called 10% ethanol ^blend wall prevents strain supplies of ... · PDF file2 1. API and AFPM...
Transcript of called 10% ethanol ^blend wall prevents strain supplies of ... · PDF file2 1. API and AFPM...
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August 28, 2013
The Honorable Gina McCarthy
Administrator
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, D.C. 20460
Re: Request Dismissal of API/AFPM Renewable Fuel Standard (RFS) Waiver Petition
Dear Administrator McCarthy,
The Renewable Fuels Association (RFA) strongly urges you to reject the petition for a partial waiver of
the 2014 Renewable Fuel Standard (RFS) submitted August 13, 2013, by the American Petroleum
Institute (API) and American Fuel & Petrochemical Manufacturers (AFPM). As this letter demonstrates,
the petition from API and AFPM does not satisfy the requirements of Section 211(o)(7)(A) of the Clean
Air Act, which clearly describes the conditions under which the U.S. Environmental Protection Agency
(EPA) may grant a waiver of the RFS requirements.
In essence, API and AFPM suggest the emergence of the so-called 10% ethanol “blend wall” prevents
them from fulfilling their obligations under the RFS in 2014 and beyond. The petitioners allege that
current infrastructure cannot deliver, and the current automotive fleet cannot consume, the volume of
renewable fuels necessary to meet the RFS going forward. As a result, the petitioners claim that stocks
of Renewable Identification Numbers (RINs) will be exhausted, as obligated parties turn in excess RINs
rather than blending physical gallons of renewable fuel to meet RFS requirements above the “blend
wall.” Upon liquidating RIN stocks, API and AFPM claim that the refining sector will, in a coordinated
manner, constrain supplies of gasoline and diesel fuel, resulting in higher pump prices and “economic
harm” for U.S. consumers.
Even if it were plausible, the doomsday scenario outlined by API and AFPM is completely avoidable.
Legal, safe, and affordable options exist for increased ethanol blending, which would, in turn, expand
the supply of RINs necessary for RFS compliance in 2014 and well beyond. The petition also ignores the
program’s extraordinary administrative flexibility, which allows EPA to adjust volumetric RFS
requirements on an annual basis. Indeed, EPA has already signaled that it intends to exercise this
flexibility in setting the 2014 standards.
In short, the petition from API and AFPM should be seen for what it truly is—a desperate attempt to
protect market share and block increased volumes of cleaner and more sustainable renewable fuels
from entering the marketplace. For the reasons discussed below, EPA should act swiftly to reject the
petition from API and AFPM.
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1. API and AFPM are not “subject to the requirements” of the RFS pursuant to Section
211(o)(7)(A) and are therefore not entitled to petition for a waiver
Out of the gate, API and AFPM have a significant problem: they have no statutory right to petition for a
waiver of the renewable fuel volume requirement. Under Section 211(o)(7)(A) of the CAA, a valid
waiver request may only be brought “by one or more States, by any person subject to the requirements
of this subsection, or by the Administrator on his own motion.”1 Not a State or the Administrator, API
and AFPM must try to satisfy the last possible criteria—a “person subject to the requirements of this
subsection,”2—but they cannot plausibly satisfy this standard.
As trade associations, API and AFPM are not directly responsible for fuel production or import and, as
such, are not subject to the RFS’s regulations. Indeed, EPA has specifically explained that the RFS
requirements apply only to a domestic “refiner that produces gasoline or diesel fuel . . . or any importer
that imports gasoline or diesel fuel” into the United States.3 API and AFPM do not meet either of these
requirements. As a result, neither organization is entitled to apply for a waiver under the CAA.4
For their part, API and AFPM pay only lip service to Congress’s clear command—that only States or
directly regulated persons may petition EPA for a waiver. They assert that they “represent numerous
refiners and importers of transportation fuel and, in that capacity, are ‘person[s] subject to the
requirements’ of section 211(o)(2) and entitled to petition for a waiver.”5 But this claim rests on notions
of associational standing that Congress plainly did not incorporate here. Instead, Congress provided
that only persons directly regulated by the RFS may petition the EPA for a waiver. Moreover, such a
limitation makes eminent sense. This is not a general petition for a rulemaking; this is a specific request
for a waiver from a regulatory requirement. If Congress wished to allow entities with only an
associational interest to request a “waiver,” one would have expected it to do so in clear terms.
At bottom, despite API and AFPM’s blanket assertion, not a single member of these associations has
signed on to their letter as a “person subject to the requirements of this subsection.” As a result, they
have no statutory right to request a waiver, and EPA should reject their petition on this ground alone.
2. The petition obscures the fundamental purpose and intent of the RFS.
Beyond the procedural infirmity, API and AFPM’s request fails fundamentally on the merits as well. The
central purpose of the Energy Independence and Security Act (EISA) of 2007 was to expand the RFS and
drive the usage of ethanol and other renewable fuels far beyond their historical role as low-level fuel
additives (e.g., 10% ethanol blends, or “E10”). The need to move beyond E10 in 2014 for the purposes of
RFS compliance should hardly come as a surprise to obligated parties. When Congress expanded the RFS
to 36 billion gallons as part of EISA, it was abundantly clear to regulated industries that such large
volumes of renewable fuel could not be absorbed by the future gasoline market without incremental
1 CAA § 211(o)(7)(A) (codified at 42 U.S.C. § 7545(o)(7)(A)).
2 id.
3 40 C.F.R. § 1406.
4 See CAA § 211(o)(7)(A) (codified at 42 U.S.C. § 7545(o)(7)(A)).
5 API/AFPM Letter at 1.
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changes to the vehicle fleet and fuel distribution infrastructure. Whether it was foreseeable that
gasoline demand would drop after passage of EISA in 2007 is irrelevant; there was absolutely an
expectation that the RFS would soon push ethanol consumption well beyond the E10 level.
The renewable fuels industry responded to the passage of EISA by dramatically increasing production
capacity and investing in new feedstock and biofuel technologies. The agriculture sector responded by
increasing feedstock output and investing in technologies to sustainably increase productivity. The U.S.
automotive industry responded by substantially increasing its production of flexible-fuel vehicles (FFVs)
capable of operating on fuel blends containing up to 85% ethanol (E85). Meanwhile, the petroleum
industry steadfastly refused to undertake the infrastructure preparations necessary to accommodate
the incrementally larger volumes of renewable fuels required under the RFS.
Moreover, the oil industry could easily rectify what it perceives to be infrastructure deficiencies that
purportedly stand in the way of satisfying the RFS. By allowing retailers to install dispensers capable of
distributing ethanol blends above E10, and by allowing storage of approved blends above E10 in existing
underground tanks currently mandated by the refiners to store “premium” gasoline, obligated parties
could very easily achieve Congress’ laudable goals of expanding renewable fuels consumption. Instead,
as explained more fully below, there is evidence that the petroleum industry has actively subverted
efforts to introduce larger volumes of renewable fuel to the American public.
API and AFPM maintain that the emergence of the so-called E10 “blend wall” in 2013 essentially caught
obligated parties by surprise. To the contrary, it was quite obvious by early 2009 that the arrival of the
“blend wall” would likely occur much sooner than was initially expected in 2007 when EISA was signed
into law. In fact, in the May 2009 analysis that accompanied EPA’s proposed rule for the RFS2, the
Agency wrote, “…under the proposed RFS2 program, we are projected to hit the E10 ‘blend wall’…by
2013.”6 EPA’s final rule for the RFS2, published in February 2010, underscored this point again, stating,
“…the nation is expected to hit the blend wall in 2013 under our high-ethanol control case [and] in 2014
under our primary mid-ethanol control case…. Regardless, to meet today’s RFS2 requirements using
increased volumes of ethanol we are going to need to see growth in FFV and E85 infrastructure and
increases in FFV E85 refueling rates.”7
Unfortunately, many obligated parties chose to blatantly ignore the strong signals compelling them to
begin preparations for higher volumes of renewable fuels and to increase investments in storage and
distribution infrastructure. Now, the members of API and AFPM seek relief from their renewable fuel
blending obligations, arguing that their failure to prepare for 2014 RFS requirements somehow merits
reprieve. EPA should not reward such blatant disregard for resoundingly clear policy signals—and
certainly not at a time when the petroleum industry is enjoying record profits.
3. The emergence of the so-called “blend wall” is not an acceptable justification for waiving the
2014 RFS volumetric requirements.
6 EPA. May 2009. “Draft Regulatory Impact Analysis: Changes to Renewable Fuel Standard Program.” EPA-420-D-
09-001. 7 EPA. February 2010. “Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis.” EPA-420-R-10-006.
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The petition from API and AFPM requests that EPA partially waive the 2014 RFS requirements based on
the arrival of the “blend wall” and the aversion of their member companies to blending ethanol beyond
the 10% level. However, the occurrence of the “blend wall,” and the related unwillingness of obligated
parties to manufacture gasoline blends above E10, does not satisfy the statutory criteria for granting a
waiver.
Section 211(o)(7)(A) of the Clean Air Act clearly specifies the circumstances under which EPA may
consider waiving annual renewable fuel blending requirements. In order to grant a waiver, EPA must
determine that “…implementation of the requirement would severely harm the economy or
environment of a State, a region, or the United States,” or determine that “…there is an inadequate
domestic supply” of renewable fuel to meet required blending levels.8
The purported lack of infrastructure to distribute larger volumes of ethanol above and beyond the
“blend wall” is not, in and of itself, a circumstance that EPA may take into consideration when
evaluating whether a waiver is justified. Indeed, the escalating volume requirements of the RFS are
meant to drive investment in the installation of new infrastructure that will enable larger quantities of
renewable fuels to be distributed to consumers. If EPA were to waive the RFS requirements based on
the notion that the necessary infrastructure to distribute larger volumes of renewable fuel “doesn’t
exist,” the Agency would eliminate the incentive created by the policy to expand renewable fuels
distribution capabilities. In this way, the API/AFPM argument that RFS requirements beyond the “blend
wall” are unachievable would become a self-fulfilling prophecy. Clearly, waiving the RFS based on the
failure of obligated parties to prepare for the “blend wall” would undermine the very intent and spirit of
EISA. As noted above, obligated parties have had at least four years to prepare for the arrival of the
“blend wall” and to invest in infrastructure to facilitate distribution of ethanol blends above E10. Their
failure to do so does not justify a waiver according to the statutory criteria.
4. API and AFPM misconstrue the statutory meaning of “inadequate domestic supply.”
The relief sought by API and AFPM hinges on their improper reading of the RFS waiver provisions in
section 211(o)(7)(A) of the Clean Air Act. The statute allows EPA to waive the RFS if it determines that
“…there is an inadequate domestic supply.” Clearly, the terms “inadequate domestic supply” refer to a
shortfall in the amount of renewable fuel that would be needed to meet RFS volumetric requirements.9
However, API and AFPM inappropriately attempt to apply the terms “inadequate domestic supply” to
8 42 U.S.C. 7545(o)(7)(A).
9 See EPA. February 2010.“Summary and Analysis of Comments.” EPA-420-R-10-003. Pg. 8-19 (“…inadequate
domestic supply to fulfill the mandates (emphasis added)…”; 75 Fed. Reg. 14,698 (“We also note that it is ultimately the availability of qualifying renewable fuel, as determined in part by the number of RINs in the marketplace, that will determine the extent to which EPA should issue a waiver of RFS requirements on the basis of inadequate domestic supply (emphasis added).” ; EPA. April 2007. “Summary and Analysis of Comments.” EPA 420-R-07-006. (“The Energy Policy Act provides that on petition by one or more States, EPA, in consultation with the Departments of Agriculture and Energy, may waive the required aggregate renewable fuels volume obligation in whole or in part upon a sufficient showing of economic or environmental harm, or inadequate supply. As a result, we believe that a renewable fuel supply problem that affects all (or a large number of) parties can be addressed using this statutory provision (emphasis added).”
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volumes of gasoline and diesel fuel, which they suggest will be purposely reduced by refiners as a result
of the 2014 RFS requirements and “blend wall.” Yet, in the petition’s discussion of potential supplies of
advanced biofuels in 2014, API and AFPM themselves admit that the terms “domestic supply” are meant
to apply to renewable fuels.10 As discussed elsewhere in this letter, there is no evidence to support the
notion that gasoline and diesel fuel supplies will be reduced because of the RFS in 2014; but even if it
could be proven that oil companies were shorting the market because of the RFS, a purposeful
“inadequate domestic supply” of gasoline and diesel fuel is not a circumstance that meets the statutory
criteria for a waiver.
5. EPA’s recent announcement that it intends to administratively adjust 2014 RFS volumetric
requirements renders the API/AFPM petition, and the attached studies, moot and irrelevant.
On August 15, 2013 (two days after API and AFPM submitted their petition for a waiver), EPA published
its final rule for 2013 renewable volume obligations. In the pre-amble to the rule, EPA addressed
concerns raised by obligated parties about impending 2014 RFS requirements, stating, “EPA anticipates
that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements,
including to both the advanced biofuel and total renewable fuel categories.”11 The announcement by
EPA underscores that the Agency has ample flexibility to modify annual RFS requirements based on the
likely availability of qualifying renewable fuels.
EPA’s intent to adjust the 2014 volumetric requirements renders the API/AFPM petition moot because
the market effects and economic “harms” alleged by the petitioners are all based on the faulty
assumption that EPA would finalize 2014 RFS volumes at the EISA levels. In addition, the conclusions of
the NERA study, which serve as the basis for the “harms” asserted by API and AFPM, are further nullified
by EPA’s announcement that it plans to adjust the 2014 requirements. Among many other questionable
assumptions, the NERA study assumes EPA will not exercise its discretion to modify the annual RFS
requirements in either 2014 or 2015. Instead, NERA assumes EPA will strictly enforce the statutory RFS
volumes from EISA. Among other basic flaws, the NERA study also uses estimates for banked RINs that
are far below data provided by EPA based on actual RIN transactions through the EPA Moderated
Transaction System (EMTS).12
Because the economic studies that support the petition are based on the faulty premise that EPA will
not use its authority to adjust 2014 or 2015 RFS requirements, the studies’ conclusions should be
rejected and the “harms” asserted by the petitioners cannot be considered relevant.
6. The basic premise of the waiver petition (i.e., that there are no viable options for obligated
parties to meet 2014 RFS blending requirements in excess of the “blend wall”) is
fundamentally flawed and contradicts recent trends in the marketplace.
10
API/AFPM Letter at 34 (“Drawing from the clear language of the section 211(o) waiver provision, only ‘domestic supply’ should be considered when setting the advanced biofuel and total renewable volumes.”) 11
78 Fed. Reg. 49,823. 12
EMTS data indicate that 2.47 billion RINs generated in 2012 were available to carry over to 2013. This compares to an assumption by NERA that just 1.85 billion carry-over RINs for the study’s primary scenario.
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API and AFPM argue that the E10 “blend wall” is an impenetrable barrier that prevents obligated parties
from satisfying 2014 RFS requirements with physical gallons of renewable fuel. They suggest surplus RIN
credits will be used in lieu of physical gallons to meet RFS obligations above the “blend wall.” API and
AFPM portend that once RIN banks are exhausted, there will be “…a shortage of RINs for compliance,”
which they suggest “will in turn limit supplies of gasoline and diesel for U.S. consumption.” This tenuous
string of arguments deliberately ignores the viability of E15 and E85, which are legal, safe, economical,
and readily available fuel blends. Increasing the use of E15 and E85 would allow obligated parties to
easily surmount the E10 “blend wall” and comply with RFS requirements in 2014 and beyond. The
petition from API and AFPM intentionally obfuscates the facts surrounding the viability of E15 and E85
as options for compliance with the RFS in 2014 and subsequent years.
a. The petition’s discussion of E15 is inaccurate, misleading, and omits important
information.
As described below, API and AFPM distort the facts surrounding E15 as a viable pathway to RFS
compliance in 2014. In addition to disregarding the marketplace’s real-world experience with E15, the
petitioners misrepresent a number of technical aspects related to commercial introduction of the fuel
blend.
i. API and AFPM ignore the marketplace’s real-world experience with E15 over
the past 13 months.
On July 11, 2012, the first gallons of E15 were sold at a retail gas station in Lawrence, Kansas.13 More
than 13 months later, an estimated 2 million gallons of E15 have been sold to thousands of vehicles built
in 2001 or later at approximately 30 retail stations in six states. It is estimated by RFA that roughly 40
million miles have been driven on E15 over the past 13 months. While the volume of E15 sold to date is
relatively small, it has demonstrated quite clearly that the fuel is safe, effective and economical. Further,
users of E15 over the past 13 months have not experienced the deleterious engine effects suggested by
API and AFPM. In fact, there has not been a single reported and confirmed case of engine damage or
inferior performance due to E15. Similarly, there have been no reported and confirmed cases of E15
misfueling in non-approved equipment. And contrary to the rhetorical warnings from API and AFPM,
there have been no liability issues whatsoever associated with the sales and use of E15 over the past 13
months. API and AFPM conveniently omit any discussion of the real-world experience with E15 to date
because it does not suit their purposes. Instead, their petition falls back on hypothetical and speculative
statements about what “could happen” to engines and infrastructure if E15 is used. These speculative
statements should be dismissed, as real-world experience with E15 has already proven them incorrect.
ii. API and AFPM mischaracterize automaker approval and warranty coverage for
E15.
13
See http://www.ethanolrfa.org/news/entry/first-station-in-the-nation-offers-e15-in-kansas/
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The use of E15 is explicitly approved by the manufactures of approximately 40% of model year (MY)
2013 and 30% of MY2012 light-duty vehicles sold in the United States.14 This percentage will grow to at
least 45% for MY2014 vehicles, as FFV volumes increase and additional automakers have committed to
explicitly warranting next year’s models for the use of E15.15 The petitioners are correct that E15 is not
explicitly addressed in warranty statements and owners’ manuals for automobiles built before 2011, but
that’s because E15 did not exist as a legal fuel in the marketplace at the time those vehicles were built
and their warranty statements were printed. Why would automakers warranty their vehicles for a fuel
that was not legally approved and not commercially available in the marketplace at the time? Further, as
a matter of policy, automakers do not modify or change vehicle warranties retroactively based on
changes in the marketplace. Thus, it is simply incorrect to argue that concern about the effect of E15 on
engines is the primary reason that automakers have not retroactively warrantied pre-2011 vehicles for
E15. Rather, the reason automakers have not retroactively warrantied pre-2011 vehicles for E15 is that
they don’t retroactively modify warranties for any reason.
iii. The Coordinating Research Council (CRC) study that serves as the petition’s
basis for dismissing E15 is profoundly flawed. The CRC results have been
challenged by scientists from the Department of Energy and other entities.
In arguing that E15 “will damage engines and other systems in millions of vehicles,” API and AFPM rely
exclusively on the results of a study they co-funded through the Coordinating Research Council (CRC).
The petitioners point out that two of the eight vehicles examined in the CRC study failed engine
durability tests on E15 and E20. What they fail to point out is that one of the eight vehicles failed the
engine durability test when operating on E0 (gasoline with no ethanol).
Upon reviewing the CRC study’s results, the Department of Energy (DOE) stated, “We believe the study
is significantly flawed…” and, “[w]e believe the choice of test engines, test cycle, limited fuel selection,
and failure criteria of the CRC program resulted in unreliable and incomplete data, which severely limits
the utility of the study.”16 Among other flaws, the CRC study failed to include E10 as a test fuel, used
arbitrary test cycles and criteria, and failed to establish a proper control group. Further, DOE points out
that some of the vehicles selected for the test were under manufacturer recall for known mechanical
failures.
14
E15 is explicitly approved in owners’ manuals, gas caps, and/or warranty statements for MY2013 General Motors and Ford vehicles. GM and Ford models represent approximately 33% of MY2013 vehicle sales (http://online.wsj.com/mdc/public/page/2_3022-autosales.html#autosalesE). Additionally, E15 is explicitly approved for use in FFVs produced by all automakers. FFVs produced by automakers other than Ford and GM represent about 7% of MY2013 vehicle sales. 15
Volkswagen recently announced all MY2014 vehicles will be explicitly approved for E15 (see http://www.greencarcongress.com/2013/07/vw-20130714.html). Volkswagen models account for about 3% of U.S. light-duty vehicle sales. 16
See http://energy.gov/articles/getting-it-right-accurate-testing-and-assessments-critical-deploying-next-generation-auto
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Notably, the DOE’s own analysis of the effects of E15 and E20 on light-duty vehicles included 86 vehicles,
with each logging up to 120,000 miles. Based on this much more robust sample of vehicles, DOE
concluded that there was “…no statistically significant loss of vehicle performance (emissions, fuel
economy, and maintenance issues) attributable to the use of E15 fuel compared to straight gasoline.”17
Further, the DOE work “…did not uncover unusual wear that would be expected to impact
performance.”18
API and AFPM completely ignore the results of the DOE study, choosing instead to sensationalize the
findings of the industry-funded and fundamentally flawed CRC study. Thus, the petition’s claims
regarding E15’s impact on engines should be rejected.
iv. The petition distorts the typical nature of commercial relationships between
obligated parties and downstream blenders and retailers.
At several points in the petition, API and AFPM suggest that most retail gasoline stations today are
independently owned, implying that refiners have very little control or influence over fuel offerings and
infrastructure at the retail level. Thus, they argue, obligated parties have no way of ensuring the
volumes of E15 needed to meet RFS requirements above the “blend wall” will be offered at retail. The
argument that obligated parties have little or no control over retail fuel offerings is absurd and
disproven by recent events in the marketplace.
Through franchise agreements and supply contracts, refiners and their midstream partners exert
tremendous influence over what fuels are made available for sale at retail gas stations—so much so that
Congress has had to enact legislation to protect retailers from the leverage that refiners have exerted
over their franchisees. In recent months, for instance, it has come to light that some oil companies are
requiring retail stations to carry premium gasoline as part of their franchise agreement.19 In many cases,
franchise agreements that require premium gasoline to be offered prevent the retailer from carrying
ethanol blends like E15 and E85 (even when the retailer prefers to offer those fuels instead of premium
gasoline).20 The Federal Trade Commission recently indicated it will investigate allegations that franchise
agreements are being used in some cases to eliminate the ability of retailers to sell E15.21
Clearly, retail fuel offerings are dictated by fuel producers and blenders upstream. That is, retailers can
only sell the fuels that obligated parties manufacture upstream at refineries and blending terminals. It is
not at all uncommon for refiners and blenders to make changes to their wholesale fuel offerings, and
retailers are accustomed to adjusting their business practices to accommodate these changes. For
example, Magellan Midstream Partners recently announced it would no longer offer 87 octane “clear”
gasoline to wholesale customers in Iowa.22 As in many other cases where refiners and blenders have
17
id. 18
id. 19
See, for example, http://www.ethanolrfa.org/news/entry/rfa-requests-multi-agency-investigation/ 20
id. 21
Tracy. T. “FTC Examines Allegations That Oil Industry Blocks Greater Ethanol Use.” Wall Street Journal. August 21, 2013. 22
See http://farmprogress.com/story-e15-ethanol-blend-expected-lowest-cost-fuel-iowa-9-101034
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changed wholesale fuel offerings, retailers are expected to adjust quickly and seamlessly to Magellan’s
switch away from 87 octane “clear” gasoline. Retailers would respond similarly to a decision by
upstream refiners and blenders to increase wholesale offerings of E15.
v. The infrastructure costs associated with selling E15 are grossly overstated by
API and AFPM.
The petitioners cite joint testimony from the Society of Independent Gasoline Marketers of America
(SIGMA) and National Association of Convenience Stores (NACS) suggesting that the cost of outfitting a
retail station to sell E15 “…can quickly exceed $100,000 per location.” This cost estimate is outrageous
and contrary to the real-world experience with E15 to date. On average, the retail stations currently
offering E15 have invested less than $10,000 in infrastructure upgrades. For the average gas station, this
cost equates to less than $0.01 per gallon of gasoline sales (for context, retail fuel margins were $0.256
per gallon for the week ending August 16, according to NACS23).
b. API and AFPM inappropriately dismiss the viability of E85 as a pathway to RFS
compliance.
In an attempt to hastily reject E85 as a workable solution to the “blend wall,” the petitioners suggest
that “there is a very limited market for E85.” While it is beyond dispute that historical usage of E85 has
been relatively low, it is unreasonable to assume such a trend will continue in the future. E85
consumption by FFVs has been low in the past due in large part to the fact that annual RFS requirements
could be easily satisfied by consumption of low-level ethanol blends like E10 in conventional vehicles
(i.e., non-FFVs). Beginning in 2014, however, blending E10 alone will no longer be a sufficient means of
complying with the RFS. For the first time in the program’s history, the RFS in 2014 obliges regulated
parties to increase production and sales of ethanol blends above E10. Already, the RFS program’s RIN
mechanism is working to strongly incentivize increased blending and consumption of E85 to facilitate
compliance. In short, past performance should not be used as an indicator of future E85 consumption by
FFVs.
i. Contrary to the claims of API and AFPM, there are more than enough FFVs to
consume exponentially larger quantities of E85 and surmount the “blend
wall.”
API and AFPM state, “…there are simply not enough flex-fuel vehicles to use enough ethanol to delay
the blendwall.” This statement is categorically false and misleading. Energy Information Administration
(EIA) data show that 15.1 million FFVs were sold from 1998 through 2012.24 Assuming 2013 FFV
production levels were consistent with 2012 rates, approximately 17.6 million FFVs have been sold. Even
if it is assumed that all pre-2002 FFVs have been scrapped and are no longer in service (based on the
average vehicle lifespan of 11 years), there would still be 15.8 million FFVs on U.S. roadways today.
23
NACS Daily. August 22, 2013. 24
See http://www.afdc.energy.gov/uploads/data/data_source/10299/10299_afv_available.xlsx
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Accordingly, the current fleet of FFVs is capable of consuming roughly 8 billion gallons of ethanol
annually (10-11 billion gallons of E85). This means the current U.S. light-duty automotive fleet (i.e., FFVs
and non-FFVs) could consume a total of roughly 20 billion gallons of ethanol—some 7 billion gallons
above the so-called E10 “blend wall.” Without question, vehicle compatibility is not a limiting factor in
expanding ethanol consumption beyond the “blend wall.” The petition’s suggestion that FFVs aren’t
available in sufficient quantities to breach the blend wall is false and should be rejected out of hand.
ii. API and AFPM cite an artificially low estimate of the number of retail locations
offering E85, and misrepresent the proximity of registered FFVs to E85 outlets.
The petition suggests only 2,300 retail stations are offering E85 today. In reality, E85 is available in more
than 2,000 cities at more than 3,080 stations, 34% more than the estimate cited by API and AFPM.25
Moreover, new independent research shows many FFVs are in relatively close proximity to E85 refueling
locations.26 Approximately one-third of FFVs are within a five-mile radius of a station offering E85, and
more than half of FFVs have access to E85 within 10 miles. This is contrary to the petition’s claim that
“FFV access to E85 is even more limited than these numbers imply.”
iii. The petition’s claims about pricing and consumer demand for E85 belie recent
observed trends in the marketplace and economic logic.
API and AFPM suggest E85 is not a viable option for overcoming the “blend wall” because pricing of E85
to offset its fuel economy loss “has not occurred.” This is patently false and contradicts recent observed
trends in the marketplace. API and AFPM cite AAA’s “fuel gauge” report in an attempt to suggest E85
prices are higher than gasoline prices on an energy-equivalent basis. However, there are obvious flaws
with the AAA methodology that render the “fuel gauge” report’s E85 price data inaccurate and
meaningless.27
E85 has approximately 80% the energy content of E10, meaning E85 should be discounted by 20% to
offset the theoretical fuel economy loss. Recent data show that, on average, E85 is being priced 20.1%
below E10 nationwide, up from 18.8% in July and just 6.1% in January.28 The current spread marks the
largest average discount in more than three years. In states like Iowa and Minnesota where there is a
25
See www.E85prices.com, accessed Aug. 22, 2013. 26
Babcock, B.A., and Pouliot, S. August 2013. “Price It and They Will Buy: How E85 Can Break the Blend Wall.” CARD Policy Brief 13-PB 11. Available at http://www.card.iastate.edu/policy_briefs/display.aspx?id=1187 27
The BTU-adjusted E85 price reported in the AAA Fuel Gauge Report appears to assume E85 has 75.9% the
energy content of gasoline. However, “E85” typically contains no more than 83% ethanol by volume and can
actually contain as little as 51% ethanol. On average, “E85” contains 70% ethanol by volume and its BTU content is
88,300 BTU/gallon—or 79.2% the energy content of E10 gasoline. This discrepancy alone leads to the Aug. 28,
2013 reported E85 BTU-adjusted price of $3.75/gallon being overstated by $0.16/gallon. Further, AAA’s retail
station sampling procedures are unclear. The statistical robustness of AAA’s sample is not known and it is unclear
how many stations are actually surveyed for daily E85 prices. The geography of the surveyed stations is very
important, as stations offering E85 in the Midwest typically have lower E85 prices (relative to gasoline) than
stations offering E85 in other parts of the country. 28
See www.E85prices.com, accessed Aug. 23, 2013.
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higher-than-average distribution of E85 pumps, E85 prices are being discounted even further (26-27%)
relative to E10.29 At some retail stations, E85 is being priced as much as 37% lower than E10. Clearly,
current discount rates are sufficient to offset any fuel economy loss when using E85.30
Consumers are responding to recent lower E85 prices by increasing consumption. While there is no
reliable nationwide data tracking E85 sales, at least two state agencies track E85 consumption in their
states. Data from both agencies indicate dramatic growth in E85 sales in recent months, as FFV owners
have responded to lower relative E85 prices. Minnesota Department of Commerce data show that E85
sales in the state jumped 81% from April to May, the largest month-to-month increase since data
collection began in 1999.31 Minnesota E85 sales reached a 23-month high in May, according to the data.
Similarly, data from the Iowa Department of Revenue show E85 sales in the state jumped 43% from the
first quarter of 2013 to the second quarter.32
Recent research conducted at Iowa State University found that attractive pricing of E85 can drive
substantial increases in utilization. According to the study:
Pricing E85 low enough to generate fuel cost savings has the potential to quickly
increase ethanol consumption, perhaps by three billion gallons over the next
year or two. Rather than being a physical barrier to increased ethanol
consumption, the E10 blend wall is an economic barrier that can be overcome
by increasing the incentive for drivers to use E85 to fuel their vehicles.33
The Iowa State analysis demonstrates how the RIN market works to lower the effective cost of E85 at
the retail level, and explains the interaction among corn, ethanol, gasoline and RIN prices.
Current RIN (Renewable Identification Number) prices are high enough to
achieve modest increases in ethanol consumption above 13 billion gallons and
to create incentives to increase the ability to consume lower-carbon ethanol in
2016 and beyond. Current high RIN prices create a large incentive for oil
companies to increase consumption of E85 because expansion in E85
consumption will decrease RIN prices.34
The authors of the Iowa State study conclude that it will be less expensive for oil companies to invest in
E85 infrastructure than it would be to continue to pay high RIN prices. Indeed, the $600-800 million in
29
id. 30
id. 31
See http://mn.gov/commerce/energy/images/E-85-Fuel-Use-Data.pdf 32
See http://www.desmoinesregister.com/article/20130820/NEWS/130820037/E85-sales-rose-43-percent-second-quarter-state-data-shows 33
Babcock, B.A., and Pouliot, S. August 2013. “Price It and They Will Buy: How E85 Can Break the Blend Wall.” CARD Policy Brief 13-PB 11. Available at http://www.card.iastate.edu/policy_briefs/display.aspx?id=1187 34
id.
12
expected 2013 RIN costs cited by Valero would be enough to add some 13,000 E85 dispensers.35 This
would more than quadruple the existing number of E85 pumps in service.
7. The market responses to the “blend wall” portended by the API/AFPM petition have not
occurred. In fact, actual events have been the exact opposite of what was predicted by
API/AFPM and the NERA study.
The petition’s assertions of “economic harm” are based on speculation that obligated parties will, in a
coordinated fashion, reduce production and imports of gasoline and diesel fuel and increase exports in
an attempt to limit the number of RINs that must be obtained to demonstrate RFS compliance. API and
AFPM argue that this purposeful shorting of the U.S. fuel supply would result in higher retail prices for
gasoline and diesel, causing “severe economic harm” to U.S. consumers. These claims are based in large
part on the results of the NERA study, which, for reasons already discussed, should be rejected by EPA.
AFPM repeated these threats in recent testimony, stating, “If obligated parties are unable to purchase
RINs in the open market at an affordable price, the remaining RFS compliance options are reducing
gasoline and diesel supplied to the U.S. through a combination of reduced refinery runs, reduced
imports, and increased exports.”36
Data from EIA clearly show that none of responses threatened by API and AFPM have actually occurred
in the marketplace. Refinery production of gasoline has not been reduced in response to the “blend
wall” and higher RIN prices. Instead, the amount of gasoline supplied to the market by domestic refiners
has actually exceeded both 2012 levels and EIA projections for 2013 (Figure 1).
35
See http://www.reuters.com/article/2013/07/30/bp-rins-idUSL1N0G01IT20130730. In the RIA for the RFS2, EPA estimated the total cost for the installation of three E85 dispensers at one station would be $177,000. Thus, $800 million/$177,000 = 4,520 stations @ 3 E85 dispensers = 13,560 E85 pumps. 36
Testimony of AFPM before House Energy & Commerce Committee. July 23, 2013. Available at: http://democrats.energycommerce.house.gov/sites/default/files/documents/Testimony-Drevna-EP-Renewable-Fuel-Standard-Stakeholder-Perspectives-2013-7-22-23.pdf
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Similarly, U.S. diesel fuel production—which the NERA study predicted would be severely reduced—has
far exceeded 2012 levels and is above EIA projected levels for 2013 on a year-to-date basis (Figure 2).
Meanwhile, exports of finished gasoline and diesel fuel have not increased, as predicted by the NERA
study. In fact, year-to-date finished gasoline exports in 2013 have been lower than exports during the
same period in 2012, when RIN prices were less than $0.04 (Figure 3). Similarly, year-to-date exports of
diesel fuel in 2013 have been 11% lower than during the same period in 2012 (Figure 4).
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Figure 3. Weekly U.S. Exports of Finished Motor Gasoline
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Further, obligated parties have not reduced imports of gasoline and diesel fuel, as threatened by the API
and AFPM petition. Year-to-date imports of diesel fuel in 2013 have actually increased by 24% over the
same period in 2012 (Figure 5). Gasoline imports have been slightly lower in 2013 than during the same
period in 2012 (Figure 6), but the decline in imports is explained by the concomitant increase in U.S.
gasoline production.
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Figure 5. Weekly U.S. Imports of Distillate Fuel
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8. The combination of increased E85 sales, increased E15 sales, carry-over RINs from 2013, and
likely administrative adjustments to the 2014 advanced biofuel standard will allow obligated
parties to easily meet their RFS requirements without adverse economic consequences.
As described above, the petition submitted by API and AFPM should be promptly rejected because the
alleged “harms” are based on misleading representation and faulty assumptions regarding: 1) the
viability of E15 and E85 as pathways to compliance, 2) the amount of carry-over RINs available, 3) the
likely levels of EPA’s final renewable volume obligations for 2014, and 4) the response of gasoline and
diesel fuel markets to the “blend wall.”
The events of the last several months have demonstrated that higher RIN values are leading to lower
E85 prices and markedly increased sales. As demonstrated by the Iowa State study, higher RIN values
are likely to enable rapid and dramatic growth in ethanol consumption via E85. In addition, the number
of stations offering E15 continues to grow; and 13 months’ worth of real-world experience has
disproven the claims of API and AFPM regarding E15’s effects on engines and infrastructure.
Further, according to EPA data, there are more carry-over RINs available for compliance with 2013
standards than estimated by the NERA study. In addition, more surplus RINs are likely to be carried into
2014 than assumed by NERA. This will aid obligated parties in complying with 2014 standards.
Moreover, EPA has already stated that it will propose adjustments to the 2014 volume requirements for
both the advanced biofuel and total renewable fuel categories. This development alone renders the
petition moot and irrelevant. Depending on the nature of EPA’s adjustments to the advanced biofuel
standard based on the availability of sugarcane ethanol, the amount of ethanol required above and
beyond the “blend wall” could be substantially reduced.
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Figure 6. Weekly U.S. Imports of Gasoline
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16
Finally, the gasoline and diesel market responses to the “blend wall” predicted by API and AFPM have
not occurred. There has been no evidence whatsoever to support the notion that lower RIN stocks and
higher RIN prices have caused refiners to reduce gasoline and diesel fuel output, cut imports, and ramp
up exports. In fact, gasoline and diesel fuel output has increased, imports have been higher, and exports
have been lower or stable—all while RIN prices have risen steadily in 2013. But the facts have
apparently not stopped API and AFPM from resorting to their classic scare tactic—threaten higher fuel
prices even as the oil industry enjoys record profits.
In conclusion, we believe EPA should act swiftly to reject the petition submitted by API and AFPM. The
conditions outlined in Section 211(o)(7)(A) of the Clean Air Act under which EPA may grant a waiver
simply do not exist. The RFS is working precisely as intended—EPA is exercising its authority to adjust
annual blending requirements, RINs are sending clear signals to the marketplace to expand renewable
fuels infrastructure and consumption, and RIN banking and trading provisions are providing compliance
flexibility to obligated parties. In short, oil refiners and importers should have no difficulty in meeting
their 2014 blending requirements.
* * * * *
Thank you for your consideration of our request to dismiss the petition from API and AFPM. Please
contact me at (202) 289-3835 with any questions.
Sincerely,
Bob Dinneen President and CEO