I. THE RENEWABLE FUEL PROGRAM
The Renewable Fuel Standard (RFS) program was created under the Energy Policy Act of 2005 and
expanded by the Energy Independence and Security Act of 2007 (EISA). The purpose of the RFS is to
incrementally increase the volume of renewable fuel blended into motor fuel, heating oil and jet fuel
nationwide. The RFS achieves this goal by requiring “obligated parties” to meet annual volumetric
renewable fuel blending mandates.
Obligated Parties
Congress authorized the EPA to identify obligated parties who are subject to annual volumetric blending
mandates. The EPA identified refiners and importers as obligated parties in a 2007 rulemaking. The EPA
selected refiners and importers as obligated parties in part because they represent the smallest number
of individual entities among all potential obligated party candidates and thus a more efficient group to
manage administratively. The EPA initially considered conferring obligated party status on every blender
along the entire petroleum distribution chain. However, selecting all blenders as obligated parties would
have created thousands of entities to regulate as compared with only a few hundred with refiners and
importers.
Renewable Volume Obligations
Obligated parties are required to meet annual volumetric fuel mandates (RVOs) established by Congress
in the 2005 Energy Policy Act. The RVO represents the minimum amount of renewable fuel that an
obligated party must blend each year into motor fuel to stay in compliance with the RFS program. RVOs
increase incrementally each year until they level off at 36 billion gallons per year in 2022. The EPA may
waive the RVO volumes established by Congress, in whole or in part, based on a determination that
implementation of the program would cause severe economic or environmental harm, or based on
inadequate domestic supply. Heating oil and jet fuel are not subject to RVOs but generate credits that
can be used to meet mandated RVOs volumes.
Renewable Identification Numbers (RINs)
The RFS requires that each gallon of renewable fuel is assigned a renewable identification number (RIN)
at the time it is produced. The RIN number follows the gallon of renewable fuel until it is blended into
motor fuel, heating oil or jet fuel. Once blending occurs, the RIN number is retired and reported to the
EPA as proof that the gallon assigned to the RIN was blended into motor fuel heating oil or jet fuel. In
this way, the EPA can track RINs to determine whether obligated parties are meeting their annual RVO.
However, not all RINS are created equal. Some RINs are counted as representing more than one gallon
of renewable fuel for purposes on meeting RVO mandates based on the amount of greenhouse gas it
displaces. The more greenhouse gas displaced by the renewable fuel gallon, the higher the gallon
equivalency assigned to the RIN. For example, one gallon of soy biodiesel counts as 1.5 gallons of
renewable fuel. Corn ethanol on the other hand, equals only one gallon of renewable fuel because it
displaces less greenhouse gas than soy biodiesel.
Blenders are not always obligated parties. Or, if they are obligated parties, they may generate more RINs
than they need to meet their RVO mandate. Blenders are not required to retire these excess RINS as
unused. Instead, they can “separate” the RINs and sell them as blending credits to obligated parties
who need them either because either don’t blend renewable fuels or have not blended enough to meet
their RVO. The obligated party then reports the purchased RIN to the EPA where it is retired and
counted against their RVO. The monetary value of RINs sold in this way is based on supply and demand
and often affected by market speculators who trade in RINs.
II. VALERO PETITION TO MOVE THE POINT OF OBLIGATION FROM REFINERS/IMPORTERS TO POSITION
HOLDERS AT THE TERMINAL RACK
Regulatory Process
Valero filed a petition for rulemaking with the EPA last year to move the point of obligation under the
RFS program from refiners and importers to position holders at the terminal rack. The EPA published a
notice in the Federal Register in November 2016 proposing to deny the petition and asked for public
comments. PMAA filed comments taking a neutral position on whether the point of obligation should be
moved. The public comment period closed on February 22, 2017. EPA will now decide, based on public
comments whether it should deny or approve the petition. EPA’s approval of the petition would not
result in moving the point of obligation to position holders. An EPA approval would only result in the
agency issuing a proposed rule to change the point of obligation and request for public comment. In
other words, the Valero petition is a procedural move asking the EPA to propose a rule changing the
point of obligation – a process that will be open to public notice and comment. If the EPA approves the
petition and initiates the rulemaking process to move the point of obligation, a final rule doing so would
not be published for at least 18 months or perhaps longer. The bottom line is that if approved the
process to move the point of obligation will be lengthy.
Obligated Parties Proposed Under Valero Petition
Valero has petitioned the EPA to move the point of obligation from refiners and importers to the last
party holding title to the fuel prior to sale from a terminal. Specifically, the Valero petition is seeking to
move obligated party status to:
“…the entity that holds title to the gasoline or diesel fuel immediately prior to the sale from the bulk
transfer/terminal system (as defined by IRS regulations 40 CFR 48.4081-1 (b)) to a wholesaler, retailer or
ultimate consumer and is required to report an federal excise tax liability for gasoline or diesel fuel on its
form 720 Quarterly Federal Excise Tax Return….”
Essentially the Valero petition would move the point of obligation down from refiners and importers to
position holders at the terminal rack.
Will Petroleum Marketers Purchasing Fuel Above the Terminal Rack Become Obligated Parties?
Petroleum marketers who acquire fuel and or title to fuel from a position holder above the terminal rack
do not fall into Valero’s definition of obligated party. Marketers who purchase fuel from position holders
above the rack are not required to remit federal motor fuel excise tax (FET) to the IRS on Form 720.
Instead, they buy the fuel at tax included price that is collected at the terminal rack. The FET is paid by
the position holder who files form 720 and remits the FET and LUST Tax to the IRS. The IRS looks to the
position holder to pay the FET and the LUST tax on fuel held at a terminal, not the marketer who pulls
from the rack. Under IRS rules, marketers cannot purchase tax free fuel above the terminal rack unless
they are also a position holder and enter into a contract with the terminal operator to lease space. Nor
does their transaction qualify as an inventory position under IRS rules. Only a position holder is
permitted to have an inventory position at the terminal. Moreover, in order to qualify as a position
holder a marketer must hold an IRS 637 S certificate. While marketers may hold a 637 UV (ultimate
vendor), 637 M (blender) or 637 UP (tax free sales from a blocked pump) certificate, these activity
letters are not a substitute for a 637 S position holder certificate. As a result, simply entering into
transaction with a position holder above the terminal rack for supply and/or obtaining title to the fuel
does not confer position holder status on a marketer under the Internal Revenue Code or obligated
party status under the Valero petition. The Valero petition limits the point of obligation to the position
holder who remits FET and LUST taxes to the IRS.
Will Changing the Point of Obligation Make Branded Marketers More Competitive with large Chain
Retailers?
Valero filed a petition for rulemaking with the EPA asking the agency to issue a proposed rule that would
move the point of obligation under the RFS rule from refiners and importers to position holders at the
terminal rack. Valero is an independent refiner and obligated party under the RFS program. Valero
wants to move the point of obligation down to position holders in part due to the economic burden
obligated party status places on the company. Since Valero does not blend renewable fuels on its own, it
must meet their annual volumetric renewable fuel blending mandate (RVO) by purchasing costly RINs
sold by position holders who blend renewable fuel at the terminal rack. Many large refiners are also
position holders who blend at the rack to meet their RVO and sell excess RINS to obligated parties like
Valero. RINs are also sold by position holders who are large, multistate chain retailers. The large retailer
position holders are not obligated parties so every RIN they produce by blending is sold to obligated
parties for what some feel are inflated prices. The sale of RINs by the large chain retailers earn millions
in profit that are also passed down to their retail outlets enabling them to sell below cost, according to
some independent branded marketers. This results in a competitive disadvantage that is difficult to
overcome. Some argue that shifting the point of obligation to position holders would cause RIN prices
to crash and prevent the big chain retailers from selling below cost at the pump.