Point of Obligation Takes Center Stage in Hearing

The director of Faegre Baker Daniels Consulting weighs in on important policy issues to follow in his column on Business Matters appearing in the March print edition of Ethanol Producer Magazine.
By Josh Andrews | February 09, 2017

During the confirmation hearing of Oklahoma Attorney General Scott Pruitt for EPA administrator, the renewable fuel standard (RFS) was one of the most frequently raised topics. Members on both sides of the aisle who support the program peppered Pruitt with questions about enforcing statutorily prescribed mandates and the timely release of annual renewable volume obligations (RVOs). But the tensest back and forth may have been the exchange between freshman Sen. Tammy Duckworth, D-Ill., and Pruitt when she attempted to pin him down on his views regarding the point of obligation debate pending before the U.S. EPA. While Pruitt declined to answer the question specifically because there is an open comment period on the question, Duckworth’s persistence on the issue demonstrates its importance.

The question surrounding point of obligation began last winter with a request for the EPA to reconsider the definition of “obligated party.” In November, the EPA responded with its intention to deny the request, while initiating a public comment period, which was extended once to Feb. 22. How the Trump administration responds to the comments will be the first key test to how it views the RFS program.

Supporters of the program have cause for concern given Pruitt’s previous comments and views questioning the RFS. However, President Trump pledged his continued support for the program throughout the campaign and Pruitt has vowed to follow the president’s lead. Pruitt’s answers throughout the hearing on the RFS were positive, to the point where he seemed to question whether the EPA was being judicious enough with its waiver authority. His comments on implementing the program, as prescribed, were what supporters needed to hear. But given the EPA’s authority to revisit the issue through the extended comment period, his refusal to offer thoughts on the question at hand did not calm fears.

The question of moving the point of obligation from refiners and importers to blenders would be a major disruption to the RFS and the way the program has effectively run the past 11 years. Such a move would turn the program on its head, adding enormous complexity to the program’s implementation and enforcement by greatly expanding the number of companies obligated. In EPA’s own analysis, it was unable to determine a final number of entities that would be included under a new definition of obligated parties and, in fact, noted that the type of company that would become an obligated party could extend as far as to railroads and big store chains. Companies that have not historically fallen under these compliance obligations would need to staff up to address these new issues and roles. Established business relationships and deals would need to be revisited.

As in all considerations related to the RFS, it is worth noting the impact that such a change would have on ongoing investments in infrastructure and in the technologies leading us into second-generation biofuels and increased efficiencies in existing production. A major change in the structure of the program at this stage in its implementation would chill investments. The market will wait to see how the industry responds to the new structure and the resulting impact on commercial producers, as well as pilot and lab-based testing and production.

Debate over the RFS will undoubtedly continue as the new Congress gears up. The inability for the previous Congress to enact comprehensive energy legislation and a new administration with wildly differing views from its predecessor only adds more incentive to consider such legislation. Add to that the beginning of the next Farm Bill reauthorization and comprehensive tax reform and there will be a number of opportunities for this administration to reinforce its support of the RFS.

It will be important for the industry to make it clear to Congress and the administration, that adhering to the volumes mandated by law is only one aspect to supporting this vital program. Support for the volumes will mean nothing if the program is broken down from within through a change in the point of obligation definition. On the flip side, a strong stance on this issue from the new administration will go a long way in quelling fears of its long-term intentions on the RFS.

Author: Josh Andrews,
Director, Faegre Baker Daniels Consulting