Small biodiesel producers still reeling as EPA sorts out fraud

Source: Amanda Peterka, E&E reporter • Posted: Thursday, March 21, 2013

Small biodiesel companies continue to suffer from the lingering effects of three fraud cases in the fuel credit market despite U.S. EPA’s efforts to clean up the mess.

Refiners are still hesitant to buy fuel credits from smaller producers, even from those that have had their production numbers audited and their credits certified. The lack of confidence in the market has forced independent biodiesel companies to sell their credits for discounts of up to 60 percent, market participants testified yesterday at an EPA hearing.

“Throughout the past 18 months I have done nothing but continue with the best business practices for my industry to no avail,” said Jennifer Case, CEO of New Leaf Biofuel LLC, a 5-million-gallon biodiesel company in San Diego. “The market continues to discount my [credits] because of the fraud that was committed by a bad actor and because I am a small and mostly unknown company.”

The issue of fraud has dogged small biodiesel producers since 2011, when EPA accused a company, Clean Green Fuel LLC, of producing millions of fake renewable identification numbers, the 38-digit figures attached to gallons of biodiesel. The credits are used by refiners to meet their yearly obligations under the renewable fuel standard.

Though the head of that company, Rodney Hailey of Maryland, has been sentenced to more than 12 years in prison and enforcement actions have been taken against two other companies found to be faking RINs (pronounced “rins”), the market continues to be rocky for small producers. Oil companies have spent millions of dollars on due diligence and prefer to buy their credits from larger, more name-brand producers

Case said that her company has been examined at least five times in the past year by third-party auditors but that her credits are currently trading 10 to 12 percent lower than those from larger companies.

The fraud “has had a particularly devastating effect on the small biodiesel producers like New Leaf,” Case said.

EPA has proposed creating a quality assurance program in which the agency would authorize third parties to conduct audits of producers. Refiners that purchase certified RINs would be able to claim an affirmative defense should those credits be found to be fraudulent.

The agency says it is eager to begin the program and provide certainty to the market (Greenwire, Feb. 11). It has proposed two types of quality assurance programs: Under the first, third parties would conduct audits continually and would be responsible for replacing invalid credits. Under the second, audits would be done quarterly, and refiners would be responsible for replacing RINs to meet their biodiesel obligations.

The proposal has been met with positive reactions overall, but producers, refiners and auditors at the hearing yesterday at EPA headquarters raised several issues that they hope to see fixed in the agency’s final regulation.

Case said she worried that the smallest producers would be stuck with the largest burden because they would be forced to pay for the first, more expensive type of quality assurance program in order to engender enough confidence to be able to freely trade their credits.

“EPA needs to understand … that the cost of compliance for small producers will be greater than all other biofuel producers and that although EPA calls the program voluntary, for small producers it is not voluntary,” Case said. “It seems odd, unfair and perhaps punitive that the smallest of all the fuel companies are saddled with the highest required compliance costs.”

She recommended that EPA require all refiners to annually purchase 15 percent of their credits under the more expensive option to spread compliance costs more evenly throughout the market. Case and several other witnesses also stressed the need for auditors to be truly independent from the market.

‘Unnecessary cost, burden’

A representative from the ethanol industry, on the other hand, called the proposal too broad in scope because it would apply to all renewable fuels that have associated RINs — not just biodiesel. The ethanol industry has not experienced fraud as the biodiesel industry has, largely because ethanol credits are assigned at the point of blending with gasoline and are never handled by producers themselves.

Over the past several years, 34.4 billion ethanol RINs have been generated, “and to our knowledge not a single one has been alleged or found to be fraudulent by EPA,” said Geoff Cooper, an economist with the Renewable Fuels Association.

The quality assurance program could add “unnecessary cost and administrative burden to our members’ operations,” Cooper added. Though the program is voluntary in nature, Cooper said it seemed “inevitable” that obligated parties would require all credits to go through the program. Refiners are already signaling that they will only purchase certified credits.

“It’s a little ironic that the program that was intended to improve liquidity in the relatively smaller biodiesel RIN pool may actually end up reducing liquidity in the [ethanol] RIN pool for renewable fuel producers who may not initially choose to participate,” Cooper said.

The refining industry, which drafted the quality assurance program last year and then met several times with EPA officials to hash out details, yesterday said it also remained concerned with the expense and scope of the audits required under the program that the agency ultimately proposed.

“We are concerned that proposal goes too far with burdensome due diligence requirements,” said Tim Hogan, director of motor fuels for American Fuel & Petrochemical Manufacturers.

Both Hogan and Patrick Kelly, a policy adviser at the American Petroleum Institute, also pushed EPA to relink credits and physical gallons of biodiesel, similar to the ethanol market. Producers, Kelly said, should be allowed to separate credits from gallons only if they are also refiners that have to comply with the renewable fuel standard.

“Eliminating this provision would have prevented the fraud experience thus far and would go a long way of preventing future instances of RIN fraud,” Kelly said.

EPA has opened a public comment period on the quality assurance program and says it hopes to issue a final rule as soon as possible. The agency will not take enforcement actions this year against parties that use invalid 2013 credits that were verified before the release of the final rule. Any changes to the program will not go into effect until next year.