Biodiesel producer settles alleged major RFS violations

Hear the 30 MMgy Iowa-based biodiesel producer Western Dubuque Biodiesel's side of the story on its settlement with the government over some serious RFS and RIN violation allegations
By Ron Kotrba | October 04, 2016

U.S. EPA and the justice department announced Oct. 4 the filing of a complaint against NGL Crude Logistics LLC and the 30 MMgy Farley, Iowa-based biodiesel producer Western Dubuque Biodiesel LLC, and a settlement with Western Dubuque to address alleged violations of the renewable fuel standard (RFS).

The complaint, filed in the U.S. District Court for the Northern District of Iowa in Cedar Rapids, Iowa, alleges that in 2011 NGL entered into a series of transactions with Western Dubuque that resulted in the generation of about 36 million invalid RINs. 

The alleged offender that EPA claims engaged in questionable transactions with Western Dubuque in 2011 was actually Gavilon LLC, which was acquired by NGL in December 2013.   

The government’s complaint alleges that in 2011, NGL purchased more than 24 million gallons of biodiesel on the open market. Since one gallon of biodiesel generates 1.5 D4 RINs, most of the 36 million RINs generated by that biodiesel were sold by NGL to other entities. The government alleges NGL then sold the biodiesel to Western Dubuque, but designated it as a feedstock. Western Dubuque reprocessed the biodiesel provided by NGL and generated a second set of RINs for the same fuel. Western Dubuque sold the reprocessed biodiesel and the second set of RINs back to NGL. NGL then sold most of these invalid RINs to other entities.

Here is Western Dubuque’s side of the story.

“In late 2010 and early 2011, a third party initiated discussions and negotiations with Western Dubuque regarding the commercial transactions that resulted in generation of the allegedly invalid RINs,” the company said in a statement provided to Biodiesel Magazine. “Under the commercial arrangements in 2011, that third party supplied to Western Dubuque a product that the third party described as a ‘methyl ester’ feedstock. Western Dubuque processed the methyl ester feedstock at its facility to meet the third party’s specifications and Western Dubuque then supplied the processed product back, receiving a modest production fee. Western Dubuque did not market the RINs created; those RINs all transferred to the third party. Western Dubuque received assurances from the third party that it had secured legal review of the proposed commercial transactions, including review of the validity of any resulting RINs. Western Dubuque consulted with an individual expert associated with its trade association before entering into the transaction.”  

EPA said it learned Western Dubuque used improper feedstocks during a 2011 inspection of the company’s biodiesel facility, after which the agency conducted an extensive investigation into transactions between Western Dubuque and NGL. EPA determined the feedstocks NGL supplied to Western Dubuque were biodiesel, which is not a permitted feedstock, and that other companies had already generated RINs for the product. Western Dubuque informed EPA that it has not used biodiesel as a feedstock since 2011.

Western Dubuque said it signed a consent decree with EPA on Sept. 16 in which it agrees to pay a civil penalty of $6 million related to the invalid RINs generated in 2011. As part of the settlement, Western Dubuque did not admit that any violations actually occurred related to the RIN program. “This was a civil dispute concerning feedstock rules,” the company said. “Western Dubuque Biodiesel believes it followed sound business steps in 2011 to evaluate the RIN-eligibility question.” The company concluded, however, that a settlement was in its best interests. “We are happy to have this matter resolved,” the company stated.

The $6 million will be paid in three installments. The first installment for half the total is due within 30 days after the consent decree goes into effect. The second installment, a $2 million payment, is due within a year; and the third and final payment of $1 million is due within two years.

The consent decree does not resolve any claims against NGL. Biodiesel Magazine reached out to NGL for comment but the firm had not responded by the time of publication.

The complaint asks the court to require NGL to retire 36 million RINs to offset the harm caused by the alleged violations and to pay a civil penalty.

Western Dubuque Biodiesel’s General Manager Tom Brooks, who also serves as the new chair of the Iowa Biodiesel Board and outgoing chair of the Iowa Renewable Fuels Association, told Biodiesel Magazine he could not comment on whether Western Dubuque Biodiesel is suing, or plans to sue, NGL for actual and punitive damages as a result of the events that led to the complaint and settlement.

The Farley, Iowa-based biodiesel producer said it settled with the federal government because “litigation always has risks and would be disruptive to our current business. Settling allows us to make clear to customers that this relates to events five years ago and, thus, need not have any bearing on our current product. We wanted to ensure that customers have full confidence in our product purchased in 2012 through 2016 and 2017.”

Executive director of the Iowa Biodiesel Board Grant Kimberley told Biodiesel Magazine, “It’s our understanding that this was a civil dispute concerning interpretation of feedstock rules when the RFS was still relatively new. Western Dubuque Biodiesel has proven itself to be an outstanding member of the biodiesel community, contributing to economic growth in the state of Iowa. We will continue to support General Manager Tom Brooks as our chair, who has become not only a state leader within two Iowa associations, but also a national leader with the national trade association. We hope the company can now put this matter behind it and move forward in continuing to provide America’s advanced biofuel.”

Western Dubuque stated it has not entered into any such transactions with this third party since 2011, and it has not used the same “methyl ester” feedstock in question. Also, the company is now operating under a RIN Quality Assurance Plan to help ensure validity of its RINs, a program that was not available in 2011.

The settlement with Western Dubuque is subject to a 30-day public comment period and final court approval.

U.S. Attorney for the Northern District of Iowa Kevin W. Techau said, “The Department of Justice is committed to maintaining the integrity of the RFS program. Congress enacted incentives for the production of biofuels to make the U.S. stronger and more energy independent. This $6 million settlement supports that goal.”

The relevant RFS regulations have since been amended to make the EPA’s position clearer related to a transaction such as this, Western Dubuque noted.    

This was the second such settlement of alleged RFS and RIN violations in the past week, as on Sept. 29 a settlement was lodged between the federal government and Chemoil Corp. The government alleges that Chemoil exported at least 48.5 million gallons of biodiesel from 2011 to 2013, but failed to retire the more than 72 million RINs that were generated for the exported fuel.