With elections over, industry looks to EPA and weighs reform chances

Source: Amanda Peterka, E&E reporter • Posted: Thursday, November 6, 2014

With the ballots counted in the midterm elections, the biofuels industry is expectantly waiting for the long-delayed final rule from U.S. EPA setting this year’s renewable fuel mandates.EPA first proposed the mandates in November 2013 in a potentially precedent-setting rule that not only scaled back refiners’ blending requirements for ethanol and advanced biofuels but also changed the way EPA calculates the targets.

According to several industry sources close to the process, the agency has been quiet on when it will release the rule, but it will likely come out in the middle of November. There is, however, a chance that EPA could sit on it until after Thanksgiving.

“It doesn’t seem like anything is happening. You don’t get the sense that any work, that they’ve really gotten much information back to begin finalizing the rule,” said one industry source, referring to conversations with midlevel EPA staffers.

Most people close to the RFS debate in Washington, D.C., expect the rule to be subject to multiple lawsuits from biofuels and oil interests when it’s finally released. Much more than just litigation is hinging on the rule’s eventual release, however: It will also likely set the tone for the 2015 standards — EPA has indicated it will release a 2015 proposal in February — and key into potential reform efforts in the new Republican-controlled Congress.

EPA’s proposed rule called for cuts of 16 percent in the nation’s ethanol and advanced biofuels 2014 mandates compared with the levels that Congress wrote into the 2007 renewable fuel standard. EPA based the cuts on limits to the amount of ethanol that can be used in gasoline and delays in building up domestic advanced biofuel production.

Biofuels groups have opposed the agency’s methodology, saying it gives control of the program to the oil industry; refiners, on the other hand, say EPA’s cuts to the program don’t go far enough.

Despite the differences, both biofuels and oil groups have expressed frustration with the length of the process. It’s slowed investment in the advanced biofuels industry and made it difficult to plan ahead for refiners, according to groups.

“It’s really just a missed opportunity that the administration has taken so long to get the rule out,” said Anne Steckel, vice president of federal affairs for the National Biodiesel Board. “It’s far overdue from what they were supposed to have done. This rule could have come out six months ago.”

EPA did not provide a timeline for rollout of the final rule in response to an inquiry from E&E Daily.

The agency has been equally quiet on what exactly the final rule will mandate.

“The only thing I’ve consistently heard from this administration is that no one will like this rule,” said Michael McAdams, president of the Advanced Biofuels Association. “The one thing they’re sure of is no one is going to like it — and since no one’s going to like it, we must have done the right thing.”

In a public appearance in early September, EPA Administrator Gina McCarthy said the final rule’s targets would be higher to reflect higher gasoline demand compared with when the agency first proposed the rule.

In the absence of clear signals since then from EPA, the biofuels and oil industries have looked toward the midterm elections for signs of the agency’s intentions.

To many, the fact that the Obama administration has not yet rolled out its final rule setting the year’s renewable fuel mandates is bad news for biofuels producers.

According to Scott Segal, who represents industry clients at Bracewell & Giuliani, if the White House believed the rule could have helped Democratic Rep. Bruce Braley — a big ethanol supporter — in his ultimately unsuccessful bid for Iowa’s Senate seat, the administration would have released the rule by now.

“There is no question that the administration played politics with the extent of the renewable volume obligation in order to affect the Iowa race between Bruce Braley and [Republican] Joni Ernst,” Segal said. “Absolutely the timing of this decision and the degree of coordination between the White House and the Braley campaign makes it obvious to me that politics were being played.”

But chances are the final rule won’t please the oil industry, either, which has called for EPA to set a 2014 standard at no higher than 9.5 percent.

Mike McKenna, a Republican energy lobbyist and strategist, suggested that the White House has delayed the rule in an effort to boost Sen. Mary Landrieu (D-La.), who is going to a runoff election early next month against Republican Rep. Bill Cassidy (see related story). A final rule opposed by the refining industry in Louisiana could do nothing but hurt Landrieu, he said.

“In Louisiana, Mary Landrieu identifies herself very openly and clearly as a friend to the oil industry,” McKenna said. “Louisiana is a much more important consideration.”

Outlook in the new Congress

The content of the final rule and ensuing lawsuits will likely set the tone for congressional action in the new, Republican-controlled Congress next year.

EPA’s actions have already increased the chances for reform of the standard, McKenna said.

“EPA recognized this thing was not workable as currently configured. It’s not a legitimate practical government program,” McKenna said. “There’s widespread acknowledgement among everybody who participates in this thing that if you give us a piece of paper, we can draw up something a hell of a lot better.”

The new Congress will likely approach the renewable fuel standard with a “mend it, don’t end it” approach, according to Segal of Bracewell & Giuliani, given that the GOP needs to protect its own Midwestern members with rural constituencies. New Iowa Senate member Ernst, for example, also expressed support for the RFS during the election.

Repeal of the standard will likely not even be feasible in the new Congress, said Scott McKee, a senior policy analyst at the Bipartisan Policy Center.

“It has to be a reform bill. They just don’t have enough votes to do a full repeal,” he said. But, he added, “to be able to do reform, it gets really hard because everybody has a different idea of reform.”

There’s also a short window for reform. Congress would likely have to take up the RFS by early 2015 in order to pass legislation before lawmaking slows down for the 2016 presidential elections.

In that short time, presumptive Senate Majority Leader Mitch McConnell (R-Ky.) will likely focus on bigger-ticket energy issues, such as approval of the Keystone XL pipeline.

This Congress, despite a bipartisan effort that included a series of white papers and hearings last summer, members of the House Energy and Commerce Committee ultimately failed to come up with a comprehensive reform package. Many smaller pieces of legislation to change parts of the RFS were introduced in both the House and Senate, but none made it to a vote.

“I don’t anticipate RFS reform legislation advancing, certainly not in the first half of next year or even in the last half of next year,” said Stephen Brown, vice president and counsel for Tesoro Corp. “The closer you get to 2016, the less we’re going to do. I would bet on no RFS legislation — all the action now moves to the courts.”

Still, a Republican-controlled Senate could mean more coordination between the House Energy and Commerce Committee and the Senate Environment and Public Works Committee under Sen. Jim Inhofe (R-Okla.) that could help ease passage of a reform measure. There will most likely be more hearings in the Senate on the RFS under Inhofe than there have been under current Chairwoman Barbara Boxer (D-Calif.).

“What I expect to see on Capitol Hill is a continuation of these loud hearings about the RFS in the context of EPA’s jurisdiction, fly-by-night attacks that they’ll have to deal with on the committee level from Republicans,” said Brooke Coleman, executive director of the Advanced Ethanol Council. “But the path to the president’s desk — it would have to be attached to energy legislation that the president likes.”

Depending on the final 2014 rule, though, there may be a shifting of alliances on the RFS that could pave a clearer way to reform, McKee said.

“I think there will be a lot of new coalitions coming out and saying, ‘This isn’t working anymore,'” McKee said. “There are lots of parties that have been super-frustrated with how the process has worked.”

Among the coalitions that could boost the chances of a reform bill would be a pairing between the oil and advanced biofuels industries. The situation isn’t so unlikely as one might imagine: Despite the opposition to the RFS, many big oil companies are pursuing advanced biofuels in some form.

McAdams of the Advanced Biofuels Association yesterday said he would be open to working with groups that want reform — including oil groups — if it means coming up with a solution that gets rid of the uncertainty that’s kept biofuels producers in “suspended animation” for the past year and a half.

“If people are willing to accommodate each other’s desires, if people are willing to compromise, there’s a solution in there that can be very good for advanced biofuels,” McAdams said.

McAdams suggested, for example, that the advanced industry could support a fix for the cellulosic portion of the renewable fuel standard. In 2007, Congress greatly overestimated the amount of cellulosic biofuel that would be available in the market by now, and EPA has used its authority to waive the standard’s requirements to reflect actual production.

EPA has taken “the teeth out of the mandate for cellulosic companies,” McAdams said. The uncertainty means advanced biofuels producers have had trouble selling credits for the fuel they actually do produce.

American Petroleum Institute Downstream Director Bob Greco said yesterday that any reform plans will depend on whatever EPA decides to do with the final 2014 rule but that API would be willing to work with the advanced biofuels industry.

“I think what we are seeing is, however, that simply mandating their existence has not proven to work, based on the difficulty of bringing these to commercial production,” he said.

The corn ethanol industry, on the other hand, plans to stick to its message of “don’t mess with the RFS” and reject all attempts at opening it up for reform, said Bob Dinneen, president and CEO of the Renewable Fuels Association.

Though the corn ethanol industry lost a key supporter in the House Energy and Commerce Committee with the midterm election loss of Rep. Lee Terry (R-Neb.) (E&ENews PM, Nov. 5), Dinneen said he was “not among those that thinks the sky is going to fall” for the RFS under a Republican-controlled Senate.

“When Mike Rounds [of South Dakota] and Joni Ernst come to Washington … they are going to well understand the importance of ethanol to their states, and I expect them to be strong supporters,” he said. “These new ethanol supporters come to town and they’re going to be greeted by Chuck Grassley [of Iowa] and John Thune [of South Dakota] — that’s a formidable force within the Republican caucus for reasonableness when it comes to the RFS.”