Another billionaire bailout?

Source: By Brooke Coleman, Bloomberg Government • Posted: Monday, August 29, 2016

When Carl Icahn talks about markets, people listen. So when the Wall Street billionaire called the renewable fuel credit markets that underpin the federal Renewable Fuel Standard (RFS) “rigged” and threatened to get political with SuperPAC money to make the point, it didn’t go unnoticed.

Icahn’s ask is pretty simple. He wants the EPA to change the rules midstream to relieve his petroleum refining assets of their obligations.

In threatening to wage a public relations war on the RFS, it’s safe to say that Icahn is accustomed to imposing his will. His reputation as a “corporate raider” precedes him. But bullying the EPA is different than using personal wealth to raid a corporation.

Generally speaking, EPA rules are not designed to be appreciated by those they regulate. The RFS, for its part, requires petroleum companies like Icahn’s CVR Refining to blend more renewable fuel, reducing dependence on foreign oil. The result has been cleaner and cheaper American-made fuel choices for consumers at the pump.

It’s safe to say the oil industry doesn’t like the program. But, incredibly, the RFS actually establishes a clear path for oil companies to profit from RFS implementation.

Every gallon of RFS-eligible renewable fuel produced has a single credit attached to it, called a RIN. Companies like CVR must retire RINs with the EPA to show RFS compliance, procured either by purchasing renewable fuel with an attached RIN or by buying RINs on the open market. But because every gallon of renewable fuel secured has a RIN attached, oil companies buying and blending more renewable fuel have RIN surpluses to sell at a profit to companies short on RINs.

If the oil industry as a whole refuses to blend more renewable fuel, RIN prices rise on increased demand. When RIN prices rise, the financial incentive to buy and blend more renewable fuel – to sell surplus RINs – increases too. Companies such as BP Plc and Hess Corp. have reported profits from procuring renewable fuel and selling RINs to companies short of them. That’s not a bug. It’s how the program works.

The crux of Icahn’s argument is that small and mid-sized refiners are ill-equipped to protect themselves from RIN exposure by blending more renewable fuel. The problem with that argument is that other merchant refiners are doing what Icahn says cannot be done.

Western Refining and PBF Energy, for example, made investments in downstream biofuel blending capacity to capture higher RIN values years ago. Just last month, Valero’s CEO Joe Gorder told investors that the “obvious operating strategy” for reducing RIN costs “is to find ways to blend more [biofuels].” It appears Valero has done exactly that by acquiring terminal services just this week that will give the refiner more capacity to store and blend biofuels.

Icahn and his petroleum company assets are not stuck. They are just making a different bet.

There is more than a little irony in Icahn’s demand for EPA to bail him out. Icahn is going out of his way to wrap his demand in politics. While excoriating the RFS, he threatened to launch a SuperPAC to make the point and celebrate Donald Trump as the regulation-slashing president we need. Except, Trump openly supports the RFS. (As an aside, it’s unclear how the current president, who presides over EPA decision-making, will be impressed by that.)

Mark Cuban, on the other hand, should be getting a kick out of this. Cuban and Icahn have been engaged in a Twitter feud over excessive regulation in the context of the presidential race. Cuban noted the irony that while railing against regulations, Icahn invests in and profits from heavily regulated markets, including energy. Now facing his mistakes (or recalcitrance) within a clearly outlined regulatory construct, Icahn wants a rule change.

Icahn’s mission to change the RFS is an extreme long shot. But the stakes are high. Tens of billions of dollars in private capital have been invested into producing low-carbon biofuels, based on the current rules. While Icahn seems to have ignored the law, other refiners prepared for it or moved quickly when RIN prices predictably rose.

But let’s not forget about the bigger picture: If regulators buckle and change the rules on this program, how are clean-energy investors supposed to respond to EPA now saying “trust us” about the Clean Power Plan?

Bloomberg Government regularly publishes insights, opinion and best practices from our community of senior leaders and decision-makers. This column is written by Brooke Coleman, executive director of the Advanced Biofuels Business Council.