AFPM Administration Letter Doc

8/14/2019 AFPM Administration Letter Doc

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President AmericanFuel & PetrochemicalManufacturers

1667 K Street, NWSuite 700Washington, DC20006

202.457.0480 office202.552.8457 direct202.457.0486 [email protected]

Charles T. Drevna

November 8, 2013The Honorable Barack ObamaPresidentUnited States of AmericaThe White HouseWashington, DC 20500

Re: 2014 Renewable Fuel Standard blending requirements

Dear Mr. President,

The American Fuel & Petrochemical Manufacturers (AFPM) writes in support of theEnvironmental Protection Agencys (EPA) indication that it plans to partially waive the 2014Renewable Fuel Standard (RFS) in ord er to address concerns with the markets ability toaccommodate higher levels of ethanol. 1 Such action would find solid grounding in both therealities of the fuel market and in the law.

Despite the biofuel industrys sustained campaign to frame this debate as a battle formarket share, the reality remains that the RFS boils down to a simple math problem: the 2014RFS if fully implemented would require more biofuel than consumers demand, and thancurrent vehicles and infrastructure are designed and warrantied to handle. Refiners are thusfaced with a series of difficult choices either force more biofuel into the market knowing that itdamages consumers engines and compromises infrastructure (bringing with it significantliability concerns), or reduce domestic supply of gasoline and diesel to limit the obligation to buycompliance credits (Renewable Identification Numbers, or RINs) needed to sell gasoline anddiesel in the United States. Neither of these options is good for the American consumer.

Recognizing this problem, on August 13, 2013, AFPM and the American PetroleumInstitute (API) filed a petition on behalf of its members seeking a partial waiver of the 2014 RFS.In its petition, AFPM detailed the technical and marketplace challenges associated withincreasing the volume of biofuel in the fuel supply, and requested a waiver that would set theethanol content in gasoline at an average of 9.7 percent, for a total 2014 RFS of 12.9 billiongallons of ethanol and 1.9 billion ethanol-equivalent gallons of biomass-based diesel. In

particular, a 9.7 percent cap would retain a market for neat gasoline (i.e., gasoline containingno ethanol) required for some applications (such as boating), promote liquidity in the RIN

1 See 78 Federal Register 49794, 49798 (August 15, 2013) (EPA anticipates that adjustments to the 2014 volume

requirements are likely to be necessary based o the projected circumstances for 2014, taking into account the E10 blendwall, and current infrastructure, and market based limitations to the consumption of ethanol in gasoline ethanol blends above E10)


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market, and account for historical differences between the Energy Information Administrations(EIA) projections of gasoline demand and actual demand.

The U.S. consumed approximately 12.9 billion gallons of ethanol in 2012 and is on paceto consume approximately 13 billion gallons in 2013. In fact, obligated parties are only able tocomply with the 2013 mandate because of banked RINs from previous years. In other words,AFPMs waiver petition simply recognizes that the RIN bank will be depleted and requests acontinuation of the same consumption levels in 2014 that occurred in 2012 and 2013. A large

portion of AFPMs request is a waiver of the 666 million gallons of imported Braziliansugarcane ethanol expected to be used for the advanced biofuel mandate in 2013. Given thesefacts, the biofuel industrys claims that not raising the mandate next year will somehow lead towidespread layoffs and plant closures ring particularly hollow.

Unfortunately, in its rush to scapegoat the refining industry, biofuel producers continue toignore the reality of the blendwall and its potential impacts on consumers. The blendwall is afunction of consumer demand, engine compatibility, infrastructure constraints, and the biofuelindustrys failure despite nearly a decade of biofuel mandates to deliver promised drop-in

biofuel that are compatible with existing engines and infrastructure. Given the heated rhetoricsurrounding this issue, AFPM would also like to take the opportunity to correct some recentmischaracterizations about the blendwall and EPAs legal authority to grant a waiver.

1. Infrastructure and retail ownership . The biofuel industry claims that refiners failed to

invest in infrastructure continue to ignore the realities of how the fuel distributionsystem actually functions. While refiners and importers of gasoline are the obligated parties under the RFS, they are often not the entities actually blending the fuel or sellingit to end-use consumers. In many cases, third-party blenders or others actually blend therenewable fuel into the petroleum blendstock, thereby capturing the RIN that the third-

party sells back to an obligated party.

Moreover, 95 percent of retail gas stations are owned by independent businesses, many ofwhich are single-store operators. In addition, more than half of the gas stations areactually unbranded and unaffiliated with refining companies. Even those stations that are

franchised, however, are largely responsible for their own equipment and investmentdecisions. These stations are free to sell higher ethanol blends (such as E85 or E15) solong as they continue to sell the branded product (a key feature of a franchise), but theygenerally have chosen not to carry these higher ethanol blends because of a lack ofconsumer demand and fear of potential liability. In general, franchisees get the benefit ofa steady fuel supply at a contracted price, marketing assistance, and the ability to use arefiners trusted brand to help sell fuel. Typically, in return, franchisees must sell at least


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two grades of the refiners product. Put another way, franchisees are getting the benefit ofa contractual bargain between two private parties the definition of a free market. Thosefranchisees may invest in additional tanks and dispensers to carry additional fuel types, ormay terminate their franchise agreements and sell unbranded fuel.

One of the largest issues for fuel suppliers are potential liabilities stemming from vehicleand small engine incompatibility with higher ethanol blends like E15, discussed more

below. Given the massive potential liability or injury associated with E15 for consumers,the retail community, engine manufacturers, and refiners, it is no surprise that E15smarket penetration is limited to a few dozen stations in the Midwest. Most important,

however, is the consumer liability resulting from potential engine damage that wouldoccur as result of E15, which cannot be used in nearly 95 percent of cars or any lawnequipment, motorcycles, boats, or countless other engines.

In addition to the infrastructure and liability issues, challenges remain including withcertification of underground storage tanks for higher blends, conflicting states laws, andthe fact that EPA has not granted a 1-pound Reid Vapor Pressure (RVP) waiver forsummer E15 like it has for summer E10.

2. Vehicle Compatibility . Although some auto companies have recently announced that2012-2014 models will be compatible with E15, there are still hundreds of millions ofcars on the road that are not compatible with that fuel. In general, it takes about a decadefor the auto fleet to turn over, meaning we will not see these changes for some time, andimplementation of the 2014 volumes will not be significantly affected by new car sales.Moreover, hundreds of millions of off-road/non-road vehicles and engines are unable andunapproved to use more than 10 percent ethanol regardless of E15s availability. 2

3. E85 Sales . The biofuel industry claims that E85 sales can bridge the gap between E10saturation and the RFS requirements, but unfortunately this claim ignores refueling

infrastructure compatibility issues and consumer acceptance of E85. Importantly, only1.5 percent of stations carry E85 and even where it is widely available, consumeracceptance remains low. In fact, data from Iowa and Minnesota (two states with the mostdeveloped E85 infrastructure) show that there has been virtually no growth in E85 sales.Minnesotas E85 sales peaked in 2007 and Iowas in 2011.

2 Rep. F. James Sensenbrenner, U.S. House of Representatives, to EPA Administrator Lisa Jackson, 5 July 2011


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The ethanol industry claims that the high RIN prices in 2013 have helped drive sales ofhigher blends because the RIN price theoretically induces price advantages, but the actualdata belies this claim. Sales have recovered from very low levels in 2012, but haveremained generally consistent with historical levels. In its 2013 Annual Energy Outlook,the EIA projected flat E85 demand through 2040. In addition, it is well documented bythe EIA and the Automobile Association of America (AAA) that ethanol costs more perunit of energy meaning it costs consumers more to travel the same distance. Forexample, AAA noted on November 7, 2013 that the energy adjusted consumer price forE85 was about 30 cents per gallon more than regular gasoline. 3 Consumers are simply

not enamored with returning to the gas station more often to fill up with a fuel that coststhem more to travel the same distance.

4. Renewable Identification Numbers . The high and volatile RIN prices during 2013 are aclear indication that RINs are in short supply as a result of the blendwall. Contrary toclaims by biofuel producers, high RIN prices were never an intended feature of the RFS

program. RINs were meant to promote some flexibility in the mandate so that refinersand blenders without access to renewable fuel could still meet their obligations.Moreover, claims that the refining industry is profiting from RINs ignore thefundamentals of the RFS program. More specifically, in 2013 there is a RIN bank fromover-compliance in previous years lessening the burden of purchasing RINs on thoserefiners that can draw from their bank in a tight market. While some refiners are in a

better position than others in 2013, starting in 2014 there will be few carryover RINs asthe bank is depleted. In other words, the refining sector will move from one of havesand have nots to one of all have nots. Due to market anticipation of Congressionalaction and EPA using its authority, RIN prices decreased from their July peak of morethan $1.40 to below $0.30 in recent days. While RIN costs are still 300 percent higherthan they were in January, this situation clearly indicates that EPA can prevent massiveand unnecessary compliance costs by exercising its authority to partially waive the RFS

for 2014.

5. Waiver authority . In an attempt to stymie bipartisan efforts to reform the RFSlegislatively, the biofuel industry testified in July, and has stated publicly multiple timesthat EPA has all the authority it needs to address issues with the RFS. Yet when EPA

3 http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asp
http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asphttp://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asphttp://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asp


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indicated that it plans to use that precise authority, the biofuel industry criticized theAgency for introducing uncertainty into the marketplace. The fact is that uncertainty wasin the market prior to EPAs announcement, and will continue to exist until Congresssteps in and enacts a long-term solution that seriously addresses the multitude of

problems with this law. AFPM continues to engage in a constructive dialogue withmembers of Congress from both parties about needed reforms to the program. In theshort-term, however, it is essential that EPA provide certainty for the market in 2014while Congress completes its work.

Congress explicitly allows EPA to waive the RFS, in whole or part, for up to a year at a

time pursuant to its authority under section 211(o)(7) of the Clean Air Act. This can beaccomplished by either a showing of severe economic or environmental harm, or byshowing an inadequate domestic supply. Contrary to claims the biofuel industrymakes, the act does not confine the definition of supply to that of renewable fuels. Dueto the onset of the E10 blendwall, the RFS will force an inadequate domestic supply ofRINs needed to comply with the RFS. In turn, the lack of available RINs will force areduction in gasoline and diesel supplied to the United States, thereby shorting domesticdemand. There is nothing in the RFS that compels, or even suggests, a narrowinterpretation of EPAs waiver authority.

In the final rule implementing the 2013 renewable fuel volumes, EPA stated that itdoes not currently foresee a scenario in which the market could consume enough ethanol soldin blends greater than E10, and/or produce sufficient volumes of non-ethanol biofuel (biodiesel,renewable diesel, biogas, etc.), to meet the volumes of total renewable fuel and advanced biofuelas required by statute for 2014. ( see 78 FR 49823; 8/15/13) AFPM wholeheartedly agrees withthis assessment. The challenges with the RFS are real, imminent, and require action beforeconsumers are faced with the adverse impacts we know are coming. AFPM and its memberslook forward to working with you to solve these challenges in the coming months.

Sincerely,

Charles T. Drevna

cc: Ron Minsk, Senior Director, National Economic Council, White HouseGina McCarthy, Administrator, Environmental Protection Agency

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