Growing pressure for a federal probe of the opaque market underpinning the Renewable Fuel Standard could bolster efforts to dramatically reform the landmark biofuels policy.
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Earlier this month, billionaire investor Carl Icahn sent a heated, 11-page letter to top officials at the US Environmental Protection Agency, arguing that the foundation of the RFS they were charged with administering was broken and rife with scheming.
The market for Renewable Identification Number credits, needed to comply with the RFS, was "rigged" and if not corrected swiftly the consequences "might well be disastrous" for refiners, Icahn wrote in the August 9 letter, which was made public this week.
"The difference between the current RIN market and all other 'rigged' markets in history is that this 'rigged' market is the only one where the originators, namely the EPA, are not getting any of the windfall and the illegal profits that always result," Icahn wrote.
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Icahn's letter, while it never mentions manipulation specifically but repeatedly calls the RIN market "rigged," is one the latest charges casting suspicion on the market for RINs. Those charges have come from both vocal supporters and opponents of the RFS.
Early this month, for example, the Renewable Fuels Association, arguably the RFS; most vocal proponent on Capitol Hill, asked the EPA and the Commodity Futures Trading Commission to investigate "irregular activity and volatility" in the market for RIN credits.
The EPA and CFTC should determine "whether certain parties may be exerting undue influence on prices or otherwise engaging in manipulative practices," the RFA wrote in its August 1 letter to the EPA and CFTC, questioning why RIN prices had risen 30% since the EPA released its proposed 2017 blending mandates.
While spokesmen for the EPA and CFTC declined to comment this week on whether such an investigation was being considered, or had already begun, sources said that the mere possibility of an investigation may bolster arguments for reforming or repealing the RFS.
"I would imagine that if there is manipulation, or even if there is an investigation, that others who aren't fans of the [RFS] program are going to argue that this is yet another example of how this program is broken and needs to be fixed, if not eliminated," said Susan Lafferty, a partner with Sutherland and a member of the law firm's energy practice group.
Lafferty said that a memorandum of understanding agreed to in March by the EPA and CFTC on information sharing in the renewable fuel and related markets would likely make such an investigation easier. Such an investigation would likely include an examination of aggregated RIN information and special calls with companies active in the RIN market.
The RFS, an annually increasing minimum threshold for biofuels to be blended into the US transportation fuel supply, faces increasing pressure for reform, including a push by some refiners to change the point of obligation for RFS compliance.
But Stephen Brown, vice president and counsel for Tesoro, a refiner that has called for repeal or major reform of the RFS, said an investigation of the RIN market may do little to move that process along.
"For the rest of this year, all of this is academic," Brown said. "An investigation by anyone at this point would take months to complete and results would be ambiguous at best. No one is seeing market manipulation other than the usual suspects. I just don't see anything coming of all this in the short term."
But questions over irregularities in the market and volatile moves in prices could certainly bolster the reform argument, a point stressed by RFA in its letter to the EPA and CFTC.
"RIN prices artificially spiked to record levels in July 2013, providing opponents of the RFS with politically expedient fodder for their campaign to repeal or reform the program," RFA wrote. "We are concerned that opponents of the RFS are similarly using the recent RIN price spike to bolster efforts to change or eliminate the program."
'MOTHER OF ALL SHORT SQUEEZES'
In 2013, RIN prices spiked amid a drought and fears of a breach of the blend wall, where ethanol blending requirements exceed 10% of gasoline demand. That price spike, an era referred to as "RINsanity," led to the EPA cutting, for the first time, the minimum threshold for biofuels to be blended for the 2014 RFS, a decision which led to biofuel and agriculture groups challenging EPA's authority to consider the blend wall when it sets annual RFS targets.
Timothy Cheung, a vice president at ClearView Energy Partners, said that high RIN prices could motivate RFS reform more than any other factor.
During a July 26 earnings call, Joseph Gorder, Valero's chairman, president and CEO, pointed to potential RIN markets manipulation as the key reason to reform the RFS program.
The structure of the RFS has "enabled speculators to drive up RIN prices, which really distorts the markets," Gorder said. "And it facilitates opportunities for RIN fraud, which we've seen a fair the amount of."
Gorder said that Valero's RINs costs could be as much as $850 million this year.
The market for RINs, which are needed to comply with federal biofuels blending mandates under the RFS, has become "the mother of all short squeezes," Icahn wrote to the EPA, arguing that it creates unfair advantages for large gasoline station chains, major oil companies and large speculators while disadvantaging independent refiners. Among those disadvantaged refiners are CVR Energy Inc., which Icahn owns a majority stake in.
"These speculators are 'hoarding' RINs hoping to get much higher prices as the time nears when refineries are obligated to get much higher prices as the time nears when refineries are obligated to deliver RINs to the EPA," Icahn wrote. "This is a classic short squeeze of a 'rigged' market which is now entering its most dangerous phase - 'hoarding.'"
An EPA spokeswoman declined to comment on Icahn's letter this week, but when it proposed its 2017 RFS rule in May it said that the surplus of banked RINs in the market could buffer against volatility.
The agency said that it estimates some 1.72 billion carryover credits, or RINs, are available for 2014 and 2015 RFS compliance, and it expects a similar number to be available going forward, which it plans to maintain to give the oil industry more flexibility on compliance.
"We believe that the collective bank of carryover RINs that we anticipate will be available in 2017 should be retained, and not intentionally drawn down, to provide an important and necessary programmatic buffer that will both facilitate individual compliance and provide for smooth overall functioning of the program," the EPA said.
The biofuels industry, eager to promote consumption, had urged the EPA to draw down the RINs bank to encourage refiners to blend more biofuels.
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