RIN Compliance Becomes a Full-time Job

The U.S. EPA is the regulating body of renewable identification numbers, as determined by the Energy Independence and Security Act of 2007. However, it is up to individual companies to wade through the evolving regulatory requirements and to comply with the EPA's rules.
By David Bennett | June 03, 2009
In April 2007, the U.S. EPA issued guidelines for the renewable fuels standard (RFS) program that went into effect Sept. 1, 2007. These regulations described, among other things, the recordkeeping, reporting and annual attestation requirements for renewable identification numbers (RINs). The first year of the program comprised only four months and required all regulated companies to have an attestation performed by an external certified public accountant. The attestation is the end result of elements contained in the regulations; therefore, companies needed to begin managing their RIN activity with focus on the attestation in order to ensure effective compliance.

The second year's guidelines introduced many elements that contribute to a host of issues for regulated companies. Among these elements are recordkeeping and reporting for significant increases in the amount of data for a full 12-month period; two years of RIN codes, (2007 and 2008) technical amendments to the program issued in the fourth quarter of 2008 by EPA; trading activity of RINs as a distinctive commodity; the economic landscape; staff turnover at regulated companies; and, probably most noteworthy, dealing with invalid and recalled RINs.

In early 2009, EPA introduced the concept of the Modified Transaction System — a database that will serve as a centralized repository for all RINs passing through the supply chain.

The efficacy of this system continues to be evaluated. Additionally, the EPA introduced its "notice of proposed rulemaking" for RFS2 on May 5, 2009. The agency's proposal included a significant expansion to the existing RFS regulations. RFS2 increases the annual standards for not only cellulosic and non-cellulosic biofuels, but also biomass-based diesel and other advanced biofuels as well. These are incorporated via the D-code component of the RIN code. All of this results in a significant increase by regulated companies of how they manage the RFS program. It also increases the procedures required as part of the annual attestation process. Two of the procedures are the independent third-party engineering reviews and validation of feedstock purchases and transfers.

People, Processes and Systems
In order to more readily comprehend the impact that these changes will have on regulated companies, it is helpful to classify the RIN lifecycle into the following five components - knowledge, recordkeeping, reporting, compliance and attestation. All regulated companies have strengths in one or more of these areas; however, far fewer have strengths in all of these areas. A company's effectiveness at managing the lifecycle generally revolves around three key elements - people, processes and systems.

People are the key ingredient of the components of RIN management. Knowledge of the regulations is critical to the day-to-day operations of a company's business activities.

Knowledge is also critical in designing the processes around RIN management. While it may not be necessary for one individual in the company to possess comprehensive knowledge of the regulations in totality, it is necessary to understand how they relate to their company. Since there are multiple types of regulated companies, the extent of knowledge will vary. For example, an obligated party needs to possess more knowledge than a blender or marketer.

Building a base of knowledge can be difficult. Companies are experiencing significant turnover in staff that focuses on the RIN program. This has been due to a variety of factors, not the least of which is the economic downturn in the past year. In addition, the person responsible for RIN management is generally not a dedicated resource; they most likely have other areas of responsibility. In some companies this might be sufficient, but for most companies it is a hindrance.

Processes are also a key ingredient of effective RIN management and compliance. While one person may be accountable for the recordkeeping and reporting, there may be many people with responsibility in the business cycle — legal, operations, finance, risk and treasury. All individuals need to be involved in the design and execution of the relevant processes in order to ensure that compliance is effective.

Systems are the culmination of people and processes. If people and processes are effective, then systems should follow suit. The system must be appropriate for the business activities of a regulated company. For instance, an obligated party or producer that uses a generic spreadsheet program as their RIN management "system" is going to experience significant difficulties, and risk devoting far too much time to making corrections than to compiling and analyzing the relevant data. This is a critical factor because companies that have the ability to properly analyze their data also have the ability to generate more profit, i.e. through RIN trading activity, and also to reduce costs, staff turnover and potential EPA penalties, which can amount to as much as $32,500 per day. The ultimate objective should be to use a system that can accommodate recordkeeping, quarterly reporting and the annual attestation. Many companies only consider the attestation as an afterthought and risk boxing themselves into a corner in terms of compliance and attestation findings.

Therefore, a concept that will serve companies well is to design their processes and systems specifically with the attestation as the end result. One way to achieve this is to utilize a certified public accountant as a key stakeholder in the design and development of the processes and systems.

RINs as a Commodity
In addition to compliance as it relates to RINs associated with renewable fuel, RINs themselves are a tradable commodity. In the past year, companies with the sole objective of RIN trading activities have begun to emerge. This is in addition to companies that also trade RINs as part of their renewable fuel programs. There are two primary factors involved in RIN trading —compliance and economic — and many companies are involved in both. RINs, like any other commodity, have a value that is subject to market conditions, availability and environmental factors. These also serve to increase complexity of effective RIN management. For publicly-traded companies, this introduces additional financial reporting considerations and Financial Accounting Standards Board regulations, such as FAS 157 and the fair value assigned to RIN-related assets on a company's balance sheet.

While renewable fuel itself is also subject to FAS 157 valuation, RIN valuation is quickly becoming a factor as well. This can also have an impact on the results of the annual attestation and should be taken into consideration at all times.

The bottom line is that RIN
requirements associated with RFS2 will force regulated companies to focus more time and resources toward ensuring proper recordkeeping, reporting and compliance. Outsourcing of day-to-day RIN management may now become a favorable option for many companies that are better served focusing on their core business activities in addition to compliance in these areas.

David Bennett is a CPA and CFF and is the owner of Renewable Energy Compliance and Advisory Services located in Stamford, CT. Contact him at rins@att.net or (203) 216-1972.