DISPUTE RESOLUTION: Oil & Gas Litigation: EPA Amends the Renewable Fuel Standard Program to Address Recent Fraud

by King & Spalding
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On February 21, 2013, in response to industry criticism over recent fraud in the Renewable Identification Number (“RIN”) market that has cost both the renewable fuel and petroleum industries millions of dollars, the Environmental Protection Agency (“EPA”) proposed a rule that seeks to amend the Renewable Fuel Standard (“RFS”) program to address the fraud and restore liquidity to the RINs market. Proposed Rule available at http://www.gpo.gov/fdsys/pkg/FR-2013-02-21/pdf/2013-03206.pdf. The RFS program was established under the Energy Policy Act of 2005 and was designed to offset the production and importation of petroleum-based transportation and jet fuel. The program requires gasoline and diesel refiners and importers either to produce and use a certain percentage of renewable fuel or to purchase RINs (renewable fuel credits that represent volumes of renewable fuel that qualify under the RFS program). RINs are generated by renewable fuel producers and importers and are tradable credits that can be purchased by petroleum refiners and importers to show compliance with their volume obligations.

There have been several recent instances of fraudulently-created credits, where alleged renewable fuel producers have sold refiners RINs associated with renewable fuel that was never actually produced. To date, the EPA has estimated that 140 million biomass-based diesel RINs were invalid. The costs of fraudulently-produced RINs pass to the purchasers of such invalid RINs as the EPA has imposed millions of dollars of civil penalties on gasoline and diesel fuel refiners and importers for using invalid RINs. EPA also required these purchasers of fraudulently-created RINs to replace them with valid RINs, imposing additional costs on refiners and importers of more than $200 million.

Faced with industry criticism of these enforcement decisions, EPA has proposed a voluntary quality assurance program for verifying the validity of RINs that would provide an affirmative defense for those who purchase invalid RINs. The proposed rule also seeks to amend the exporter provisions to guarantee that the proper type and amount of RINs are retired whenever renewable fuel is exported. Furthermore, EPA issued a Second Interim Enforcement Response Policy to address invalid RINs that already exist and may be currently trading in the market. Policy available at www.epa.gov/enforcement/documents/policies/erp/secondierp013113.pdf. Under this policy, refiners and importers who buy RINs that are later exposed as invalid would not have to replace the RINs as long as they fall below 2 percent of their annual RFS obligation. This protection is a temporary exemption and only applies in 2013 and 2014.

The core of this proposed rule is the quality assurance program, which sets up a three-tiered system of RINs. Companies that purchase RINs from producers who participate in the quality assurance program have an affirmative defense that would shield the company from civil liability for the transfer or use of invalid RINs. A first type, named QAP-A, is likely to cost more than other two types of RINs because it comes with the highest degree of protection from civil liability. Under this type, third-party auditors monitor renewable fuel producers’ RINs in real time and verify the validity of the RINs. The auditor, not the refiner or importer, would be responsible for replacing any invalid RINs.

A second type of RINs, called QAP-B, are also verified by a third-party auditor but require only quarterly monitoring by the auditor. Unlike QAP-A RINs, refiners and importers would have to replace any invalid QAP-B credits. Therefore, this second type is likely to be priced lower than QAP-A credits. Both the first and second types of RINs would protect refiners and importers from the civil penalties that they were previously subject to.

Finally, a third type of RINs are the “unverified RINs,” where a refiner would remain responsible for both the replacement of invalid RINs and subject to civil liability, even if it had nothing to do with the production of the invalid RINs.

EPA is accepting comments on the proposal through April 18. It is not clear yet what type of RIN will be preferred by petroleum refiners and importers, but at least the first two options give parties some protection from the types of civil penalties they previously faced for the use of invalid RINs.


   

  Anisha Sud
  Houston
  +1 713 276 7336

  asud@kslaw.com
  View Profile

 

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