NATSO Analysis: Federal Court Sides with Fuel Retailers, Informative for Current RFS Debates

On August 30, the D.C. Circuit Court of Appeals issued a decision in a lawsuit brought by the merchant refining community that sought to require EPA to change the so-called "point of obligation" under the Renewable Fuel Standard (RFS). The court's opinion in the case, which was first filed more than two-and-a-half years ago, is noteworthy for its implications on current policy debates over the future of the RFS.

On Aug. 30, the D.C. Circuit Court of Appeals issued a decision in a lawsuit brought by the merchant refining community that sought to require the Environmental Protection Agency (EPA) to change the so-called "point of obligation" under the Renewable Fuel Standard (RFS). The court's opinion in the case, which was first filed more than two-and-a-half years ago, is noteworthy for its implications on current policy debates over the future of the RFS.

In essence, those refiners that brought the lawsuit wanted fuel retailers and wholesalers, rather than refiners and importers, to have to buy Renewable Identification Numbers (RINs) to comply with the RFS. The D.C. Circuit on Aug. 30 ruled against them, and held that EPA is not required to fundamentally alter the RFS because the RFS is working as Congress intended.

NATSO, along with NACS and SIGMA, filed an amicus brief in the case. The brief was designed to push back on certain aspects of the plaintiffs' arguments. Specifically, NATSO argued that changing the "point of obligation" would raise fuel prices, increase EPA's administrative burdens in implementing the program, and result in less renewable fuel being blended into the fuel supply in the United States.  

The court agreed. And while this represents a modest victory for the fuel marketing industry (the court was simply upholding a decision EPA had already made), the fact is that the refiners who filed the lawsuit have been winning the larger battle over these very same issues for the past two years.  Indeed, EPA's new, more liberal standard for exempting "small" refineries from their obligations under the Renewable Fuel Standard has given these refining companies the same outcome (via a different means) that they sought in the fight over the point of obligation.

In essence, it is a fight over market share. Refiners want to lose as little market share as possible to biofuels, and biofuels producers want to gain as much of refiners' market share as possible.  Refiners' previous push to change the point of obligation, like their current push for more small refinery waivers, was designed to discourage fuel retailers from displacing petroleum-based fuel with biofuels.

Fuel retailers, for our part, remain caught in the middle. NATSO is fuel agnostic: Our members simply want to sell what our customers want to buy.  And in our experience, the product our customers want to buy is fuel at the lowest price possible.  

NATSO's views on the RFS are entirely governed by that principle: The RFS should be structured to allow our members access to diverse sources of efficient supply, because this enables us to buy fuel (both petroleum-based fuel and renewable fuel) and sell it to customers for as low a price as possible.

The Trump Administration is considering a number of changes to biofuels policy, from prospectively accounting for waived volumes in establishing the RFS's annual renewable fuel mandates, to increased incentives for biofuels infrastructure. As these policy debates unfold, the Administration would be wise to study the D.C. Circuit opinion that came out on Aug. 30. 

For example, that opinion concluded that there was sufficient evidence to demonstrate that higher ethanol RIN prices would have little impact on the price of E10 gasoline.  Specifically, the court found that if ethanol RIN prices go up, this should be offset by concomitant decreases in the price of ethanol itself, resulting in negligible impact on retail gasoline prices. NATSO agrees with this conclusion. Thus, were the Trump Administration to decide to prospectively account for waived volumes, it may result in higher ethanol RIN prices, but it would not likely result in higher retail prices for E10 gasoline.

With respect to diesel fuel, the RFS actually works to lower retail diesel prices (and thus the price of all goods that move by truck). The biodiesel RIN makes a product that is generally more expensive than diesel fuel (biodiesel) less expensive than diesel fuel. This incentivizes diesel retailers to buy and blend as much biodiesel as possible. Higher RIN prices therefore put pressure on the diesel complex by threatening to displace their gallons, i.e., replacing something more expensive (diesel) with something less expensive (biodiesel).  This downward pressure on price largely gets passed on to consumers because of the competitive, transparent nature of the retail diesel market. 

NATSO members blend biodiesel into diesel so that it allows them to sell their diesel fuel for less money. This drives market share and gives consumers more money to spend in stores where margins are better. Consumers do not want to pay more money for biodiesel and they never will. 

So the more biodiesel that is blended into the diesel fuel supply, it means that NATSO members are able to use biodiesel to lower the price of retail diesel fuel. Conversely, when less biodiesel is being blended, it means that there is less of a cheaper, more environmentally friendly product displacing a more expensive, petroleum-based product. It is unfortunate that throughout all of the uncertainty and volatility in the RFS program in recent years, it is the biodiesel industry, and the feedstock-growing soybean farmers, that have been hit the hardest.  Increasing demand for biodiesel through higher total advanced biofuel mandates would be an easy, politically painless way for the Administration to mitigate some of the damage that these constituencies have absorbed through the small refinery waivers and the larger trade war with China. 

The Trump Administration is expected to announce significant policy changes to how it is implementing the RFS in the coming weeks. NATSO will continue to keep its members apprised of all relevant developments. 

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