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1099 NEW YORK AVENUE NW SUITE 900 WASHINGTON,

DC 20001-4412

January 27, 2014

The Hon. Gina McCarthy

Administrator

United States Environmental Protection Agency

1200 Pennsylvania Avenue, N.W.

Washington, DC 20460

via email and certified mail)

EPA Docket Center

United States Environmental Protection Agency

EPA West Building, Room 3334

1301 Constitution Ave. NW

Washington, DC 20460

via hand delivery)

.J E N N E R B L O C K t tP

David W DeBruin

Tel 202

639-6015

Fax 202 639-6066

ddebru n@jen

ner. com

Re:

Petition to Revise the Renewable Fuel Standard Regulations

Dear Administrator McCarthy:

Monroe Energy LLC ( Monroe ) respectfully submits this petition, pursuant to

Olijato

Chapter o the Navajo Tribe v Train,

515 F.2d 654, 666 (D.C. Cir. 1975), concerning 40 C.F.R.

80.1406(a)(1 . That regulation makes refiners and importers of gasoline or diesel fuel

obligated parties for the purpose

of

compliance with the Renewable Fuel Standard ( RFS ), 42

U.S.C. 7545(0).

In

EPA's Notice for Proposed Rulemaking ( NPRM ) for the 2014 RFS

requirement,

see

EPA, Proposed Rule, 2014 Standards for the Renewable Fuel Standard

Program, 78 Fed. Reg. 71,732 (Nov. 29, 2013) ( 2014 NPRM ), EPA proposed a new

methodology for setting annual RFS volume requirements in 2014 and future years, because

the supply of renewable fuels made available to consumers will no longer be adequate to meet

the statutory volume requirements. EPA should simultaneously shift the obligation from refiners

and importers to blenders, as it said it would consider doing

in

circumstances such as those that

exist now. Indeed, if EPA adopts the methodology it has proposed for setting the volume

requirements, rather than an

alternative such as Monroe has proposed

in

its comments

on

the

proposed rule, the existing regulation making refiners and importers obligated parties could no

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longer be defended as a reasonable exercise

of

EPA's discretion. That regulation would need

to be revised to impose the compliance obligation

on

blenders.

As discussed in detail below, EPA acknowledged in 2010 that the rationale that originally

justified imposing the compliance obligation on refiners and importers was no longer valid.

EPA, Regulation of Fuels and Fuel Additives: Changes to Renewable Fuel Standard Program,

75 Fed. Reg. 14,670, 14,722 (Mar. 26, 2010) ( 2010 Rule ). Yet when the agency last

examined the issue in 2010, it chose to leave its rule unchanged, because it found no pressing

reason to alter course. However, the agency pledged to revisit the issue if the RIN market did

not operate as intended, with resulting high prices for obligated parties.

EPA recognized at the time that high RIN prices could result if the market approached

the blendwall, and that high prices can affect refiners and importers differently depending

on

whether they are affiliated with blenders. Refiners and importers affiliated with blenders can

obtain most, if not all, of the RINs they need for compliance without incurring any cash cost,

simply by receiving those RINs from their affiliated blenders. Refiners and importers without

blending capabilities, by contrast, must acquire RINs on a secondary market, and they incur

significant cash costs to do so. A differential impact

on

obligated parties is inconsistent with a

fundamental purpose of RINs, which is to allow refiners and importers to comply with the RFS

requirements regardless

of

whether they themselves blend fuel or are affiliated with blenders.

RINs are intended to be a competitively neutral means of compliance.

The statutory obligation is now above the blendwall. The methodology EPA has

proposed to address that problem

in

the 2014 NPRM does not prevent high RIN prices that

have a disparate impact

on

refiners without affiliated blending capabilities. As Monroe's

comments in response to the 2014 NPRM explain in detail, EPA's proposed methodology still

sets the annual volume requirements too high, leaving an insufficient margin for error and

creating incentives for parties with access to RINs to horde them for potential use the following

year. As a result,

6

RIN prices remain far above their historical level and reflect speculation

rather than market fundamentals. Since EPA released the 2014 NPRM, the price for 6 RINS

generally has been above 30 cents per RIN. The historical average, prior to 2013, was about 2

Monroe believes that this O ijato petition may not be ripe until the publication o f a final 2014 rule. The

new grounds that would give rise to Monroe's right to seek judicial review of 40 C.F.R. § 80.1406(a)(1

,

s 42 U.S.C.

§

7607(b)(1 , and that trigger Monroe's obligation to file a petition with the agency pursuant

to

Olijato

before seeking judicial review, will not arise unless and until EPA adopts its proposed

methodology (or a different methodology that also results

in

disproportionate harm to refiners that are

unaffiliated with blenders)

in

a final rule. Nevertheless, out of

an

abundance of caution, Monroe files this

petition now, within 60 days

of

the publication

of

the 2014 NPRM.

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cents. Market fundamentals have not changed so dramatically as to explain a fifteen-fold

increase in RIN prices.

If EPA finalizes the methodology for setting annual RFS requirements that it proposes in

the 2014 NPRM, thus allowing high RIN prices to persist and differentially burdening one

subgroup

of

refiners, it will no longer be defensible to continue to impose the compliance

obligation

on

refiners and importers. There is no policy rationale for disproportionately

burdening a subclass

of

obligated parties, and it would be arbitrary and capricious to continue to

impose the compliance obligation on refiners and importers

in

such circumstances.

Accordingly, if the methodology proposed

in

the 2014 NPRM is adopted, EPA would need to

revise its regulations to make blenders, rather than refiners and importers, responsible for

compliance with the RFS requirements. Shifting the compliance obligation downstream to

blenders would prevent any skewing

of

the refining market resulting from high RIN prices. It

would also advance the overall purpose

of

the RFS program, by imposing the obligation on

entities that directly affect whether compliance

is

achieved and thereby more directly aligning

parties' incentives with Congress's goals.

I.

The RFS Statute Requires That EPA Impose the Compliance Obligation on

Refiners, Importers, or Blenders As Appropriate.

Congress directed EPA to impose

an

RFS compliance obligation

on

refineries,

blenders, and importers, as appropriate. 42 U.S.C. §7545(o)(3)(B)(ii)(I). EPA has interpreted

the phrase as appropriate,

id.

to give the agency discretion to determine the parties

on

which

the compliance obligation should be imposed. See EPA, Regulation

of

Fuels and Fuel

Additives: Renewable Fuel Standard Program, 72 Fed. Reg. 23,900, 23,925-27 (May

1

2007)

( 2007 Rule ). That discretion, however, is not unbounded. The word appropriate means

suitable for a particular ... condition ... ; fitting.

Am. Heritage Dictionary o the English

Language

88 (4th ed. 2000). Thus, by using the phrase as appropriate, Congress meant to

underscore that EPA must select the parties

on

whom to impose the compliance obligation

in

a

manner that fits the overall purposes of the statutory scheme. Cf

Chem. Mfrs. Ass n

v

EPA,

217 F.3d 861, 866-67 (D.C. Cir. 2000) (holding that regulations must be consistent with the

purpose of the Clean Air Act).

II. EPA Has Acknowledged That There Is No Current Justification For Imposing the

Compliance Obligation on Refiners and Importers Rather Than Blenders, and

Pledged to Revisit Its Regulation in the Circumstances That Now Exist.

In

2007, when it promulgated rules governing the first RFS program, EPA decided to

impose the compliance obligation on refiners and importers, but not blenders. It did so largely

for administrative convenience, 2007 Rule, 72 Fed. Reg. at 23,923- even as it acknowledged

that refiners and importers do not generally produce or blend renewable fuels at their facilities,

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id

at 23,937, and thus would need to rely

on

the actions of third parties, such as blenders and

ultimate consumers, to satisfy the RFS requirement. See id ( [T]he actions needed for

compliance largely center on the production, distribution, and use of a product by parties other

than refiners and importers. ).

One could question the rationality of requiring one industry to demonstrate, under threat

of signif icant penalties, that another industry has used a certain amount of renewable fuel. See

Am. Petroleum Inst.

v

EPA 706 F.3d 474, 480 (D.C. Cir. 2013) (criticizing regulatory scheme

that applies the pressure to one industry (the refiners) when it

is

another ... that enjoys the

requisite expertise,

plant, capital and ultimate opportunity for profit. ). Nevertheless, the

administrative considerations identified by EPA at least amounted to some kind of justification.

In

2010, however, EPA determined, in its rulemaking implementing the second version

of the RFS program, that the rationale ... for placing the obligation on just the upstream refiners

and importers is no longer valid. 2010 Rule, 75 Fed. Reg. at 14,722. Logic dictated that

blenders, who were the ones using renewable fuel and separating the RINs that could be used

to demonstrate compliance, should bear the compliance obligation. Nevertheless, EPA chose

to adhere to its prior policy and continue to place the compliance obligation solely on refiners

and importers. It did so in order to prevent any possible disruption [of] the RFS program during

the transition from RFS1 to RFS2. Id EPA pledged, however, that it would continue to

evaluate the functionality of the RIN market, and that it would consider revisiting its decision

to impose the compliance obligation

on

refiners and importers if it determine[d] that the RIN

market

is

not operating as intended, driving up prices for obligated parties and fuel prices for

consumers.

Id

Ill. Continuing to Impose the Compliance Obligation Refiners and Importers Is

Arbitrary and Capricious

In

Light of the Methodology for Setting Annual RFS

Requirements Proposed in the 2014 NPRM.

A

The Purpose of the RIN System Was to Facilitate Compliance

by

Refiners

and Importers in a Competitively Neutral Manner Regardless of Whether

Refiners and Importers Themselves Blended Fuel.

For a number of years, the RIN system allowed all refiners and importers equally to

demonstrate compliance, regardless

of

whether they themselves blended any renewable fuels

or instead relied upon third parties to do so. As EPA described it the RIN system was intended

to preserv[e] the natural market forces and blending practices that will keep renewable fuel

costs to a minimum, 2007 Rule, 72 Fed. Reg. at 23,929, and to allow current blending

practices to continue wherein some refiners purchase a significant amount of renewable fuel for

blending into their gasoline while others do little or none.

Id

The RIN system thus provid[ed]

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a means for all refiners to economically comply with the standard.

Id

at 23,929-30. Indeed,

until January 2013,

6

RINs traded for just a few pennies each.

Beginning in January 2013,

6

RIN prices spiked, at one point rising to more than

1

each, and they have remained volatile. As EPA acknowledged, the price spike was largely due

to the approaching

E10 blendwall: RFS statutory volume requirements continue to increase

year-on-year, and have outstripped the economy's ability to absorb renewable fuel.

ee

EPA,

Regulation

o

Fuels and Fuel Additives: 2013 Renewable Fuel Standards, 78 Fed. Reg. 49,794,

49,822 (Aug. 15, 2013) ( 2013 Rule ) ( We recognize that the approaching E10 blendwall and

the related anticipation of future scarcity o RINs

in

the context o currently high feedstock prices

is the primary driver for these price increases. ). In these circumstances, the RIN market no

longer functions properly.

Specifically, high and volatile RIN prices disproportionately disadvantage one subgroup

o

refiners and importers: those who lack any blending capability of their own and who must

acquire RINs on the secondary market

in

order to demonstrate compliance with the RFS

requirements. Whereas refiners who have their own blending capabilities, or are affiliated with

blenders, can obtain the RINs needed for compliance without incurring any cash cost, refiners

without any affiliated blending capabilities are forced to incur significant cash costs to obtain the

RINs they needed. In these circumstances, the RIN system no longer serves its purpose of

preserving the natural market forces and permitting current blending practices to continue

wherein some refiners purchase a significant amount

o

renewable fuel for blending into their

gasoline while others do little or none, thus providing a means for all refiners to economically

comply with the standard. 2007 Rule, 72 Fed. Reg. at 23,929-30. To the contrary, the RIN

system severely penalizes those refiners who happen to lack any blending capability

o

their

own, and bestows a competitive advantage on those refiners who happen to be affiliated with

blenders.

Although the RIN market became dysfunctional early

in

2013, EPA pledged,

in

the 2013

Rule, to address the problem

in

its rulemaking for 2014 (which, by the time the 2013 final Rule

was issued, would be scheduled to begin within a matter of a couple of months). Specifically,

EPA acknowledged in the 2013 Rule that it does not currently foresee a scenario in which the

market could consume enough ethanol sold in blends greater than E 10, and/or produce

sufficient volumes

o

non-ethanol biofuels (biodiesel, renewable diesel, biogas, etc.), to meet the

volumes

o

total renewable fuel and advanced biofuel stated

in

the statute. 2013 Rule, 78 Fed.

Reg. at 49,823. EPA, however, indicated its intention to address that problem in its 2014

rulemaking by lowering the statutory volume requirements to levels that would be reasonably

attainable:

Given these challenges, EPA anticipates that in the 2014

proposed rule, we will propose adjustments to the 2014 volume

requirements, including to both the advanced biofuel and total

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renewable fuel categories. We expect that

in

preparing the 2014

proposed rule, we will estimate the available supply

o

cellulosic

and advanced biofuel, assess the E10 blendwall and current

infrastructure and market-based limitations to the consumption of

ethanol in gasoline-ethanol blends above E10, and then propose

to establish volume requirements that are reasonably attainable in

light

o

these considerations and others as appropriate.

Id EPA's promise to chart a reasonable path forward that appropriately addresses the

blendwall and other constraints, id., left open the possibility that the market distortions of 2013

were temporary and would be resolved going forward by EPA's 2014 rulemaking. See id at

49,822. Thus, although it was arbitrary and capricious for EPA not to have reduced the

statutory volume requirements

in

2013 - as Monroe has argued before the D.C. Circuit,

see

Docket No. 13-1265 - the 2013 Rule suggested that any market dysfunction would be limited to

the 2013 year, and in subsequent years EPA would use its discretion to reduce statutory volume

requirements to avoid such distortions.

B The 2014 NPRM Proposes a Methodology for Setting Annual RFS

Requirements That Has Resulted and Will Result in Elevated RIN Prices.

In

the 2014 NPRM, EPA for the first time proposed a methodology that would guide it

in

setting annual volume requirements below those imposed by the statute - not only for 2014, but

also for 2015 and for the years following. See 2014 NPRM, 78 Fed. Reg. at 71, 734 ( we would

intend this framework to apply not just to 2014, but to later years as well. ).

However, as explained fully

in

Monroe's comments to the 2014 NPRM, the methodology

proposed by EPA fails adequately to address the problem

o

high RIN prices that impose a

differential burden on certain obligated parties. If adopted, the methodology proposed by EPA

in

the 2014 NPRM will entrench for the future a system

in

which RINs impose

an

onerous

financial burden for those refiners and importers who remain unaffiliated with blenders. That

is

because EPA's proposed methodology sets a volume requirement that remains too high, basing

it on overly optimistic predictions and ignoring the incentives EPA itself has created for parties

with ready access to

RINs to horde them as insurance against future uncertainty.

In the 2014 NPRM, EPA seeks to project the volume of ethanol that could reasonably

be

onsumed

as E10 and higher ethanol blends, and would add to that the volume of all non

ethanol renewable fuels that could reasonably be expected to be available. 2014 NPRM, 78

Fed. Reg. at 71738 (emphasis added). But EPA's projections are, as the agency itself

acknowledges, inherently uncertain - they reflect probabilistic predictions that may not be borne

out in reality - and, as a result, the amount of ethanol that could actually be consumed and the

amount of other renewable fuels that actually is available may well vary significantly below

EPA's projections. Parties with access to RINs are able to hedge that risk by banking extra

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RINs; but that means a tighter supply of RINs (and thus higher prices) for those refiners and

importers who must purchase them

on

the secondary market.

The clearest evidence of this

s

the market's reaction since EPA released the 2014

NPRM. The price for 6 ethanol RINs jumped from approximately 20 cents per RIN to

approximately 30 cents per RIN n the weeks following EPA's publication of the 2014 NPRM,

and the price remains at approximately 30 cents per RIN - far above the historical level of

approximately 2 cents per RIN and far above the level that would exist if the price were driven

by market fundamentals rather than speculation. Thus, refiners unaffiliated with blenders

continue to face high cash costs to obtain the RINs they need for compliance.

C

If EPA Adopts the Methodology Proposed

in

the 2014 NPRM, It Would No

Longer Be Appropriate to Impose the Compliance Obligation on Refiners

and Importers.

If EPA finalizes the methodology proposed n the 2014 NPRM - despite the persistence

o

high RIN prices and the resulting competitive disadvantage for obligated parties who must

incur cash costs to purchase their RINs on the secondary market - EPA would be required to

revisit its decision to make refiners and importers, rather than blenders, the obligated parties.

As EPA recognized n 2010, the rationale for imposing the obligation on refiners and importers

no longer

s

valid, and, unlike n 2010, doing so now creates market dysfunction and competitive

injury to refiners and importers who must rely on others to blend renewable fuel. The RIN

system was never meant to penalize refiners or importers simply because they lacked their own

blending capabilities; to the contrary, the RIN system was intended to facilitate compliance by all

refiners and importers regardless of whether they had their own blending capabilities.

Had EPA proposed a methodology for reducing statutory volume requirements that

would on a going forward basis ensure that the market remained sufficiently far from the

blendwall to restore the market to its historic functioning, there would be no need for EPA to

reassess its choice of obligated parties. But because EPA's proposed policy sets volume

requirements at levels that inject significant uncertainty

n

the RIN market, resulting

n

high

prices and competitive injury that is inconsistent with the purpose

o

the RIN system, it would be

arbitrary and capricious for EPA to continue to treat refiners and importers as the appropriate

parties responsible for compliance. See 42 U.S.C. 7545(o)(3)(B)(ii)(I).

EPA has never articulated any rationale for a regulatory scheme that would impose

differential burdens on refiners depending upon whether they are affiliated with blenders;

indeed, those differential burdens simply cannot be squared with the purpose

o

the RIN

system, which was to ensure that the means to demonstrate compliance will be readily

available even for those obligated parties [who do] not have access to renewable fuels or the

ability to blend them, and so must use credits to comply. 2007 Rule, 72 Fed. Reg. at 23,904; id

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Christopher Grundler

Director Office

o

Transportation and Air Quality

Environmental Protection Agency

William Jefferson Clinton Building

1200 Pennsylvania Avenue N W

Mail Code: 6401A

Washington DC 20460

via email and certified mail)

Bill Charmley

Acting Director Assessment and Standards Division

Office o Transportation and Air Quality

via email)

Byron Bunker

Director Compliance Division


via email)

Karl Simon

Director Transportation and Climate Division


via email)

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