QAP 2.0: The Final Rule

Traversing the maze of U.S. EPA's proposed RIN Quality Assurance Plan was daunting, but after 16 months, the final rule provides a simpler pathway to getting markets back on track.
By Ron Kotrba | September 10, 2014

After several damaging cases of biodiesel RIN fraud were exposed in 2011 and 2012, it was clear something needed to be done to police the Wild West-like market and protect obligated parties and good-faith biodiesel producers alike from the crippling aftermath caused by a handful of bad actors. When the U.S. EPA issued its Quality Assurance Plan proposed ruling at the dawn of 2013, however, the consensus between the biodiesel and oil industries was that the program was too burdensome and costly.

The proposal, which was uniquely a proposal and an implemented rule until the actual final rule was published, provided obligated parties an affirmative defense against civil liability for retiring invalid RINs, and included Option A, Option B, and the status quo “buyer beware” approach. While both options provided obligated parties with an affirmative defense against civil liabilities, they differed in which party in the chain would be responsible for replacing any retired invalid RINs if the generator of the invalid RIN were unable to. Under A, if the biodiesel producer were unable to replace invalid QAP-A RINs they generated, the proposal required the QAP auditor to bear the cost of replacement. Under B, the obligated party that retired the invalid QAP-B RINs would be responsible for replacement.

Under the proposal, Option A was much more rigorous, comprehensive and costly compared to B. Option A required near real-time, ongoing auditing and reporting while quarterly auditing was all B demanded. QAP-A replacement by the auditor, as the proposed rule required, was to be backstopped by one or more replacement mechanisms: a RIN escrow account, a RIN bank or a financial instrument. There was also a replacement cap for auditors under A and a limited exemption for obligated parties under B. Option A limited the replacement obligation of the auditor to 2 percent of RINs they audit over a 5-year period. If the third-party verifier audits 100 million RINs, for instance, and 10 million are invalid, they would have to replace 2 million. Under Option B, there was a limited exemption for obligated parties (for 2013-’14 only) to not have to replace up to 2 percent of their total renewable volume obligation (RVO) if they retire invalid QAP-B RINs. This was put in the proposal to encourage obligated parties to buy RINs again, and if retired, invalid QAP-B RINs are 2 percent or less of their total RVO.

The EPA’s Byron Bunker, who spoke at the 2013 National Biodiesel Conference shortly after the proposed rule was issued, said he expected both options to be included in the final rule. It turned out he was wrong.

Final Rule
The final QAP rule was issued in July—a year and a half after the proposal was published. In its final rule, the agency finalized both proposed QAP program options included in the proposed rule for an interim period from Feb. 21, 2013, through Dec. 31, 2014. Beginning Jan. 1, 2015, the program will consist of a single QAP option (Q-RINs). “Given the difficulty experienced by auditors in setting up Option-A QAPs, the apparent lack of use of the Option-A QAP in the interim period, and the overwhelmingly negative comments regarding Option-A by producers and obligated parties alike, we are not finalizing Option-A as a compliance alternative for use after the interim period,” the agency stated in its final rule. The single QAP option closely resembles the QAP-B option established in the proposal.

After RIN fraud was exposed, the National Biodiesel Board formed a RIN Integrity Task Force that worked to establish recommendations for complementing the private-sector efforts with strengthened RFS requirements.

The EPA’s new regulations incorporate many of the task force’s recommendations, including strong protections for obligated parties but also clear responsibilities, without any reduction in required volumes. The new program gives obligated parties an affirmative defense against civil penalties. However, it confirms that obligated parties still have ultimate responsibility for replacing RINs found to be invalid. Anne Steckel, NBB’s vice president of federal affairs, says allowing a complete affirmative defense, in which invalid RINs are not replaced, would have allowed the EPA to effectively “write off” required volumes, resulting in a de facto reduction in RFS volumes and less incentive for fraud prevention among obligated parties. Another aspect of the task force’s recommendations that were incorporated in the final rule is a streamlined QAP process that provides strong protections for RIN buyers while also avoiding costly, time-consuming red tape that would hurt biodiesel producers and obligated parties. Also, Steckel says the final rule includes strengthened auditing requirements with strong professional standards that ensure true independence for those parties charged with identifying fraud.

“The major differences between the proposed and final rules are QAP types available and site visit frequency,” says Ashley Player, domestic QAP manager for Weaver. “The single QAP that will take effect Jan. 1 is almost identical to the QAP-B available during the interim period. EPA found, based on industry adoption during the interim period and feedback from QAP providers, producers and obligated parties, that the QAP-A option was not cost-effective. Likewise, EPA listened to industry concerns and elected to reduce the site visit requirements to biannually instead of quarterly.” Susan Olson, vice president of biofuels at Genscape Inc., says site visits are required twice a year without remote sensor monitoring and once a year with remote sensor monitoring.

“EcoEngineers is pleased that the EPA included all of our recommendations to make the program simpler and more cost-effective for producers,” says Shashi Menon, managing partner at EcoEngineers. “The final version of the rules only has one QAP RIN type, a Q-RIN, as opposed to the A and B types in the proposed rules.” The final rule has also taken a strong and sensible stand on the issue of independence of third-party auditors, Menon says. Karyn Jones, chief operating officer and QAP manager at EcoEngineers, adds that the final rule removes the requirement that the auditor be a professional engineer.

Regarding independent auditors, Olson says the final rule disallows RIN generators to be QAP auditors. “This appears to apply to RIN agents,” Olson says. The rule also establishes qualifications for independent third-party auditors, and sets requirements for audits of biofuel production facilities. According to RINtrust LLC, the auditor requirements in EPA’s final QAP rule indicate that the auditor cannot provide QAP and attestation services for the same facility; cannot generate RINs for the producer; must be independent from fuel producers; must have access to a professional engineer and a certified public accountant; and must have errors and omissions, or E&O, insurance.

Although the QAP-A portion of the program is being phased out, Olson says Genscape has been working on a commercial RIN replacement solution outside of the EPA’s program and plans to launch a commercial offering well ahead of the QAP-A phase out. “We listened to the industry and our clients, and recognized that there might be a better way to provide a RIN replacement solution,” Olson says. “The economics tell us that there is a place for RIN ‘insurance’ in the market.” Genscape will continue to provide QAP-A and QAP-B services until the programs are phased out and will transition its services to the new Q-RINs for 2015. “If  [the EPA Moderated Transaction System] can accommodate Q-RINs before Jan. 1, 2015, then tagging of Q-RINs may become available before that time,” Olson adds. EcoEngineers says over the next few months, it will work with EPA to test and launch the new version of EMTS, which will qualify Q-RINs and provide the administrative updates required by QAP providers under the new rules, Jones says. 

During 2014-’16, the final rule’s limited exemption excuses 2 percent of an obligated party’s RVO from the requirement for RIN replacement if Q-RINs up to the 2 percent limit later turn out to be invalid. “This appears to be an annual exemption calculated by D-code through 2016,” Olson says. “The 2014 exemption appears to include the entire ‘interim period’ of QAP from Feb. 21, 2013, to Dec. 31, 2014.” According to RINtrust, the exemption is intended to make obligated parties more willing to buy RINs from smaller, less well-known biofuels producers whose RINs might otherwise hold a higher perceived risk than RINs from large producers. “While the voluntary QAP and ‘buyer beware’ market style shifts the financial burden of verifying RINs to the producers, it also helps to level the playing field for small producers,” says Pete Moss, president of Frazier, Barnes & Associates and RINtrust member. “The Q-RIN program gives small producers the ability to demonstrate the validity of their RINs and to compete with larger producers.”

The final rule also establishes minimum requirements for feedstock verification, the verification that volumes produced are consistent with the amount of feedstock processed, and verification that RINs are appropriately categorized.

During the interim period, RINs verified under a preregistered QAP prior to July 2, 2014—the date the EPA issued its final rule—are valid, according to RINTrust; and A and B QAPs can be used to validate RINs until Jan. 1, 2015.

“There are nuances to the new QAP rule,” Player says. “One of the more confusing aspects is the timeline of QAP implementation. If renewable fuel producers want to generate Q-RINs in EMTS on Jan. 1, they need to have passed a QAP A or B audit by that date. Prior to the effective date of the final rule,” which is Sept. 16, 2014, “RINs may be verified retrospectively, but after the effective date, auditors must verify RINs prospectively.” EPA wants QAP providers to review what has happened and anticipate what will happen, Player says. “If a QAP-B audit is completed on Oct. 20 based on activity in the third quarter, RINs generated after Oct. 20 by the producer will be B-RINs until Jan. 1, at which point they will be Q-RINs. The RINs generated before the QAP-B report was issued will not carry with them an affirmative defense or qualify for the limited exemption for obligated parties.”

For biodiesel producers, RIN separation provisions do not change with the final rule. A producer may separate RINs from the corresponding volume of fuel if the party designates the neat renewable fuel or blend as transportation fuel, heating oil or jet fuel; and the neat renewable fuel or blend is used without further blending, in the designated form, as transportation fuel, heating oil or jet fuel.

Exportation of fuel with renewable content, for which the RINs were not retired, has become a major issue and one that EPA has addressed in its final QAP rule. “The EPA has clearly stated it now believes that any export of transportation fuels must have ‘contemporaneous’ proof that the transportation fuels are free of renewable fuels,” says Ramon Benavides, president and founder of Global Renewable Strategies and Consulting LLC. “Otherwise they will be declared as containing renewable fuels. This is a fantastic outcome because, in the event an exporter fails to obtain ‘contemporaneous’ evidence that the exported commodity did not contain a renewable element, then an export RVO is automatically assumed as default at 5 to 20 percent for diesel and a retirement is due in 30 days or less. However, it was not clear regarding gasoline’s CBOB or RBOB, but we believe those values would be assumed by oxygenate blend data and would apply as well. If this were to hold true, then the exports of diesel and gasoline would potentially invoke greater than 1.28 billion gallons of ethanol equivalency demand in addition to retirements for neat renewable fuels. Our initial assessment of EIA data suggests that the exporters will invoke an annual cost of no less than $32 million in additional testing, fees and compliance oversight. Otherwise, the cost through notices of violation would be greater than $250 million. The rule created a win for the renewable fuel sector that many have overlooked.”

Final Perspectives
“We believe the EPA did a good job of strengthening the audit requirements in the rule and streamlining the QAP program so that there are clear lines of responsibility, and all stakeholders can have confidence in RIN markets,” Steckel says. “It is a good rule that is in line with the private-sector protections that have already been put in place since these isolated criminal cases came to light several years ago. Together, this new rule and the private-sector programs offer significant new safeguards against RIN fraud and should ensure that it remains a thing of the past. We look forward to working with EPA on implementing this program.” One thing Steckel says the NBB advocated for but EPA did not include in its final rule is strong bonding requirements on RINs for imported fuels.

“The QAP rule is a reasonable program that appears to be carefully constructed by the EPA in such a way that minimizes potential conflicts of interest by limiting the services that can be provided by a QAP service company,” Moss says. “The final rule accomplishes the goal of protecting buyers and obligated parties without unduly burdening producers. Given the relatively high value of RINs and the underlying potential for fraud, it is imperative that the renewable fuel industry strives to verify all RINs that are generated in a streamlined manner. Even though there is a cost associated with the verification process, both producers and obligated parties benefit from the increased due diligence. Over time, the cost of compliance should decline as a result of process efficiencies and increased competition.”  

“Global Renewable Strategies and Consulting applauds the EPA for completing a complex voluntary Quality Assurance Program for the renewable fuel industry,” Benavides says. “The rule has a solid core for additional compliance and a rigid requirement for affirmative defense as requested by the obligated parties.”

“The QAP rule is a major step towards developing stable RIN markets, and we are very pleased that the EPA has finalized these important rules,” Menon says. “Now there will be standard verification programs for RINs that will mitigate the risks of purchasing RINs of unknown origins. These rules will make the QAP program mainstream and it will become a standard feature of operating a renewable fuel facility.”

“Obligated parties may be incentivized to purchase verified RINs in order to claim an affirmative defense against penalties on A-RINs, B-RINs, and Q-RINs and will receive a limited exemption for small quantities of B-RINs and Q-RINs that they use for compliance purposes,” says Player. “Biofuel producers should be prepared for questions from their customers about their QAP status, and these producers should know that achieving Q-RIN production capability will not happen overnight.” 
 
Author: Ron Kotrba
Editor, Biodiesel Magazine
218-745-8347
rkotrba@bbiinternational.com

 
 
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