New System, New Start For All Things RIN

With all the changes to the renewable identification number (RIN) system, many have been scrambling to understand and comply.
By Luke Geiver and Holly Jessen | April 15, 2010
The countdown continues to July 1the date when the "currency of compliance" for the revised renewable fuels standard (RFS2) switches to a new system. As part of the final rule for RFS2 issued in early February, the U.S. EPA will institute a new accounting system for the generation, sale, purchase, separation or retirement of all RINs. After an extensive review process that lasted more than eight months, the EPA created a closed system that will more closely monitor all things RIN. The biggest change to the process, the EPA Moderated Transaction System, will take effect in July, but there are many other changes to know.

Expanded from one fuel type in the first standard, RFS2 now includes four classifications of fuel as defined in the 2007 Energy Independence and Security Act. EPA is referring to the new RINs types as CBAR, an acronym for cellulosic, biomass-based diesel, advanced biofuels and renewable fuel, which will now be indicated in the 38-digit identification number. Prior to July 1, the RIN number would define the fuel as cellulosic (1) or noncellulosic (2) in origin. The fuel definition code in the 22nd spot in the 38-digit number will expand to one of five new classification numbers. Using the CBAR definitions, a number is assigned to each letter. The C for cellulosic ethanol will equal a 3 in the code, a B will equal a 4 and so on. The number 7 in the 22nd spot of the code is assigned to cellulosic biodiesel, a new fuel type under development since EISA was enacted.

Although the lengthy code still exists under RINs2, the task of generating the number is shifting from being the producer's role to the EPA's. A major weakness of the first RINs system was its susceptibility to human error that often resulted in RINs with extra numbers, duplicated codes, or production information that didn't match the RINs. Now, RINs codes will be generated and monitored by the EPA via the Web-based EMTS.

The first step for RFS2 compliance is to register, even if an ethanol producer was registered under RFS1. During an informational session on RINs accounting, Tony Miller, an EPA chemical engineer, stressed the importance of registering with the Central Data Exchange as a "submitter" within the QTAGReg system. The program typegasoline, diesel or renewable fuelis indicated along with expected business activities such as RIN generator or owner, refiner, importer, exporter, pipeline/pass through terminal, mobile facility, small refiner, oxygenate blender, truck loading terminal, independent lab, renewable diesel, small blender, transmix and finally, nonrenewable fuels importer. Plant information is included in the initial registration including the selection of all processes performed at the facility.

To generate RINs on the Web site, the registered user has numerous options, two of which Miller believes will be the easiest and most efficient for most. One option, Miller notes, is the wizard, a step-by-step process asking the user for information on a single batch of transactions including RIN year, fuel code, reason code, trading partner, assignment code and transaction code. The second option for generating RINS allows a user to submit a larger batch of transactions. For example, if a producer completes 10 RINs-generating transactions in one day, the producer can combine all that information into one template for submission.

Regardless of the approach taken by the submitter, the EPA provides the template for submitting information on its Web site. The Excel spreadsheet can be used to generate RINs for buying, selling, generating, separating or retiring. An EMTS conversion tool is also available on the Web site to convert the spreadsheet to XML format for uploading to the EMTS.

One strength of the new system is that RINs transactions with incorrect data will not be accepted into the database. In addition, both the buyer and seller must confirm a transaction within five days or it will be rejected. EMTS will notify parties if a submission failed, a trade has expired, or a trade has been denied. In the new system, the validity of RINs can be determined with the click of a button. To aid in the process of information input and reduce errors, the EPA has also developed a checklist for users as they navigate the system.

Too Early to Tell
With a major overhaul in the reporting mechanism and new complexities to navigate, the jury is still out among the ethanol industry. Kelly O'Farrell, supervisor of the accounting and auditing department at Christianson Associates, says she has talked to a few ethanol producers who have tested the new Web-based system. It's too early to tell, she says, whether it will really be a big improvement over RINs1. "They don't believe it's a time saving thing but it's a quality improvement," she says.

"I think that most market participants find the program to be complex and burdensome," says Graham Noyes, RINs specialist at Stoel Rives LLP. Noyes believes the required verification of a transaction within a five-day period is a key issue that will need to be field tested. "To be fair, the EPA was handed this by Congress and it was not a simple system to set up for anyone," he added.

O'Farrell reports that one frequently raised complaint is that the EPA is asking for pricing information, something that ethanol producers didn't have to disclose in the past. Many of her customers are questioning why per-gallon and RIN-transaction prices are now reported.

RINs pricing is likely to change drastically under the new system. David Steiner of Blue Ocean Brokerage LLC points out that under RINs1, ethanol and biodiesel RINs were interchangeable. Obligated parties could purchase either type. Now, with four RINs types, cellulosic, biomass-based diesel, advanced biofuels and renewable fuel, four distinct markets, each with its own pricing relationships, are created. "We'll probably see less linkage between the different RINs markets," he adds. For example, there was a big spread between biodiesel and ethanol RINS in early 2010. By mid-March biodiesel RINs had traded for 19 cents or even as high as 37 or 39 cents per gallon and ethanol RINs were only at 3.5 to 4 cents, Steiner says. That situation was created by the demand for biodiesel RINs since not as much biodiesel was blended in early 2010 as producers waited to hear whether the tax credit would be extended. Price differences won't stop with that example, he suggests. "Each market is going to function and have its own unique price as a result."

Engineering Reviews Required
Separate from the details of RINs, but equally important, is a new requirement for third-party engineering reviews as part of the registration process. The engineering reviews will verify a plant's production is classified in the proper CBAR category, and in the case of grandfathered ethanol plants, verify that the plant has not recently expanded its capacity. Any capacity expansion initiated after December 2007, the date of EISA's enactment, is not grandfathered in, and must meet the 20 percent greenhouse gas reduction target for renewable fuels.

The engineer completing the review must be a professional chemical engineer licensed through a regulatory state agency. In addition to registering as an EMTS user early, Miller emphasized the engineering review is also a task that should be completed early as only the EPA will determine when the review is complete. Noyes says the reviews are only just getting started as both engineering firms and producers are still determining how to do them. "It is a significant expenditure, and there will be even more challenges and costs for those pursuing new fuel pathways," he adds.

Ethanol plants grandfathered in to the RFS2 will have an additional six months to submit an engineering review. "This will direct the focus of engineering review resources on producers of advanced, cellulosic and biomass-based diesel," the preamble to the RFS2 final rule says. "EPA fully expects these producers of advanced renewable fuels to meet the engineering review requirement; however, if they are having difficulties producing engineer's reports prior to April 1, we ask that they contact us."

Beth Hilbourn, senior consultant at Turner, Mason & Co., says the company is preparing to conduct engineering reviews and verifications. However, like many others, Turner, Mason & Co. still has questions on what the EPA expects. Ethanol producers are calling the company, most saying they're reading and trying to understand the regulations but "waiting to react" until they have more information. "It's pretty onerous for these companies," she says.

Unchanged Elements
With all the functions the EMTS performs, there are some aspects the system will not cover. The new system will not replace quarterly reporting. Also, the system will not generate product transfer documents or satisfy all recordkeeping needs. And, annual attestations will still be required from an independent auditor. "PTD (product transfer documents) processes will have to get much more efficient," Noyes says, noting that many market participants will decide to use other third-party service providers to enable quicker compliance.

Other elements of RINs accounting did not change. The equivalence values attributed to each fuel type are the same. However, the EPA did reassign the Btu value of ethanol used as the baseline to 77,000 Btu per gallon from 77,750 Btu per gallon.

With the clock ticking down to the RINs2 EMTS, in mid-March many producers had yet to start testing the new EPA system. "This will be very clunky initially as everyone gets used to the new requirements," Noyes says. "It will be particularly interesting to see how the new categories of RINs are traded and valued in the market."

The EPA offers a number of resources for help on the registration process or clarification on regulations. To view informational tutorials, a list of frequently asked questions, or to download the conversion tool, go to: http://www.epa.gov/otaq/fuels/renewablefuels/epamts.htm. To speak with a technical support staff member email emts-testing@pqa.com or call (800) 385-6164. For questions or concerns regarding regulatory or registration issues email EPAFuelsPrograms@epa.gov or call (202) 343-9755. EP

Luke Geiver and Holly Jessen are associate editors of Ethanol Producer Magazine. Reach Geiver at (701) 738-4944 or lgeiver@bbiinternational.com and Jessen at (701) 738-4946 or hjessen@bbiinternational.com.