Cases of fraud have badly damaged a federal biodiesel credits trading program, but it's not beyond repair and deserves to be saved, witnesses told a US House Energy and Commerce Committee subcommittee on July 11. The system of credits—known as renewable identification numbers, or RIN—is functioning comparatively well overall, they indicated.
"This program is not broken," maintained Andrew Sprague, owner of Union County Biodiesel Co. LLC in Morganfield, Ky. "Many of us were surprised in late 2011 that it was working so well."
The biodiesel industry is coming up with its own independent verification program and should be allowed to help solve the problem, he told the committee's Oversight and Investigations Subcommittee. "Obligated parties did not do their due diligence," he added, "but that's water under the bridge."
The 2007 Energy Independence and Security Act expanded the 2005 Energy Policy Act's biofuels blending mandate to include diesel fuel in addition to gasoline. The US Environmental Protection Agency established the RINs trading system to help the obligated parties—refiners and product importers—meet their renewable volume obligations (RVO).
It also created the EPA Moderated Trading System (EMTS) to register and track renewable fuels transactions and required biodiesel producers and importers to supply third-party engineering reports verifying a facility's capacity to produce qualifying fuel. It has said that it does not certify or validate fuel produced and registered in its system, and obligated parties have to conduct their own due diligence when concluding RIN transactions.
But refiners representing the obligated parties under the system did not learn for 15 months that EPA was investigating Clean Green Fuel, a RIN supplier in Maryland, for possible fraud, another witness said. "EPA could have prevented obligated parties from purchasing these RINs in the first place by simply indicating on EMTS that Clean Green was not a biofuel producer in good standing," American Fuel & Petrochemical Manufacturers Pres. Charles T. Drevna said.
Remained silent
"Instead, EPA chose to remain silent, allow RIN fraud that it knew was occurring to continue, and require obligated parties to replace those invalid RINs at a cost of more than $40 million," he continued. "Then, as if to add insult to injury, it issued notices of violations and fines to the 24 obligated parties that purchased the Clean Green RINs, even though they were the victims of fraud that EPA knew about and allowed to continue."
One major question during the hearing was whether obligated parties recognized the need to conduct their own due diligence of RIN suppliers. Some may have believed EPA took care of that when it registered producers, importers, and third parties on its EMTS after reviewing their biodiesel engineering reports, Drevna said.
"Unfortunately, EPA's review amounts to little more than a rubber stamp approval and has enabled biodiesel producers to game the system," he told the subcommittee. "Absent a tip, EPA does not enforce its requirements and instead relies on a ‘buyer beware' enforcement scheme that actually penalizes the victims of fraud."
Reports of RIN fraud, which Drevna estimated involved 6-7% of the total market, also hurt legitimate biodiesel suppliers. "Everything changed in November 2011 when EPA announced it was bringing enforcement actions against people who fraudulently generated invalid RINs," said Jennifer Case, cofounder and chief executive of New Leaf Biofuel in San Diego. "Overnight, our customers were unable to sell the RINs we attached to our fuel, which meant that New Leaf and other small producers lost the ability to sell biodiesel for a competitive price."
"Today, only the top 10-15 plants are operating at significant levels as they have large balance sheets which will support legal action from obligated parties if wrongdoing is discovered," noted Thomas F. Paquin, president of VicNRG LLC, a Keller, Tex., fuel distributor that also handles biofuels and RINs. "Effectively, a two-tiered system has developed whereby major conglomerates are benefiting from the sale of approved RINs while many small producers are unable to sell any and, by default, the fuel they produce."
Behind notification delay
EPA, meanwhile, tried to reach settlements with refiners and other obligated parties that unwittingly bought invalid RINs from Green Leaf and two Texas suppliers, Absolute Fuels and Green Diesel, two officials from that agency testified. The agency was unable to notify obligated parties it had launched its investigation of Green Leaf when it became a criminal matter involving the US Department of Justice, and those investigators asked EPA to delay the notifications while they gathered evidence, according to Phillip Brooks, air enforcement division director in EPA's Enforcement and Compliance Assurance Office.
"When we sent out the violation notices, we didn't impose a penalty," he told the subcommittee. "We met with the recipients and found the vast majority had not done due diligence. In some cases, the penalty was 10¢/RIN instead of $37,000. This was generally accepted."
The agency also is working with biodiesel manufacturers, obligated parties, and other stakeholders to stamp out RIN fraud, added Byron Bunker, acting compliance division director in EPA's Transportation and Air Quality Office. "There's already considerable agreement among many of them on possible solutions," he said.
Joe Jobe, the National Biodiesel Board's chief executive, said NBB formed a RIN integrity taskforce in March to develop and deploy a comprehensive real-time monitoring program with Genscape, a Louisville energy monitoring specialist, as a subscription service so obligated parties can electronically verify an individual biodiesel producer's RINs. More than 70 producers and 15 obligated parties have signed up so far, he told the subcommittee.
"We also are working with both the EPA and obligated parties through the American Petroleum Institute and AFPM to consider whether additional regulatory modifications can better focus enforcement efforts on the bad actors, while ensuring that the goals of the program are met," Jobe said. "It will require a combination of regulatory and private sector solutions."
Committee members agreed that the problem needs to be solved. "This hearing is important because everyone knows fraud exists in RINs," said Rep. Lee Terry (R-Neb.). "We need to address it or face the potential of the biofuels program being eliminated."
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