Dissecting EPA Views on Ethanol Issues Ahead: Blend Wall; 2013 & 2014 RFS and Beyond

June 14, 2013 04:56 AM
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Agency focused on several issues with 2014 RFS decision a potential key for U.S. policy

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.

U.S. renewable fuels policy remains a key focal point for a host of U.S. sectors, including agriculture and the general economy. Law requires increasing use of renewable fuels as part of the U.S. fuel supply, but the constraints facing the industry that have been present for years now appear to be coming to a head.

At the center of this is the U.S. Environmental Protection Agency (EPA), the agency with the “final” call on the Renewable Fuels Standard (RFS) levels. Christopher Grundler is the Director of the Office of Transportation and Air Quality and he testified last week to a subcommittee of the House Oversight and Government Reform Committee, presenting in his prepared remarks the issues the agency is looking at relative to the U.S. renewable fuels situation. In that testimony, Grundler admitted that meeting the requirements in law for 2014 could indeed be a challenge.

In the question and answer session with lawmakers, Grundler largely toed the “company line” and did not tip his hand a great deal relative to the decisions EPA is faced with on this topic. However, some of his responses did provide a glimpse at what could potentially be the outcome of EPA’s exam of the issues.

Overall, Grundler noted the agency will assess the situation based on three key questions: “What is the law saying? What does the science tell us? And what is the right thing to do here?”

Blend Wall: This percolating issue appears about to boil over as the industry hits the point where production outstrips the utilization of ethanol in particular. As Grundler testified, it is not a new issue. “When Congress wrote the statute back in 2005 and 2007, you know, it created a dramatic change in the transportation fuels market and anticipated these increasing volumes,” he stated. “It's clear Congress anticipated that the market would solve this problem. The blend wall is not a new issue. Clearly, the market has not solved this problem yet. There are market realities that we're very much aware of, and need to address.”

EPA has gotten “a lot of advice” on how to address the blend wall, Grundler noted. “Some have suggested how we can do it in a way that could still preserve this advanced biofuel innovation promise. Others have come at it from a different point of view, and we're right now doing hard work analyzing those comments, looking at the law, looking at the data, and giving recommendations to the administrator.”

The 2012 waiver request decision: EPA received requests for a waiver of the RFS requirements for 2012, but rejected those calls. Grundler said that the decision was made recognizing the “devastating impact of the drought across all of America and many different sectors and many different families that were impacted by that drought. The question before the agency and the administrator at that time actually was a pretty narrow question though, which is: Would waiving the RFS change any of that situation? Would waiving the RFS change the supply-demand question?”

As EPA examined the issues utilizing “extensive analysis and modeling,” which included “500 different scenarios using a statistic model and consulting with experts at the Agriculture department and the Energy department,” Grundler said the agency “found that it was highly unlikely that if we waive the standard, it would have made any difference to the people's suffering and the prices of corn. And so, the law required us to deny that waiver.”

What is the criteria of severe harm? Grundler was pressed extensively on what definition EPA was using as “severe” and he simply said there was no such definition. “We were careful to say that this is a fact-specific question, a case by case situation and it was based on the market conditions at that time. It was based on our estimate of how many so-called rollover RINs were available to refiners to meet their obligations, as well as how quickly our refinery within this waiver time period, this one year period, could change their operation. The fact to the matter is that the U.S. refining industry has -- and the fuel distribution has optimized around the use of ethanol as a blending agent. And we found that the evidence suggested that there's a strong demand by the refining industry to use this product as -- to blend their gasoline products.”

Further, Grundler said EPA took the view based on their analysis that even if they waived the RFS requirements, the demand and use of ethanol blended with gasoline “would continue certainly over the near term. And therefore, would not have made any difference in pea prices or corn prices. So we required to deny the waiver based on how the law asked us to exercise that authority.”

What about the future – both 2013 and 2014: EPA has sought public comments on its 2013 proposal for RFS volume requirements, including meeting with stakeholders in the petroleum and livestock industries – all sectors also testified at the hearing. “This is a very serious question,” he stated. “We're hearing them loud and clear. We're doing the analysis right now. We've had a lot of advice on how EPA should precede and address this Blend Wall both now and in the future. And we're going to be making the decision as soon as we can.”

But that timing remains murky as Grundler would only commit to EPA making the decision by the end of summer – which he did identify as Sept. 21, prompting one lawmaker to openly wonder whether that meant an EPA decision would be announced on Sept. 20 or 21!

Two key authorities: Grundler addressed the issue of the waiver request for the overall RFS requirements. But he also noted EPA could “adjust the standard based on the total amount that we adjust for the cellulosic standard. So there are a couple of ways for the agency, a couple of tools.”

What could happen: Grundler obviously did not testify that the agency would make adjustments for either 2013 or 2014. But he did make an interesting observation – “We clearly see particularly in 2014 and 2015 and the pace by which Congress anticipated the growth of this mandate is confronting very real market barriers right now. And we're looking at all kinds of comments today in terms of what the best way to address that.”

Comments: First, Grundler is a career government employee (since 1980), not a political appointee. Typically, those in a non-political role are reticent to “make news” when they appear before a congressional panel. And Grundler is no different.

However, as I and others have assessed his testimony, some potential signals do emerge:

EPA is very aware of the blend wall and has put and continues to put a great deal of analysis on this matter. And, that analysis is revealing concern on the part of the agency that the renewable fuels industry has not really yet moved beyond corn-based ethanol as the primary feedstock, even though Congress clearly was expecting this to happen.

The mention in his prepared remarks that meeting the 2014 requirements could be difficult opens the possibility to an adjustment, most likely on the cellulosic or advanced ethanol requirements.

An overall waiver of the RFS requirements certainly would not be expected at this point given that the major drought in 2012 did not prompt such an action and even though the 2013 growing season is unfolding with challenges, they don’t appear at this point to present the kind of supply questions on the U.S. corn crop in particular that were faced in 2012.

What will EPA do? That remains the question and Grundler clearly was keeping the agency’s cards close to his vest. But the blend wall question and increased RFS requirements are two issues they agency will be making a decision on. Given the commitment to have a 2014 decision out yet this summer, this might suggest the agency could make some changes to the standard as opposed to just following what is laid out in terms of numerical targets under law.

After all, a 2014 proposal published in the summer of 2013 would give plenty of time for comment and analysis by those outside EPA. And that is something that hasn’t been afforded the past two years as EPA has not met the deadline of announcing their plans by Nov. 30 of the year preceding the requirements, i.e., Nov. 30, 2012, for the 2013 standards.

NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.






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