulosic biofuel production relative to the statutory volume for 2017.
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
favorably situated to export fuel from the U.S. have increased exports as a result of any burden associated with the
RFS program. 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).
32 Based on the compliance information submitted by obligated parties for the 2016 compliance year, EPA
calculated that there were over 2 billion 2016 RINs available for use in 2017 (see Carryover RIN Bank Calculations
for 2018 NPRM). Such carryover RINs are available to obligated parties for compliance purposes, effectively
supplementing the volume of RINs associated with renewable fuel production during the compliance year.
33 Renewable Fuel Standard Program: Standards for 2017 and Biomass-Based Diesel Volume for 2018. 81 FR 8946
(December 12, 2016).
34 Proposed Rule: Renewable Fuel Standard Program: Standards for 2018 and Biomass-Based Diesel Volume for
2019. 82 FR 34206 (July 21, 2017).
35 RIN generation data are available publicly at https://www.epa.gov/fuels-registration-reporting-and-compliance-
help/public-data-renewable-fuel-standard.
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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.36
Despite these successes, in recent years the EPA has exercised the statutory waiver authorities to
reduce the renewable fuel volumes from those specified in the statute, largely due to the shortfall
in cellulosic biofuel production.37 While the EPA relied on the use of the general waiver
authority in 2014-2016, reductions in the 2017 final rule and proposed 2018 rule were made
using only the cellulosic waiver authority. Reductions using the cellulosic waiver authority in
2017, and those proposed for 2018, can be attributed to lower production of cellulosic biofuels
than envisioned by Congress resulting from challenges experienced with the development and
commercialization of cellulosic biofuel production technologies. The projected production and
use of non-cellulosic renewable transportation fuels in 2017 and again in 2018 meets or exceeds
the volume envisioned by Congress in EISA.38 Similarly, required biodiesel volumes for 2017
are 100% greater than the statutory prescribed minimum volume, and for 2018 the required
volume is 110% greater than the statutory minimum.39 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. We note, however, that these issues were not the basis for reducing the RFS standards in
2017, nor for the proposed reductions in 2018. In the rule establishing the renewable volume
obligations for 2017, and again in our proposed rule for 2018, the EPA determined that the
supply of conventional biofuel is sufficient to meet the implied statutory target of 15 billion
gallons. We also found that the supply of non-cellulosic advanced biofuels was sufficient to
meet or exceed the implied statutory requirements for these fuels.40 As discussed further below,
the primary factor limiting the production of cellulosic biofuels, including cellulosic ethanol, is
the slower than expected development and commercialization of technologies that can reliably
and economically produce these fuels.
Some commenters suggested that changing the point of obligation would provide benefits to the
cellulosic biofuels industry, whereas other comments agreed with EPA's proposed assessment
that changing the point of obligation would not positively impact the cellulosic biofuel industry.
36 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.
37 For a Ml discussion of EPA's waiver authorities see the preamble to the Final Rule establishing the 2014-2016
RFS standards (80 FR 77420, Dec. 14, 2015).
38 The statutory volumes for total renewable fuel, advanced biofuel, and cellulosic biofuel in 2017 are 26.0, 11.0,
and 7 billion gallons respectively. Therefore, the implied statutory targets for conventional biofuel (the difference
between the required volumes of total renewable fuel and advanced biofuel) and non-cellulosic advanced biofuels
(the difference between the statutory volumes of advanced biofuel and cellulosic biofuel) are 15.0 billion gallons
and 4 billion gallons respectively. The volumes proposed by EPA in our July 2017 proposed rule for 2018 for total
renewable fuel, advanced biofuel, and cellulosic biofuel are 19.24, 4.24 and 0.238 billion gallons respectively, with
an implied volume of 15.0 billion gallons of conventional biofuel and 4 billion gallons of non-cellulosic advanced
biofuel.
39 Compare CAA 211(o)(2)(B)(v) (1 billion gallon minimum) with the required volumes of 2.0 and 2.1 billion
gallons of biomass-based diesel in 2017 and proposed in 2018 respectively.
40 EPA calculates the implied statutory target for non-cellulosic advanced biofuels by subtracting the statutory
volume for cellulosic biofuel from the statutory volume for advanced biofuels for each year.
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These comments are discussed in more detail in Section III.F below. However, overall the EPA
does not find the arguments for moving the point of obligation in an effort to support the
cellulosic biofuel industry convincing. The proposed cellulosic biofuel volume for 2018 is just
3.4% of the statutory volume (i.e., 238 million ethanol-equivalent gallons expected production
compared to a statutory volume of 7 billion gallons). Furthermore, the vast majority of the
cellulosic biofuel currently produced is biogas rather than liquid cellulosic biofuels. 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, particularly liquid cellulosic
biofuels, 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 rules
establishing the standards for 2014-2017 and in the proposed rule to establish standards for
2018.41 Beyond 2018, 90% of the growth in the statutory RFS volumes is intended to be
cellulosic biofuel, with the remainder of the growth coming from non-cellulosic advanced
biofuels. Because the statutory design of the RFS program provides limited incentives to
obligated parties to invest in the development of cellulosic biofuels (since the statute requires
that the cellulosic biofuel volume be set equal to the volume projected to be produced in any
given year if this volume is lower than the statutory volume, and also allows the use of cellulosic
waiver credits rather than RINs in years with such a reduction), it is unlikely that changing the
point of obligation as requested by the petitioners would result in increased investment in
cellulosic biofuels by the obligated parties under their proposals. As discussed further in Section
III.F, and based on evidence presented by petitioners, and the information before the agency at
this time, changing the point of obligation of the RFS program is unlikely to address the
significant challenges associated with the commercialization of cellulosic biofuel, as these
challenges are associated with the economic production of cellulosic biofuels at commercial
scale rather than the distribution and use of cellulosic biofuels, and would not be expected to
benefit the production, distribution, and use of non-cellulosic transportation fuel in the United
States, as detailed further below.42
B. Current RIN Prices Are Not Indicative of a Dysfunctional RIN Market
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.43 As
discussed in a memorandum prepared in support of the proposed RFS annual standards for 2014-
41 80 FR 77420 (Dec., 14, 2015), 81 FR 89746 (December 12, 2016) and 82 FR 34206 (July 21, 2017).
42 As discussed in more detail in Section III.C below, changing the point of obligation is also not expected to
significantly impact the market dynamics currently limiting the distribution and use of E85.
4343 Some commenters suggested that when described in RFS1 and RFS2, RINs were a compliance mechanism only,
and not described as a means to effect change in the marketplace. EPA notes that while RINs were designed to
provide flexibilities, as the costs associated with increasing renewable fuels in the marketplace has increased, it is
logical for RIN prices to increase as well. While at the time the RIN system was created, and the standards were
essentially non-binding, RINs played solely a compliance role, but that naturally changed as the standards became
more difficult to meet.
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2016, the EPA does not believe that the D6 RIN prices44 observed in recent years are indicative
of a dysfunctional RIN market.45 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. 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.46 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.47
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 would be likely to result in lower D6 RIN prices than would be
expected to occur with the existing point of obligation, nor would such a change result in D6
RIN prices comparable to those observed in 2012 or earlier. The price of RINs will continue to
vary in the marketplace in response to a variety of factors.
Several commenters disputed the EPA's statement in the proposed denial of petitions seeking a
change in the RFS point of obligation that the observed RIN prices were not indicative of a
dysfunctional RIN market. For example, one petitioner submitted a paper alleging significant
friction in the RIN market related to the current point of obligation.48 This paper cites several
factors they claim are the sources of high friction in the RIN market: high RIN transaction costs
(indicated by high bid-ask spreads), high RIN price volatility (which may be a sign of an illiquid
market), poor availability of information on RIN prices, differing levels of access to renewable
fuels and/or markets for renewable fuel blends among obligated parties, and the potential for
RIN market manipulation.
44 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.
45 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.
46 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
increased volatility could be one outcome of changing the point of obligation.
47 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.
48 Charles River Associates RINs Market Frictions and the RFS Point of Obligation, February 2017.
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After reviewing this paper, the EPA has concluded that a number of the claims made by the
authors are not well supported by the data presented, while other issues highlighted by the
authors would be unlikely to be significantly impacted by a change in the point of obligation.
The authors present no data to support their argument that RIN transaction costs are high, nor do
they present a compelling argument as to why changing the point of obligation would be
expected to lower transaction costs. Instead, the commenter simply suggests that the historical
volatility of RIN prices is evidence of the high transaction costs and the relative thinness of the
RIN markets.49 While the EPA does not have access to data on RIN transaction costs we have
no reason to suspect that they are unreasonably high. Data published by EPA on our public
website refutes the suggestion that there is thinness in the RIN market. For the 2014 compliance
year, the most recent year for which RIN trade data are publicly available, there were over 50
billion RIN transactions.50 We believe that the price volatility observed in the RIN market is the
result of a number of factors including volatility in underlying commodity pricing, the statutory
design of the RFS program, which requires RVOs to be adjusted annually, uncertainty related to
legal challenges to the annual volume obligations, and the challenges associated with increasing
the consumption of renewable fuel volumes beyond the E10 blendwall. The EPA also disputes
that there is poor availability of information on RIN pricing. The EPA is aware of at least two
subscription services (Oil Price Information Service and Argus) and one free price report
(Progressive Fuels Limited) that report daily RIN price information, including the bid/ask prices
and in the case of Argus the RIN trade volumes. Other issues raised in this report, such as the
relative inelasticity of the supply of RINs due to the very small markets for El 5 and E85, the
contractual relationship between refiners and branded stations, and the lack of availability of RIN
holding and trade information due to CBI constraints are not expected to be impacted by a
change in the point of obligation in the RFS program.51
One petitioner also implies that higher RIN prices lead to higher fuel prices for consumers.52
When D6 RIN prices first rose substantially in 2013, attention turned to whether and how such
RIN price increases affect consumer fuel prices. The 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.53 External, non-EPA assessments similarly concluded that increased RIN prices had
49 A thin market is one in which the trading volume is relatively low and/or there are a relatively low number of
buyers and sellers.
50 See Annual RIN Sales/Holdings Summary on EPA public website: https://www.epa.gov/fuels-registration-
reporting-and-compliance-help/annual-rin-salesholdings-summary.
51 See Section III.B - III.D for a further discussion of the anticipated impacts of changing the point of obligation on
the sales of renewable fuels and renewable fuel blends. The contractual relationships between the refiners and retail
stations, which can include fuel purchase restrictions, sales volume requirements, requirements on the number of
grades of gasoline which must be offered, etc. predate the RFS requirements and are therefore unlikely to change
substantively if the point of obligation is changed. Finally, RIN holding and trade information is generally claimed
as confidential business information (CBI), and this would likely be the case regardless of whether the obligated
parties are refiners and importers or if they are "position holders" or blenders.
52 Valero Petition for Rulemaking, June 13, 2016. Page 18.
53 "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.
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not had a significant impact on retail gasoline (E10) prices.54 When RIN prices rise, the market
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 EO 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 than they would be absent high RIN prices, while
fuels with lower renewable content are relatively more expensive when RIN prices are high.55
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 the 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 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 or import) are selling excess RINs and generating windfall profits. Several other parties
have submitted documents to the EPA disputing these claims.56
54 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 .
55 Even when RIN prices are relatively high fuels with high renewable content may not be cheaper than fuels with
lower renewable content on an energy-equivalent basis. For example, despite relatively higher RIN prices since
2013, the national average price discount for E85 relative to E10 has never reached or exceeded 22% (the price
discount needed for achieve parity between E85 and E10 on an energy equivalent basis). See also "A Preliminary
Assessment of RIN Market Dynamics, RIN Prices, and Their Effects," Dallas Burkholder, Office of Transportation
and Air Quality, U.S. EPA, May 2015. and "An Assessment of the Impact of RIN Prices on the Retail Price of E85,"
Dallas Burkholder, Office of Transportation and Air Quality, U.S. EPA, November 2015.
56 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.
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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). Our reasons for not believing that merchant refiners are
uniquely impacted by the RFS program are summarized below.57
To understand why this is the case, we must consider the fundamental argument about cost
disparities that petitioners and merchant refiners present to the EPA. Several 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.58 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 for the RVO associated with the production volumes they do not market,
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. In addition, as discussed further below, all
refiners and importers of gasoline and diesel fuel destined for the domestic market incur costs to
comply with RFS obligations. This is true whether the refiners and importers acquire RINs by
blending renewable fuels (in which case they realize a cost when they sell blended fuels for a
lower price than the weighted average of the petroleum blendstocks and renewable fuels that
comprise the blended fuel) or purchasing separated RINs - meaning no fundamental inequity
exists.59 Moreover, because all refiners and importers have RFS obligations in proportion to the
fuels they produce or import, they all have similar per gallon costs of compliance related to the
RFS program, and they all seek to recover those costs through the pricing of their products,
whether that product is blended with renewable fuel and sold at a terminal or is unblended
57 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.
58 For example, see comments from CVR Energy on the 2017 RFS standards proposed rule, EPA-HQ-OAR-2016-
0004-0213.
59 The issue of whether or not integrated refiners and other unobligated blenders acquire RINs "for free" or at a
reduced cost is addressed more fully later in this section.
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petroleum blendstocks sold at the refinery gate. 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 market price of the fuel
they sell that is attributable to the RFS obligations. The market price they receive for the
gasoline and diesel fuel they sell reflects the cost of RINs. While high RIN prices increase the
market price of petroleum blendstocks, they generally do not increase the market price of fuels
blended with renewable fuels, as the blenders use the value of the RIN to reduce the price of the
blended fuels. The same dynamic applies to all gasoline blendstocks and diesel fuel produced by
both merchant and integrated refiners alike. Further, many merchant refiners blend a portion of
the gasoline and diesel they produce with renewable fuels and directly market this fuel (while
selling the majority to other parties for marketing), while many integrated refiners sell a portion
of the gasoline and diesel they produce as unblended blendstocks to other fuel marketers. There
are not two prices in the market for petroleum fuels based on whether or not they are intended to
be marketed directly to consumers or sold to a downstream marketer, but rather separate prices
for petroleum blendstocks and blended fuels.
The 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.60 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).61 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 also very similar chemically. 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 and diesel prices.
Several commenters submitted assessments of the fuels market disputing the EPA's claim that
merchant refiners were generally able to recover the cost of RINs through the higher prices for
the products they sell. Some of these studies referred to this as an inability to "pass-through" the
cost of the RFS program to consumers. After careful review of the information submitted, the
EPA does not find these assessments convincing. All obligated parties, including merchant
60 Valero Petition for Rulemaking, June 13, 2016. Page 18.
61 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.
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refiners, are generally able to recover the cost of the RINs they need for compliance with the
RFS obligations through the cost of the gasoline and diesel fuel they produce.
Some of these assessments submitted or referenced in comments simply assumed that RIN costs
were not recovered by merchant refiners and/or were not experienced by integrated refiners or
other parties that acquire RINs by blending.62 As discussed above, these assumptions are
unfounded, as they ignore the complexities of the fuels market and the various ways costs are
recovered and/or experienced as a result of the RFS obligations. Other assessments attempt to
examine blender margins as a means of determining whether or not the cost of RINs are
recovered by merchant refiners, or alternatively if the value of the RINs are passed on to
consumers or withheld by blenders.63 While examining correlations between RIN prices and
estimated blender margins may provide some level of indication about the ability for the blenders
to withhold some portion of the RIN value, we do not believe these assessments can be used to
draw definitive conclusions on the degree of RIN passthrough in the marketplace, as there are
many other factors that impact blender margins other than RIN prices that were changing
simultaneously and were not addressed in the study.64 Finally, one commenter presented an
argument that integrated refiners would have an incentive to attempt to prevent the value of the
RIN from being reflected in the wholesale prices of gasoline and diesel.65 This comment
effectively argued that parties that purchase bulk quantities of gasoline blendstock (such as
unobligated blenders or refiners that market more fuel than they refine) would be incentivized to
keep the purchase prices of these products low. It does not, however, address why the parties
would be effective in negotiating sales prices that do not reflect the value of the RIN.66 The
62 See, for example, Baker & O'Brien Impact of RINs on Merchant and Integrated Refiners, October 28, 2016 and
comments by CVR Energy (EPA-HQ-OAR-2016-0544-0396). We also note that the calculations cited by
CVR.Energy in the DOE Study at B-5 not only simply assume that refiners that purchase separated RINs do not
recover the cost of the RINs, but also erroneously assume that refiners that blend ethanol into gasoline retail the full
value of VEETC tax credit, which expired at the end of 2011. The value of this tax credit is responsible for the
majority of the advantages claimed by the commenter for refiners that blend ethanol vs. those that buy RINs to meet
their RVO.
63 See, for example, Charles River Associates Evaluating the Response of Blender Margins to RIN Price Changes,
February 2017.
64 For example, the local market demand vs. supply (whether the local market is short or long on gasoline) can have
a significant impact on blender margins. We further note that this study did not consider data prior to 2013, which
would have allowed for consideration in the variability of blender margins during a time when RIN prices were very
low.
65 See Comment from Bob Neufeld, Neufeld Consulting LLC, EPA-HQ-OAR-2016-0544-0272.
66 In his comments Mr. Neufeld effectively assumes that parties that purchase gasoline and diesel at wholesale will
be able to set the market price at a level that does not reflect RIN costs. EPA believes this is highly unlikely. The
only evidence Mr. Neufeld presents to support his arguments are several calculations contained in a powerpoint
presentation (also submitted in his comments on the proposed denial). We believe there are several fundamental
flaws in the calculations presented in this document. First, in his calculations Mr. Neufeld uses E10 and BOB prices
from Mitchell, South Dakota but ethanol prices from Chicago. This is highly problematic as the relevant ethanol
price for these calculations is the price in Mitchell, South Dakota, which may be higher than the price in Chicago.
This is particularly important when the relevant margins are only a few cents. Mr. Neufeld also ignores any
blending costs that would be realized by parties purchasing ethanol and BOB separately but not by parties
purchasing blended E10. In comparing blending margins between marketers/retailers and obligated refiners he
assumes that integrated refiners receive the market price for BOBs, which is not the case if they are selling blended
fuels (rather than BOBs) and retaining the RINs for compliance purposes. Finally, we note that any assessment
focusing on a single location may not adequately represent the full economics of a national level program.
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wholesale price of gasoline and diesel is determined by the relative supply and demand of these
products, and the supply curves for refined products reflects all relevant costs, including crude
oil costs, labor and capital costs, and RFS compliance costs.
The EPA also received numerous comments from a variety of stakeholders, including refiners,
retailers, and academic researchers supporting our assessment that merchant refiners generally
recover the cost of the RINs they purchase through higher prices for the petroleum based fuels
they produce.67 Along with the assessments cited in the discussion above, we believe two
related papers by Knittel et al and a paper prepared by Argus Consulting Services, all of which
were submitted in comments to our proposed denial, present compelling evidence that merchant
refiners are able to recover the cost of RINs.68 All of these papers examined the wholesale prices
of petroleum fuels that are very similar with the exception of whether or not the producers of
these fuels incurred an RFS obligation (for example, diesel fuel and jet fuel prices from the U.S.
gulf coast). Unlike other studies that examined indirect indicators that are susceptible to many
factors outside of the RFS program such as blender margins or crude oil crack spreads, this
methodology allows the authors to directly assess the impact of RIN prices on fuels that are very
similar both physically and chemically.69 The authors of these papers concluded that the RIN
cost was generally included in the sales prices of obligated fuels. Knittel et al further found that
the RIN pass through, or the ability of the merchant refiners to recover the cost of RINs was
complete (not statistically different than 100%) and occurred quickly (within 2 business days).70
Multiple commenters critiqued methods used by Knittel et al in these papers.71 These critiques
generally focused on 3 issues: the removal of Brent crude based spreads from the assessment, the
addition of a NYH CBOB - Rotterdam EBOB spread, and the pooling approach used by the
authors. The removal of the Brent crude based spreads improves rather than diminishes the
assessment presented by Knittel et al. We believe the impact of the RIN price on the wholesale
price of refined products is most clearly seen by comparing pairs of refined products rather than
comparing crude prices to refined product prices, as many compounding factors can and do
influence the price relationship between crude oil and refined products. Further, while there may
be concerns related to the appropriateness of the decisions by the authors to include an additional
refined product price spread and pool the results of the various comparisons, EPA does not
believe these decisions had a significant impact on the conclusions of the paper. Even if the EPA
excludes consideration of the additional refined product pair and assesses the five original
67 For example, see comments submitted by Marcia Pica Karp, Chevron, EPA-HQ-OAR-2016-0544-0209; David
Masuret, Cumberland Farms, EPA-HQ-OAR-2016-0544-0160; C.R. Knittel etal. EPA-HQ-OAR-2016-0544-0280.
68 Knittel, Christopher R., Meiselman, Ben S., and Stock, James H. The Pass-Through of RIN Prices to Wholesale
and Retail Fuels under the Renewable Fuel Standard, November 2016.; Knittel, Christopher R., Meiselman, Ben S.,
and Stock, James H. The Pass-Through of RIN Prices to Wholesale and Retail Fuels under the Renewable Fuel
Standard: Analysis of Post-March 2015 Data. November 23, 2016.; Argus Consulting Services. Do Obligated
Parties Include RIN costs in Product Prices? February 2017.
69 Argus Consulting Services also examined the average price ratio between RBOB and ULSD to crude prior to
2013 and between 2013 and 2016 which, while not conclusive on its own, similarly indicated that refiners were
reflecting RIN costs in the prices of RBOB and ULSD. Argus also noted that both Argus and Platts include RVO
cost considerations in their pricing methodology.
70 Ibid.
71 Charles River Associates. Review of Updated Pass-Through Analysis of Knittel, Meiselman and Stock. February
2017.
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refined product spreads individually rather than together as suggested by commenters critiquing
the Knittel et al paper, this paper provides compelling evidence that the RIN price is reflected in
the wholesale price of refined products subject to an RFS obligation, and that the RIN cost is
therefore generally recovered by obligated parties, including merchant refiners.
In their petition, Valero, while generally acknowledging their efforts to recover RIN costs
through higher prices for their petroleum blendstocks,72 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.73 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 separated RINs with an easily-identified
price, it is not the case that they acquire these RINs for free.74 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.75 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.76 Thus, integrated refiners are selling blended El0 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 the EPA, Murphy USA discussed this
72 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.
73 For example, see Valero Petition for Rulemaking, June 13, 2016. Page 16.
74 Parties that acquire RINs through blending have affirmed that they do not receive RINs for free. For example, see
testimony from Chris Vergona of Musket Corporation on the proposed 2018 RFS annual rule.
75 "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.
76 Ibid
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market reality, stating that the RIN prices supported a negative "spot-to-rack margin."77 They
are purchasing petroleum blendstocks from refiners for a higher price than they can recover for
this product when sold at the rack as blended E10 but maintaining profitability through RIN
sales. This observed market practice supports the findings by the 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.78
While the 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.79 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 result of their
designation as obligated parties in the RFS program.
The 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.80 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
77 See Presentation from Murphy USA to EPA, August 16, 2016.
78 "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 .
While these papers demonstrate that the cost of transportation fuel to consumers does not increase due to higher RIN
prices, EPA acknowledges that higher renewable fuel obligations can lead to higher transportation fuel prices for
consumers if renewable fuels cost more than the petroleum based fuels they displace.
79 See 2017 US Refining Forecast: Lean Times Ahead, Opportune LLP, December 7, 2016. Available online:
https://www.lexology.com/library/detaiLaspx?g=b7ae9acf-fc7d-466c-92a8-43b9fc005722. In recent years, US
refinery profitability has benefited from exporting excess refined products given their favorable economics
situations compared to many foreign refiners.
80 The parties most commonly cited by the petitioners are Murphy USA and Casey's General Stores.
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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,"81 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
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."82 In other words,
overall fuel supply margins (including RIN sales) have been relatively consistent despite the
significant increase in RIN prices. This supports the EPA's view that RIN costs and revenues
must be viewed in combination with other product supply and wholesaling margins. The EPA
received many comments from blenders indicating that the RIN value is used to offset the cost of
blending, and that the value of the RIN is used to pass savings onto consumers.83 Additionally,
many blenders indicated that they purchase fuel above the rack only some of the time, and
instead chose to purchase blended fuel below the rack at times, based on factors such as
geography, store density, suppliers, relationships with terminals and infrastructure.84
The 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
profits, 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 million85 were
significantly higher than in 2012 ($84 million), they were significantly less than net profits in
2011 ($324 million).86 While we acknowledge that there are many factors that impact the
profitability of a company such as Murphy USA in any given year, we nevertheless believe that
the data before the Agency does not support the claims by some parties, whether explicit or
implicit, that RIN sales represent windfall profits to companies that blend renewable fuels.
81 Murphy USA, Inc., U.S. SEC Form 10-K for the financial year ended December 31, 2015.
82 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).
83 See, e.g., Comments submitted by Cumberland Farms, EPA-HQ-OAR-2016-0054-0160.; SEI Fuel and 7-Eleven,
EP A-HQ-0 AR-2016-0054-013 3.;
84 See, e.g., Comments submitted by SEI Fuel and 7-Eleven, EPA-HQ-0AR-2016-0054-0133. Fuel purchased below
the rack would not have an RFS obligation even if EPA changed to point of obligation to the "position holders" as
the petitioners have requested.
85 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.
86 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.
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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.87 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 that 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,88 a practice the 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.
Many commenters addressed the issue of the potential for unobligated blenders to earn windfall
profits from RIN sales and the competitive advantages these RIN sales could provide relative to
small retailers that do not blend renewable fuels. Many commenters, including several large
retailers and unobligated blenders, agreed with the EPA's assessment of the market and affirmed
that unobligated blenders are not realizing windfall profits from RIN sales.89 One commenter
provided data from their local market including the prices of ethanol, gasoline blendstocks,
RINs, and other costs associated with supplying blended transportation fuel demonstrating that
the value of the RIN was indeed reflected in the wholesale price of E10 and was not withheld by
the fuel blender.90 This commenter presented further information demonstrating that despite
their status as a largely unobligated blender, the RIN prices had no impact on their retail fuel
margins from August 2008 through August 2016.91
Other commenters, however, questioned this finding, with several submitting papers or public
statements made by representatives of unobligated blenders supporting their views.92 Two
primary references often cited by commenters, which are generally representative of comments
received on this issue, are a report on the estimation of the margins of large retailers by Ramon
87 Murphy USA Inc. Reports Third Quarter 2014 Results. Yahoo! Finance, November 5, 2014. Available online
.
88 Casey's General Stores, Inc., Annual Report (Form 10-K) (June 26, 2015).
89 For example, see comments from Casey's General Stores, Inc, EPA-HQ-OAR-2016-0544-0268, NATSO EPA-
HQ-OAR-2016-0544-0282, SEI Fuels and 7-Eleven, EPA-HQ-OAR-2016-0544-0133, Murphy USA, EPA-HQ-
OAR-2016-0544-0372, QuikTrip, EPA-HQ-OAR-2016-0544-0198, and KwikTrip, EPA-HQ-OAR-2016-0544-
0105.
90 See comments from Cumberland Farms, EPA-HQ-OAR-2016-0544-0160. As part of their comment Cumberland
Farms also submitted a screen shot of the software they use to calculate and account for E10 fuel costs. The value of
the RIN is directly taken into account in their pricing calculations.
91 Ibid.
92 For example, see comments from Valero, EPA-HQ-OAR-2016-0544-0274, Small Retailer Coalition, EPA-HQ-
OAR-2016-0544-0344, Buffalo Services, Inc., EPA-HQ-OAR-2016-0544-0184, Friendly Mart Food Stores, EPA-
HQ-OAR-2016-0544-0387.
29
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Benavides and a paper authored by Dr. Weinstein on the consequences of RIN trading for small
retailers.93 The paper by Mr. Benavides attempts to estimate retail margins for two large retailers
(Pilot/Flying J and Loves) compared to reported national averages. After finding higher than
average retail margins, Mr. Benavides attributes these higher margins to the ability to retain the
value of the RIN when blending renewable fuels. This paper, however, contains several
methodological flaws. As noted in comments by the National Association of Truck Stop Owners
(NATSO)94 the paper considers only data from a single day rather than an extended time period,
used broad market data rather than data specific to the companies it assesses, does not consider
costs to transport renewable fuels to retail outlets, simply assumes that retailers retain 100% of
the value of the RIN and any tax credits associated with the renewable fuel, and does not account
for the actual prices paid by their customers (which often include significant discounts from
posted prices). The paper also incorrectly assumes a uniform, nationwide price for renewable
fuels. Finally, even if the higher margins suggested by this paper are accurate (which appears
highly unlikely), the paper makes no attempt to attribute this higher margin to the value of the
RINs versus other factors that may contribute to higher margins of the companies assessed
relative to the national average such as these parties' ability to buy fuel in bulk, high fuel sales
volumes, etc.
The EPA also reviewed the paper prepared by Dr. Weinstein for the Small Retailer Coalition on
the unintended consequences of the RFS program for small fuel retailers.95 In concluding that the
current point of obligation could disadvantage small retailers (relative to large retailers with the
ability to blend renewable fuels and separate RINs) Dr. Weinstein relied on two primary sources;
the paper by Mr. Benavides discussed above and statements by several large companies that own
retail fuel stations and blend renewable fuels. Generally, Dr. Weinstein highlights income
associated with RIN sales and statements that access to RINs and RIN revenue advantages these
companies relative to their competitors as the basis for his conclusions. However, these
statements do not justify Dr. Weinstein's conclusions. First, as discussed above, income from
RIN sales is not equivalent to profits from the separation of the RINs, nor is it evidence that
these parties can retain all or a significant portion of the value of the RINs. Indeed, as
highlighted in the statement by Murphy in their Form 10-Q filed on November 3, 2016 (quoted
in Dr. Weinstein's paper) Murphy accepts negative product supply and wholesale margins in
order to get access to RINs. The RINs are not "free" to these large retailers, and do not represent
windfall profits. Additionally, statements that these companies are advantaged relative to their
competitors with respect to their ability to realize additional margin from RINs and RIN sales do
not suggest windfall profits as a result of the current point of obligation in the RFS program.
There are many reasons these companies could be advantaged relative to their competitors with
respect to their ability to realize profits from RINs and RIN sales such as advantageous long term
contracts for renewable fuels, access to renewable fuels with higher value RINs (such as
advanced or cellulosic biofuels, as alluded to by Couche-Tard's CFO Claude Tessier), better
retail markets for higher level blends of renewable fuels, and the ability to hold RINs in an effort
93 Benavides, Ramon M. Renewable Fuel Incentives: Estimation of Large Retailers' Margins and Weinstein, Dr.
Bernard L. Renewable Identification Numbers (RINs) Trading Under the Renewable Fuels Program: Continued
Unintended Consequences for Small Fuel Retailers Updated Report. February 2017.
94 See comments from NATSO, EPA-HQ-OAR-2016-0544-0282.
95 Weinstein, Dr. Bernard L. Renewable Identification Numbers (RINs) Trading Under the Renewable Fuels
Program: Continued Unintended Consequences for Small Fuel Retailers Updated Report. February 2017.
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to sell when the prices are most favorable.96 None of these factors are the result of the point of
obligation in the RFS program, nor would any of them change if EPA were to change the point
of obligation as the petitioners suggest.97
After reviewing the comments submitted on our proposed denial of the petitions to change the
point of obligation in the RFS program, the EPA reaffirms the position stated in our proposed
denial. We do not believe the available data indicates that large retailers or unobligated blenders
are realizing windfall profits as the result of their access to RINs. On the other hand, a contrary
finding is well supported by the data presented here and the supporting comments submitted by
many with direct knowledge and experience on this issue. While we recognize that many small
retailers may be facing significant economic hardship, we do not believe this hardship is
primarily or even materially caused by the current point of obligation in the RFS program, but
rather by a number of broader market factors (see Section II.D for a further discussion of this
issue).
D. The Current Regulations Do Not Appear to Negatively Impact Small Retailers
The EPA received comments from the Small Retailers Coalition, an organization created in 2016
representing over 200 owners of gas stations and convenience stores, as well as comments from a
number of parties that own and operate retail fuel stations.98 EPA also received comments from
the National Black Caucus of State Legislators echoing many of the concerns raised by the Small
Retailers Coalition, contending that independent gasoline retail stations are harmed by the
current point of obligation.99 These comments suggested that the current point of obligation is
harming small retailers by allowing their competitors to obtain and sell RINs which allow their
competitors to more competitively price their fuels. They contend that their competitors are
gaining a $0.10-$0.15 per gallon advantage over small and medium suppliers. Commenters
further suggest that this pricing advantage is available to their competitors as a result of their
ability to realize windfall profits from RIN sales and that the disparity will likely result in the
closure of a large number of the stores owned by single-store owners and medium sized gas
stations and convenience stores. According to some commenters, such closures could lead to
lower levels of competition among parties that sell gasoline and diesel at the retail level,
ultimately leading to higher fuel prices for consumers. Some commenters suggested that because
large retailers are realizing such significant profits from RIN sales they have no incentive to
invest in infrastructure to expand the availability and use of renewable fuels, and in some cases
96 See comments from the Small Retailers Coalition, EPA-HQ-OAR-2016-0544-0344.
97 These advantages are related to the company's ability to acquire renewable fuels at lower prices than their
competitors or their ability to sell renewable fuel blends at higher prices than their competitors. To the degree these
advantages exist, they are highly unlikely to be impacted by a change in the point of obligation.
98 For example, see comments from the Small Retailer Coalition. EPA-HQ-OAR-2016-0544-0344; Short Stop,
EPA-HQ-OAR-2016-0544-0174; L & L Stores, EPA-HQ-OAR-2016-0544-0426. EPA also received a series of
comments from the Petroleum Marketers Association of America (PMAA). Initial comments from PMAA indicated
support for maintaining the current point of obligation, however in subsequent correspondence PMAA stated it was
taking a neutral position on where the point of obligation should be placed due to growing concerns for unfair
competition in the retail market. EPA believes these concerns are adequately addressed in this section.
99 Comment from National Black Caucus of State Legislators, EPA-HQ-OAR-2016-0544-0166.
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large retailers may actively work to restrict the expansion of this infrastructure, since
commenters claim expanded infrastructure would reduce RIN prices. In comments, the Small
Retailers Coalition suggested EPA should consider the impacts on small retailers of the current
point of obligation in EPA's response to the petitions to change the point of obligation.100 EPA
has done as the Coalition has suggested, and EPA's analysis is provided in this document.
While the EPA recognizes the very real economic challenges faced by single-store owners and
medium sized gas stations and convenience stores, we do not believe these challenges are
primarily, or even materially, the result of the current point of obligation in the RFS program or
the RFS program more generally. As discussed in further detail in Section II.C above, EPA does
not believe that the comments submitted on our proposed denial adequately support the claims
that large retailers and unobligated blenders are able to realize windfall profits from RIN sales.
After carefully reviewing the comments and the available market data the EPA reaffirms that
while unobligated parties that acquire RINs by blending renewable fuels (such as large retailers)
can and generally do receive significant revenue through the sale or RINs, there is a cost to
acquiring these RINs that is approximately equal to the revenue received through their sale. We
also note that it is implausible that such a significant price advantage ($0.10 to $0.15 cents per
gallon according to the Small Retailers Coalition, which is approximately 3 times higher than the
average profit per gallon)101 could be sustained in the highly competitive retail fuel market. To
the degree that larger competitors are able to access lower cost fuels, there is no basis for
concluding that these advantages are attributable to the RFS program. Rather, we believe that
the significant challenges faced by many small retailers are rather the result of challenges in the
retail fuels market such as a declining demand for refined transportation fuels (particularly
gasoline), increased competition from large retailers and high-volume retail outlets, a lack of
flexibility in fuel purchasing options relative to larger (often unbranded) retailers, and many
others, many of which were mentioned by the small retailers in their own comments. After
reviewing the information submitted by the petitioners and commenters, along with other market
data, EPA has concluded that large retailers do not have the incentive or ability to effectively
inhibit the greater use of renewable fuels in the United States (See Sections III.B - III.E below
for a further discussion of these issues. While we understand that small retailers face significant
economic challenges, these challenges are unrelated to the RFS program, and would not be
fundamentally altered by changing the point of obligation in the RFS program.102
100 Comments from Small Retailers Coalition, EPA-HQ-OAR-0544-0185. The Small Retailers Coalition has also
recently filed a complaint alleging that EPA has failed to do this analysis. See Small Retailers Coalition v. US EPA
and Scott Pruitt, W.D. Tex., Case 7:17-cv-00121, Complaint filed 8/28/17.
101 According to NACS, the average retail fuel margin is about 3 to 5 cents per gallon (NACS. 2015 Retail Fuels
Report).
102 In addition to believing that the RFS program is not harming small retailers generally, the EPA has also been
presented with claims that the RFS program can benefit small retailers. The EPA received comments from the
Petroleum Marketers and Convenience Stores of Iowa indicating that small retailers are benefiting from the RIN
value through RIN trading via third party aggregators. Comments from Petroleum Marketers and Convenience
Stores of Iowa, EPA-HQ-OAR-2016-0544-0199.
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E. The EPA Has Not Seen Evidence That High RIN Prices Have or Will Force
Refiners to Decrease Production or Increase Exports
In their petition, Valero suggested that if the 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.103 As discussed above, both merchant refiners and integrated
refiners experience RIN acquisition costs, and both recover these costs through the price of the
petroleum products they sell. The RFS program therefore does not impact merchant refiners in a
way that would make them more or less likely than integrated refiners to decrease production of
gasoline and diesel or increase exports of these fuels. Rather, decisions to decrease production
or increase exports are driven by broader market factors, which effect both merchant and
integrated refiners.
We also note that the idea that the RFS program could result in a reduced supply of gasoline and
diesel to the United States through lower production volumes or increased exports is not new, 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.104 Were high RIN prices to have this effect, one would expect to have
seen a drop in fuel supply beginning in 2013, when RIN prices spiked.
103 One commenter (NERA) claimed that since RIN costs are reflected in the wholesale price of gasoline
blendstocks high RIN prices would encourage gasoline exports, as exported gasoline could receive the value of the
RIN without incurring the RIN obligation. This commenter ignored the fact that the market price for exported
gasoline is discounted relative to gasoline sold for the domestic market, and that this discount reflects the cost of the
RIN obligation (for further discussion of this issue, see Section II. C above).
104 The EPA also performed a separate analysis of refinery closures, derating, and expansions from 2013-2017. See
Section III.G for a further discussion of the impact of the RFS program on refining capacity.
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Figure 1
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distillate in the United States has increased significantly since 2010106 due to a number of factors
including access to low cost crude oil and natural gas and high refinery utilization rates. During
this same time period, demand for refined products in the United States has been fairly
constant.107 Refiners seeking export markets for their products at a time when supply increases
have outpaced domestic demand for their products is a natural response, and is unrelated to the
RFS program.
F. A Relatively Small Number of Obligated Parties is Generally Advantageous
In the 2007 RFS1 rule, the 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. After promulgating the final RFS2 rule we gained additional
experience implementing the program that further supports our decision to maintain the current
approach. Under the current system, it is renewable fuel producers who generate RINs, for
gallons of biofuel produced, and it is the refiners and importers of gasoline and diesel fuel who
must retire the RINs to demonstrate compliance. While the EPA is engaged in compliance and
enforcement activities to address instances of invalid 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 addition, refiners and importers are subject to significant
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, strand their investments, 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
106 See EIA data on U.S. Refinery and Blender Net Production of Distillate Fuel Oil
(https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MDIRPUSl&f=M) and U.S. Refinery and Blender
Net Production of Finished Motor Gasoline
(https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MGFRPUSl&f=M).
107 See EIA data on Weekly U.S. Product Supplied of Distillate Fuel Oil
(https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WDIUPUS2&f=W) and Weekly U.S. Product
Supplied of Finished Motor Gasoline
(https://www.eia. gov/dnav/pet/hist/LeafHandler. ashx?n=PET&s=W GFUPU S2&f= W).
35
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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 to the currently regulated refiners and importers, many "position holders" and
blenders sell relatively small volumes of gasoline and diesel, and are likely 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. This concern was affirmed by our
analysis of a data set recently provided to us by the Internal Revenue Service (IRS) (for a fuller
discussion of the data the EPA received from IRS, and the EPA's assessment of this data, see
Sections IV. A and IV.B). The IRS data set included the volume of gasoline and diesel sold by all
"positions holders" aggregated into groups of five and arranged from highest to lowest
volume.108 When the EPA overlaid this data set with our volume data for obligated parties
(grouped in the same manner as the IRS), we found there were about 300 more parties in the IRS
data set. Moreover, as discussed below, when we compared the total volume associated with
"position holders" we found that more than half of the "position holders" (those with the smallest
volumes) were responsible for less than 1% of the aggregate volume. Our conclusion from this
comparison is that there is a significant number of small volume parties that are current "position
holders" (subject to the IRS fuel tax laws) that would become new obligated parties, would likely
not be familiar with how to comply with the RFS requirements and may not have the resources
to do so. 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 the EPA each year,
and reduces the complexity associated with determining the volumes of gasoline and diesel for
which each obligated party has a compliance obligation. This allows for more effective
implementation and enforcement of the RFS program. In addition, we believe it is preferable to
i°8 por exampie irs provided EPA with the total volume of gasoline and diesel sold by the 5 parties that sold the
most gasoline and diesel, the total volume sold by parties that sold the 6th - 10th highest volumes of gasoline and
diesel, etc. This IRS data was provided to the EPA on May 22, 2017. See IRS Aggregated Volume Data. This data is
treated as CBI.
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place the RFS obligation on larger companies with greater resources who are better positioned to
comply with the RFS standards.109
Several commenters contested the EPA's statements that changing the point of obligation to the
"position holders" would increase the number of obligated parties.110 These commenters further
argued that parties with enough capital and expertise to purchase fuel in bulk above the rack
would be able to comply with RFS obligations. However, based on information from the IRS
(discussed briefly above and further in Section IV. A and IV.B), we determined that if the point
of obligation in the RFS program were placed on the "position holders," the number of obligated
parties would increase significantly, and that many of these parties sell relatively small volumes
of gasoline and diesel.
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 significantly increase the
production, distribution, and use of renewable fuels, then a potentially higher number of
obligated parties on its own would not likely be a reason to retain the current point of obligation.
In light of the reasons discussed above, however, and because we do not think shifting the point
of obligation would lead to higher renewable fuel production and use, and for other reasons
discussed in this document, we believe that placing the obligation on the smaller number of
refiners and importers is preferable.
G. The Current Program Structure Does Not Require Market Repositioning to
Achieve Compliance
One of the petitions the 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.111 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.
The EPA strongly disagrees with the petitioner's assessments of the EPA's previous statements.
In the document referenced by the petitioner, the 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
109 While the evidence before EPA demonstrates that the cost of RINs are generally recovered by the obligated
parties, larger companies with greater resources are significantly more likely to have expertise related to complying
with EPA regulations (including, but not limited to their RFS obligations), ensuring the validity of RINs, etc.
110 For example, see comments submitted by Valero, EPA-HQ-OAR-2016-0544-0274; AFPM, EPA-HQ-OAR-
2016-0544-0360; Monroe Energy, EPA-HQ-OAR-2016-0544-0368
111 See Valero Energy Corp. Petition for Rulemaking, June 13, 2016, 16-17. Valero referred to statements made by
EPA in .1 Preliminary Assessment ofRIN Market Dynamics, RIN Prices, and Their Effects (May 14, 2015), written
by Dallas Burkholder.
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access to pipeline capacity112 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, the 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.
The EPA created the RIN system in accordance with Congressional direction, both as a general
compliance mechanism for the RFS program and to allow for the generation and use of
credits.113 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. For example, according to EPA data there were over 50 billion RIN trades for
the 2014 compliance year (the most recent year for which data are available).114 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 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.
H. The Current RIN Market Does Not Appear to be Subject to Significant Manipulation,
and a Change in the Point of Obligation will not Reduce Fraud
Some commenters suggested the RIN market is not functioning due to manipulation and
speculation within the market. Others noted that a lack of transparency in the RIN market allows
for speculation, and that a revision of the definition of obligated party would increase
transparency and reduce market abuse. It is not clear from comments how changing the
definition of obligated party would increase transparency. Although the EPA has not seen
evidence of manipulation in the RIN market, claims of market manipulation prompted the EPA
to execute a memorandum of understanding (MOU) with the U.S. Commodity Futures Trading
Commission (CFTC), which has the authority and expertise to investigate such claims. The EPA
will continue to apprise the CFTC of allegations regarding potential market manipulation.115
112 While the ownership of positions at terminals and pipeline capacity are not necessary to enable ownership of
gasoline or diesel blendstocks at the rack, owning positions at terminals and pipeline capacity are ways for obligated
parties to retain ownership of petroleum blendstock at the rack, where it can be blended with renewable fuels.
113 See CAA 211(o)(5).
114 See Annual RIN Sales/Holdings Summary on EPA public website: https://www.epa.gov/fuels-registration-
reporting-and-compliance-help/annual-rin-salesholdings-summary
115 Some commenters alleged speculation was negatively impacting the functioning of the RIN market. Speculation
is a normal part of the market. Market participants that speculate on future supply or demand, and therefore prices,
aren't doing anything wrong. In fact, this helps the market ensure that the future demand is met at the lowest overall
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Some commenters suggested that third party speculators (parties that are not involved in the
production or blending of renewable fuels and are not obligated parties) and RIN-long parties are
withholding RINs to drive up prices. They allege that third parties and RIN-long parties116 are
profiting from these actions at the expense of small and merchant refiners. These commenters
have not provided sufficient evidence to support their claims that integrated refiners or
unobligated blenders (who would likely be RIN long) are intentionally withholding RINs from
the market in an effort to manipulate RIN prices. As discussed further in Section II.B above, we
do not believe that current RIN prices reflect successful efforts by some parties to artificially
inflate RIN prices, but rather that they are reflect the costs associated with producing additional
volumes of renewable fuel (in the case of biodiesel) or the financial incentives needed to sell
additional volumes of higher level blends of renewable fuel (in the case of ethanol).
The EPA received some other comments that changing the point of obligation to the "position
holders" would reduce fraud in the RFS program. These parties generally claimed that "position
holders" are better equipped to ensure the validity of RINs because they are closer to the actual
point of blending. In response to these comments, EPA notes that the majority of the RIN fraud
seen in the RFS program to date has been for RINs associated with biodiesel. The majority of
biodiesel is blended with diesel downstream of the rack. Therefore, "position holders," who by
definition transfer ownership of the fuel at the rack, may be in no better position to monitor
biodiesel blending than a refiner. Under the current Part 80 regulations, each obligated party
incurs an RVO for both diesel and gasoline, even if they are only producing one of the two types
of fuel. Likewise, if the point of obligation moved to "position holders," even "position holders"
that only blend ethanol into gasoline would still incur an RVO for diesel and would still be
required to acquire RINs from biodiesel blending.
Several commenters pointed to comments from Doug Parker indicating that the chain of custody
between producer, blender, and refiner has led to fraud within the RIN market. As an initial
matter, historically, EPA has seen fraud within the RIN market at locations upstream of the point
of compliance and the point of obligation. Generally, defendants in the majority of the RIN fraud
cases brought to date generate RINs for fuel that is never produced, generate RINs for fuel that is
not used for a qualifying purpose (transportation fuel, heating oil or jet fuel), or export renewable
fuel without retiring the appropriate RINs. These cases have resulted in significant criminal
convictions and a substantial number of associated civil enforcement cases. The EPA believes
that our enforcement actions and increased due diligence by RIN purchasers have helped to deter
these types of violations, and note that these fraud cases are unlikely to have been prevented by a
different point of obligation due to the nature of the fraud.
price possible. Unlike market speculation, market manipulation involves a deliberate (and illegal) attempt to
interfere with the free and fair operation of the market and create artificial, false or misleading appearances with
respect to the price of, or market for, RINs.
116 RIN-long parties are those who obtain more RINs through blending than their obligation under the RFS program;
i.e., they are "long" on RINs as compared to their obligation.
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Some commenters, relying on Doug Parker's analysis suggested that "shortening the RIN chain
of custody between the point of compliance117 and the point of obligation" would inherently
reduce the opportunity and incentive for fraud.118 These comments suggest that the current
"chain of custody" places refiners and importers "multiple steps removed from the decision point
on where renewable fuel is purchased in order to blend it,"119 and that blenders have direct
engagement with renewable fuel producers and are better able to "assess the quality and integrity
of their suppliers."
These commenters suggested that a change to the point of obligation would place compliance
through blending closer to the renewable fuel source and would improve verification. Despite
commenters suggestions to the contrary, the chain of custody between renewable fuel producers
and obligated parties could be just as long as it is currently, and would likely be as long in the
case of biodiesel, where renewable fuel is blended beyond "position holders," as discussed
above. Because obligated "position holders" would still have four unique renewable fuel volume
obligations, they would likely still have to sell and purchase RINs to meet their RVOs for types
of renewable fuel which they are unable to blend. This is especially true for "position holders"
that primarily sell a single fuel type, such as gasoline or diesel, and therefore have limited
opportunities to blend ethanol or biodiesel respectively. Doug Parker's initial comments may
have been based on a theory where the "blender" would be obligated, and would be the person
with access to the renewable fuel that would be blended. For ethanol blending, the blender and
the "position holder" are likely the same person, however, for biodiesel, it is much less likely
that the blender and the "position holder" are the same person. In his comments, he states that
"changing the point of obligation to the location where actual decisions are made on blending
conventional and renewable fuel would . . . significantly enhance compliance and reduce
opportunities for fraud."120 However, changing the point of obligation to "position holders"
would not always place the point of obligation where "actual decisions are made on blending;"
for example, biodiesel blending decisions are often made below the rack. Thus, the disconnect
between the point of obligation and the point of blending could still exist, and likely would for
biodiesel. While changing the point of obligation to the position holder may shorten the chain of
custody for RINs associated with ethanol, most of which is currently blended at the rack, we note
that the vast majority of RIN fraud cases to date have been associated with biomass-based diesel
(D4) RINs.
There continues to be a significant risk of invalid RINs in the market arising from the use of
improper feedstocks, unapproved pathways or even improper attribution of pathways (e.g.
overstating production of renewable fuel from cellulosic vs. non-cellulosic feedstocks). Smaller
parties with less resources will have correspondingly less likelihood of detecting these problems.
Doug Parker, in comments, also suggested that "soaring prices of RINs" act as an additional
incentive for fraud. The EPA does not dispute that fraudulent activity often occurs for financial
117 Although the "point of compliance" is not defined in Parker's comments, EPA believes that this would be the
point where renewable fuel is blended with non-renewable fuel. As mentioned above, for ethanol blending, this
often occurs at the rack, however blending of biodiesel occurs most often downstream from the rack.
118 See, e.g., Comments from Small Refiners' Coalition, HQ-OAR-2015-0054-0406.
119 Parker, Doug. Update to: September 4, 2016 White Paper Addressing Fraud in the Renewable Fuels Market and
Regulatory Approaches to Reducing this Risk in the Future. February 3, 2017.
120
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gain, but EPA disagrees that moving the point of obligation will reduce the price of RINs as
discussed in this section and in Section III.
In arguing for a change in the point of obligation, Monroe Energy suggested that under the
current definition of "obligated party," blenders and non-obligated parties who sell RINs have no
incentive to ensure that their RINs are valid, and that refiners and importers are the only parties
at risk when purchasing potentially fraudulent RINs. The EPA notes that Monroe's statement is
inaccurate since parties who sell RINs must register under the RFS program, and can be held
liable if the RINs they sell are deemed invalid or fraudulent. Therefore, they do indeed have an
incentive to ensure that RINs they purchase and sell are valid. However, we also believe that
larger entities, with more assets at risk and more resources to devote to compliance, are more
likely to engage in in-depth due diligence investigations into RIN validity than smaller, less
sophisticated parties. Therefore, a scheme that eliminated many larger refiners and importers
from the obligation to acquire RINs, and shifted RIN responsibilities to smaller entities such as
many "position holders" and blenders, would be more likely to result in an increase, rather than a
decrease in instances of RIN fraud. BP and others who do not favor a change in the point of
obligation suggested that smaller parties who could become obligated if the point of obligation
were changed may not have the capability to conduct due diligence to ensure that the RINs they
acquire are valid. Once the relaxation of RIN verification occasioned by such a change in the
point of obligation were noticed, the change could encourage the generation of fraudulent RINs.
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 point of obligation should only be changed if it would
be expected to lead to net benefits. As we discuss in this section, we do not believe that the
record before us indicates that this is the case.
In their petitions submitted to the 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 the
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 the 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 resulting shortfall in cellulosic biofuel production volumes relative to the
statutory targets. In addition to the shortfall in cellulosic biofuel production, the EPA also noted
challenges associated with increasing the supply of renewable fuel to consumers associated with
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distribution and use of renewable fuels, particularly ethanol and biodiesel in its rule establishing
the RFS standards for 2014-2016.
In their petitions, the parties requesting that the EPA change the point of obligation did not
address how changing the point of obligation might impact the shortfall in cellulosic biofuel
production,121 but instead narrowly focus on the impacts on the distribution and use of other
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 blending industries,122 and the many comments received on
the proposed denial, we continue to believe that the benefits to renewable fuel blending claimed
by the petitioners are highly unlikely to occur. As explained below, the data available to EPA
does not indicate that changing the point of obligation would result in an increase in the
infrastructure needed to blend renewable fuels at terminals or offer these fuels at retail stations,
nor would it be expected to appreciably impact the price of renewable fuel blends at the retail
level. While we have received comments from large renewable fuel producers123 and
associations representing renewable fuel producers124 opposing changing the point of obligation,
only a few renewable fuel producers or associations have expressed support for changing the
point of obligation.125 Some of the renewable fuel producers that supported changing the point
of obligation appeared to do so conditionally, requesting that EPA consider factors such as
increasing requirements for renewable fuel use and promoting predictability and stability for all
sectors in our decision on the point of obligation.126 Other renewable fuel producers
acknowledged the potential concerns with changing the point of obligation while expressing the
belief that changing the point of obligation could lead to positive outcomes, and concluded by
simply requesting that the EPA consider a rulemaking process to receive stakeholder input on
this issue.127 Since renewable fuel producers would stand to gain from any RFS structural
changes that would increase the distribution and use of renewable fuels, their general opposition
to a change in the point of obligation is significant.
121 Several petitioners and commenters did address this issue in their comments on the proposed denial of the
petitions to change the Point of Obligation in the RFS program. These comments are addressed in Section III.F
below.
122 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.
123 Comments from REG on the proposed RFS standards for 2017 and the biomass based diesel standard for 2018
(EPA-HQ-OAR-2016-0004-3477).
124 Letter from SIGMA and RFA to Congressmen Whitfield and Rush, June 30, 2016.
125 For example, see comments submitted by Valero Renewable Fuels Company, EPA-HQ-OAR-2016-0544-0413.
126 For example, see comments from Crimson Renewable Energy, EPA-HQ-OAR-2016-0544-0376.
127 For example, see comments from AgriFuels, EPA-HQ-OAR-2016-0544-0210.
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Additionally, the EPA notes that the agency did not exercise the general waiver authority on the
basis of inadequate domestic supply in establishing the 2017 RFS standards, and did not propose
to do so for the 2018 standards. Thus, EPA established for 2017, and proposed for 2018 EPA,
volume reductions that are attributable to insufficient production of cellulosic biofuel. We do
not believe that this type of shortfall would be reduced or alleviated by a change in the point of
obligation. Thus, the focus of the petitioners on potential impacts of a change to the point of
obligation on distribution and use of renewable fuels such as ethanol and biodiesel is not even
directed at the primary hurdles facing renewable fuel growth under the RFS program going
forward. Finally, the United States Court of Appeals for the District of Columbia Circuit
recently ruled that EPA's interpretation of the "inadequate domestic supply" portion of its
waiver authority in developing the 2016 total renewable fuel standard was inappropriate, and that
in the future EPA may only consider "supply-side factors: in assessing if an "inadequate
domestic supply" of renewable fuel exists.128 Therefore, to the extent that petitioners claim that
a change in the point of obligation would overcome constraints in the distribution of renewable
fuel from refiners, importers or blenders to consumers, or in the use of renewable fuel by
consumers, it does not appear that this would lead to a difference in EPA's use of the inadequate
domestic supply waiver authority under the direction EPA recently received from the DC Circuit.
For these and other reasons, as discussed below, contrary to the petitioners' claims, the 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 the EPA's statutory authority to place the point of
obligation on various suggested parties.
A. Some of the Proposed Changes to the Point of Obligation Are Inconsistent with
the CAA
EPA believes that certain of the proposed changes to RFS point of obligation are inconsistent
with the Clean Air Act. Although we note these inconsistences here, we emphasize that our
denial of the petitions is not dependent on this legal analysis. For the reasons described
elsewhere in this document, the EPA would deny the petitions seeking a change in the point of
obligation even if it concluded that it had legal authority to enact the suggested changes.
In its petition for reconsideration, the Coalition recommends that the 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 the 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
128 See Americans for Clean Energy v. Environmental Protection Agency, No. 16-1005, Slip Op. 31-32 (D.C. Cir.
July 28, 2017) ("ACE').
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required to comply with the annual percentage standards. CAA 21 l(o)(3) describes the
requirement for the 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."129 Distributors are excluded from this list. Reading these two provisions together,
EPA's interpretation is that it has authority to establish ancillary compliance provisions which
apply to distributors, but it does not have authority to make distributors directly subject to the
annual percentage standards.130'131
A number of Petitioners and other commenters suggest that the point of obligation be placed on
"position holders."132 They explain that "position holders" may or may not be blenders, but they
argue that because all "position holders" could be blenders, the 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."133 In comments, Petitioners suggested that the EPA has
broad authority to obligate "position holders" as a subset of blenders because they "control the
point of blending." Commenters also suggested that the EPA could redefine "refiner" and
"refinery" to include "position holders." Some commenters suggested that the EPA's past
consideration of its authority to impose the point of obligation on downstream parties means the
EPA must have the authority to regulate "position holders."
The EPA does not interpret CAA 21 l(o) as authorizing it to make "position holders" subject to
the renewable volume obligation if they are not blenders, importers or refiners. EPA received
comments from the Association of American Railroads, the American Trucking Association and
UPS indicating that they or their members are not refiners, importers, or blenders, and yet would
be obligated under the proposed definition of obligated party because they are "position
holders."134 A "position holder" may have authority to decide whether or not to blend renewable
fuel into non-renewable fuel at a particular terminal, but EPA does not interpret the term
129 CAA 211(o)(3)(B)(ii)(I).
130 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 net benefits, potentially including the
increased production, distribution and use of renewable fuels. However, for the reasons discussed elsewhere,
including in Sections III.B.-E., we do not believe that this would be the case.
131 EPA notes that the Coalition has moved away from this interpretation in its comments, and instead advocates that
the definition of "obligated party" should be changed to obligate "position holders." In their comments on the RFS
2014-2016 final rule, they urged EPA to place the obligation on "position holders," Comments from Small Refiners
Coalition Comments on Renewable Fuel Standard Program: Standards for 2014, 2015, and 2016 and Biomass-Based
Diesel Volume for 2017, HQ-OAR-2015-0111-2339, and in the comments on the proposed denial, the Coalition also
suggested that EPA define "obligated party" to include "position holders." Comments from Small Refiners
Coalition, HQ-OAR-2016-0544-0406, 5. In the alternative, the Coalition argues that EPA clearly has the authority to
obligate all blenders. Ibid.
132 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.
133 Valero Petition for Rulemaking, June 13, 2016.
134 Comments from Association of American Railroads, EPA-HQ-OAR-2016-0544-0359; Comments from
American Trucking Association, EPA-HQ-OAR-2016-0544-0355; Comments from UPS, EPA-HQ-OAR-2016-
0544-0076.
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"blender" in CAA 21 l(o) as describing anyone who is in a position to choose whether or not to
engage in blending, but rather as describing those parties who actually engage in blending.135
EPA also does not believe it would be appropriate to redefine the terms "refiners" and
"importers" to include "position holders" who do not engage in any refining or importing. Such
an approach would not be consistent with EPA's existing regulatory definitions or common
industry usage. In sum, EPA does not interpret the CAA as authorizing it to place the point of
obligation on all "position holders" or distributors, since they are not all refiners, importers or
blenders. Of course, EPA does have authority to place the point of obligation on blenders (which
would include the majority of the "position holders"), but for reasons discussed further below we
continue to find it appropriate not to do so.
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 parties that are either "naturally long on RINs," because they are obligated parties that
blend renewable fuels at volumes above their RFS obligations (generally because they blend
renewable fuel into more petroleum products than they refine or import), or because they blend
renewable fuels but are not obligated parties under the RFS program. According to the
petitioners and some commenters, 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.136 The EPA has
investigated these claims and does not find them to be supported. We acknowledge that some
parties may be hesitant to contribute financially towards the addition of new infrastructure at
terminals to increase the availability of higher level blends of renewable fuels due to insufficient
local demand for these fuels (in the case of E85) or previous investment in infrastructure to offer
these blends outside of the terminal (in the case of biodiesel). As discussed further in Section
III.C below, we do not believe the addition of such infrastructure would be likely to increase the
availability of RINs to such a degree that it would appreciably impact the price of RINs. It is
therefore highly unlikely that any opposition to additional blending infrastructure at terminals is
driven by a desire to restrict RIN availability which could theoretically result in higher RIN
prices.
The EPA spoke with several terminal owners/operators to assess the current status of renewable
fuel blending infrastructure at terminals.137 Currently all, or nearly all, terminals contain the
necessary infrastructure for the onsite storage of ethanol and the blending of ethanol with
135 A decision to treat people as having engaged in an activity simply because they have the opportunity to engage in
it would be quite unusual. For example, a landowner not making active use of their land would not normally be
considered a "farmer" simply because they could decide in the future to engage in farming.
136 For example, see Effects of Moving the Compliance Obligation under RFS2 to Suppliers of Finished Products,
NERA Economic Consulting, July 27, 2015.
137 See Magellan Meeting Notes, December 16, 2015; Independent Fuel Terminal Owners Association meeting
notes, January 8, 2016; Kinder Morgan meeting notes, January 22, 2016.
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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 the 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 times138 if the existing infrastructure resulted in loading delays for trucks at the rack.
Based on these conversations, as well as the comments received, EPA does not believe that
blending infrastructure at terminals is a significant factor limiting the sale of higher level ethanol
blends. EPA further notes that the preponderance of ethanol produced and used in the United
States is conventional (non-advanced) ethanol, and since EPA determined that the implied
statutory volume of 15 billion gallons of conventional fuel would be supplied in 2017 and has
proposed a similar finding for 2018, that increases in ethanol distribution infrastructure does not
appear necessary to attain the statutory volume targets for conventional and non-cellulosic
advanced biofuels.
Biodiesel blending infrastructure at terminals is less universal than ethanol blending
infrastructure, but substantially more blending occurs downstream of terminals for biodiesel as
compared to ethanol. Production and use of biodiesel has been steadily increasing in recent
years, and there is a paucity of evidence suggesting the lack of blending infrastructure poses an
obstacle or constraint on further biodiesel use. In fact, biodiesel blending is well above the
required volume. 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.139 A
review of publicly available information from OPIS suggests that approximately half of all
terminals list prices for biodiesel and/or biodiesel blends.140 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.141 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. Several large truck stop chains, driven by a desire to offer their
customers lower priced fuel, have invested in infrastructure at retail locations to provide
biodiesel blends for that location, and in some cases at other nearby retail stations.142 Similarly,
"jobbers" may take diesel fuel from bulk terminals and blend it with biodiesel before subsequent
138 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.
139 Magellan Meeting Notes, December 16, 2015.
140 See OPIS Rack City List ('http://www.opisnet.eom/resources/rackcode.aspx#biodiesei'). 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.
141 See ASTMD 975.
142 See National Biodiesel Board comments on 2017 Annual Standards Rule; Attachment 6 (EPA-HQ-OAR-2016-
0004-2904).
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distribution, providing another opportunity for biodiesel blending.143 In these cases it is unclear
what impact, if any, changing the point of obligation to "position holders" 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.144 As noted earlier, the required volume of biomass based diesel for 2017
is twice 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 the 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.
The EPA received comments claiming that changing the point of obligation would likely
increase investment in biodiesel blending infrastructure at terminals, and that this would lead to
higher biodiesel use in the United States.145 Commenters claim that the most cost effective point
to blend biodiesel is at the terminal, but that currently obligated parties with sufficient RINs
and/or unobligated blenders are blocking the installation of additional biodiesel blending
infrastructure at terminals. If the point of obligation were changed, they argue that the equal
obligations at the rack would result in greater investment in biodiesel blending infrastructure at
the rack. In his comments Mr. Jobe, president of Rockhouse Advisors, argues that because most
biodiesel blending currently takes place downstream by a relatively small number of large
companies this allows these companies to realize significant profits by keeping biodiesel prices
low and/or keeping D4 RIN prices high.146 He further argues that the current point of obligation
discourages domestic biodiesel by encouraging the import of biodiesel at a lower cost, and that
moving the point of obligation could benefit domestic producers by moving the demand for
biodiesel away from the coasts to the approximately 1,000 terminals around the country.
The EPA believes it is highly unlikely that the many claimed benefits to the biodiesel industry
associated with changing the point of obligation would occur. All or nearly all of these claimed
benefits are dependent on additional investment in biodiesel blending at terminals. However, as
Mr. Jobe notes in his comments, the response to increasing RFS requirements for biomass-based
diesel and advanced biofuel has primarily been to increase biodiesel blending capacity
downstream of the terminals. This is likely occurring because the parties that are currently
blending the majority of the biodiesel have determined that it is more cost effective to blend
143 Ibid.
144 However, changing the point of obligation to "blenders" would make every truck stop or fuel retailer that blends
biodiesel subject to the RFS. This could result in a reduction in downstream blending of biodiesel (as these parties
concluded it was no longer worthwhile to engage in blending), or else could bring a large number of small entities,
with little relevant compliance experience, into the RFS program.
145 See, e.g., comments submitted by Joe Jobe, President of Rockhouse Advisors, LLC, EPA-HQ-OAR-2016-0544-
0271.
146 Ibid.
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biodiesel downstream of the terminal, rather than at the terminal itself, and not because a small
number of companies are exercising market power to reap excess profits. This is the case even
though the majority of obligated parties (refiners and importers) are "position holders," and
would stand to benefit by adding biodiesel blending infrastructure at terminals if this were likely
to result in lower cost compliance options. Further, Mr. Jobe does not present compelling
evidence that the current price of biomass-based diesel RINs is the result of a relatively few large
biodiesel blenders ability to artificially inflate RIN prices. Rather, the high price of biomass-
based diesel RINs is generally the result of the relatively high cost of biodiesel production due to
the high cost of the marginal feedstock (generally virgin soy oil) relative to petroleum diesel.147
If the EPA were to change the point of obligation to "position holders" it would result in
increased obligations for many of the parties that currently sell gasoline and diesel at the rack,
including both those that are currently obligated parties and those that are not.148 Mr. Jobe
claims this would increase the incentives for parties who sell gasoline and diesel at the rack to
invest in biodiesel blending infrastructure at the rack, as they would now all be "RIN-short" and
would need additional RINs to meet their RFS obligations.149 However, if the majority of the
biodiesel blending (and thus BBD RIN separation) is currently occurring downstream of the rack
by parties such as truck stop owners with little to no RFS obligations, as claimed by the
commenters and supported by the data they present, this strongly implies that most obligated
parties currently selling gasoline and diesel at the rack are already "RIN-short" with respect to
biomass-based diesel RINs and must obtain at least some portion of their required BBD RINs
through purchasing separated RINs.150 It follows that because most parties that sell gasoline
and diesel at the rack are likely RIN-short with respect to their biomass-based diesel obligations,
that terminals should already have a significant incentive to add biodiesel blending
infrastructure. There are two cases in which this would not be true; if purchasing separated RINs
from the large unobligated blenders is a more cost effective way of acquiring D4 RINs than
adding biodiesel blending infrastructure at the terminal, or if the unobligated blenders are
sufficiently able to block the installation of the necessary infrastructure. If the former is the case,
it appears unlikely that changing the point of obligation will cause parties to choose a more
147 According to USDA's August 25, 2017 National Weekly Ag Energy Round-up the price for crude soybean oil
was approximately $0.34 per pound. Each gallon of biodiesel requires approximately 7.5 pounds of feedstock, which
would result in a feedstock cost of approximately $2.55 per gallon of biodiesel produced from soy oil. According to
the Energy Information Administration, the spot price for No. 2 ULSD on August 25 ranged from $1.59 - $1.73,
depending on location. For biodiesel produced from soy oil (likely the marginal gallon of biodiesel) the feedstock
cost alone is significantly greater than the wholesale cost of petroleum diesel, before considering other costs of
production such as labor, energy, capital recovery, etc.
148 Currently obligated parties could see their obligations increase if they may sell more fuel across the rack than
they currently refine. Because the proposed change to the point of obligation would make the obligation proportional
to the amount of fuel sold over the rack, this could result in an increase for rack sellers in this position.
149 Mr. Jobe's comment also appears to assume increasing RFS standards that would require obligated parties to
continue to increase renewable fuel blending in subsequent years. If the standards do not increase substantially there
would be no incentive to expand renewable fuel distribution infrastructure beyond what already exists, as using
existing infrastructure is more cost effective than installing new infrastructure.
150 While the IRS data assessed by EPA indicates there are a large number of "position holders" that are currently
not obligated parties, the data also indicates that these non-obligated "position holders" are responsible for a very
small volume of the gasoline and diesel sold at terminals (see further discussion in Sections IV. A and IV.B).
Therefore, in light of the considerable biodiesel blending that occurs downstream from terminals, it is reasonable to
assume that the gasoline and diesel sold at terminals is by parties that are generally "RIN-short" with respect to
biomass-based diesel RINs.
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expensive compliance option. If instead unobligated blenders are able to block the installation of
the necessary infrastructure to blend biodiesel at terminals, it seems unlikely that changing the
point of obligation will cause the large downstream blenders to abandon their presumably
profitable downstream blending operations in favor of participating in infrastructure investments
at the rack.
Even if changing the point of obligation were to increase biodiesel blending infrastructure at
terminals, the benefits to domestic biodiesel producers that Mr. Jobe claims would result seem
highly unlikely. Additional blending infrastructure at terminals would not cause biodiesel
blenders to suddenly purchase higher volumes of domestic biodiesel if imported biodiesel
continues to be available at lower prices. Demand for biodiesel is much more likely to be
impacted by the price of biodiesel (relative to petroleum based diesel) than the availability of
blending infrastructure at terminals. As long as significant volumes of low cost imported
biodiesel are available we anticipate imported biodiesel will preferentially be purchased and
blended over higher priced domestic product, particularly near large ports. In this scenario,
obligated parties that sell significant volumes of fuel in the interior of the United States would
likely purchase separated RINs to meet their compliance obligations, rather than purchasing and
blending relatively high cost domestic biodiesel.
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 such optimization. Biodiesel blending
infrastructure is more varied, with many terminals having blending infrastructure on-site, some
receiving pre-blended biodiesel, and much biodiesel being blended downstream of terminals.
Where biodiesel blending infrastructure does not exist we believe it is primarily the result of the
higher expense associated with transporting biodiesel to locations with limited or no local
biodiesel production.
In any case, we do not believe that the lack of proper incentives to expand blending
infrastructure is a primary factor limiting the production or use of renewable fuels in the
transportation sector. While blending infrastructure is not universal at all terminals, the primary
issues limiting the production and use of renewable fuels are the status of the production
technologies to economically produce cellulosic fuels and to a lesser degree the limited
consumer demand for higher level ethanol blends.151 Given the observed sufficiency of blending
infrastructure, and the apparent ability of the current regulatory program to incentivize
installation of blending infrastructure (whether at or downstream of fuel terminals), the record
before us does not support the allegations of petitioners that changing the point of obligation
would result in increased use of renewable fuels in the United States as a result of additional
incentives or motivation for the installation of blending infrastructure.
151 While low consumer demand for higher level ethanol blends did not require the use of EPA's general waiver
authority to reduce the implied statutory volume of conventional biofuel in 2017, or in EPA's proposed rule for
2018, low demand for these fuels could theoretically result in higher RIN prices than would be realized if consumer
demand for these fuels were greater. However, as discussed throughout this document, the record before EPA does
not demonstrate that changing the point of obligation is likely to result in greater sales volumes of higher level
ethanol blends.
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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 that could affect the expansion of renewable fuel use in the United States,
identified both by the EPA in prior actions and by 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 E85.152 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,153 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.154 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. Consequently,
available evidence strongly suggests that the RFS program, in conjunction with other incentives
for biodiesel, have been very effective in increasing the supply of biodiesel.
The current retail availability and pricing for E85, however, is significantly different. E85 is
currently offered for sale at approximately 3200 stations across the United States (approximately
2% of all retail fuel stations).155 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 some 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 is not generally applicable across the United States.156 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 E10.157 In a
supporting document for the final rule establishing the RFS percentage standards for 2014-2016,
152 As discussed in Section II. A, the EPA believes that at this time the primary factor constraining attainment of the
statutory volume targets is the shortfall in cellulosic biofuel production. EPA did not base the reduced volumes
used in establishing the 2017 RFS standards, or the proposed 2018 RFS standards, on any perceived limitation in the
ability to distribute or sell E85, and at this time we have no basis for expecting that this limitation would impact
future waiver decisions. However, if changing the point of obligation were to lead to the market selling greater
volumes of higher level ethanol blends (such as E85 or E15) at lower prices this could potentially reduce the price of
D6 RINs, which is perceived by the petitioners as advantageous.
153 The $l/gallon biodiesel blenders tax credit has been available every year from 2010-2016 (in some years the tax
credit was reinstated retroactively). Currently, this tax credit is not available for 2017.
154 Letter from Pilot Flying J to Administrator McCarthy, August 16, 2016.
155 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/
156 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.
157 See discussion in the final rule establishing the RFS standards for 2014-2016 (80 FR 77,420, Dec., 14, 2015).
50
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the EPA examined the potential for higher RFS standards, and the higher RIN prices that could
be expected as a result of higher standards, to incentivize lower E85 retail prices and higher sales
volumes.158 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 the 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. In comments, petitioners
and others suggested that obligating downstream parties like "position holders," and increasing
obligations for currently RIN-long parties, could result in more price discounting. We find no
basis for the claim that changing the point of obligation would have this effect, nor did
commenters submit any data that would support this conclusion. 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 non-competitive pricing of E85 at retail is not due to the
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 a not unexpected E85 pricing
strategy by retail stations that seeks to maximize fuel margins through withholding RIN value
and 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.159
One of the arguments made by the petitioners, in their petitions and in comments, 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 (un-obligated blenders and parties that sell more gasoline
and diesel fuel blended with renewable fuel than they refine or import) 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 the 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.
158 "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.
159 Even if EPA changed the point of obligation to "position holders" retail station owners would generally not be
obligated parties, and thus the change is unlikely to directly impact retail fuel pricing decisions.
51
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The 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 E15 and E85. While some of the parties
(blenders or position holders) that would become obligated if the EPA were to change the point
of obligation as suggested in the petitions 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 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).160
This is consistent with letters EPA has received from fuel blenders who told the 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.161
The petitioners and commenters did not provide compelling evidence to 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.162 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 the 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. The
average retail price discount for E85 relative to E10 in Iowa was very similar to the national
average retail price discount. The average discount for E85 relative to E10 in Iowa at the retail
160 This finding conflicts with the paper prepared by NERA on behalf of Valero (Effects of Moving the Compliance
Obligation under RFS2 to Suppliers of Finished Products), however we note that NERA provides no data to support
their claim that the value of the RIN is not reflected in the wholesale price of E85. Instead, they simply refer to the
fact that the full value of the RIN is not reflected in the retail price of E85.
161 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.
162 http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_2013/Pages/WhoSellsGas.aspx
52
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level, however, was much smaller than the average discount for E85 relative to E10 at the
wholesale level (See Figure 3 below). Further, 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 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 in Iowa
$2.00
$1.80 p
5160
»t* ¦
$1.40
• •**
¦
$1.20
$1.00
$0.80
$0.60
J" J1 J> ^
4; of .c?'' «,t> tS> ¦# <$>v 4' 4'*
— E85 Wholesale Price
Wholesalewith 100% Passthrough
Wholesale with 0% Passthrough
Wholesale prices with 100% and 0% pass-through calculated using E10 and ethanol prices from the following
sources and assuming the effective ethanol price is discounted by 100% and 0% of the RIN value respectively
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/retailer-center/iowa-wholesale-e85-price-listing-services/)
Ethanol price from Agricultural Marketing Resource Center (http://www.agmrc.org/renewable-
energy/ethanol/midwest-ethanol-cash-prices-basis-data-and-charts-for-selected-states/)
RIN Prices from OPIS and Argus Media
53
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Figure 3
E85 Pricing: Iowa Wholesale and Retail Price and National Retail Price Averages
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
r\V rty
A?
r\> _r\>
Iowa Wholesale ES5 Discount toElO
1 Iowa Retail E35 Discount to E10
National Retail ES5 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://iowarfa.org/retailer-center/iowa-wholesale-e85-price-listing-services/)
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 E85.163
The petitioners provide insufficient evidence to support this argument. In fact, some of the
comments that EPA received supporting a change to the point of obligation concede that the
market for ethanol is highly inelastic due to the limited demand for E85 and other higher level
ethanol blends.164 The EPA estimates that total E85 sales were approximately 150 million
gallons in 2014. In our final rule establishing the RVOs for 2014-2016, the 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 still be expected to remain low, just under 300 million gallons.165
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
163 In this section EPA lias 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.
164 For example, see comments submitted by NATSO, EPA-HQ-OAR-2016-0544-0282; Chevron, EPA-HQ-OAR-
2016-0544-0209
165 80 FR 77,420 (Dec., 14, 2015).
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generate an additional 110 million RINs per year,166 or approximately one half of one percent of
the total number of RINs 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 would significantly reduce the overall price of RINs. Additionally, in 2016 approximately
240 million D6 RINs were supplied from grandfathered biodiesel and renewable diesel.167 It is
very likely that these were the marginal cost D6 RINs as the RIN price associated with these
fuels is governed by the high price of feedstocks used to produce these fuels relative to
petroleum. Even if additional RINs could be generated by supplying greater volumes of E85,
these additional RINs would only be expected to appreciably reduce the D6 RIN price after
displacing these marginal conventional biodiesel and renewable diesel RINs. Since petitioners
and commenters provide insufficient information to demonstrate that changing the point of
obligation would result in enough additional low cost D6 RINs to displace the high cost D6 RINs
currently provided by conventional biodiesel and renewable diesel, the claim that potential
additional RINs generated from increased E85 blending would depress the overall D6 RIN price
is unsupported.
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 marketplace; 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 the 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 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, the 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. As discussed in previous sections, the evidence available to
the EPA does not indicate that changing the point of obligation would result in greater
availability or price discounts for cellulosic biofuels or biodiesel blends. With respect to higher
level ethanol blends, 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, it appears highly unlikely
that changing the point of obligation would influence the relative pricing of E85 versus E10. In
the next section, we discuss why the EPA does not believe that data support the position that
changing the point of obligation would increase the availability of E85 at retail stations.
166 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.
167 See 2016 RIN Supply.
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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. The petitioners and others
argue that if the EPA were to place the point of obligation on the blenders or "position holders,"
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
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.168 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.169
The EPA also assessed the current affiliation of stations selling E85 in the proposed denial. The
EPA received several comments on that assessment, including one that provided an updated
assessment of E85 station affiliation information. EPA has used the information provided in that
comment in the revised assessment presented below.170
Using the information presented in the comments, we find that of the approximately 3200
stations selling E85 in the United States at the end of 2016, approximately 40% 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 47% of all stations selling E85 were
not affiliated with an obligated party, 10% were private stations or stations owned by a federal,
state, or local organization,171 and 3% were unable to be categorized.172 Large retail chains, such
as Casey's General Stores, Kwik Trip, and Murphy USA, as well as other unbranded stations are
168 http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_2013/Pages/WhoSellsGas.aspx
169 Ibid.
170 Letter from Ron Minsk to Sarah Dunham. February 22, 2017. Submitted as an attachment to comments from
Valero, EPA-HQ-OAR-2016-0544-0274.
171 The 10% of E85 stations that were private or owned by a federal, state, or local organization are not included in
the 47% of E85 stations not affiliated with an obligated party.
172 These numbers are based on an assessment of data from AFDC by Ron Minsk, submitted in comments on our
proposed denial of the petitions, EPA-HQ-OAR-2G16-0544-0145.
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not generally obligated parties under the current regulations.173 These data do not appear to
support 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. While there
are differences of opinion on the degree to which obligated parties can influence whether or not
their branded stations offer 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 40% of all
stations that sell E85 are branded stations.174 In contrast, large retail chains often directly own
retail stations, thus giving them control of the fuel offerings at the stations they own, and a
significantly higher proportion of these stations offer E85 relative to branded stations, as shown
below; this suggests that the current point of obligation provides significant incentives for these
stations to offer E85 under the right market conditions.
Table III.D-1
Retail Fuel Stations and E85 Stations by Affiliation
Branded Stations
(affiliated175 with
obligated parties)
Unbranded Stations
(not affiliated with
obligated parties);
Not including
private stations
Private
Stations
Uncategorized
Stations
All Retail Fuel
Stations176
50%
50%
Unknown
N/A
E85 Retail
Stations
40%
47%
10%
3%
Furthermore, while only 50% of all retail fuel stations are not affiliated with refiners,
approximately 57% of all E85 stations are not affiliated with refiners. An unbranded station is
therefore approximately 17% more likely to offer E85 for sale than a branded station if we
exclude consideration of private unbranded stations.177 Unbranded station are approximately
173 Large retail chains could become obligated parties for all or a portion of the petroleum products they sell if the
point of obligation were changed to the renewable fuel blender or the "position holder." These parties purchase fuel
above or below the rack depending on the logistics and economics of fuel purchasing and renewable fuel blending at
various locations. See. e.g.. Comments from Casey's General Stores. EPA-HQ-OAR-2016-0544-0268.
174 This number increases to 46% percent of all E85 stations affiliated with obligated parties (vs.54% of all E85
stations not affiliated with obligated parties) if we consider only public stations
175 For the purposes of this assessment, EPA has defined a station as affiliated with an obligated party (or a non-
obligated party) if they use the party's name for marketing purposes, such as in the name of the station, on the
station signage, etc. Affiliated stations may or may not be directly owned by the party with which they are
affiliated.
176 EPA does not have data on the total number of private retail fuel stations in the United States, however it is likely
that it is sufficiently small that it does not impact this analysis.
177 Since the number of branded and unbranded stations are approximately equal, we determined that unbranded
stations are approximately 17% more likely to offer E85 than branded stations by dividing the percentage of E85
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42% more likely to offer E85 for sale than a branded station if we include private stations in the
count of unbranded stations that sell E85.178 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 higher rate at unbranded retail fuel stations relative to retail fuel stations that are
affiliated with obligated parties. The record before EPA does not contain sufficient evidence to
demonstrate that the point of obligation is a significant factor in a retail station's decision
whether or not to offer E85.
In his critique of the EPA's assessment of the number of E85 retail stations as branded as
compared to unbranded stations presented in the proposed denial, Mr. Minsk argued that in
addition to errors in categorization, the comparison presented by the EPA (comparing E85
stations counts at branded vs. unbranded stations) was inappropriate. Mr. Minsk argues that it is
more informative to compare the number of E85 retail station affiliated with obligated parties
that are "RIN-long" vs. those affiliated with obligated parties that are "RIN-short."179 Mr. Minsk
concludes E85 stations are much more likely at retail station affiliated with RIN-short obligated
parties, with E85 offered at 2.7% of all stations affiliated with RIN-short parties (893 out of an
estimated total of 31,000 stations), as compared to E85 being offered at 0.9% of all stations
affiliated with RIN-long parties (368 out of an estimated 41,000 stations). When focusing only
on stations added since 2013, when D6 RIN prices first rose significantly, E85 was added at 460
stations affiliated with RIN-short parties (1.5% of their total of 31,000 stations) while 125
stations affiliated with RIN-long parties added E85 (0.3% of their 41,000 affiliated stations).180
Mr. Minsk suggests this is evidence that RIN-short parties are more effective at encouraging the
availability of E85 at retail stations they are affiliated with, and that moving the point of
obligation to the "position holders" (and, if EPA were to set an RVO that effectively requires
higher level ethanol blends, thereby eliminating the ability for some parties to obtain the RINs
needed for compliance by simply bending 10% ethanol with the gasoline they sell at terminals)
would result in more retail stations offering E85, and therefore greater sales volumes of ethanol.
The conclusions reached by Mr. Minsk, however, are not sufficiently supported by the data.
First, Mr. Minsk's assessment appears incomplete, as it does not address the majority of the E85
stations that are unbranded by the percentage of E85 stations that are branded. This calculation was then repeated
when including the percentage of private E85 stations with the percentage of unbranded E85 stations.
178 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 stations 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.
179 In his paper, Mr. Minsk categorizes obligated parties as RIN-long vs. RIN-short primarily based on the volume of
gasoline and diesel the obligated parties produce relative to the estimated volume of fuel sold at their associated
retail stations. For more detail, see Letter from Ron Minsk to Sarah Dunham. February 22, 2017. Submitted as an
attachment to comments from Valero, EPA-HQ-OAR-2016-0544-0274.
i8° gpA questions Mr. Minsk's focus on stations added since 2013. While it is true that D6 RIN prices rose
substantially in this year, it is certainly possible that obligated parties could have anticipated that increasing demand
for RINs, and associated higher RIN prices, would result from the rapidly increasing RFS statutory volumes. E85
stations added prior to 2013 therefore may have been in response to expectations of higher demand for RIN (and
associated higher RIN prices) in the future.
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stations (E85 stations not affiliated with any type of obligated party, and therefore affiliated with
parties that are by definition "RIN-long" due to their lack of an RFS obligation) despite the fact
that these stations outnumber stations affiliated with obligated parties. EPA further notes that Mr.
Minsk does not convincingly address the source of motivation that the "RIN-short" obligated
parties may have for encouraging their affiliated stations to offer E85. As discussed above, the
potential market for E85 is not sufficient to generate enough RINs to drive down the price of D6
RINs. This is especially true as a high RIN price is currently necessary to incentivize E85 sales,
and the D6 RIN price is likely currently determined by the marginal gallon of conventional
biofuel which we believe is currently conventional biodiesel rather than ethanol sold as E85. If
increasing the number of retail E85 stations is unlikely to result in lower D6 RIN prices it is
reasonable to question whether there are other factors, unrelated to whether an E85 station is
affiliated with a RIN-long or RIN-short obligated party, that may explain why E85 is more likely
to be offered at branded stations affiliated with some obligated parties that others. After
reviewing the data EPA concludes that retail stations owned by a large company are much more
likely to offer E85 than retail stations owned by a party owning a single, or small number of
retail, regardless of whether the station is affiliated with a RIN-long or RIN-short obligated party
or if the station is branded or not. We do not find this surprising, as installing E85 infrastructure
is a capital intensive project and therefore much more likely to occur at stations with significant
access to capital (such as stations owned by large companies) rather than at stations owned by
single-station owners. We further conclude that the higher prevalence of E85 stations affiliated
with RIN-short parties (vs. RIN long parties) is the result of a higher rate of direct ownership of
retail stations among RIN-short obligated parties, rather than a desire by RIN-long obligated
parties to restrict the availability of D6 RINs.
The four parties categorized by Mr. Minsk as RIN-long (BP, Chevron, Shell, and Exxon) directly
own an estimated total of just 458 stations out of the approximately 41,000 affiliated stations.181
Conversely, direct ownership of retail stations is more common among the parties characterized
by Mr. Minsk as RIN-short. Through its Speedway brand Marathon directly owns 2,730 retail
stations, substantially more than all of the RIN-long parties combined.182 Similarly Western
Refining and MAPCO directly own most or all of their affiliated stations.183 While Valero does
not currently own many retail stations, the vast majority of the stations affiliated with Valero that
offer E85 are owned by CST, a large company that owns approximately 3,000 retail stations.184
Additionally, a relatively large number of the stations affiliated with Valero (43 of 107) added
E85 prior May 2013 when Valero spun off its retail operations to CST brands, meaning these
stations may have been directly owned by Valero at the time they added E85.185 Altogether, of
the 893 E85 stations affiliated with RIN-short obligated parties we estimate that over 500 of
these stations are directly owned by a RIN-short obligated party or a large retail brand formerly
181 NACS. Who sells America's Fuel? Available online at:
http://www.nacsonline.com/YourBusiness/FuelsReports/GasPrices_2013/Pages/WhoSellsGas.aspx
182 https://www. speedway ,co tn/About/ The vast majority of the stations affiliated with Marathon that offer E85 (321
out of 367) are Speedway stations, See EPA assessment of E85 stations affiliated with Marathon.
183 See http://www.wnr.com/about-us and https://www.mapcorewards.com/about/. Based on these websites we
estimate that Western Refining owns 429 retail stations (approximately 75% of their total affiliated stations) while
MAPCO owns 345 stations (over 95% of their total affiliated stations).
184 http://www.cstbrands.com/en-ns/OurCompany See also EPA assessment ofE85 stations affiliated with Valero.
185 See also EPA assessment ofE85 stations affiliated with Valero.
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owned by a RIN-short obligated party.186 Note that this is a higher number of stations than
directly owned by all of the RIN-long parties combined.
Apart from whether a retail station is owned by a large company or a party owning a single or
small number of stations, there are other factors that likely influence whether or not stations offer
E85. For example, 165 E85 stations affiliated with RIN-Short obligated parties (19% of all the
E85 stations affiliated with RIN-short obligated parties) are affiliated with either CENEX (149
stations) or CountryMark (16 stations). Stations affiliated with both CENEX and CountryMark
are primarily located in the midwest, which may indicate that they have greater access to low
cost E85 (as a result of proximity to many ethanol production plants) or the station owners and/or
customers may be more inclined to support E85. Further, while it does not appear that CENEX
directly owns any retail stations, CENEX is owned by CHS, a large agricultural cooperative that
may be inclined to support the addition of E85 at their affiliated stations in an effort to support
their core agricultural business. To the degree that increased E85 sales support ethanol prices,
and ultimately corn prices, these benefits would be expected to be realized by CHS.
Based on our analysis of the data, EPA concludes that the most predictive factor for whether or
not a retail fuel station offers E85 is whether the retail station is owned by a large company or
whether a party the owns only a single or a small number of retail stations. Since Mr. Minsk's
study does not control for this factor, or other potentially significant factors such as geography,
we do not believe his work provides a sufficient basis for concluding that retail fuel stations
affiliated with RIN-short parties are more likely to offer E85 than stations affiliated with RIN-
long parties. There is thus insufficient support for the claim that changing the point of obligation
would significantly increase the rate of growth of the number of retail stations offering E85.
Unless consumer demand for E85 increases significantly, the expansion of E85 availability at
retail will likely be minimal, except in cases where grant funding or other incentives are
available, and any addition of E85 at retail stations is very likely to be at stations owned by
parties with significant access to capital. Changing the point of obligation will not impact any of
these factors, and therefore is not expected to result in additional availability of E85 at retail.
Additionally, some commenters suggested that other limitations in the market, including the
number of flex fuel vehicles, and liability and infrastructure compatibility surrounding El 5 use,
are key factors limiting the use of fuel blends with higher renewable content that would not be
impacted by changing the point of obligation.187
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 production, distribution and use of renewable fuels and, as discussed elsewhere, we do not
believe that the incentives for renewable fuel production, distribution, and use would be greater
186 A total of 568 E85 stations are affiliated with Marathon, Western Refining, MAPCO, and Valero, however not all
of these stations appear to be owned by one of the obligated parties (or CST).
187 See, e.g., Comments from Cumberland Farms, EPA-HQ-OAR-2016-0544-0160; Comments from Tesoro, EPA-
HQ-OAR-2016-0544-0244.
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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.
Some commenters cited to language in the 2014-2016 final rule indicating that high RIN prices
would only result in modest increases in volumes of E85 as evidence that RIN prices cannot
drive renewable fuel blending.188 These commenters take this language out of context. In the
2014-2016 final rule, the EPA was attempting to assess the degree to which an annual volume
standard could incentivize additional E85 sales in a single year, not the degree to which the RFS
program as a whole can incentivize long term investments that could result in increased
renewable fuel availability and use. EPA continues to believe that the RIN value is incentivizing
investments to increase renewable fuel use.
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. The supply of cellulosic biofuel for 2018 was
projected in the 2018 annual rule proposal to be only 3.4% 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 90% of the growth in the statutory volumes from 2018 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, to the degree that it reduces the incentive of the refiners to participate in
the commercialization of cellulosic biofuels, changing the point of obligation from primarily
refiners, who have significant financial resources and experience in commercializing new fuel
production technologies on a large scale, to include many smaller downstream parties without
such financial resources or experience may negatively impact the ability of the cellulosic
188 See, e.g., Comments from CVR, EPA-HQ-OAR-2016-0544-0396, citing Renewable Fuel Standard Program:
Standards for 2014, 2015, and 2016 and Biomass-Based Diesel Volume for 2017, 80 Fed. Reg. 77,420, 77,459 (Dec.
14, 2015).
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biofuels industry to overcome these challenges. 189 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 a number of cellulosic
technologies are nearing commercial-scale production.
Some commenters suggested that by changing the point of obligation to the "position holders"
EPA would increase the obligation for large integrated refiners, as most of these parties sell more
gasoline and diesel at the rack than they refine or import.190 These commenters argued that
changing the point of obligation to the "position holders" would encourage these large integrated
refiners to invest in cellulosic biofuels. Other parties, including large integrated refiners,
indicated that an increasing RIN obligation for them would hinder their abilities to invest in
cellulosic biofuels. Some parties associated with the renewable fuels industry supported EPA's
conclusion that changing the point of obligation to "position holders" could harm investors in
cellulosic biofuel production technologies and production facilities close to commercial-scale
production.191 Parties arguing that changing the point of obligation to "position holders" would
increase investment in cellulosic biofuel development stated that the large integrated refiners
have the necessary resources and are most capable of investing in research and development, but
currently have no incentive to invest as they can fulfill their regulatory requirements without
using cellulosic biofuel. As support for these statements the commenters compare the revenues
of large integrated refiners to those of relatively smaller merchant refiners and the fact that
several large integrated refiners are currently engaged in R&D efforts. The EPA does not find
the arguments that changing the point of obligation to "position holders" would increase
investment in cellulosic biofuel development convincing.
While the EPA acknowledges that large integrated refiners have significant revenues it is not
clear why integrated refiners should be expected to invest in cellulosic biofuel development
while merchant refiners, many of whom have less but still significant resources, should not.192
The commenters note that several integrated refiners have recently reduced funding of R&D
efforts for cellulosic biofuels. They allege that if these parties had relatively greater RIN
obligations they would not have scaled back their investment. However, the EPA notes that these
companies began investing in cellulosic biofuel R&D at a time when the RFS obligations were
much lower than today. These parties did not suddenly reduce their investments after finding
themselves with excess RINs. Rather, as the commenters themselves discuss, they have had
excess RINs since the beginning of the RFS program. Indeed, if RIN obligations beyond a
company's ability to obtain RINs by blending renewable fuels made a company more likely to
invest in cellulosic biofuels, we would expect large merchant refiners such as Valero, Holly
Frontier, and PBF Energy, which also have significant resources, to be investing significant sums
189 See, e.g. Comments from Tesoro, EPA-HQ-OAR-2016-0544-0244, suggesting that a change to the point of
obligation could "negatively impact ongoing efforts to spur advanced biofuel production initiatives being pursued by
the refining industry." See also Letter from Tesoro, Ensyn, and Honeywell noting their efforts for a path forward for
cellulosic biofuel production.
190 EPA notes that this change would also decrease the RFS obligation of merchant refiners
191 See, e.g. Comments from BIO, EPA-HQ-OAR-2016-0544-0217.
192 Valero compares the combined revenue of Chevron and Shell ($197 billion in 2015) to the combined revenues of
Valero, Holly Frontier, and PBF Energy ($78 billion in 2015), see EPA-HQ-OAR-2016-0544-0274. EPA believes
that any of these companies have sufficient revenue to invest in cellulosic biofuel development if so inclined.
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in cellulosic biofuels, yet even the commenters acknowledge this is not the case. It appears it is
likely that those integrated refiners that reduced their investment in cellulosic biofuel did so after
determining that these investments were unlikely to result in long term profits, or that whatever
profits could be realized were less than alternative investment opportunities. Finally, we note
that because the cellulosic waiver authority in CAA 21 l(o)(7)(D) requires that EPA establish the
cellulosic biofuel volume requirement at the level projected to be produced (if this volume is
lower than the statutory volume) and to make cellulosic waiver credits available as an alternative
means of compliance when the statutory volume is not in effect, the design of the RFS program
provides limited encouragement for parties of any type to invest in cellulosic biofuels. Obligated
parties, like all parties, are only expected to invest in cellulosic biofuel to the degree that they
believe these investments will be profitable in the long term. We believe that changing the point
of obligation to the "position holders," and thereby placing a greater burden on integrated
refiners would be highly unlikely to significantly impact integrated refiner's investments in
cellulosic biofuels.193
G. Changing the Point of Obligation Would Not Be Expected to Increase Energy
Security
As mentioned above, one of the stated goals of EISA and the RFS program is to increase energy
security. Many commenters suggested that the EPA should consider how modifying the
definition of obligated party could increase energy security and proposed several ways obligating
"position holders" may result in increased energy security. These commenters often cited to
comments by Commander Kirk S. Lippold, who suggested that the RFS program is harming US
energy security.194 Commander Lippold claims that the current point of obligation threatens the
viability of some refiners, increases fuel costs to the military and other domestic consumers, and
stimulates demand for foreign biofuels. EPA finds insufficient factual basis for these claims.
Some commenters suggested that the reason the U.S. has become a net exporter of petroleum
fuel in recent years is that obligated parties were exporting fuels to avoid the RIN obligation.
Some of these commenters conceded that the RFS played only some part in this, however others
attributed the export of petroleum fuel to the RFS program. We do not believe these statements
to be accurate, as the decision to export gasoline and diesel from the United States is driven by a
desire to realize the maximum profits for these products in the global refined product market.
There are no fuel shortages within the United States, so the exported fuel is not being exported at
the expense of domestic use, but to find a market offering higher prices for these fuels than the
domestic market. (See also Section HE. for a further discussion of this issue). Changing the
point of obligation to "position holders" would not alter these fundamental market dynamics,
193 Some commenters suggested that changing the point of obligation could also increase development and
investment in advanced biofuel production and use. These commenters did not provide any reasons why a change
would result in these increases, and therefore EPA does not find these arguments compelling for similar reasons
expressed above regarding cellulosic biofuel. See, e.g., Comments from CVR Energy, EPA-HQ-OAR-2016-0544-
0396. In fact, EPA received comments suggesting that a change to the point of obligation would negatively impact
ongoing efforts to increase advanced biofuel production. See Comments from Tesoro, EPA-HQ-OAR-2016-0544-
0244.
194 Letter from Cdr. Kirk S. Lippold, to U.S.EPA, EPA-HQ-OAR-2016-0544-0143.
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sand therefore would be unlikely to increase the energy security of the United States by
decreasing the amount of exports of petroleum fuel.
Other commenters suggested that the current point of obligation would cause refineries to close,
with some specifying that merchant refineries would be the most likely to close as a result of the
RFS program. Commenters claimed that such closures would threaten American energy
independence and national security. They stated that closure of northeast refineries would
exacerbate dependence on foreign energy sources and could lead to price spikes in fuel.
Commenters also suggested that increasing petroleum prices could harm the Department of
Defense and other agencies.
Whether produced by domestic refiners (e.g., Northeast refineries) or imported into the U.S.,
gasoline and diesel fuel bear the exact same RIN obligation. Thus, there can be no incentive
provided by the RFS program for greater dependence on foreign energy sources. Furthermore,
The EPA disagrees that the current point of obligation is likely to cause refinery closures, for
merchant refiners or any other refiners. Data reviewed by EPA demonstrates that refiners recover
the cost of the RIN through higher prices for their petroleum products as discussed in section
II.C. However, to further assess whether or not the RFS program, and specifically high RIN
prices, might be causing refinery closures EPA examined publicly available data from the
Energy Information Administration on refinery closures, deratings, and expansions from 2013 to
2017. We chose these years for our assessment, as this time period corresponds to the years with
elevated D6 RIN prices. If the RFS program were causing refinery closures through high RIN
prices, they would have been most likely to occur during these years. In its refinery capacity
report, the Energy Information Administration (EIA) publishes a list of U.S. refinery
shutdowns.195 The list of refinery closures since 2013 is provided in Table III.G-1 below. As a
point of reference, in 2013 there were 143 operable refineries with a total atmospheric crude
distillation capacity196 of 18,560,000 barrels per day in 2013.
195 Table 13 Refineries Permanently Shutdown by PAD District Between January 1, 1990 and January 1, 2017
https ://www. eia. gov/petroleum/refinerycapacity/table 13 .pdf
196 Total Atmospheric Crude Distillation Capacity is the most commonly used measure of the capacity of a refinery.
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Table III.G-1
Refinery Closures (2013-2017)
Company Name
Location
Date of
Shutdown
Total Atmospheric
Crude Distillation
Capacity (bbl/cd)
Asphalt Plant
Hess Corporation
Port Reading, NJ
3/2013
0
No
Axeon Specialty
Savannah, GA
12/2014
28,000
Yes
Products LLC
Ventura Refining
Thomas, OK
11/2014
12,000
No
and Transmission
LLC
Trigeant LTD
Corpus Christi, TX
12/2014
0
Yes
Pelican Refining
Lake Charles, LA
1/2015
0
Yes
Company LLC
Antelope Refining
LLC
Douglas, WY
12/2016
3800
Yes
Flint Hills
North Pole, AK
6/2014
126,535
No
Resources LP
A review of the list of refinery closures that occurred between 2013 and 2017 does not provide a
compelling case for hardship caused by the RFS program. Four of the seven refineries are
asphalt refineries which do not produce transportation fuels and are therefore not affected by the
RFS program. The Flint Hills refinery is located in Alaska, which is exempt from the RFS
program. According to a journal article covering the Hess refinery closure, the Hess
management attributed the refinery closure to dwindling demand on the East Coast along with
heating oil sulfur standards which were phasing in there.197 The last refinery on the list of
refinery closures is the Ventura refinery in Thomas, OK. Reviewing the gasoline production
information provided by this company to EPA does not show that the Ventura refinery produced
gasoline when this refinery was operating, although the refinery may still have had to comply
with RFS program if the refinery produced diesel fuel.198
While there were very few refinery closures from 2013-2017 (and only one small refinery for
which the available information is insufficient to discount attribution to the RFS program),
refineries added additional capacity at their refineries. Between 2013 and 2017, the EIA data
shows that the U.S. refining industry increased its atmospheric crude oil throughput capacity
from about 19 million barrels per stream-day to 19.8 million bbl/stream-day, an increase of more
than 4%. 199 A portion of this change in crude oil distillation capacity was for condensate
197 Bell, Deborah; Hess Port Reading Refinery to Permanently Close Next Month, Woodbridge Patch, January 28,
2013. Available Online: https://patch.com/new-jersey/woodbridge/hess-port-reading-refinery-to-permanently-close-
next-month.
198 EPA conducted an analysis looking farther back in time in the draft regulatory impact analysis supporting the
proposed Tier 3 emission standards, EPA-420-D-13-002, March 2013. Refineries closed at a far greater rate in
years past. For comparison 102 refineries closed over the decade from 1982-1992, 46 from 1992-2002, and 2 from
2002 to 2012.
199 Table 6 Operable Production Capacity of Petroleum Refineries, January 1, 1988 to January 1, 2017
https ://www. eia. gov/petroleum/refinerycapacity/table6 .pdf
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splitting and for asphalt plants which do not produce finished fuels and therefore would not be
affected by the RFS program. To focus our analysis more directly on refineries affected by the
RFS program, we reviewed changes in individual refinery operable atmospheric crude oil
capacity from 2013 to 2017.200 201 The results of our assessment (as shown in Table III.G-2
below) show that from 2013 to 2017 refinery expansions outnumbered closures 39 to 4, and
atmospheric crude capacity increases were more than 25 times the reductions. Note that this
table does not include any added capacity for condensate splitters, any expansion or contraction
at asphalt plants, or any expansion or contraction of refineries located in Alaska.
200 Refinery capacity data by individual refinery as of January 1, 2013; Available Online at
https://www.eia.gov/petroleum/refinerycapacity/archive/2013/refcap2013 .php
201 Refinery capacity data by individual refinery as of January 1, 2017; Available Online at
https ://www. eia. gov/petroleum/refinerycapacity/
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Table III.G-2
Refinery Expansions, Closures, and Derating (2013-2017)
Million Barrels per Stream-Day
Refinery Name
Expansions
Closu res/De ratine
Net Expansion
ALON USA ENERGY INC
4,000
0
4,000
AMERICAN REFINING GROUP INC
1,300
0
1,300
BIG WEST OIL CO
3,000
0
3,000
BP
r
4,000
0
4,000
CALCASIEU REFINING CO
25,000
0
25,000
CALUMET
36,000
0
36,000
Chalmette Refining LLC
2,000
0
2,000
CHEVRON
17,000
0
17,000
CHS MCPHERSON REFINERY INC
9,500
0
9,500
CITGO REFINING
0
1,500
-1,500
COUNTRYMARK COOPERATIVE INC
2,600
0
2,600
DELEK REFINING LTD
10,000
0
10,000
ERGON
3,300
0
3,300
EXXONMOBIL
31,000
0
31,000
Flint Hills Resources LP
30,000
0
30,000
HERMES CONSOLIDATED LLC
4,000
0
4,000
HOLLYFRONTIER
27,020
0
27,020
HOUSTON REFINING
0
6,000
-6,000
LIMA REFINING COMPANY
15,000
0
15,000
MARATHON
120,500
0
120,500
MONROE ENERGY LLC
18,000
0
18,000
Motiva
20,000
0
20,000
PASADENA REFINING SYSTEMS INC
9,200
0
9,200
PDV Midwest Refining LLC
5,200
0
5,200
PHILADELPHIA ENERGY SOLUTIONS
0
5,000
-5,000
PHILLIPS 66
31,156
0
31,156
PLACID REFINING CO
23,500
0
23,500
PREMCOR REFINING GROUP INC
5,000
0
5,000
SHELL CHEMICAL LP
10,500
0
10,500
Silver Eagle Refining
100
0
100
SINCLAIR WYOMING REFINING CO
5,000
0
5,000
ST PAUL PARK REFINING CO LLC
19,200
0
19,200
SUNCOR ENERGY (USA) INC
500
0
500
TESORO
if
27,600
0
27,600
TOLEDO REFINING CO LLC
13,000
0
13,000
TORRANCE REFINING CO LLC
2,000
0
2,000
VALERO
276,500
18,000
258,500
VENTURA REFINING & TRANSMISSION
0
14,000
-14,000
WESTERN REFINING
5,000
0
5,000
WRB REFINING LP
3,000
0
3,000
TOTAL
819,676
44,500
775,176
The review of the individual refinery atmospheric crude capacity changes from 2013 to 2017
does not indicate hardship on the part of the US refining industry, and in fact, suggests that the
market conditions in this time period promoted growth. Refiners are generally making
investments in their refineries to expand their throughput capacity, suggesting that the US
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refining industry is growing and healthy. Furthermore, the refineries which expanded their
atmospheric crude oil capacity included small, medium and large refineries, as well as both
integrated and merchant refiners. Aggregate refinery expansions totaled about 820 thousand
barrels per stream-day (kbbl/stream-day), but is offset by 31 kbbl/stream-day of refinery closures
and modest derating, for a total of 789 kbbl/stream-day of added throughput capacity (excluding
condensate splitters, asphalt plants, and refineries located in Alaska).
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, the
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
greatly expanded the number of regulated parties and increased the complexity of the RFS
program unnecessarily.202 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. 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 the 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 as obligated parties under the amended RFS2 program. In explaining our
202 72 Fed. Reg. at 23923.
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reasoning, we noted once again that changing the point of obligation would likely result in a
significant increase in the number of obligated parties under the program.
Several of the petitions received by the 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.203 As the 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.204 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 the 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. The 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,
since they are already regulated in some fashion. 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, 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.205
A. The Number of Obligated Parties Would Increase if the Point of Obligation was
shifted to "Position Holders" or "Blenders"
Petitioners generally propose to change the point of obligation to "positions holders" and argue
that doing so would involve a similar number of obligated parties or could reduce the number of
obligated parties as compared to the number of obligated party refiners and importers that exist
today. Petitioners provided EPA with an analysis to support their argument. Petitioners also
argue that this proposed change would be relatively easy to implement because the number of
203 75 Fed. Reg. 14721 (March 26, 2010).
204 Ibid.; Renewable Fuel Standard Program (RFS2) Summary and Analysis of Comments, EPA-420-R-10-003
(February 2010), at 3-216.
205 Downstream blenders who blend renewable fuel into transportation fuel and own RINs at blending must report
the quantity of RINs purchased, separated from renewable fuel, and sold according to the reporting requirements
under 40 CFR 80.1451(c). They must also register with the EPA under 80.1450 and keep records as required under
80.1454. Small blenders can also shift the compliance burdens if they qualify under 40 CFR 80.1440. Obligated
parties must meet all of these requirements and also calculate an annual renewable volume obligation, acquire 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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obligated parties would at least remain relatively the same, if not decrease.206 But as discussed in
more detail below, we believe that Petitioners' suggested change would result in a significant
increase in the number of obligated parties. More importantly, we believe that the type of parties
Petitioners seek to shift the point of obligation to, and their experience level and available
resources indicate that implementing Petitioners' proposed change would result in a less
effective RFS program that would be more difficult to implement and enforce.
As discussed above, the EPA believes that all else being equal, placing the point of obligation on
a smaller number of obligated parties with significant financial resources and expertise in fuels
markets is preferable to placing it on a larger number of relatively small entities. This approach
facilitates program effectiveness by limiting the number of entities the EPA must interact with to
provide guidance and to ensure compliance. 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.
In the proposed denial, the EPA argued that the number of obligated parties would increase
significantly if the point of obligation under the RFS Program were changed from refiners and
importers to "position holders" at the rack. We cited our discussions with terminal operators and
associations and our own data on oxygenate blenders for reformulated gasoline (RFG) to
estimate that the obligated party count would increase from around 150 to between 350 and
1,000. The EPA argued that a higher number of obligated parties, many of whom would have
less expertise and fewer resources to provide oversight to the RIN program to help ensure the
validity of RINs than the current obligated parties, could result in greater non-compliance and
RIN fraud. This could negatively impact the ability of the RFS program to achieve its statutory
goals. A larger number of obligated parties would also result in higher compliance monitoring
and assistance costs, among other key market and policy concerns.
In its petition, Valero stated that moving the point of obligation to the "position holder" would
not increase the obligated parties above 200, based on their extensive knowledge of all players in
the fuel blending and sales industry. In its analysis, Valero aggregated all entities to the parent
company level to come up with the 200 count. We note that this may not be an "apples to
apples" comparison with the number of obligated parties under the current RFS regulations, as
not all parties comply with their RFS obligations at the parent company level. EPA attempted to
aggregate the list of obligated parties in 2016 to the parent company level to provide a count
comparable to Valero's estimate. Based on this assessment there were approximately 97
obligated "parent companies," after aggregating the full list of obligated parties; significantly
less than the estimate provided by Valero.207
• 206 See Valero Petition for Rulemaking, June 13, 2016, EPA-HQ-OAR-2016-0544-0008, Attachment D and E. See
also report by IHS Global Insight, Inc., submitted by Monroe, EPA-HQ-OAR-2016-0554-0368, Attachment J
(claimed as CBI).
207 RFS 2016 Obligated Parties. This document contains information claimed as CBI.
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During and after the comment period, the EPA engaged with the IRS to obtain more concrete
information about the count of "position holders." Since several of the petitioners and
commenters suggested changing the point of obligation to the "position holders," this
information would allow EPA to determine the number of obligated parties that would result
from changing the point of obligation to the "position holders." IRS reviewed the data it
maintains on "S" registrants, which is defined by the IRS to include, using their definitions,
enterers, position holders, refiners, terminal operators, or throughputters of gasoline, diesel fuel
(including a diesel-water fuel emulsion), or kerosene, or industrial users of gasoline.208 The IRS
noted that they cannot identify which type of actor an "S" registrant is (enterer, position holder,
refiner, etc.). The EPA notes that, utilizing IRS definitions, refiners (those that break bulk at a
refiner gate), position holders (those that break bulk at a terminal), and enterers (those that
import fuel through means other than at a terminal such as truck are the actors that would
become obligated parties if the point of obligation shifted to "position holders" as proposed by
petitioners and as the term is used in this document. Terminal operators and throughputters
would not become obligated parties if the point of obligation shifted to "position holders" as
proposed by petitioners, as these parties do not hold title to the gasoline or diesel fuel
immediately prior to the sale of these fuels at the terminal.209 If a terminal operator or
throughputter "breaks bulk," in a given quarter, they are categorized for that quarter as a position
holder or refiner. "S" registrants file Form 720, the Quarterly Federal Excise Tax Return, to
report the quantity of fuel they own. EPA requested the number of "S" registrants who paid taxes
as owners of gasoline or diesel, to represent the potential number of obligated parties if the point
of obligation shifted to "position holders" as proposed by petitioners because the RVO applies to
volumes of gasoline and diesel ("S" registrants that do not own any gasoline or diesel in any
given year would not pay taxes or have an RFS obligation for that year).
Information received from the IRS included the following:
• For fiscal year 2015, there were 1,571 "S" registrants, of which 715 filed Form 720 tax
forms.210
• In calendar year 2016, 443 of the Form 720 tax filers paid taxes as owners of gasoline or
diesel.211
• There is approximately a 30 percent turnover in number of parties that pay taxes as
owners of gasoline or diesel from year to year.212
208 The IRS definition of "position holder" is different than how the term is used in this document, and how it is used
by petitioners. The IRS definition applies only to parties who hold title to fuel above the terminal rack. Refiners who
hold title to fuel above the refinery rack are a separate entity ("refiners") under IRS definitions.
209 Using IRS terminology, these parties do not "break bulk"
210 Not all parties that filed a Form 720 tax form paid taxes as owners of gasoline or diesel
211 Some of the 720 tax filers paid taxes on fuels other than gasoline or diesel, and therefore would not likely become
obligated parties if EPA changed the point of obligation to the "position holder"
212 This estimate of annual turnover was provided to EPA by IRS. It is not calculated using the information in the
preceding bullets.
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Based on this information, the EPA has concluded that the best estimate for the number of
parties that would have been obligated parties in 2016 if EPA changed the point of obligation to
the "position holders" is approximately 443. The 30 percent turnover in program participations
from year to year implies that the obligated parties could be quite variable year over year.
Although the total number of obligated parties would likely be around 450 per year, the EPA
would still need to track the parties who may have been obligated in previous years, and account
for movements in and out of the RFS program. For example, if 30% of the "position holders"
changed from 2016 to 2017, we would expect that there would be a total of approximately 576
parties that were "position holders" over a two year period.213 Assuming the EPA adopted the
approach to reporting currently utilized by the IRS, as suggested by many petitioners and
commenters, we would expect approximately 450 obligated parties in any given year along with
a large group of parties we would need to consider as "potentially obligated parties" (at least
133214 based on turnover in a single year, and likely many more) based on their prior year's
activities. Since IRS cannot share data on the identity of the Form 720 tax filers nor on the
volumes of gasoline or diesel they move over the rack this would cause significant enforcement
challenges for EPA, especially as many of these parties would likely be difficult to identify. In
calendar year 2016, there were 120 obligated parties under the current RFS regulations;215 a
change to obligate "position holders" would more than double the number of obligated parties.
The matter would be even more complex for EPA administration in light of the additional
potentially responsible parties whose activities EPA would likely feel obligated to monitor to
some degree to verify whether they should be obligated parties in any given year, assuming these
parties could be identified. As such, the EPA continues to believe that the obligated party count
would increase significantly, and program administration would be considerably more complex,
under the petitioners' proposal.
The EPA received several comments that challenged EPA's assertion in the proposed denial that
an increase in the number of obligated parties would result in a higher administrative burden on
the EPA, in part because it would increase the number of annual compliance reports for the EPA
to review every year. While administrative burden is a secondary consideration, relative to
achieving the statutory goals of the RFS program, EPA has assessed the claims made by these
commenters. One set of comments countered that changing the point of obligation to "position
holder" would result in a decrease in the number of RIN transactions because obligated parties
would acquire the RINs at blending and retire them without intervening transactions.216 The
argument follows that the EPA would need to verify fewer RIN transactions, thereby decreasing
213 This is the minimum number of obligated parties that would be expected if EPA changed the point of obligation
to the "position holders," assuming a 30% turnover. The actual number of obligated parties would likely be far
higher.
214133 is 30% of 443 (the number of "position holders" in 2016)
215 40 CFR Part 80 currently allows obligated parties to comply with the RFS requirements at the "facility" level if
they so choose, and thus provides for flexibilities for obligated parties to comply as compared to reporting to the
IRS. In 2016 the EPA received 191 compliance demonstrations; 93 from aggregated refiners, 59 from individual
facilities, and 39 from importers of gasoline or diesel. We note that some of the obligated parties submitted
compliance demonstrations as both aggregate refiners and importers of gasoline and diesel.
216 Comments from Valero Energy Corporation, EPA-HQ-OAR-2016-0544-0274.
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administrative burden. The EPA notes that its compliance monitoring and verification costs have
little to do with the number of RIN transactions that occur. Rather, the EPA expends the majority
of its oversight resources to monitor and provide compliance assistance for registration activities
(including updates to registration after an ownership or personnel change), annual compliance
report submissions, RIN retirements, and remedial actions for errors that have occurred. The
oversight burden of these activities is directly related to the total number of obligated parties and
not the total number of RIN transactions. Furthermore, the EPA notes that current obligated
parties submit other compliance reports to EPA to meet other Part 80 requirements, and EPA
uses these reports to help verify RFS volumes in the annual compliance reports. If the "obligated
party" definition changes to "position holder," EPA would no longer be able to utilize this data
verification method and would need to develop other verification methods to ensure the integrity
of the RFS program.
Another set of comments suggested that compliance costs would not increase with an increase in
the number of obligated parties because the EPA could get the list of obligated parties along with
their verified gasoline and diesel volumes directly from IRS.217 In light of these comments, the
EPA discussed at length with IRS whether a data sharing agreement could be developed to allow
the EPA to obtain this type of detailed IRS data on "position holders." The IRS stated that tax
returns and tax return information are confidential and may be disclosed only as authorized under
Internal Revenue Code section 6103(a). "Return information" is broadly defined to include any
information gathered with regards to a taxpayer's liability under the Code, including a taxpayer's
identity. As such, the IRS stated that even a mere list of "position holders" would constitute
return information and could not be provided to the EPA without the consent of each "position
holder." Therefore, the EPA has concluded that the commenters' argument is incorrect and that
EPA would be unable to obtain the information it would need from the IRS to identify the
"position holders" and determine their obligated volumes of gasoline and diesel and would
instead need to develop its own systems to identify obligated parties and track their obligated
fuel volumes.
Some commenters argued that "position holders" would have very little compliance burden as
obligated parties because they would simply utilize the measurements, calculations, and records
already in place to meet IRS requirements.218 Likewise, they argued that EPA could simply
change its RVOs requirements to equal the volumes reported on Form 720. However, based on a
detailed comparison of IRS requirements to RFS requirements, the EPA has concluded that the
volumes reported on Form 720 are different than the volumes used to calculate RVOs. Most
notably, ethanol and biodiesel that is blended into gasoline and diesel fuel at the terminal
upstream of the rack are included in the Form 720 gasoline and diesel volumes, while those
biofuels must be excluded from gasoline and diesel volumes used to calculate RVOs. In addition,
home heating oil volumes, kerosene, fuel used by ocean going vessels, volumes used in Alaska
and the Territories, and volumes that cross a rack a second time are reported on Form 720, while
217 See, e.g., Comments from CVR Energy, EPA-HQ-OAR-2016-0544-0396; Comments from the Small Refiners
Coalition, EPA-HQ-OAR-2016-0544-0406.
218 Comments from Valero Energy Corporation, EPA-HQ-OAR-2016-0544-0274.
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those volumes must be excluded in determining RVOs. Data provided to the EPA by the IRS
shows that the total volume on which taxes were paid by "S" registrants in 2016 was about 244
billion gallons. The total gasoline and diesel volumes produced by refiners and importers in
2016 according to the RFS compliance reports submitted by these parties to the EPA was about
180 billion gallons.219 Therefore, EPA has concluded that obligated parties would not all be able
to simply use the Form 720 volumes to calculate their RVOs; a significant number would likely
need to take, maintain, and report different measurements than they currently do for IRS
compliance purposes. Likewise, the EPA would have to expend significant administrative
resources to create regulations, instructions and compliance assurance assistance related to
obtaining and verifying the information need for obligated parties to calculate their RVOs.
The Small Refiners' Coalition and CVR Energy suggested that if the EPA could not obligate
"position holders" due to concerns about statutory authority, then the EPA could instead obligate
all blenders, and that such a change would not add to the complexity of the program or harm
small entities.220 The EPA disagrees with those conclusions - for the reasons articulated above
about the additional complexities associated with designating "position holders" as obligated
parties, obligating "blenders," which includes many "position holders" and other small entities,
would also increase complexity in the RFS program, due to an increased number of obligated
parties, and potentially very small entities, including retail station owners. These small entities
would have additional obligations and requirements, and although they may currently separate
and sell RINs, they do not currently have the same requirements as an obligated party. More
importantly, however, as discussed in Section III above, EPA does not believe, based on the
information in the record, that changing the point of obligation to downstream parties (either
"position holders" or blenders) would result in additional production, distribution or use of
renewable fuels.
B. The Potential for Noncompliance May 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. The 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. The addition of a number of small entities with relatively less regulatory experience and
expertise could lead to increased overall noncompliance with RFS requirements. This could be
seen as increasing the overall regulatory burden 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
219 See EPA Annual Compliance Data for Obligated Parties and Renewable Fuel Exporters under the Renewable
Fuel Standard (RFS) Program; Table 1. https://www.epa.gov/fuels-registration-reporting-and-compliance-
help/annual-compliance-data-obligated-parties-and#total-gasoline
220 See, e.g., Comments from CVR Energy, EPA-HQ-OAR-2016-0544-0396; Comments from the Small Refiners
Coalition, EPA-HQ-OAR-2016-0544-0406.
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likely also increase the administrative burden on the 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, the 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
the EPA's review of small refinery petitions alleging that their compliance would result in
disproportionate economic hardship. The 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.
The 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, the 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, the 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 and that the uncertainty may last for
some time.
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 fewer resources to be able
to comply with the registration, reporting and recordkeeping requirements under the RFS
program. Further, we believe the number of obligated parties would significantly increase, which
would place greater strain on limited resources to ensure compliance and conduct program
oversight. In particular, the information received from the IRS after the proposed denial was
issued has strengthened our rationale for why and how administrative costs and the potential for
fraud and/or non-compliance would increase with a change in point of obligation to "position
holder." Since there is an approximately 30 percent turnover from year to year in the 720 tax
filers program, it would require significant resources to identify those new obligated parties and
to verify that no other obligated parties are evading the requirements. It would also require an
increase in resources to provide compliance assistance to those new obligated parties as they
learn a new program for the first time, or become re-acquainted with it after a period of non-
activity. Additionally, while current obligated parties typically have significant assets that could
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potentially be used to pay civil penalties and to purchase RINs to replace any determined to be
fraudulent, it is reasonable to assume that many "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 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 prevail 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 decreased potential for EPA 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 still more uncertainty into the RIN market.
In the proposed denial, the EPA argued that placing the obligation on a smaller number of parties
with significant assets generally results in a more efficient and therefore more effective program.
The EPA stated that refiners and importers generally have greater resources than downstream
market participants that enable them to provide oversight of the RIN generators to help ensure
that the RINs being traded in the marketplace are valid. Changing the point of obligation, we
posited, 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 expected
that many would be smaller companies with fewer resources than the existing obligated parties.
The EPA received some comments that "position holders" are big and sophisticated companies
that would not be financially burdened by RFS compliance and RIN validity oversight duties. In
its engagement with IRS during and after the comment period, the EPA requested from IRS data
on the quantity of gasoline and diesel reported by "position holders" in calendar year 2016 in
order to assess the size of the companies. The IRS was unable to provide the names associated
with each volume of fuel, or the names of the parties that paid excise tax for gasoline or diesel
more generally. Instead, the IRS provided EPA with a dataset that grouped the 443 "S"
registrants that paid excise tax for gasoline or diesel in calendar year 2016 into blocks of five in
descending order of gallons reported; for each block of five registrants, the dataset aggregated
the gasoline and diesel gallons reported into one number.221 Grouping the parties that paid excise
tax in 2016 in this way resulted in a dataset of 86 data points for the EPA to analyze. The EPA
compared this information to similar data available to the Agency from the obligated parties'
2016 RFS compliance reports. From this information, the EPA compared the volume of gasoline
and diesel produced or imported by the 100 largest parties to the total reported volume gasoline
and diesel volume in both the IRS and EPA data sets. The 100 largest obligated parties (per the
current RFS definition) reported gasoline and diesel volumes that were 95% of the total volumes
reported by all obligated parties. Similarly, the 100 "position holders" with the largest volumes
221 For example, IRS reported the quantity of gasoline and diesel reported by the five largest "position holders" in
2016, the volume produced by the 6th-10th largest "position holders," the volume produced by the 11 h-15 largest
"position holders," etc. As noted above, the IRS did not provide the identity of the parties that paid excise tax for
gasoline or diesel in 2016. See IRS Aggregated Volume Data.
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accounted for over 95 percent of all volumes reported by all "position holders" paying excise
taxes on gasoline and diesel in 2016. This suggests that the differences between the number of
obligated parties under the current RFS regulations and "position holders" is not merely the
result of company aggregation, as the proportion of total fuel represented by the 100 largest
parties in each data set are similar.
The IRS data also showed that over 99.5% of all gasoline and diesel is sold by the 215 largest
"position holders." This means that the remaining 228 registrants222 - a majority of "position
holders" in fiscal year 2016 - together accounted for less than 0.5 percent of all volumes
reported on the IRS Form 720. If EPA changed the point of obligation to the "position holders"
of gasoline and diesel as requested by the petitioners, we would expect a large number of new
obligated parties. For 2016 alone there would have been an additional 323 obligated parties.223
However, since there is approximately 30 percent turnover from year to hear in the identity of
the "position holders" the total number of parties who would have the role of "obligated party"
over the years could be significantly higher and the lack of stability in the pool of obligated
parties would mean more difficulty in tracking and accounting for those parties. The EPA
expects that a great many of the parties who would not consistently be obligated parties would be
obligated for small volumes of gasoline and diesel, since the total volume of obligated fuel from
the 228 "position holders" with the lowest volume of reported gasoline or diesel combined is
projected to be less than 0.5% of the total obligated volume of gasoline and diesel sold in the
United States. This data strongly supports EPA's assessment that changing the point of
obligation to the "position holders" would result in an obligation being placed on a large number
of previously unobligated parties, and that many of these newly obligated parties are likely to be
small businesses.224
C. The EPA Would Need to Establish Transition Provisions
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 (by them or others to whom they may sell these RINs) in satisfying RFS
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 the EPA indicates that, in aggregate,
parties carried over approximately 2.5 billion 2016 RINs into 2017. While smaller in magnitude,
222 This number is calculated by subtracting the 215 "position holders" responsible for 99.5% of all gasoline and
diesel from the total number of 443 "position holders."
223 This number is calculated by subtracting the number of obligated parties under the current RFS regulations in
2016 (120) from the number of "position holders" that sold gasoline or diesel in 2016 (443)
224 As discussed further in Section V.B., some parties who would become obligated under a change to the definition
of "obligated party" may choose to adjust their business practices to avoid an obligation under the RFS program. If
parties were to take this action, this could mitigate some of the concerns raised in this section, but would be unlikely
to cause all parties to change their practices and would likely have other ramifications.
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a number of parties also carried forward an aggregate deficit of approximately 400 million RINs
from 2016 into 2017.
If the EPA abruptly 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, thus raising concerns about
fairness. 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.
While the tradable nature of the RINs in the RFS program would help to mitigate these potential
negative impacts, a change to the point of obligation could also cause volatility in the market.
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 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. Even if EPA were to take steps such as providing significant lead time to
minimize impacts, a change to the point of obligation could result in RIN market volatility and
disparities in RIN-holdings.
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.
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As discussed previously, shifting the point of obligation downstream could result in about 450
obligated parties in EMTS in any given year. This could result in an increase in EMTS
transactions (transfers, separations and retirements) as a larger number of RIN batches (many of
them likely of smaller volume) 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 non-obligated EMTS participants 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. The EPA may find that the additional potential for non-compliance requires
additional reporting of information not currently tracked in EMTS, such as accounting for
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.
V. Changing the Point of Obligation Could Cause Significant Market Disruption
In the petitions the 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. The 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, the EPA requested and
received many comments related to the point of obligation of the RFS program. These
comments were carefully considered and the 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
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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 the 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 we do not believe
that changing the point of obligation will result in significant increase in the production
distribution and use of renewable fuel, these impacts are important to consider.
B. If the Point of Obligation is Changed, Parties Would Be Expected to Reposition
Themselves to Avoid or Minimize 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,
the EPA received letters from a number of independent fuel marketers and parties that own a
large number of retail fueling stations.225 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 the 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 the 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.226
225 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.
226 Ibid.
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In their letters to the 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 expected
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,
increasing fuel prices for consumers, 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. The EPA primarily spoke with and received written communication from 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 the EPA were to change the
point of obligation as requested by the petitioners react as they have claimed in discussions and
written communication with the 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 the 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 mitigated, as these parties likely would adjust their businesses to avoid
becoming obligated parties under the new definition. However, such market restructuring would
likely have other market ramifications.
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 and independent fuel marketers and
retail station owners exit their current market positions as renewable fuel blenders and "position
holders," it is possible that the current obligated parties that do not sell gasoline and diesel at the
rack, 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, the RFS obligations may not be substantially different in this
scenario than they are today, and if this were the case it is questionable if the benefits claimed by
the petitioners would not be realized. During the time period when the 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 the EPA invests significant agency
resources to enable the change in the point of obligation and fuels industry participants withhold
significant investment decisions until the EPA's final decision and the fallout from the decision
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are known, this could have a significant negative impact on achieving the goals of the RFS
program.
In comments, those in support of changing the point of obligation suggested that the benefits of
being a "position holder" would outweigh any costs of becoming an obligated party under the
RFS system, and "position holders" would not change their market practices in order to avoid the
RFS obligation, citing to benefits such as "the ability to purchase fuel in bulk at discount, the
ability to better control their fuel supply, and advantages related to the collection of taxes."227 In
contrast, many parties who would become obligated under the Petitioners' proposed definition
stated that they would indeed change their market position or at least reevaluate their position
purchasing fuel above the rack.228 Some stated that they currently purchase some of their fuel
above the rack, and some fuel below the rack depending on the costs and market dynamics,
indicating that parties would be willing to modify their position in the future as well. Based on
the evidence before it, EPA believes some parties would change their market position in
response to a change in the point of obligation, and that such a change further supports EPA's
denial.
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 fuel 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 even 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. This concern was echoed by many commenters.229 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 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 the EPA were to change the point of obligation of the RFS
program as requested by the petitioners.
227 See, e.g., Comments from CVR Energy, EPA-HQ-OAR-2016-0544-0396.
228 See, e.g., Comments from UPS, EPA-HQ-OAR-2016-0544-0076.
229 See, e.g., Comment from Casey's, EPA-HQ-OAR-2016-0544-0268; Comments from American Trucking
Association, EPA-HQ-OAR-2016-0544-0355.
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VI. Other Comments
The EPA received comments contending that the RIN market is "illegal," as the statute provides
that transfer of credits must be "for the purpose of complying" with the RFS program, CAA
section 21 l(o)(5)(B), and that unobligated blenders and RIN traders do not comply with the RFS
program.230 They also state that the "EPA allows entities to generate RINs from blending any
volume of renewable fuel,"231 and not just those quantities greater than the statutory volumes, as
suggested by the statute.232 In response, EPA notes that the RIN system was initially
established through notice and comment rulemaking with considerable support from stakeholders
in RFS1, and then reaffirmed with relatively minor adjustments in RFS2. Thus, the time to seek
judicial review of the creation of the RIN compliance system is past. EPA did not reopen this
matter in the context of its proposed denial of the petitions seeking a change in the point of
obligation, so these comments are beyond the scope of this action. By means of explanation,
and without intending by this response to open this resolved matter for further debate or
consideration, we note that the RIN system serves two purposes: as a general compliance
mechanism, and as a means of implementing the statutes' credit provisions. These commenters
ignore or minimize the compliance mechanism aspect of the RIN system, and EPA's authority
under CAA Sections 21 l(o)(2) and 301 to establish a compliance program which could include
credit elements that extend beyond the specific elements required in CAA Section 21 l(o)(5).
Monroe Energy stated that the EPA had an obligation to conduct a jobs analysis under CAA
section 321(a) before it denied the petitions for rulemaking, citing Murray Energy Corp. v.
McCarthy, No. 5:14-CV-39 (N.D. W. Va. 2014). The company further stated that, had the EPA
performed this jobs analysis, EPA would have recognized the threat of closures and job losses to
merchant refineries. First, the EPA notes that on appeal of the district court decision cited by
Monroe Energy, the Fourth Circuit Court of Appeals held that CAA section 321(a) does not
impose a non-discretionary duty on the EPA. Murray Energy Corp. v. EPA, 861 F.3d 529 (4th
Cir. 2017). Second, CAA section 321 does not, as this commenter suggests, specify that
completion of a jobs analysis is a prerequisite to the Agency's authority to act on a petition for
rulemaking or to take any other final agency action. Finally, the EPA has evaluated claims that
the RFS program as currently structured harms merchant refiners, and disagrees with
the commenter that this is the case See Section II.C, supra.
The EPA received additional comments that are outside the scope of this determination. Some
commenters suggested that conventional biofuels lack environmental and greenhouse gas
benefits. Other commenters suggested that the RFS should incent co-processing of renewable
feedstocks with petroleum at refineries.233 The EPA also received comments suggesting a "diesel
230 See, e.g., Comments from CVR Energy, EPA-HQ-OAR-2016-0544-0396; Comments from the Small Refiners
Coalition, EPA-HQ-OAR-2016-0544-0406.
231 Commenters' suggestion that RINs may be generated from blending is inaccurate; RINs are generated at the
point of renewable fuel production, and can be separated at the point of blending. See 40 CFR 80.1426-27.
232 CAA section 21 l(o)(5)(A)(i)
233 See Comments from UPS, EPA-HQ-OAR-2016-0544-0076.
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disparity:" that refiners that produce a higher percentage of diesel have difficulty meeting their
RVO through blending.234 In addition, some commenters suggested that the RFS program should
not include imported biofuel.235 As these comments are outside the scope of this determination,
we decline to address them here.
VII. Conclusion
Congress authorized the EPA to require "refiners, importers, and blenders, as appropriate" to be
obligated parties in the RFS program.236 After reviewing the petitions the EPA has received
requesting changes to the point of obligation in the RFS program, reviewing the comments
submitted on our proposed denial of these petitions, assessing the relevant data available to the
EPA, and speaking with and reviewing written communication from numerous parties that would
likely be impacted by the requested change, the EPA continues to believe that the point of
obligation is appropriately placed on refiners and importers, consistent with the current
regulation. 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. In addition,
we do not believe that the evidence indicates that the changes Petitioners 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. Both in the short and long-
term, we believe that the program is more likely to succeed with the current set of obligated
parties. The 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. 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 could 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 addition,
the EPA believes the point of obligation should be retained to promote stability and regulatory
certainty.237 The Administrator is therefore denying the petitions requesting that the EPA initiate
a rulemaking process to reconsider or change the regulation identifying refiners and importers of
gasoline and diesel fuel as the entities responsible for complying with the annual percentage
standards adopted under the RFS program.
EPA has determined that this action is nationally applicable for purposes of CAA section
307(b)(1). since the result of this action is that the current nationally-applicable regulation defining
234 See Comments from CVR Energy, EPA-HQ-OAR-2016-0544-0396; Comments from Small Refiners' Coalition
EPA-HQ-OAR-2016-0544-0406.
235 See Comments from the Small Refiners' Coalition, EPA-HQ-OAR-2016-0544-0406.
236 CAA Section 21 l(o)(3)(B)(ii)(I).
237 In addition, as noted in section III. A. EPA does not interpret the Clean Air Act as authorizing us to place the
point of obligation on distributors or on "position holders" that are not refiners, blenders or importers.
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obligated parties who must comply with nationally applicable percentage standards developed under the
RFS program remains in place. In the alternative, even if this action were considered to be only locally or
regionally applicable, the action is of nationwide scope and effect for the same reason, and because the
action impacts entities that are broadly distributed nationwide who must comply with the nationally-
applicable RFS percentage standards, as well as other entities who are broadly distributed nationwide that
could potentially have been subject to such requirements if EPA had elected to grant the petitions seeking
a change in the definition of obligated parties.
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