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The renewable fuel, RIN 'custody' debacle

With the addition of the word custody in a proposed EPA amendment to the sulfur rule, confusion abounds as concerned parties speculate the number of required RFS registrants could double or triple as a result
By Ron Kotrba | April 08, 2015

In February, the U.S. EPA proposed technical amendments to the “sulfur rule” (Tier 3 Motor Vehicle Emission and Fuel Standards, Nonroad Engine and Equipment Programs, and MARPOL Annex VI Implementation: Direct Final Rule 40 CFR Parts 59, 80, 85, 86, 600, 1037, 1043, 1051, 1054, 1060, 1065, and 1066) that may have big, adverse impacts on the renewable fuel standard (RFS) program. While several technical amendments were made, the change discussed here is to CFR Part 80.1453 and the addition of one word: “custody.”

“The big elephant in the room,” says Ramon Benavides, president of Global Renewable Strategies and Consulting, “is whether or not any person that has custody of a renewable fuel with K-1 RINS would have to be registered as a RIN owner and subject themselves to the program.”

If this is the case, Benavides says the RFS program may double or triple in size. In his company’s negative public comment to EPA on the proposed amendments, he says government data shows that there are 539,000 interstate carriers in the U.S.

“It is impractical to think that all of these would be parties in the program,” he wrote to EPA. “However, it is possible that 1 percent of that number, or 5,390, could be custodial parties. This would imply that with the advent of interstate carriers only, the RFS program could nearly double in size because of this requirement.”

“To further complicate the matter, it is not clear if a party that has custody and the actual party that has title would have to issue two product transfer documents (PTDs) that signify custodial changes and ownership changes,” Benavides tells Biodiesel Magazine. “This would have significant impact especially to pipeline operators and blenders. A single transaction could have three PTDs—two for custodial changes and one for ownership change.”

Benavides says the custodial entity would have to create a PTD signifying a change in custody at point of transfer. “Clearly, this could be disastrous,” he says.

Confused yet? Naturally. This is complicated stuff. In fact, Benavides says at first glance, this was overlooked by his legal counsel.

“Since this proposed rule and final rule were issued on the same date, one would have missed this amendment,” he says. “Even our legal counsel missed this aspect and she stated, ‘I had seen the notice, but wasn’t aware EPA included RFS amendments.’”

The proposed rule does provide an exemption from issuance of a PTD for neat or blended renewable fuels dispensed into several types of systems. “However,” Benavides says, “it must be noted that the exemption is for issuance and not creation. If a renewable fuel is sold, a PTD is created because it is a RIN generation requirement to have a designation on a PTD. Failure to create a PTD for volumes sold, and the generation of a RIN would be a RIN generation violation. Clearly, this is a prohibited act.”

It is not certain under the rule how the EPA will categorize the word custody, according to Benavides. “As it is now, all parties are required to issue a PTD to signify a transfer of ownership has occurred when a renewable fuel with K-1 RINs are attached,” he says. “This is known as a sell transaction in the EMTS system and requires a recording of the transaction in EMTS. It is not clear if a custodial change will have the same effect. These transaction types require all persons that touch K-1 RINS to report the transactions for tracking purposes. It also requires all parties to be registered.”  

The intended outcome of this amendment was to streamline all fuels programs with similar language. This, according to Benavides, was an area that was considered inconsistent with other programs.

So how can something intended to do good have such a negative impact? “My opinion is this was not well thought out, especially since the EPA comments are less than one paragraph and only stated that the amendment was for alignment with other programs,” Benavides says. “While there are other credit programs, the other programs are not burdened with significant guidance on how to conduct transactions or events.”

If the rule becomes final and the renewable fuel producer engages in this type of transaction, Benavides says he then sees the need for the renewable fuel producer or importer to have clear language that limits liability and burden of risk wherever possible.

“Regardless, the final consideration lies in the prohibited acts that indicate no person can cause harm to the parties,” he says. “In a nutshell, all parties are responsible to each other, and this becomes complicated when adding custodial persons that are not registered parties.”

Still confused? I asked Benavides to provide a hypothetical scenario of how this proposed amendment might affect the business dealings of potential Biodiesel Magazine readers. Here’s what he had to say.

“Let’s say the party is an importer, the imported biodiesel is cleared and all criteria is met for RIN generation. Up until the QAP rule, this was normally five business days after all final verifications. Today, that practice is not allowed because there must be a designation on a PTD. A PTD can only be issued upon the ‘transfer of ownership.’ This implies that if RINs are generated under the past practice, then under the supervision of a QAP, a potentially invalid RIN (PIR) event may have occurred. If the party is not QAP then a RIN generation violation may have occurred. Let’s call this this first liability of $37,500.

“Now this importer sells the biodiesel but the title transfer does not occur until arrival at the purchasers destined facility. This would mean that the transporting entity would now have custody of the biodiesel. Thereby, a PTD that signifies that the fuels and RINs is created and issued for the custodial transfer. It is possible to withhold the K-1 RINs and issue them with a final PTD to the purchaser. However, depending on the timing of the custodial transfer, this could cause a RIN retention event that could be construed as a violation of the rule. Let’s call this the second violation $37,500 per day.

“This also incurs a transfer violation and the famous cause [of] another violation. Let’s add $75,000 per day.

“This implies that all freight carriers, regardless of modality, involved in supporting these transactions are now custodial agents and would need to have PTDs issued to them, and the PTD originator would have to track the shipment until arrival at the new location and then issue a final PTD that signifies a ‘transfer of ownership.’  Further, a custodial change at destination dictates a PTD is required from the transporter. If they fail to issue a PTD, then this may be violation of the rule. It is interesting to note that a failure to issue a PTD is not a direct prohibited act unless it is a PTD used to generate RINs.

“It is important to understand that the parties in these type of transactions—purchaser, transporter and seller—must know the timing and volumes delivered to accurately record the transaction in EMTS and reconciliation of volumes and associated RINs to avoid improper reporting, which is another violation.

“This would also apply to any renewable fuel producer that engages in a transaction that the title transfer is freight on board (FOB) destination.”   

Benavides says this small but profound change—the addition of the word “custody”—would indicate to him and his colleagues that a PTD is required even when there is not a sell or buy transaction. Ultimately, it comes down to how EPA categorizes the term in relationship to the RFS program.

“Simply stated,” Benavides says, “the addition of the word ‘custody’ overwhelmingly adds confusion, risk, liability and imposition of civil penalties while attempting to meet other program requirements.”

Funny how the addition of one word to streamline and sync regulations can cause utter confusion and chaos—that’s our government at work, ladies and gentlemen.