Corn State Legislators File Companion Bills to Marginalize the RFS Small Refinery Exemption
The federal Clean Air Act requires that transportation fuel sold or introduced into commerce in the United States contain minimum levels of renewable fuel. The Renewable Fuel Standards (“RFS”) program, administered by the U.S. Environmental Protection Agency (“EPA”), is the regulatory mechanism used by the EPA to fulfill this statutory mandate. Under the RFS program, obligated parties comprised of fuel refiners and importers of foreign-refined transportation fuels must blend renewable fuels into their fuel products or else acquire credits, known as renewable identification numbers (“RINs”), that represent the required renewable fuel volumes.
Corn-growing farmers oppose the RFS program regulatory exemption, known as the “Small Refinery Exemption,” arguing it undermines the intent of the program — the increased usage of renewable fuels in transportation fuels — by reducing the demand for renewable fuels. In particular, these farming interests object to the reduction in volume of biofuel demand when the EPA issues a Small Refinery Exemption, and those interests further believe that there are now too many waivers being granted, which further depresses the market for their corn. Hearing their constituents, Congressional members from large corn-growing states have introduced companion bills in the House of Representatives and the Senate that focus on marginalizing the Small Refinery Exemption at the expense of refinery interests. The bills would seek to have the RFS program account for renewable fuel volumes otherwise lost when the EPA grants waivers under the exemption process. As a practical matter, these bills would increase the demand for the farming interests’ corn at the expense of non-exempt refiners, who would have to take on the small refiner exempt share.
I. How the Small Refinery Exemption Process Works.
The RFS program commenced in 2006 pursuant to requirements in the Clean Air Act, section 211(o) that were added through the Energy Policy Act of 2005. The statutory requirements for the RFS program were subsequently modified through the Energy Independence and Security Act of 2007, whose goals include moving the United States toward greater energy independence and security as well as increasing the production of renewable fuels. Pursuant to these statutory mandates, the EPA is required to set renewable fuel percentage standards every year, through 2022, for certain biofuels constituting the renewable fuels blended into transportation fuels. These annual volume targets are called Renewable Volume Obligations (“RVOs”) and they determine how many gallons of biofuels refiners will blend into transportation fuels for a particular year.
Under the RFS program, U.S. refiners and importers of foreign-refined transportation fuel may be afforded relief from RVO requirements on a temporary basis by petitioning the EPA that it refines crude oil at a facility constituting a “small refinery.” The EPA considers the exemption temporary in that it applies for only one calendar year (that calendar year being the “compliance year”) and a refiner must petition under the exemption on an annual basis for each compliance year in which it seeks coverage. A “small refinery” is defined under the RFS program to mean a refinery for which the average aggregate daily crude oil throughput (as determined by dividing the aggregate throughput for the calendar year by the number of days in the calendar year) does not exceed 75,000 barrels in the most recent full calendar year prior to submitting a petition, and cannot be projected to exceed the 75,000 barrels per day threshold in the compliance year or years for which the refinery is seeking an exemption.
The exemption may be granted by the EPA only if it determines, based on supporting evidence provided in the refiner’s petition, that “disproportionate economic hardship” exists for the refinery in the compliance year for which exemption is requested. The EPA provides guidance on its website and in correspondence on the type of documents typically included in a petition and which the agency uses in making its determination on whether a disproportionate economic hardship exists:
- company business plans;
- financial statements;
- tax filings;
- loan covenants and restrictions affecting the purchase of RINs;
- descriptions of local impediments to blending;
- description of local market conditions negatively impacting a refinery’s ability to comply with its RFS obligations;
- description of extent of RFS compliance costs relative to refinery operating margins and capital expenditures; and
- effect of RFS compliance costs on the ability of the refinery to remain financially viable and profitable.
The EPA will evaluate the submission to determine whether the exemption may be granted, and will issue a decision within 90 days of receiving complete supporting information for the request from the refiner or importer seeking the exemption. If the EPA determines that a disproportionate economic hardship exists, then the refinery is exempt from complying with the RVO requirements under the RFS program for the particular calendar year for which the waiver is sought.
What constitutes a disproportionate economic hardship is not expressly defined under the RFS program but the EPA provides guidance on this subject. In correspondence prepared by the EPA and dated December 6, 2016,1 the agency outlines its general position on the types of information that should be submitted by a petitioner in a Small Refinery Exemption petition. In providing its comments, the EPA cites to a 2011 U.S. Department of Energy study2 on disproportionate economic hardships for small refineries in stating that:
A small refinery is most likely to experience a “disproportionate economic hardship” from its RFS requirements when it faces “a high cost of compliance relative to the industry average, and an effect sufficient to cause a significant impairment of the refinery operations. Specifically, “disproportionate economic hardship” encompasses an impact on “the ability of the [refinery] to remain competitive and profitable.” The EPA therefore considers whether the petitioning small refinery will remain competitive and profitable while satisfying its RFS obligations.
The EPA goes on to state in the December 6, 2016 correspondence that since 2011, when the EPA began evaluating small refinery petitions, the EPA has adopted this interpretation of “disproportionate economic hardship” as set forth in the U.S. Department of Energy study.
II. Farming Interests Raise Concern Over the Small Refinery Exemption Being Too Successful.
Since 2010, implementation of the RFS program has sought to have increased volumes of biofuels blended into transportation fuels. During this time, the Small Refinery Exemption — which seeks to maintain the competitive position of small refiners — has resulted in increased exemptions.
However, corn-growing interests now view the exemptions as going too far. Based on RFS data provided by the EPA in 2019, the pace at which Small Refinery Exemption petitions are being made and waivers granted remained relatively steady in compliance years 2013 to 2015, but has increased since that time. Since compliance year 2015, when 14 petitions were received by the EPA, the number of petitions has increased to 20, 37 and 40 petitions for years 2016, 2017 and 2018, respectively. The information contained in Small Refinery Exemption petitions as well as the determinations made by the EPA in granting or denying these petitions typically are not publicly available. The RFS program does not require the public disclosure of this material, due to commercial data submitted by refiners in pursuing an exemption. The expectation is that the EPA reviews Small Refinery Exemption petitions in an appropriate manner, consistent with applicable requirements under the RFS program.
|Compliance Year||Number of Petitions Received||Number of Grants Issued||Number of Denials Issued||Number of Petitions Declared Ineligible or Withdrawn||Number of Pending Petitions|
Source: U.S. EPA Fuels Registration, Reporting, and Compliance Help webpage (last updated May 16, 2019).
As a result of the EPA’s waiver approvals, there is a corresponding volume of gasoline and diesel exempted from the RFS program each compliance year. As the number of waivers increase, so, too, do the volumes of gasoline and diesel exempted (as do the volumes of RVOs exempted, as reflected by the number of RINs).
|Compliance Year||Estimated Volumes of Gasoline and Diesel Exempted (million gallons)||Estimated Renewable Volume Obligations (RVO) Exempted (million RINs)|
*All numbers in Table are rounded to the nearest 10 million gallons or RINs
Source: U.S. EPA Fuels Registration, Reporting, and Compliance Help webpage (last updated May 16, 2019).
Simply put, concerns have been raised by corn farmers that the EPA does not re-allocate to larger, non-exempt refineries the share of the required volume of biofuel initially allocated to small refineries, which subsequently obtain a waiver under the RFS program. Coupled with their objections over the increased number of waivers granted over the past couple of years, the farming interests point to a sizeable volume of biofuels not being blended into transportation fuels. Additionally, because the EPA does not disclose financial information submitted by refiners seeking a Small Refinery Exemption, the farming interests assert that the EPA may be granting waivers that are not fully consistent with RFS program requirements.
III. Corn State Congressional Members Introduce Legislation to Overcome Reduced Biofuel Demand from Increased Waivers.
Hearing the call of its corn-growing constituents, Congressional members from among the largest corn-growing states in the United States have introduced companion bills in the House of Representatives and the Senate that focus on limiting the Small Refinery Exemption. The ultimate aim of the bills is to minimalize the loss of any volumes of biofuels through the Small Refinery Exemption process. That aim shifts more of the biofuel burden to larger, non-exempt refiners whose obligations to blend would increase if those otherwise lost volumes are now accounted for in the RVOs for a particular year. Additionally, the bills seek to disclose commercial information provided by refiners seeking waivers, which disclosure effectively removes privacy protection for business confidential information.
A. H.R. 3006 Legislative Proposal.
On May 23, 2019, Chairman of the U.S. House Committee on Agriculture, Collin Petersen (D-MN), together with Representatives Dusty Johnson (R-SD), Dave Loebsack (D-IA), Rodney Davis (R-IL), and Roger Marshall (R-KS) — all representing states with large corn-growing interests — introduced the Renewable Fuel Standard Integrity Act of 2019, H.R. 3006, in the U.S. House of Representatives. The intent of H.R. 3006 is twofold. First, the bill sets a deadline of not later than June 1st of the year preceding a particular compliance year for refineries to submit petitions for Small Refinery Exemptions. This criterion would take effect with respect to any petition requested for calendar year 2021 or subsequent calendar years. The obvious intent of setting a June 1st deadline is to assure that all Small Refinery Exemption petitions are received by the EPA and acted upon well before the November 30th deadline by which annual RVO requirements for the upcoming compliance year must be finalized. Under that scenario, the total biofuel requirement could not be reduced by any waivers from refiners for petitions submitted after June 1st. The counter argument to the setting of this June 1st deadline is that refiners require flexibility in determining that their facilities may qualify for the Small Refinery Exemption and the RFS program as currently implemented provides that flexibility. Decision-making in operating a refinery is a dynamic process, requiring all sorts of data and responses, and a refiner that is unable to conclude until the latter half of a particular year that it could indeed qualify as a small refiner under the program in the forthcoming compliance year would be shut out from participating in the exemption process. The net effect would be to decrease waivers, resulting in increased RVOs, all at the expense of non-exempt refiners.
Second, H.R. 3006 states that it seeks to bring transparency to the Small Refinery Exemption process, by requiring that critical information pertaining to the waiver request is made publicly available. Specifically, the bill expressly states that any information submitted to the EPA with respect to a Small Refinery Exemption petition will not be deemed to be a trade secret or confidential information. Additionally, all such information will be subject to public disclosure, notwithstanding the specifically enumerated exemptions listed under 5 U.S.C. § 552(b) of the federal Freedom of Information Act (the “FOIA Exemptions”), or any other federal law or regulation. The clear intent of this second criterion is that all information provided by a petitioner in its petition for a Small Refinery Exemption is fair game and available for dissemination to the public. The opposing viewpoint is that Congress has already spoken on the issue of confidentiality, and information meeting the FOIA Exemptions or other exclusions is excluded from public disclosure. Removing this safeguard would not only provide farming interests with another tool to challenge any exemptions sought or granted, but also is expected to have a chilling effect on refiners filing petitions for exemptions due to concerns that they must now publicly share information that they consider privileged or confidential commercial or financial information or that would otherwise perhaps put them at a competitive disadvantage. These impediments would serve to limit refiners’ participation in the Small Refinery Exemption process, thereby resulting in increased RVOs that must be satisfied by non-exempt refiners.
B. S.B. 1840 Legislative Proposal.
More recently, on June 13, 2019, U.S. Senators Tammy Duckworth (D-IL), Dick Durban (D-IL) and Deb Fischer (R-NE) — senators of states with significant corn-farming interests — introduced a bill in the Senate similar in scope to the House bill. The Senate bill, S.B. 1840, seeks “to establish certain requirements for the small refineries exemption of the renewable fuels provisions under the Clean Air Act, and for other purposes.”
The focus of S.B. 1840 is nearly identical to H.R. 3006. First, the bill seeks to establish a deadline of no later than June 1st of the year preceding the compliance year for which a waiver may be issued and if the petition should fail to be submitted to the EPA Administrator by such deadline, the petition will be ineligible for consideration or approval. Also, the requirement would apply to information submitted under a petition for calendar year 2021 or subsequent years. As already discussed above with respect to H.R. 3006, the effect of this early deadline is to have the EPA receive and consider all petitions well before the November 30th deadline for finalization of the RVO standards but, as a practical matter, it would also serve to shut out a segment of refiners who do not know by June 1st whether they would qualify for the exemption. Second, the bill would also require public dissemination of information about the petitioner as well as the information contained in the petition. In particular, at the same time that the EPA Administrator informs the petitioner of a decision on whether to grant the petition, the Administrator would also:
- make publicly available:
- The name of the petitioner;
- the name and location of the facility for which relief under the petition was requested;
- the time period for which relief under the petition was requested; and
- the extent to which the Administrator granted or denied the petition; and
- submit to Congress a report:
- describing the nature of the relief requested in the petition, including the factors identified by the petitioner to demonstrate disproportionate economic hardship; and
- including the detailed description required under the RFS rules that is submitted by the petitioner describing the hardship the refinery would encounter in complying with the RVO.
As discussed above with regard to H.R. 3006, the practical implications of the publication of this information is that farming interests will be provided with another tool to challenge exemptions, with a chilling effect on refiners filing petitions for exemptions.
Finally, S.B. 1840 includes a provision obligating the EPA to take into account any volumes of biofuel lost due to the granting of waivers when determining the RVO requirements for a given year. Those volumes lost due to the grant of a waiver for a Small Refinery Exemption would have to be made up by non-exempt refiners, who would be obligated to blend those volumes into their transportation fuels or acquire RINs for those lost volumes
Farm state Congressional members have introduced companion bills in the House and Senate to curtail the Small Refinery Exemption available under the RFS program. Those bills would limit the Small Refinery Exemption such that fewer waivers are granted by the EPA and any volumes of biofuels lost due to waiver are allocated to non-exempt refiners. In this sum-zero game, these bills seek to benefit corn-farmers at the expense of non-exempt refiners. While the proposed bills represent only an initial step, it is noteworthy that bills have now been introduced in Congress that seek to change how the RFS program is implemented — for the advantage of farmers and the disadvantage of non-exempt refiners.
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1 EPA, Financial and Other Information to be Submitted with 2016 RFS Small Refinery Hardship Exemption Requests (Dec. 6, 2016).
2 U.S. Department of Energy, Small Refinery Exemption Study, An Investigation into Disproportionate Economic Hardship (Mar. 2011).
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.