After U.S. EPA’s much-anticipated renewable identification number (RIN) quality assurance program (QAP) proposed rule was released last week, biodiesel producers and industry stakeholders at the 2013 National Biodiesel Conference & Expo in Las Vegas eagerly awaited deciphering from the agency’s Byron Bunker, director of the compliance division for the Office of Transportation and Air Quality. Bunker spoke on a panel at the event and answered questions from the audience.

Bunker began by giving an overview of the proposed rule, established to restore confidence in the biodiesel RIN market and provide due diligence after isolated instances of fraud burned obligated parties under the renewable fuel standard (RFS) with notices of violation (NOV), settlement fines and replacement costs, while also freezing the RIN market, hurting U.S. biodiesel producers in the pocketbook over the past year. 

The proposed rule establishes the minimum requirements necessary for any third-party auditor to register with EPA to participate in the voluntary regulated program. “This creates a new class of regulated entities,” Bunker said, adding that would-be auditors must submit their plan to EPA on how they will meet those minimum program requirements. “This is voluntary,” he continued, “and it is meant to leverage existing third-party verification [programs] already out there.” 

EPA’s program proposal provides obligated parties an affirmative defense against civil liability for retiring invalid RINs, and includes three options: Option A, Option B, and the current “buyer beware” approach currently in effect. While both Option A and Option B would provide obligated parties with an affirmative defense against civil liabilities, they differ in which party in the chain would be responsible for replacing any retired invalid RINs if, for whatever reason, the invalid RIN generator (biodiesel producer) themselves were unable to. Bunker said EPA expects both options to be included in the final rule.

Under Option A, if the biodiesel producer were unable to replace invalid QAP-A RINs they generated, the proposal requires the QAP auditor to bear the cost of replacement. Under Option B, the obligated party that retired the invalid QAP-B RINs would be responsible for replacement. 

“Ninety-nine percent of the time we expect it to be remediated by producer,” Bunker said. “This happens today more than people realize,” meaning common reporting errors or innocent mistakes happen, and producers willingly replace any invalid RINs they may have generated.

Option A requires a much more rigorous and comprehensive audit procedure than Option B; the former involves near real-time, ongoing auditing and reporting while quarterly auditing suffices for the latter. Bunker characterized Option A as very robust. “It’s hard to imagine invalid RINs with this kind of oversight,” he said.

QAP-A replacement by the auditor, as the proposed rule exists now, must be backstopped by one or more replacement mechanisms: a RIN escrow account, a RIN bank or a financial instrument.

Bunker said the obligated parties want QAP-A RINs, but noted that QAP-B is less oversight at less cost to the producer.  

There is also a replacement cap for auditors under Option A and a limited exemption for obligated parties under Option B. Option A limits 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. Bunker highly recommended comments in the proposal, particularly on this 2 percent limit. Under Option B, there is a limited exemption for obligated parties (for years 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, Bunker said, to encourage obligated parties to buy RINs again, and if retired, invalid QAP-B RINs are 2 percent or less of their total RVO, he said it’s not worth tracking them down.

Even though the proposed rule was only released last week, Bunker said the start date is Jan. 1. Since no one can be expected to comply to a proposed rule retroactively, he said the QAP provider can do a retrospective audit back to Jan. 1 by auditing the plant’s records. This is a unique situation in that, for this year, EPA is finalizing a proposal but for 2014 forward, the actual final rule, which Bunker said he hopes is out early the second half of this year, will be in effect.

Robert Barton, managing director of agriculture and biofuels for QAP provider Genscape followed Bunker’s presentation, and he said auditing QAP-A RINs requires voluminous amounts of data storage and a system with the ability to scale if they are expected to store the information for five years.

Christianson & Associates CPA Kari Hickman, also on the panel, said there is no change to 2013 attestation requirements, and she anticipates accounting firms could rely on the “QAPer” and conduct documentation reviews of the auditor and verification of engineering reviews rather than doing it themselves, particularly for QAP-A RIN generators, for the sake of efficiency.

If the much more rigorous Option A plan costs biodiesel producers more money, it is logical to expect that QAP-A RINs would command a higher value in the market, but Barton mentioned there is no designation in EMTS, EPA’s moderated transaction system, between QAP-A and QAP-B RINs. The panelists noted it is possible auditors will list for obligated parties which producers are QAP-A, QAP-B or neither, and the obligated parties could make purchasing decisions off that information. Hickman also said the attest costs would be lower for QAP-A RIN generators.

Biodiesel Magazine asked Bunker whether QAP-A RINs would bring more value than QAP-B RINs in order to justify the higher cost of the rigorous Option A audit protocols. “It depends on who you ask,” he said, adding that he is not sure but he would think they would.

Finally, Bunker noted that obligated parties are not required to retire any RINs bought this year until February 2014, when a final rule is in place, which should help provide confidence in purchasing.

Several small producers expressed concerns to Bunker about the possibility of EPA no longer allowing RINs to be separated by the producer because it would be difficult to build their market if local biodiesel buyers have to register with EPA and deal with RINs. Bunker thanked them for their comments and asked them to put it in writing in a formal comment to the proposal for EPA to consider.

Bunker also spoke briefly about exports and EPA’s proposal to tighten the RIN retirement window. He said EPA is proposing labeling and product transfer documents changes to better track biodiesel content in diesel exports. He also said RINs may no longer be invalidated by downstream actions if upon generation the RIN was valid, and certain downstream actions could constitute a violation. An affirmative defense would not apply in these situations.

It was stressed several times that this proposed rule is just that—a proposal—so there may be a lot of unanswered questions yet. Bunker strongly urged stakeholders to provide comments by April 18 to ensure the final rule is as sound as possible.