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May 17, 2019
Small refinery exemptions hobble renewable fuels program

Will EPA change direction?

The EPA’s implementation of the small refinery exemption is one of the more disputed aspects of the federal Renewable Fuel Standard (RFS) program. The major question associated with the exemption appears to be how does the Agency make decisions to approve or deny applications for exemptions? Under President Donald Trump, the EPA has been exceedingly generous in approving exemptions that temporarily remove small refineries from the Renewable Volume Obligations (RVO) with which other refineries must comply. For example, in 2016, the Obama administration EPA received 14 applications for small refinery exemptions for RFS compliance year 2015. The Agency approved seven of those applications and denied seven. In contrast, in 2017, the EPA received 35 applications for small refinery exemptions and granted every one for RFS compliance year 2016. The exemptions effectively remove a large amount of renewable fuel from the market and have major repercussions for the nation’s farmers, according to the head of one ethanol association.

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“There’s no way to view continued abuse of EPA waivers except as a betrayal of rural manufacturing workers and farm communities, said Emily Skor, CEO of Growth Energy. “The EPA has now destroyed 2.6 billion gallons of biofuel demand, eliminating the market for a billion bushels of U.S. grain. Farm families are already facing natural disasters, on top of lost export markets. If the EPA doesn’t act now to restore the market promised to farmers, there is little hope for a swift rural recovery. EPA must start considering denials for the record 39 exemption requests that have already arrived for 2018. If 2018 looks anything like 2017 in terms of refinery handouts, the damage to the rural economy could be irreparable.”

The RFS is the product of 2005 and 2007 amendments to the Clean Air Act (CAA). Under the program, petroleum refiners and importers (obligated parties) have RVOs based on an annual EPA determination that four types of renewable fuel must comprise certain percentages of transportation fuel produced for domestic use. Obligated parties meet this requirement either by directly blending the required percentage of renewable fuel into the traditional fuels they refine or import or by purchasing Renewable Identification Numbers (RINs) associated with volumes of renewable fuel produced or imported by third parties. The CAA also allows the EPA to waive the RFS volume requirements based on an Agency determination that severe economic or environmental harm is occurring or based on inadequate domestic supply. Over the years, the waiver has been used by small refineries that make the economic hardship claim.

DOE study

Congress defines small refineries as those with an average crude oil throughput of 75,000 barrels or less per day. The lawmakers recognized that these entities might have difficulty complying with the RFS program because they lack the ability to blend renewable fuels into conventional fuels and therefore would be forced to purchase RINs to meet their RFS obligations. Small refineries were initially granted a blanket exemption from RFS compliance through 2010.

Congress also directed the Department of Energy (DOE) to conduct a study to determine when a small refinery could be said to suffer disproportionate economic hardship if it was made to comply with the RFS. In 2011, the DOE issued its Small Refinery Exemption Study, which included a scoring matrix designed to evaluate the full impact of disproportionate economic hardship imposed by the RFS program on small refiners. The matrix comprises two major sections. One section combines scoring for disproportionate structural and economic weightings and uses factors that include access to capital/credit and business lines other than petroleum. The second section rates the impact of compliance with the RFS program on the economic viability of the firm and uses factors that include relative refining margin and the amount of renewable fuel blending occurring in the refinery. If application of the methodology results in a score of 1.0 or more for a small refinery, the DOE concludes that the refinery will suffer a disproportionate economic impact if made to comply with the RFS.

The CAA indicates that the DOE must convey the results of its evaluations to the EPA, and the two agencies must then consult on the hardship applications and the scores the DOE reached for hardship applicants. However, the statute also states that the EPA alone has the authority to grant a waiver from the RFS. EPA Administrator Andrew Wheeler has stated that the EPA simply follows the DOE’s recommendations on waiver requests.

Advanced Biofuels Association complaint    

Here’s where the developments get murky. According to a complaint against the EPA the Advanced Biofuels Association (ABFA) filed in court, the Agency has “blatantly disregarded DOE’s methodology, Congressional directives, and its own historic practice on May 4, 2017, when it unveiled a policy under which a small refinery can be found to suffer disproportionate economic hardship on the basis of adverse structural conditions alone without evidence that compliance with the RFS Program is adversely affecting the economic viability of a small refinery so that it is no longer profitable or competitive.”

The ABFA contends that of the 48 EPA decision documents for compliance years 2016 and 2017, the Agency granted exemptions to at least 24 small refineries that received a DOE score of 0.0, indicating that RFS program compliance costs have no impact on the small refinery’s ability to stay competitive and profitable.

“EPA’s insistence that any structural disadvantage of a refinery amounts to disproportionate economic hardship warranting a full exemption from the mandates of the RFS Program is an unlawful attempt to read the word ‘hardship’ out of the CAA,” the ABA asserted. “A small refinery that remains profitable and competitive despite complying with the RFS Program can hardly be said to be suffering ‘hardship.’”

The ABFA seems to assert that the EPA is granting exemptions despite the results of DOE’s scoring. For example, the ABFA states:

“While EPA has the statutory authority to consider ‘other economic factors,’ since May 4, 2017 the Agency has treated this power as a license to issue decisions that differ radically from DOE’s recommendations with little explanation. Prior to EPA’s change of methodology on May 4, 2017, its decision documents routinely exceeded 20 pages in length and contained a detailed summary of DOE’s analysis of each small refinery seeking an exemption followed by several pages of independent analysis of the small refinery’s hardship petition. After May 4, 2017, however, most of EPA’s decision documents are only five pages and, after setting aside boilerplate language, contain only a short paragraph—often a single sentence—justifying a full exemption, over DOE’s recommendation, to small refineries that are profitable and competitive.”

DOE’s recommendations

Another view is that the DOE may be sending recommendations to the EPA that are not based on the results of its scoring matrix. For example, in an April 10, 2019, letter to Energy Secretary Rick Perry, Senator Chuck Grassley (R-IA) asked for “clarity” regarding how the DOE is reviewing requests for small refinery exemptions. According to Grassley, the ABFA’s statement that 24 refineries scoring 0.0 in the DOE’s methodology still received exemptions “seems to indicate that compliance costs with the RFS had little to no impact on the small refinery’s ability to stay competitive and profitable.” If, as the EPA says, it is granting exemptions based on the DOE’s analyses and recommendations, Grassley wants to know whether the DOE has changed how it conducts those analyses and makes those recommendations. Grassley’s specific questions for Perry:

  • Has the DOE changed the criteria, the interpretation of the criteria, the methodology, or any other significant aspect of how it makes recommendations to the EPA for small refinery exemptions?
  • Are you aware of any instances where the DOE recommended no small refinery exemption (or only a partial exemption), but the EPA granted a small refinery exemption anyway? If so, how many times has this occurred?
  • The DOE’s Small Refinery Exemption Study states that the DOE would make a recommendation of disproportionate impact if the scoring of both indices—disproportionate structural impacts metrics and viability index—were greater than 1.0. How does the DOE’s recommendation for a partial exemption for a small refinery with a Viability Index of 0.0 square with the CAA’s requirement that the exemption can be extended only if the refinery is subject to a disproportionate economic hardship from compliance with the RFS?

In its study, the DOE notes that since certain small refineries may have to rely on RIN purchases instead of blending as an RFS compliance strategy, scenarios where RIN prices might be substantially higher than their historical value can lead to severe economic impact on the refineries. However, RIN prices have recently reached “historic lows,” Jeff Cooper, president and the CEO of the Renewable Fuels Association, told AgriTalk. That would seem to discourage any wholesale approval of exemption requests. In an interview with Reuters, EPA Administrator Andrew Wheeler ventured that the low RIN prices “may” lead to fewer exemption approvals. News media have reported that final decisions on the current crops of exemption requests may come at the end of May.                  

Unified opposition

As suggested by the statement by Growth Energy’s Skor, both ethanol manufacturers and the agricultural sector, particularly corn growers, view the number of exemptions approved by the EPA as a grievous blow to their economic well-being as well as to the RFS program itself. The following statements by RFS advocates take the same position.

“If these exemption trends continue, they will fully and completely undermine the RFS at the expense of rural America and cause consumers to pay more at the pump for dirtier fuels. With dozens of ethanol plants closing or idling and U.S. ethanol consumption showing the first annual decline in 20 years, it is unfathomable that the new EPA Administrator would double down on former Administrator Pruitt’s unjustifiable abuse of the small refinery exemption provision.”
-Jeff Cooper, President and CEO, Renewable Fuels Association

“These waivers have a direct impact on rural America and corn farmers. With an already tough economic environment, more waiver abuse will continue to chip away at farmers’ bottom line by destroying demand for corn.”
-National Corn Growers Association

“On National Agriculture Day, as farmers are long-suffering from lost market opportunities and low prices, and many farmer-owned ethanol plants across rural America are considering whether to suspend operations or sell out to a bigger company because of limited demand here at home, EPA has further depressed demand for ethanol by rubber stamping five more small refinery exemptions for 2017, and done so without reallocating the blending obligations to other refiners. Any benefit of selling E-15 year-round will be wiped out until and unless EPA gets back to the rule of law when it comes to these refinery waivers under the Renewable Fuel Standard.”
-Brian Jennings, CEO, American Coalition for Ethanol

“EPA is misusing this provision, stretching the definition of ‘disproportionate economic hardship’ to lower RIN prices for the benefit of a small number of merchant refiners that have refused to invest in RFS compliance over the last 10 years. As RFS compliance costs were already passed along to consumers through the crack spread, EPA’s actions allow a small number of companies to profit off of American consumers—not to mention endangering renewable fuel blending in 2018 and 2019 because of the new carry-over RINs.”
-Michael McAdams President, Advanced Biofuels Association

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