Charles T.

Drevna President

American Fuel & Petrochemical Manufacturers 1667 K Street, NW Suite 700 Washington, DC 20006 202.457.0480 office 202.552.8457 direct 202.457.0486 fax Cdrevna@afpm.org

November 8, 2013 The Honorable Barack Obama President United States of America The White House Washington, DC 20500 Re: 2014 Renewable Fuel Standard blending requirements Dear Mr. President,

The American Fuel & Petrochemical Manufacturers (AFPM) writes in support of the Environmental Protection Agencys (EPA) indication that it plans to partially waive the 2014 Renewable Fuel Standard (RFS) in order to address concerns with the markets ability to accommodate higher levels of ethanol. 1 Such action would find solid grounding in both the realities of the fuel market and in the law. Despite the biofuel industrys sustained campaign to frame this debate as a battle for market share, the reality remains that the RFS boils down to a simple math problem: the 2014 RFS if fully implemented would require more biofuel than consumers demand, and than current vehicles and infrastructure are designed and warrantied to handle. Refiners are thus faced with a series of difficult choices either force more biofuel into the market knowing that it damages consumers engines and compromises infrastructure (bringing with it significant liability concerns), or reduce domestic supply of gasoline and diesel to limit the obligation to buy compliance credits (Renewable Identification Numbers, or RINs) needed to sell gasoline and diesel in the United States. Neither of these options is good for the American consumer. Recognizing this problem, on August 13, 2013, AFPM and the American Petroleum Institute (API) filed a petition on behalf of its members seeking a partial waiver of the 2014 RFS. In its petition, AFPM detailed the technical and marketplace challenges associated with increasing the volume of biofuel in the fuel supply, and requested a waiver that would set the ethanol content in gasoline at an average of 9.7 percent, for a total 2014 RFS of 12.9 billion gallons of ethanol and 1.9 billion ethanol-equivalent gallons of biomass-based diesel. In particular, a 9.7 percent cap would retain a market for neat gasoline (i.e., gasoline containing no ethanol) required for some applications (such as boating), promote liquidity in the RIN
1

See78FederalRegister49794,49798(August15,2013)(EPAanticipatesthatadjustmentstothe2014volume requirementsarelikelytobenecessarybasedotheprojectedcircumstancesfor2014,takingintoaccountthe E10blendwall,andcurrentinfrastructure,andmarketbasedlimitationstotheconsumptionofethanolingasoline ethanolblendsaboveE10)

market, and account for historical differences between the Energy Information Administrations (EIA) projections of gasoline demand and actual demand. The U.S. consumed approximately 12.9 billion gallons of ethanol in 2012 and is on pace to consume approximately 13 billion gallons in 2013. In fact, obligated parties are only able to comply with the 2013 mandate because of banked RINs from previous years. In other words, AFPMs waiver petition simply recognizes that the RIN bank will be depleted and requests a continuation of the same consumption levels in 2014 that occurred in 2012 and 2013. A large portion of AFPMs request is a waiver of the 666 million gallons of imported Brazilian sugarcane ethanol expected to be used for the advanced biofuel mandate in 2013. Given these facts, the biofuel industrys claims that not raising the mandate next year will somehow lead to widespread layoffs and plant closures ring particularly hollow. Unfortunately, in its rush to scapegoat the refining industry, biofuel producers continue to ignore the reality of the blendwall and its potential impacts on consumers. The blendwall is a function of consumer demand, engine compatibility, infrastructure constraints, and the biofuel industrys failure despite nearly a decade of biofuel mandates to deliver promised drop-in biofuel that are compatible with existing engines and infrastructure. Given the heated rhetoric surrounding this issue, AFPM would also like to take the opportunity to correct some recent mischaracterizations about the blendwall and EPAs legal authority to grant a waiver. 1. Infrastructure and retail ownership. The biofuel industry claims that refiners failed to invest in infrastructure continue to ignore the realities of how the fuel distribution system actually functions. While refiners and importers of gasoline are the obligated parties under the RFS, they are often not the entities actually blending the fuel or selling it to end-use consumers. In many cases, third-party blenders or others actually blend the renewable fuel into the petroleum blendstock, thereby capturing the RIN that the thirdparty sells back to an obligated party. Moreover, 95 percent of retail gas stations are owned by independent businesses, many of which are single-store operators. In addition, more than half of the gas stations are actually unbranded and unaffiliated with refining companies. Even those stations that are franchised, however, are largely responsible for their own equipment and investment decisions. These stations are free to sell higher ethanol blends (such as E85 or E15) so long as they continue to sell the branded product (a key feature of a franchise), but they generally have chosen not to carry these higher ethanol blends because of a lack of consumer demand and fear of potential liability. In general, franchisees get the benefit of a steady fuel supply at a contracted price, marketing assistance, and the ability to use a refiners trusted brand to help sell fuel. Typically, in return, franchisees must sell at least

two grades of the refiners product. Put another way, franchisees are getting the benefit of a contractual bargain between two private parties the definition of a free market. Those franchisees may invest in additional tanks and dispensers to carry additional fuel types, or may terminate their franchise agreements and sell unbranded fuel. One of the largest issues for fuel suppliers are potential liabilities stemming from vehicle and small engine incompatibility with higher ethanol blends like E15, discussed more below. Given the massive potential liability or injury associated with E15 for consumers, the retail community, engine manufacturers, and refiners, it is no surprise that E15s market penetration is limited to a few dozen stations in the Midwest. Most important, however, is the consumer liability resulting from potential engine damage that would occur as result of E15, which cannot be used in nearly 95 percent of cars or any lawn equipment, motorcycles, boats, or countless other engines. In addition to the infrastructure and liability issues, challenges remain including with certification of underground storage tanks for higher blends, conflicting states laws, and the fact that EPA has not granted a 1-pound Reid Vapor Pressure (RVP) waiver for summer E15 like it has for summer E10. 2. Vehicle Compatibility. Although some auto companies have recently announced that 2012-2014 models will be compatible with E15, there are still hundreds of millions of cars on the road that are not compatible with that fuel. In general, it takes about a decade for the auto fleet to turn over, meaning we will not see these changes for some time, and implementation of the 2014 volumes will not be significantly affected by new car sales. Moreover, hundreds of millions of off-road/non-road vehicles and engines are unable and unapproved to use more than 10 percent ethanol regardless of E15s availability. 2 3. E85 Sales. The biofuel industry claims that E85 sales can bridge the gap between E10 saturation and the RFS requirements, but unfortunately this claim ignores refueling infrastructure compatibility issues and consumer acceptance of E85. Importantly, only 1.5 percent of stations carry E85 and even where it is widely available, consumer acceptance remains low. In fact, data from Iowa and Minnesota (two states with the most developed E85 infrastructure) show that there has been virtually no growth in E85 sales. Minnesotas E85 sales peaked in 2007 and Iowas in 2011.
2

Rep.F.JamesSensenbrenner,U.S.HouseofRepresentatives,toEPAAdministratorLisaJackson,5July2011

The ethanol industry claims that the high RIN prices in 2013 have helped drive sales of higher blends because the RIN price theoretically induces price advantages, but the actual data belies this claim. Sales have recovered from very low levels in 2012, but have remained generally consistent with historical levels. In its 2013 Annual Energy Outlook, the EIA projected flat E85 demand through 2040. In addition, it is well documented by the EIA and the Automobile Association of America (AAA) that ethanol costs more per unit of energy meaning it costs consumers more to travel the same distance. For example, AAA noted on November 7, 2013 that the energy adjusted consumer price for E85 was about 30 cents per gallon more than regular gasoline. 3 Consumers are simply not enamored with returning to the gas station more often to fill up with a fuel that costs them more to travel the same distance. 4. Renewable Identification Numbers. The high and volatile RIN prices during 2013 are a clear indication that RINs are in short supply as a result of the blendwall. Contrary to claims by biofuel producers, high RIN prices were never an intended feature of the RFS program. RINs were meant to promote some flexibility in the mandate so that refiners and blenders without access to renewable fuel could still meet their obligations. Moreover, claims that the refining industry is profiting from RINs ignore the fundamentals of the RFS program. More specifically, in 2013 there is a RIN bank from over-compliance in previous years lessening the burden of purchasing RINs on those refiners that can draw from their bank in a tight market. While some refiners are in a better position than others in 2013, starting in 2014 there will be few carryover RINs as the bank is depleted. In other words, the refining sector will move from one of haves and have nots to one of all have nots. Due to market anticipation of Congressional action and EPA using its authority, RIN prices decreased from their July peak of more than $1.40 to below $0.30 in recent days. While RIN costs are still 300 percent higher than they were in January, this situation clearly indicates that EPA can prevent massive and unnecessary compliance costs by exercising its authority to partially waive the RFS for 2014. 5. Waiver authority. In an attempt to stymie bipartisan efforts to reform the RFS legislatively, the biofuel industry testified in July, and has stated publicly multiple times that EPA has all the authority it needs to address issues with the RFS. Yet when EPA
3

http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asp

indicated that it plans to use that precise authority, the biofuel industry criticized the Agency for introducing uncertainty into the marketplace. The fact is that uncertainty was in the market prior to EPAs announcement, and will continue to exist until Congress steps in and enacts a long-term solution that seriously addresses the multitude of problems with this law. AFPM continues to engage in a constructive dialogue with members of Congress from both parties about needed reforms to the program. In the short-term, however, it is essential that EPA provide certainty for the market in 2014 while Congress completes its work. Congress explicitly allows EPA to waive the RFS, in whole or part, for up to a year at a time pursuant to its authority under section 211(o)(7) of the Clean Air Act. This can be accomplished by either a showing of severe economic or environmental harm, or by showing an inadequate domestic supply. Contrary to claims the biofuel industry makes, the act does not confine the definition of supply to that of renewable fuels. Due to the onset of the E10 blendwall, the RFS will force an inadequate domestic supply of RINs needed to comply with the RFS. In turn, the lack of available RINs will force a reduction in gasoline and diesel supplied to the United States, thereby shorting domestic demand. There is nothing in the RFS that compels, or even suggests, a narrow interpretation of EPAs waiver authority. In the final rule implementing the 2013 renewable fuel volumes, EPA stated that it does not currently foresee a scenario in which the market could consume enough ethanol sold in blends greater than E10, and/or produce sufficient volumes of non-ethanol biofuel (biodiesel, renewable diesel, biogas, etc.), to meet the volumes of total renewable fuel and advanced biofuel as required by statute for 2014. (see 78 FR 49823; 8/15/13) AFPM wholeheartedly agrees with this assessment. The challenges with the RFS are real, imminent, and require action before consumers are faced with the adverse impacts we know are coming. AFPM and its members look forward to working with you to solve these challenges in the coming months. Sincerely,

Charles T. Drevna cc: Ron Minsk, Senior Director, National Economic Council, White House Gina McCarthy, Administrator, Environmental Protection Agency