More on House investigation of EPA's fraud handling

On May 24 the U.S. House of Representatives’ Committee on Energy and Commerce sent a letter to Lisa Jackson, head of the U.S. EPA, notifying her the committee is investigating the agency over its administration of the renewable fuel standard (RFS2); specifically, its handling of the fraud issue in the biodiesel RIN credit market. Three known cases of RIN fraud have been identified, and investigations into more cases are underway.

The committee has asked EPA to reply with written responses and requested documents to a host of questions regarding its handling of the RIN fraud issue, including its stance on imposing onto obligated parties strict liability for RIN compliance and law enforcement action against good faith purchasers.

Eric Rubury, president of OceanConnect LLC, a RIN brokerage company suing EPA over its handling of the RIN scandal, tells Biodiesel Magazine, “I don’t know where this is taking matters, but from the tone of the letter from the House, it seems that there is growing concern in Congress that the EPA’s approach is causing harm to a worthy program and that this harm could have been completely avoided. I think concern should also be raised regarding the EPA’s assertions that a number of these past issues have been ‘settled’ with various obligated parties, suggesting some measure of closure on reasonable terms. I feel that nothing could be further from reality.”

He says while he doesn’t know why various obligated parties “settled” with EPA, one thing is clear: “the specter of fines of up to $37,500 per day that would have continued accruing had any of the parties challenged EPA.” That comes to $14 million per obligated party over a year’s time. “Regardless of whether a party feels that a settlement offer is fair, business interests must also take into account potential financial exposure should one not accept the offer—and at $14 million, the fine itself would have far exceeded even the unfair settlement demand to simply replace RINs.”

He notes that de facto fines on obligated parties are the entire costs of the replaced RINs, and some “good faith, diligent parties had to replace RINs at upwards of five times the original cost,” Rubury says. Regarding the settlements, he adds, “We hope that the EPA does not point to acceptance of settlement offers as evidence of anh sort of fair-minded, equitable approach it feels that it has taken in these matters. On the contrary, while parties may have settled with the EPA, organizations representing their business interests continue to point to the capricious and arbitrary nature of the EPA in this matter.”

The questions (in some cases paraphrased) the House committee wants EPA to respond to by June 7 follow.  

1) Provide a detailed chronology of EPA’s actions with regard to Green Diesel, including a description of its communication of these actions to the regulated community including but not limited to when and how EPA first learned that Green Diesel’s RINs may be invalid, and when and how it first notified the purchasers that the agency believed Green Diesel RINs were invalid.

a. Did EPA know of the potential invalidity of the Green Diesel RINs prior to the April 20, 2012, settlement agreement with 31 companies?

b. If so, why did EPA wait to issue NOV against Green Diesel until 10 days after the settlement regarding the invalid RINs of Clean Green and Absolute Fuels?

2) Provide registration and/or reregistration applications and materials submitted by Clean Green, Green Diesel, Absolute Fuels and any related companies. Describe EPA’s review and approval process of any such applications.

a. Were engineering reviews and site visits by third parties conducted before approval?

b. Provide all documents submitted to EPA to satisfy these regulatory requirements and all documents related to reviews/visits.

c. Did these companies submit any attestation reports? Please provide.

3) Under the EMTS system is it possible for participants to block transactions with certain RIN producers within the system from which they choose not to purchase RINs? Provide registrations/reregistrations and all documents submitted to EPA as part of these applications for the 10 most frequently blocked registrants on EMTS as of the date of this letter. For each registrant, describe EPA’s application review and approval process.

4) The committee has been informed that there may be additional fraudulent RINs currently in the marketplace. Describe EPA’s plan for managing and investigating the possibility of additional invalid RINs within the RFS program.

a. Are there presently participants in the RFS program under investigation for invalid, fraudulent, or otherwise improper RINs, regardless of whether the investigation is preliminary, partial or complete?

b. If so how many?

c. When does EPA expect to complete any pending investigations of companies participating in the RFS program? When does EPA expect to fully inform impacted parties and the regulated community of its findings?

5) What regulatory approaches would the agency be able to implement so that an obligated party operating in good faith can avoid penalties and/or NOVs under the RFS program as a result of using fraudulently generated RINs? Is a regulatory change necessary? Why or why not?

6) Was EPA statutorily obligated to impose strict liability for RIN compliance or is this a product of EPA’s policy choices?

a. Provide all documents relating to EPA’s decision to impose strict liability for RIN compliance.

7. How if at all does EPA believe that the “buyer beware” approach helps to ensure the reliability of the RINs purchased in the renewable fuels marketplace in the stance of fuel that is produced but is perhaps off-specification?

a. If a RIN purchaser buys RINs from a broker, how can that purchaser obtain the necessary due diligence information regarding the fuel supplier?

b. The RFS program allows separation of RINs from the gallon of biofuel. As a consequence, might a RIN purchaser that exercises due diligence be unable to discern whether a RIN was properly generated and appropriately coded in EMTS?

8. In EPA’s Feb. 23, 2012 response to the committee, the agency invoked low-sulfur fuels as an example of industry participants engaging in due diligence to ensure that the sulfur tolerances of each batch are met. But physical fuel can be inspected and tested by each buyer, while separated RINs cannot. Given that RINs are essentially a currency created under the supervision of EPA, is there an additional obligation on the part of the agency to ensure validity of the RINs?

9. Why has EPA moved forward with enforcement actions against good faith purchasers? Does EPA make any distinction between good faith and bad faith purchasers?

a. Under what circumstances would EPA decide not to bring an enforcement action?

b. On what basis will EPA decide to bring or not bring an enforcement action against a purchaser in the future?