Companies that bought fake renewable credits fault EPA for lack of warning

Source: John McArdle, E&E reporter • Posted: Friday, July 13, 2012

One thing that has particularly irked companies that were taken in by a recent high-profile scam involving the peddling of fraudulent renewable energy credits on the biodiesel market is the fact that U.S. EPA knew about the scam for more than a year before it told buyers about it.

Oil refiners and other obligated parties that purchase the renewable fuel credits to satisfy government mandates have questioned why EPA didn’t provide them with a heads-up about the green energy scheme sooner.

At a hearing yesterday of the House Energy and Commerce Subcommittee on Oversight and Investigations about the ongoing uncertainties in the biodiesel marketplace, Phillip Brooks, head of EPA’s Air Enforcement Division, offered an explanation.

Brooks told committee members that after EPA inspectors first visited the Maryland-based Clean Green Fuel company in July 2010, the agency knew it had a criminal case on its hands. At that point, the civil division turned the case over to criminal prosecutors and the Department of Justice stepped in.

“Criminal takes the lead when there are concerns about flight risk, destruction of evidence and seizure of assets, and so in this case all of those things were in play,” Brooks explained. “They asked us to hold off” on disclosing the fraud.

Clean Green Fuel owner Rodney Hailey was charged in the case in October 2011. Last month, he was found guilty of selling $9 million worth of fake renewable fuel credits, which are represented by unique 38-digit Renewable Identification Numbers (RINs) that are tied to gallons of biodiesel (E&ENews PM, June 25).

In what appears to be a similar situation, EPA announced a second fraud case this February. EPA and the Secret Service began investigating the company at the center of those charges in March 2011.

In all, EPA has accused three companies of faking about 140 million renewable fuel credits worth $150 million.

But EPA’s slow-wheels-of-justice defense isn’t likely to soothe the anger of the company officials who have been fined for purchasing those fake credits.

Supporters of EPA on the committee noted yesterday that the RIN trading system was, at the request of industry and producers, set up as a “buyer beware” market that puts the responsibility on purchasers to ensure that the RINs they buy actually represent biodiesel that had been created.

But Charles Drevna, president of American Fuel & Petrochemical Manufacturers, argued yesterday that EPA was unfairly penalizing the victims.

“During its investigation, EPA issued no indication to obligated parties that they may be buying invalid RINs” from Clean Green Fuel, Drevna said. “In fact, EPA stood by while obligated parties accessed [EPA Moderated Transaction System] data and continued to purchase Clean Green RINs that EPA knew were invalid.”

Rep. Brian Bilbray (R-Calif.) asked Brooks whether EPA has some obligation to go back and “cut some slack” to companies that were purchasing invalid RINs at the time EPA and DOJ were conducting their investigation.

“I am concerned that there might be a mindset of ‘Let’s crucify one guy on the front gate, and anybody who would try to buy these bogus things purposely would be scared to death,'” Bilbray said.

But Rep. Henry Waxman (D-Calif.), the ranking member of the full Energy and Commerce Committee, was less sympathetic to those who bought the bogus RINs.

When setting up the biodiesel credit market, “EPA consulted extensively with industry stakeholders and chose the approach with less government involvement,” Waxman said.

“The petroleum refiners’ trade association endorsed this approach. But that flexibility for industry carried with it an important and clear responsibility: The oil refiners and other obligated parties had to ensure that they were using valid credits to comply with the law.”

Brooks said EPA sought to find a middle ground after the extent of the fraudulent RIN purchases was revealed.

“We met with everybody. … We talked about the circumstances,” he said. “What we learned was that the vast majority did not do any due diligence.”

Still, Brooks said, EPA decided to levy penalties for the fraudulent RIN purchases that were far below what the agency could have hit the buyers with.

Today, Stephen Brown, a lobbyist for Tesoro Corp., one of 24 companies that received a violation notice for purchasing fake credits from Clean Green Fuel, questioned EPA’s standard for what constitutes due diligence by the companies.

“All three of these producers [that have been charged] are still listed in EPA’s [online] system as providers of RINs,” Brown said. “In fact, you can still set up sales and purchase transactions with all three of these companies online as of today. To me, that’s Exhibit A that the agency refuses to get off the dime and accept any responsibility.”