Testimony from congressional hearing on biodiesel RIN fraud
In advance of today's House subcommittee hearing on biodiesel RIN fraud, witness testimony was made available to the public.
Jennifer Case, co-founder of the San Diego-based biodiesel plant New Leaf Biofuel, said the U.S. EPA should finalize every current fraud case from 2011 and swiftly provide the marketplace with information on all fraudulent RINs that are actually in the marketplace. “The sooner that all of the fraud is exposed, the better,” she said. Also, Case said EPA should update the regulations “in a way that creates a process other than a ‘notice of violation’ (NOV) so that obligated parties and others in the chain of RIN ownership can address RIN replacement in a constructive way.”
Case said after EPA’s November announcement that it was pursuing enforcement action against those who fraudulently generated RINs, her business—like nearly every other small and medium U.S. biodiesel producer—changed for the worse. “Overnight, our customers were unable to sell the RINs we attached to our fuel, which meant New Leaf and other small producers lost the ability to sell biodiesel for a competitive price. Nearly eight months later, New Leaf is still struggling to obtain a fair value for the RINs we generate. And although our plant is currently under construction to increase capacity, we have actually had to slow down production due to sluggish sales.”
George A. Sprague, owner of Union County Biodiesel Co. LLC, said, “On Jan. 2, 2012, we were effectively put out of business by the lack of confidence in the EPA’s RIN program. Without the ability of our customers to sell our RINs, we could not sell our biodiesel. UCBC sold only a couple of truckloads of biodiesel in January and February of 2012, and Midwest Biodiesel did not sell much more. We have been facing financial ruin and the closure of our businesses because everyone in the biodiesel industry feared what action the EPA was going take on the innocent participants of the EPA’s own RIN system. By March 2012, we had initiated direct contact with several obligated parties and reestablished some sales of UCBC and MBP RINs. Unfortunately, the sale of biodiesel was extremely slow due to the overall uncertainty in the RIN market and the continued fear of what action the EPA was going to take. As an example, we have one customer who bought a total of 60 million gallons of biodiesel last year from multiple biodiesel manufacturers that decided to not buy a single gallon of biodiesel in 2012 until the RIN crisis is solved and the EPA determines how it is going to penalize the innocent participants in its own RIN system.”
Sprague said while EPA created the moderated transaction system (EMTS) program for tracking and monitoring RIN activity, the agency did not include the necessary program safeguards. He also said EPA allowed RIN separation too early in the process, “which was a major contributing factor to the current fraud situation.” To help solve the crisis, Sprague said obligated parties should be granted presumptive liability. Also, he said independent RIN verification by producers must be endorsed by the EPA, and that no RIN separation should take place until the biodiesel is sold as transportation fuel. Finally, Sprague said that all RINs must be considered valid once verified and entered into the EMTS system by the biodiesel producer.
“This committee, Congress and the EPA must immediately act to preserve the biodiesel industry and to preserve the small to midsized biodiesel manufacturer,” testified Sprague. “The obligated parties and large biodiesel manufacturers can play the waiting game to see what policy transpires, small biodiesel manufactures cannot wait … Our greatest long-term fear is that Congress and the EPA will take a position of inaction or lack of positive corrective action and this course will most certainly doom the vast majority of small and midsized biodiesel manufacturers in our country to a path of elimination and bankruptcy.”
Thomas Paquin, president of VicNRG LLC, said EPA has the flexibility and can use several regulatory approaches to restore confidence. He offered three points for EPA to consider in helping remedy the situation surrounding biodiesel RIN fraud. One, he said EPA should revise its IERP as it relates to invalidity of all pending biomass-based diesel RINs so that no further RIN substitution would be required.
“In fact, 42 USC §7545 (o) (2) (B) (ii), specifically states that the EPA must take into account many factors, to include job creation, and in this case, demanding replacement of RINs is the basis for massive job destruction. EPA must also provide companies with the opportunity to present an affirmative defense to ensure that diligent and blameless companies are not penalized for the acts of others.” Two, EPA should establish a permanent due diligence process and an affirmative defense. “It is a fundamental tenet in American law that there must be, at the very least, the right to prove oneself innocent of an offense,” he said. Finally, Paquin said, “If EPA is unwilling to facilitate any of these remedies, it should consider whether a petition to waive the RFS would be appropriate in these circumstances.” He said given the fact that RIN fraud is costing hundreds of millions of dollars, not to mention forcing small biodiesel producers and petroleum distributors out of business, the “severe harm threshold” to the economy may have already been met.
“These assertions and requests are not made lightly but only because of the dire consequences caused by the current enforcement policy,” Paquin said. “We believe our immediate and short-term solutions of modifying IERP, eliminating replacement of RINs for good faith purchasers, and the opportunity for affirmative defense is the foundation necessary to save the system, its associated investments, and, ultimately, jobs in a struggling U.S. economy. Anything other than that will only serve to reduce the effectiveness of the RFS program, as liabilities are much too significant for all but the largest industry participants. We stand ready to assist and contribute to find a solution to this critical problem.”
J.P. Fjeld-Hansen, managing director of Musket Corp., said the issue of biodiesel exports is “considerably larger” than the identified cases of RIN fraud and their effect on the biodiesel industry. “Musket believes there are many who are exporting biodiesel, either blended as a diesel blend, blended into heating oil and bunker fuel, or as straight B100 and are not declaring their obligation to retire/buy RINs pursuant to §80.1430 of EISA,” he said. “Internally, we refer to this practice as ‘strip and ship.’ Currently there is no economic incentive to export biodiesel to Europe if the rules are properly followed. Freight costs to ship to Europe plus the countervailing duty make biodiesel substantially more valuable to blend and use in the U.S. However, if an exporter strips the RINs from the physical gallons of biodiesel, sells those RINs to the market, and ships the biodiesel overseas without retiring or buying back RINs as required under the rules, an exporter can make a substantial profit.”
Although the statute mentions only gasoline and diesel blend exports specifically, he said, “We believe many people have exploited the lack of specificity in regard to heating oil blended with biodiesel and have exported a significant volume of biodiesel without declaring an obligation to retire the RINs in blatant contravention of the spirit and purpose of the RFS. Since these exporters are not buying RINs back from the market, an excess of RINs are left depressing the price of RINs and threatening the existence of small biodiesel producers and undermining the entire purpose of EISA.”
Fjeld-Hansen said while some may ignore the impact of biodiesel exports on the market because U.S.-based biodiesel plants benefit by making the additional gallons, his company believes this practice threatens all U.S.-based biodiesel producers in the medium and longer term.
“Musket suspects that a substantial volume of biodiesel has been exported since January 2011 for which no obligation has either been declared and/or satisfied through the purchase of RINs,” he testified. “Foreign producers are already approved to make biodiesel with RINs, and many more have applied for approval. Without effective policing of exports, RFS2 will increasingly become a foreign produced/foreign consumed program. Foreign produced biodiesel will make but a brief stop in our ports only for the purpose of stripping and selling the RINs.”
He offered three “common sense changes” for Congress to consider. One, require RINs to be retired immediately upon export of biodiesel and renewable diesel; two, require the EPA to coordinate monitoring and enforcement actions with U.S. Customs and Border Protection and the U.S. DOE on exports of biodiesel, diesel containing biodiesel, and heating oil containing biodiesel; and three, require all sellers of diesel sold in the U.S. to disclose the biodiesel content.
“Under the current ASTM standard, wholesalers and retailers are not required to disclose biodiesel content up to 5 percent,” he said. “This frustrates upstream buyers, blenders and ultimately truck owners. Accordingly exporters of ASTM diesel may not know they are exporting biodiesel and thereby creating an obligation to retire RINs. We believe that if these changes are made, the true intent of the EISA will be upheld and the U.S. biodiesel industry will remain vibrant.”
National Biodiesel Board CEO Joe Jobe said, “Overall, we think the EPA has done an adequate job enforcing the regulation, and we encourage the EPA to continue enforcement actions so that the handful of bad actors who have disrupted the biodiesel marketplace are removed from the system and punished.” He said RFS is a relatively new program, and strong enforcement will motivate would-be criminals to keep on the straight and narrow.
“The only good news with these cases is that the scam has now come to light and will be very difficult to repeat going forward,” Jobe said. “In fact, the RIN fraud we’re discussing today is from previous years, and the private sector is already working with EPA to address it.” Jobe added that the current RIN fraud issues took place in 2009-’11. “In 2012, obligated parties have done what they should have been doing in 2009, 2010 and 2011,” he told Congress. “They have been inspecting and requiring audits of the biofuel producers from which they purchase biodiesel and RINs. In essence, the Wild West of buying and selling RINs from market participants you don’t know has ended, the wrongdoers are being rooted out, and everyone now knows that the deals that are too good to be true are in fact too good to be true.”
He said in the second half of 2010, 7.1 billion RINs were generated, of which EPA has indicated approximately 32 million, or less than one-half of 1 percent, should not be used for compliance purposes. In 2011, 15.4 billion RINs were generated by biofuel producers, of which the EPA has indicated approximately 108 million, or less than 1 percent, should not be used for compliance purposes.
“In 2012, we anticipate nearly an identical number of RINs will be generated as in 2011, and thanks to better due diligence that has been put in place by the private sector and EPA’s continued enforcement efforts, we anticipate nearly zero fraudulent RINs being generated,” Jobe said. “The private sector has great responsibility in discovering fraudulent RINs. NBB’s RIN Integrity Task Force helped support the development and deployment of a comprehensive auditing and real-time monitoring program that is being launched now to give the market restored confidence in any biodiesel producer that is participating in the program. This third-party, private-sector response has come together with impressive speed and innovation, and we are confident that it will be effective in preventing improper transactions and restoring liquidity to the RIN markets … Currently there are more than 70 registered biodiesel producers and 15 obligated parties who have signed up to discuss this service with Genscape.”
With numbers presented differently than Jobe’s, Charlie Drevna, president of the American Fuel and Petrochemical Manufacturers Association, said 140 million fraudulent RINs constitutes between 5 and 12 percent of the biodiesel RIN market to date. “EPA’s handling of the fraud was concerning in several ways,” Drevna said. “After first getting a tip that Clean Green Fuels (the first fraudulent producer) was not producing biodiesel and after visiting the producer’s site to confirm, it took EPA more than a year to inform obligated parties. In the meantime, obligated parties unknowingly purchased millions of fraudulent RINs. After announcing that Clean Green Fuels RINs were invalid, EPA informed obligated parties that they had 14 days to replace invalid RINs and subsequently issued Notices of Violations to 24 obligated parties for violating the Clean Air Act, effectively punishing the victims of the fraud. The same situation was repeated when a second producer, Absolute Fuels, was found to be producing fraudulent RINs.” Drevna said despite multiple requests from obligated parties, EPA has declined to identify any due diligence steps that would, at minimum, provide an obligated party legal protection if they unknowingly purchase an invalid RIN. “Again, this ‘buyer beware’ policy amounts to punishing the victims of fraud.”
EPA’s Byron Bunker and Phillip Brooks testified that EPA believes the discussions so far have resulted in a number of promising options for consideration, including a proposal to establish a third-party verification system to help industry participants ensure that RINs are valid.
“EPA understands the seriousness and urgency of the fraudulent RIN issue and has been diligently working with industry to alleviate uncertainties in the renewable fuels market for obligated parties and producers alike. Our goal now is the same as it has always been—successful implementation of the program established by Congress in 2007 under EISA. We are working closely and continuously with industry and other stakeholders to explore all options that could improve implementation of the RFS program. We are committed to taking action to make necessary adjustments to the program in a timely manner.”
Eric Rubury, president of OceanConnect, a RIN broker that has a pending lawsuit against EPA on these matters, told me, “Our continuing concern is an unrealistic belief perhaps among industry and agency participants is that there is a solution forward that doesn’t necessarily seek to fully resolve the outstanding problems of the past. Unless the EPA is willing to adjust its approach—which punishes innocent and diligent market players—there is no reason to assume that those players will return to the marketplace. Financial intermediaries, such as OceanConnect LLC, which were critical in aggregating RINs from smaller producers in order to provide a market for them and to meet the needs of large obligated parties, are no longer active in the market, depressing any liquidity that was needed by the smaller biodiesel producers. Moreover, the EPA continues to feel that it bears no responsibility in this catastrophe … It is depressing to think that a government agency feels that it has no responsibility whatsoever to protect its program and the public and simply returns to the increasingly indefensible platitude of 'buyer beware.'"