Don't Change the RFS Point of Obligation

Don't Change the RFS Point of Obligation
AP Photo/Julio Cortez

One of the President-elect’s earliest supporters, largest donors and closest advisors, Carl Icahn, wants the Environmental Protection Agency (EPA) to rig the system in favor of one of his largest investments.  Mr. Icahn’s problem is with the Renewable Fuel Standard (RFS), which requires refineries to blend increasing amounts of renewable fuels like ethanol and biodiesel into the nation’s fuel supply. Under the RFS, the EPA designated refiners and importers as “obligated parties” because placing the obligation on a smaller number of parties with significant assets generally results in a more efficient and effective program. Mr. Icahn claims this is costing CVR Energy - the refinery in which he owns an 80% stake - $200 million a year. Icahn and a small group of refineries want EPA to shift that obligation downstream to independent blenders and retail gas stations. 

Investors are betting that Mr. Icahn has the President-elect’s ear, but as a candidate, Trump vowed to protect the RFS. Shifting the point of obligation would not only be a significant market interference - it would make it nearly impossible for the President-elect to keep several of his campaign promises - particularly fostering domestic energy independence, ensuring low energy prices and reducing the size and scope of the EPA.

Decreasing Renewable Fuel Production

My father started our company in 1964 with one filling station in Lubbock, Texas. We now operate terminals, fuel storage facilities, retail gas-stations and truck-stops across the Southwest. Among other services, we blend ethanol and biodiesel into traditional fuels, as required under the RFS. We also ship unblended fuel to terminals across the country.  Mr. Icahn argues that shifting his burden onto our business will increase the use of biofuels and promote energy independence. The opposite is true.

The renewable credits that are available for blending are a pass-through cost regardless of the point of obligation.  For refiner’s that cannot blend enough renewables to meet the RFS – they can buy credits or export fuel to offset those costs.  As a terminal operator – we can only offset our costs by blending renewable fuels. Shifting the point of obligation means we would incur significant losses shipping to terminals that we don’t control – and we would stop doing so as a result.  This is exactly what is happening in California which operates under the same onerous rules that Mr. Icahn wants EPA to impose on the rest of the country. By the close of 2016, we will stop shipping fuel to California.  Were EPA to follow suit, our company alone would see a reduction in the consumption of renewable fuels by 40% based on 2015 numbers.

Raising Gasoline Prices

Gas is a commodity with the free market determining the spot price. Small operations like ours compete with major refiners every day to sell retail fuel to consumers at the lowest possible price. Moving the point of obligation eliminates our ability to compete and gives major refiners a significant unfair advantage over small businesses in small markets across the country. Liquidity and competition are what keep fuel prices low. If we obligate blenders and retail operators, liquidity would be squeezed out of the market, killing competition. We chose to make significant infrastructure investments in railroad logistics, terminal blending expansion and retail blending at the pump - enabling us to blend renewable fuels. Those investments have created lower cost fuel options for consumers and created jobs.  If we are forced to buy from refiners, we lose the ability to buy fuel in the open market and compete with refiners on price. Once that happens, we will be forced to stop shipping to other terminals. Once pipeline shippers like us start leaving markets like we have in California – refiners will lose a major competitor and fuel prices will go up.

Empowering EPA Bureaucrats

Currently, there are approximately 200 obligated parties under the RFS. Mr. Icahn is proposing EPA increase those by about 500% - creating 1,000 new individual points of obligation. This means more transactions to track, more EPA staff to track those transactions and many more opportunities for error and outright fraud.

Even though they all have the same obligations under the law, and have for nearly 10 years, many refiners oppose changing the point of obligation.  These are refineries that invested in the infrastructure necessary to comply with the RFS. These investments allow them to offset the costs associated with being an obligated party and get credit for blending renewable fuels at their terminal rack facilities. Refineries like Mr. Icahn’s that divested their terminal rack and retail operations to become pure-play refiners are the only ones looking for a government bailout. These were business decisions informed by their view of the marketplace but many of these refiners only did so under pressure from investors like Mr. Icahn. This was poor advice to follow, but rewarding them would only perpetuate the “rigged-system” that Mr. Trump campaigned so hard against.

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