Print

Can QAP Audits Lead to an EPA Safe Harbor?

Quality Assurance Program, or QAP, audits can provide biodiesel producers an opportunity to reduce their renewable fuel standard (RFS) penalty exposure. A strategic use of EPA's Small Business Compliance Policy is worth understanding and considering.
By Graham Noyes | January 07, 2014

The renewable fuel standard (RFS) administered by the U.S. EPA has always presented a double-edged sword to biofuel producers. On the upside of the sword, renewable identification number (RIN) credits are a valuable commodity, worth billions of dollars annually. On the downside, compliance with the RFS regulations is a daunting task, with each violation creating a penalty exposure of $37,500 per day. Strict liability permeates the RFS program such that even a company’s vigilant and good faith efforts to comply do not forge an effective shield against EPA enforcement.

The EPA’s recent decision to establish a quality assurance program (QAP) could provide some welcome relief. As described elsewhere, the proposed QAP system provides an affirmative defense to market participants under specified circumstances. QAP audits could also provide producers with an opportunity to reduce their RFS penalty exposure. This could be particularly valuable to companies that discover they have unknowingly committed minor but persistent violations of RFS regulations. While not a universal solution, the strategic use of the EPA’s Small Business Compliance Policy is worth understanding and considering.  

The QAP system is voluntary, but EPA expects that most RINs purchased and used for compliance purposes will be QAP-verified. Auditors must obtain approval from EPA to provide QAP services. Upon approval, the auditor must verify RINs in accordance with the requirements of the EPA-approved QAP. Producers choosing to have their RINs verified must provide the auditor with access to personnel, records and information. The QAP audits entail a more intensive third-party review of a facility’s RFS compliance profile than do attestations. As a result, some QAP audits are likely to reveal specific events of RFS noncompliance to facility managers.

In EPA parlance, the QAP audit may constitute a voluntary discovery of violation that provides the company with an opportunity to self-disclose and receive a penalty reduction. To qualify as a small business, the business must be one that employs 100 or fewer individuals across all facilities and operations that the business owns (i).  Under the policy, the qualifying business must also: (1) voluntarily discover the violation, (2) promptly disclose the violation within the required time period of 21 days, and (3) expeditiously correct the violation within the proper time frame. To obtain the benefits of the policy, the facility must also meet criteria on violation history, lack of harm, and criminal conduct (ii).  Late disclosure may be permissible in exceptional cases where there are complex circumstances. However, in our experience, EPA construes the policy narrowly, insists that the time frame be met, and only provides penalty relief for the violations specifically disclosed in writing.  

If all criteria are met, the EPA will waive 100 percent of the gravity component of the civil penalty. EPA’s calculation of penalties includes two components: the gravity component and the economic benefit component. The economic benefit component is the direct economic benefit that a company received as a result of not complying with the regulatory requirement. In the case of failing to file a particular type of report, the economic benefit would be the savings of not having to pay someone to prepare the report. In the case of generating RINs for biofuel not produced, the value of the RINs sold would be included as economic benefit. Distinct from the penalty, EPA typically requires injunctive relief, such as retiring valid RINs to replace invalid RINs. Thus the penalty should not be regarded as the only cost exposure that a company has in an EPA enforcement proceeding. Nonetheless, it is the gravity component that typically constitutes the lion’s share of the overall penalty. 

Note that this article is intended to make producers aware of the policy, but is not provided as legal advice that any company follows a particular course of conduct. In the event a potential RFS regulatory violation is discovered through a QAP audit or other means, it is recommended that counsel be consulted immediately. The 21-day time period of the policy is very short. Even if the company’s attorney is not familiar with the RFS regulations, the involvement of an attorney enables the attorney-client privilege to provide confidentiality while the company determines the appropriate remedial action. 

i http://www.epa.gov/compliance/incentives/smallbusiness/index.html
ii Id. 

Author: Graham Noyes
Attorney, Stoel Rives LLP
916-319-4675
jgnoyes@stoel.com

 

0 Responses

     

    Leave a Reply

    Biodiesel Magazine encourages civil conversation and debate. However, comments containing personal attacks, profanity, business solicitations or other advertising will be deleted.

    Comments are closed

 
Array ( [PATH] => /sbin:/usr/sbin:/bin:/usr/bin [PP_CUSTOM_PHP_INI] => /var/www/vhosts/biodieselmagazine.com/etc/php.ini [FCGI_ROLE] => RESPONDER [REDIRECT_REDIRECT_PP_CUSTOM_PHP_INI] => /var/www/vhosts/biodieselmagazine.com/etc/php.ini [REDIRECT_REDIRECT_STATUS] => 200 [REDIRECT_PP_CUSTOM_PHP_INI] => /var/www/vhosts/biodieselmagazine.com/etc/php.ini [REDIRECT_STATUS] => 200 [HTTP_HOST] => biodieselmagazine.com [HTTP_X_REAL_IP] => 54.227.141.230 [HTTP_X_FORWARDED_FOR] => 54.227.141.230 [HTTP_X_ACCEL_INTERNAL] => /internal-nginx-static-location [HTTP_CONNECTION] => close [HTTP_ACCEPT_ENCODING] => x-gzip, gzip, deflate [HTTP_USER_AGENT] => CCBot/2.0 (http://commoncrawl.org/faq/) [HTTP_ACCEPT_LANGUAGE] => en-us,en-gb,en;q=0.7,*;q=0.3 [HTTP_ACCEPT] => text/html,application/xhtml+xml,application/xml;q=0.9,*/*;q=0.8 [SERVER_SIGNATURE] =>
Apache Server at biodieselmagazine.com Port 80
[SERVER_SOFTWARE] => Apache [SERVER_NAME] => biodieselmagazine.com [SERVER_ADDR] => 64.207.180.117 [SERVER_PORT] => 80 [REMOTE_ADDR] => 54.227.141.230 [DOCUMENT_ROOT] => /var/www/vhosts/directory.biodieselmagazine.com/httpdocs/biodieselmagazine.com [SERVER_ADMIN] => jkeller@bbiinternational.com [SCRIPT_FILENAME] => /var/www/vhosts/directory.biodieselmagazine.com/httpdocs/biodieselmagazine.com/app/webroot/index.php [REMOTE_PORT] => 44415 [REDIRECT_QUERY_STRING] => url=articles/9498/can-qap-audits-lead-to-an-epa-safe-harbor [REDIRECT_URL] => /app/webroot/articles/9498/can-qap-audits-lead-to-an-epa-safe-harbor [GATEWAY_INTERFACE] => CGI/1.1 [SERVER_PROTOCOL] => HTTP/1.0 [REQUEST_METHOD] => GET [QUERY_STRING] => url=articles/9498/can-qap-audits-lead-to-an-epa-safe-harbor [REQUEST_URI] => /articles/9498/can-qap-audits-lead-to-an-epa-safe-harbor [SCRIPT_NAME] => /app/webroot/index.php [PHP_SELF] => /app/webroot/index.php [REQUEST_TIME] => 1397937129 )