Mike W. Leger
Turner, Mason, & Co.
DallasLarry H. Lott
KMPG Peat Marwick Environmental Management Practice
Dallas
The U.S. Environmental Protection Agency's new reformulated fuels regulations impose a myriad of new record keeping and reporting requirements, in addition to the new quality standards. These requirements include an annual procedures review, or "attestation."
The attestation is part of EPA's enforcement plan and is required of all refiners, importers, and oxygenate blenders. This annual report is due May 31 of the year following the covered period and must be performed by a certified public accountant or a certified internal auditor.
The attestation procedure is too complicated and detailed to be explained fully here, but the main points covered by the attestation are outlined to inform refiners who may be unaware of the requirements.
WHAT IS COVERED?
The required attestation is a procedures review of the gasoline quality and volume data and documentation that form the basis of the various reports submitted to EPA for conventional gasoline and RFG. The attestation provides a check of mathematical accuracy, document consistency, and adequacy of procedures.
Procedures for refiners, importers, and downstream oxygenate blenders are different and each is listed separately in the regulations. Refiners and importers must perform the following specific steps for the attestation, as pertinent for RFG, RFG before oxygenate blendstock (RBOB), conventional gasoline, and gasoline blendstocks:
- Read the reports required by EPA for the previous year.
- Test the mathematical accuracy of the year-end gasoline inventory reconciliation analysis.
- Test the mathematical accuracy of calculations in gasoline tender listings and compare the tender volumes to those contained in EPA reports.
- From a representative sample of RFG and conventional gasoline tenders:
- Confirm product transfer document (PTD) volumes and compare PTD designations for consistency of time and place.
- Trace back to the batch or batches from which the gasoline was produced or imported and compare company internal laboratory analyses to the results reported to EPA, and to the time and place designations from the PTD.
- From a representative sample of RBOB or conventional gasoline blendstock requiring oxygenate tenders:
- Verify the volumes on the tender listings with the PTDs.
- Determine that downstream oxygenate blender contracts were in place, or that gasoline was otherwise accounted for properly.
- Review PTDs for indication of type and amount of oxygenate to be added.
- Trace back to the batch or batches from which the gasoline was produced or imported, review company internal laboratory analyses, and verify the consistency of the type and volume of oxygenate specified with that on the PTD.
- Verify that the sampling and testing frequency of the quality assurance program conforms to the requirements specified in the regulations.
- Verify gasoline blendstock volumes, types, and disposition for refiners and importers subject to tracking requirements. Tracking requirements are triggered when the sum of all trackable blendstocks sold in a compliance year is 3 vol % of the gasoline sold. (Trackable blendstocks are certain EPA-specified gasoline blendstocks sold to other refiners or blenders. Sale does not exclude these blendstocks from the regulatory requirements.)
EPA AUDITS
The new regulations are very broad and far-reaching, impacting virtually all aspects of gasoline manufacture and distribution. Many operational procedures are affected and are covered by detailed rules for implementing the regulations.
About 350 EPA inspectors began taking samples at terminals on Dec. 1, 1994. And checks at retail stations started in January 1995. Audits of oxygenate blenders and refineries are scheduled to begin some time in 1996.
Inspection teams will be placed permanently in the Dallas, Houston, Chicago, and Wisconsin markets and all along the U.S. East Coast.
The California Air Resources Board will be the main enforcer in that state, although there will be some federal presence.
Some items that EPA may be checking include:
- Proper designation of gasoline batches for testing and volume determination
- Independent sampling and testing of RFG and proper sampling protocol
- Use of the testing procedures specified by EPA
- Retention of RFG samples
- Quality control procedures for RFG
- Proper compositing of conventional gasoline
- Proper segregation of RFG and conventional gasoline
- Proper seasonal designation of individual batches
- Compliance with additive regulations
- Compliance with simple or complex model requirements.
QUALITY ASSURANCE
In addition to the regulations governing the manufacture of RFG and conventional gasoline, there are quality assurance requirements for downstream oxygenate blending and numerous restrictions on downstream gasoline operations.
The magnitude and complexity of the new regulations call for comprehensive control policies and procedures that go beyond those employed previously in the industry. These new procedures should address not only the compliance issues associated with gasoline manufacture, but also quality assurance programs, all the way to the consumer.
When gasoline is shipped as a fungible product in common carrier systems, the identity of the manufacturer is lost. This can complicate quality control and assurance efforts, but it does not relieve the manufacturer of responsibility for product quality.
Most companies traditionally have had good quality control measures at the refinery level, where there is sophisticated testing equipment. But the extension of quality measurement and control downstream of the refinery may call for modifications to existing practices.
The requirements of these regulations may limit terminal blending to oxygenates because, under the new laws, a blender who adds blendstocks other than oxygenates is considered a refiner. This designation activates requirements for a separate registration and significantly more testing and reporting.
LIABILITY
EPA's enforcement policy calls for several parties in the distribution chain to have presumptive liability in the event of noncompliance. If, for example, off-spec RFG is found at a retail outlet in the Northeast U.S., parties from the retail operator to the Gulf Coast refinery that manufactured the gasoline are presumed liable.
The presumptive liability aspects of the program call for prudent operators to develop appropriate defensive mechanisms to mitigate individual liability. Differences in company philosophies and acceptable risk levels will result in different approaches to this issue. But the potential fines involved dictate that measures be taken to protect companies' interest.
COMPLIANCE AUDITS
The magnitude of the changes to governmental regulation of gasoline manufacture and the potential consequences for noncompliance call for a multidisciplined effort to assure strict adherence to the new requirements. In addition to making certain that all divisions of the company's operations have incorporated the new requirements in the normal course of business, a compliance program should be well coordinated from an overall company standpoint.
This program should include having a well-documented plan for organizing the company's response and defense in the event of a notice of violation. The company's quality control manager or other designee should serve as the overall company coordinator.
Once a comprehensive compliance program is developed, an audit should be conducted to assure that all EPA regulations are met. This audit can be conducted internally or by independent third parties knowledgeable about the operational, technical, accounting, and record keeping features of the program.
Such audits can be conducted in phases. A Phase-I audit should be conducted as early in 1995 as possible to identify any procedural issues that may result in noncompliances, and to ascertain that sufficient data are being collected to support the annual attestation.
To identify compliance issues, Phase-2 audits should be conducted after the first quarterly reports for RFG are generated. Audits should include site visits to all facilities covered by the regulations.
Copyright 1995 Oil & Gas Journal. All Rights Reserved.