RFS2 Provisions and Attest Requirements

With RFS2 came a new set of requirements for obligated parties, renewable fuel producers and importers, and RIN owners.
By Wade Watson | September 20, 2010
The U.S. EPA recently issued a revised set of regulations for its Renewable Fuel Standard program. RFS2 took effect July 1, and it expands the previous RFS program beyond gasoline to generally include all transportation fuel.

The RFS program was intended to require a minimum volume of renewable fuel to be used each year in the transportation sector. RFS2 extends the timeframe to increase those volumes to at least 2022. RFS2 also contains other new provisions that require attention this year, provisions that add reporting complexity and influence evaluations various parties will face during the annual attest engagements. Among these provisions is a more encompassing label for transportation fuels covered by the RFS program, which now includes motor vehicle, nonroad, locomotive and marine (MVNRLM) diesel. Also, four separate renewable fuel categories-cellulosic biofuel, biomass-based diesel, advanced biofuel, and total renewable fuel-were created, providing a renewable volume obligation (RVO) for each category. Another aspect of RFS2 is an EPA-moderated trading platform for all renewable fuel transactions; the EPA launched its EPA-Moderated Transaction System, and all renewable fuel transactions occurring on or after July 1 must utilize that platform. It is designed to help eliminate some of the common trading issues that troubled RFS1-trading a 38-digit renewable identification number (RIN) credit. Affected parties that did not register with EMTS by July 1 must register at least 60 days prior to engaging in any transactions involving RINs. Feedstock criteria that defines renewable biomass is also part of the new RFS2 program, along with a redefined RIN D Code, which verifies that feedstocks meet the renewable biomass definition. Life-cycle greenhouse gas (GHG) emissions measures for the four renewable fuel classifications are also new. RFS2 requires that those measures be less than the life-cycle GHG emissions of the 2005 baseline average for the gasoline or diesel fuel it replaces. Grandfathering for renewable fuel from existing facilities is addressed at the time of a party's RFS2 registration.

All attest reports must be submitted to EPA no later than May 31 of the year following the compliance year (e.g., by May 31, 2011 for the 2010 compliance year). Here are the specific new attest requirements.

Annual report For RFS2, an auditor must obtain supporting documentation for all transportation fuel production or import volumes. For refiners, this will probably mean obtaining an inventory reconciliation analysis that includes both gasoline and MVNRLM diesel. The auditor will additionally need documentation identifying any renewable fuel blended with transportation fuel. The auditor will use this information to ensure that no renewable fuel volumes are included in the total production or import volume used to calculate the RVOs.

RFS2 also requires that exporters of renewable fuel designate renewable fuel volumes-in gallons-as being one of the four renewable fuel categories.

RVO For RFS2, the auditor must calculate the RVO for each of the four fuel categories. This applies to obligated parties and exporters. The four RVOs calculated are based on all gasoline and MVNRLM diesel produced or imported on or after January 1, 2010. The auditor must verify that their calculations agree with the values reported to EPA in the annual compliance demonstration report.

RINs used for compliance For RFS2, the auditor must obtain documentation for all RINs used, calculate the total number of RINs used in these documents by fuel category and RIN generation year and compare these totals to those in the annual compliance demonstration report. In comparison to RFS1, the RIN usage calculations for an obligated party or exporter will become much more complex, attributable to the following reasons.

Any 2008 and 2009 biodiesel RINs that were used for compliance in 2009 can be credited towards the 2010 obligation for biomass-based diesel. Obligated parties are allowed to use excess 2008 and 2009 biodiesel and renewable diesel RINs for compliance in 2010, as long as the sum of all previous generation year RINs does not exceed 20 percent of their 2010 obligation, and the 2008 RINs do not exceed 8.7 percent of their 2010 obligation. Also, the volume requirements are generally nested within one another, so that any fuel that satisfies the advanced biofuel requirement also satisfies the total renewable fuel requirement, and fuel that meets either the cellulosic biofuel or the biomass-based diesel requirements also satisfies the advanced biofuel requirement.

Sampling for exporter compliance To assess compliance with RFS2, the auditor must select a sample of batches from each separate category of renewable fuel exported and review the corresponding supporting documentation (invoices, bills of lading and other documentation). The auditor must state whether this documentation refers to exported fuel as advanced biofuel or cellulosic biofuel.

RIN transaction reports RFS2 attest requirements cover RIN transactions reported under RFS1 (form RFS0201) standards, as well as those conducted via EMTS.The auditor must select a sample for each RIN transaction type-purchased, sold, retired, and reinstated-occurring during the compliance year. The auditor must then obtain contracts, invoices or other documentation, as well as the product transfer documents (PTDs) for those samples. The information in those documents is then compared to the transaction reports filed with the EPA, with any exceptions noted.

RIN activity reports For RFS2, the auditor must obtain the supporting documentation used to generate the information in the RIN activity reports and recompute the components reported to EPA, reporting any exceptions. The RIN activity includes transactions conducted via EMTS, as well as those conducted under RFS1 practices, adding to the evaluation complexity.

RIN generation reports Consistent with RFS1, the auditor must obtain and review supporting documentation for all batches of renewable produced or imported during the compliance year. All aspects of RIN generation must be included in review conducted by the auditor. However, a critical component of the auditors review will be ensuring that the proper RIN D Codes have been utilized.

PTDs RFS2 requires the auditor to select a sample of renewable fuel batches produced or imported, review the corresponding PTDs to ensure that they contain all of the required information and verify the accuracy. However, all regulated parties must comply with the PTD requirements listed in the regulations.

Feedstock, biomass considerations For RFS2, the auditor must verify that feedstocks for a producer or importer of renewable fuel meet the definition of renewable biomass. This is done by the auditor selecting a sample of fuel batches produced or imported and obtaining supporting documentation related to feedstock purchases. The EPA offers criteria for defining renewable biomass: planted crops and crop residue harvested from existing agricultural land cleared or cultivated prior to Dec. 19, 2007, and that was nonforested and either actively managed or fallow on Dec. 19, 2007; planted trees and tree residue from a plantation located on nonfederal land (including land belonging to an Indian tribe or an Indian individual that is held in trust by the U.S. or subject to a restriction against alienation imposed by the U.S.) that was cleared at any time prior to Dec. 19, 2007 and actively managed on Dec. 19, 2007; animal waste material and animal byproducts; slash and precommercial thinnings from nonfederal forestland that is not ecologically sensitive forestland; biomass (recent) obtained from the immediate vicinity of buildings and other areas regularly occupied by people, or of public infrastructure, in an area at risk of wildfire; algae; separated yard waste or food waste, including recycled cooking and trap grease, and materials described in RFS2 80.1426(f)(5)(i).

Producers using planted crops and crop residue from existing U.S. agricultural lands are subject to the aggregate compliance approach, and currently do not have to keep records regarding the land's status on December 19, 2007. For these producers, it is important for the auditors to verify that the feedstock documentation reviewed presents a U.S. point of origin.

Engineering review RFS2 requires that the auditor obtain documentation of independent third party engineering reviews. The auditor must then review and verify those records.
RIN transaction reports RFS2 requires listing RIN transactions conducted under RFS1, as well as those completed through EMTS.

RIN activity reports For the RIN activity evaluation, RFS2 requires that an auditor validate RIN separations for RIN owners.

Prepare While many of the compliance elements of RFS1 remain intact, RFS2 brings substantial changes and increased complexity to the RFS program. IT systems must be reconfigured to accommodate the new provisions, such as the four renewable fuel categories and a redefined RIN D Code. Keeping abreast of these and any future RFS developments is essential for attaining and sustaining compliance.

Wade Watson is a certified public accountant and an audit partner in Weaver's Houston office. Reach him at wade.watson@weaverandtidwell.com.
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