Obama’s punt on renewable fuel sets up fights in court, congress

The Obama administration’s decision to put off issuing quotas for the use of renewable fuels this year sets up fights in Congress and the courts over a program that’s been bitterly contested for nearly a decade.

The delay, announced Friday by the U.S. Environmental Protection Agency, follows months of fighting between refiners and ethanol producers over a proposal by the agency to lower the quotas for ethanol, biodiesel and cellulosic fuels.

With the EPA nearly a year late in setting the mandates for 2014 under a Bush-era law, fuel blenders were left scratching their heads all year over how much of the additive they were supposed to be using.

“The powers that be in Washington always tend to procrastinate, but this has been getting ridiculous,” Pavel Molchanov, an analyst at Raymond James & Associates, said in a research note. “There is no precedent for this.”

The 2005 law was designed to encourage the use of renewable fuel and lessen U.S. dependence on imported oil. Refiners such as Exxon Mobil Corp. and Valero Energy Corp. are required to add a certain amount of renewable fuels to gasoline and other products each year following guidelines set out in the law and interpreted each year by the EPA.

2014 Delay

The agency said today that it wouldn’t set this year’s requirements under the Renewable Fuels Standard until 2015, when it also will issue quotas for 2015 and 2016. The agency could waive the 2014 requirements altogether or accept whatever has been produced as meeting the mandate.

Refiners rose today in New York trading. Phillips 66, the largest U.S. oil refiner, rose 2 percent to close at $79.42 in New York, and Tesoro Corp. (TSO), based in San Antonio, rose 2.7 percent to end at $77.73.

“This unexpected announcement highlights that there are still significant challenges facing the RFS and underscores the need to come together and find a practical, bipartisan solution,” Michigan Republican Representative Fred Upton, the chairman of the House Energy and Commerce Committee, said in a statement today.

Added Iowa Republican Senator Charles Grassley, an ethanol booster: “Unfortunately, as we also saw this with the Keystone XL pipeline, uncertainty, delay and indecision are hallmarks of this administration on energy policy.”

Lobbyists for oil companies opposed to the law said the idea of setting a retroactive quota shows that EPA isn’t capable of managing the program. They urged Congress to scrap the law altogether.

Ambiguous Course

Today’s delay “is a gross dereliction of responsibility that leaves fuel refiners and the biofuels industry alike to navigate a course of ambiguity,” Charles Drevna, the president of the American Fuel & Petrochemical Manufacturers, said in a statement today.

The group, which represents companies including Exxon Mobil Corp. and Chevron Corp. (CVX), also said today it will sue the EPA for failing to issue the targets by last November, as the law requires.

“Being unable to issue the 2014 blending requirements until after the close of the year underscores the fact that this government program is broken,” Angelia Graves, a spokeswoman for Marathon Petroleum Corp. (MPC) in Findlay, Ohio, said in an e-mail. “This is only one of many issues that make the RFS unworkable. Legislative action is required to either completely eliminate the RFS or significantly overhaul it so that impacted parties are able to fulfill their obligations.”

Proposed Rule

In a draft rule released a year ago, the EPA said it would require blending 15 billion to 15.52 billion gallons of renewable fuels such as corn ethanol and biodiesel in 2014, down from 18.15 billion gallons set in the 2007 legislation. A final proposed rule was sent by the agency to the White House and was forecast to slightly increase that quota, although the proposal hadn’t been made public.

The EPA justified that cut by saying ethanol was bumping up against a so-called blend wall, or the maximum amount of the fuel that could be mixed into the gasoline supply without damaging engines. Ethanol producers say the blend wall is an imaginary creation of refiners — whose products are displaced the renewables — and threatened to sue if EPA finalized that rule.

Driving habits have changed in the seven years since the law was enacted and vehicles burn less fuel, shrinking the overall pool for which ethanol is blended, said Aakash Doshi, an analyst at Citigroup Global Markets Inc., in New York.

“The EPA cannot waive a magic wand and change that,” Doshi said in a telephone interview today.

Compromise Legislation

Now the quota fight will spill into 2015, with the likelihood that it will move into the courts and Congress. Lawmakers have worked to revise the mandates, although no compromise measure has advanced to a vote.

“Congress may be the best situated to negotiate a palatable deal for both sides of the debate,” Tim Cheung, an analyst at ClearView Energy Partners, said in a research note today.

Not everyone is threatening to run to Congress or the courts. Biofuel producers praised the EPA’s delay, because they said the agency acknowledged their argument that a proposal to cut quotas would snuff out future investment in their fuels. They say EPA can use its authority to put the program on sound footing.

‘Move Quickly’

“We appreciate the administration’s willingness to pivot in the right direction this late in the game,” said Brooke Coleman, executive director of the Advanced Ethanol Council. “The key now for advanced biofuel investment is to move quickly to fix what needs to be fixed administratively.”

Coleman said that the practical impact of the EPA’s decision is that 2014 “is a time-out year” and predicted the agency would end up accepting what’s already been produced as the standard for this year.

Compliance with the mandate is tracked by Renewable Identification Numbers, or RINs, certificates that are attached to each gallon of biofuel. Once blenders mix renewable fuel into gasoline, they can trade the credits.

Corn-based ethanol RINs fell 13 percent to 49 cents today, the biggest decline since February, data compiled by Bloomberg show. Denatured ethanol for December delivery gained 11 cents, or 5.7 percent, to $2.058 a gallon at 2 p.m. on the Chicago Board of Trade.