[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
RIN FRAUD: EPA'S EFFORTS TO ENSURE MARKET INTEGRITY IN THE RENEWABLE
FUELS PROGRAM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
JULY 11, 2012
__________
Serial No. 112-161
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
__________
U.S. GOVERNMENT PRINTING OFFICE
81-890 PDF WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
COMMITTEE ON ENERGY AND COMMERCE
FRED UPTON, Michigan
Chairman
JOE BARTON, Texas HENRY A. WAXMAN, California
Chairman Emeritus Ranking Member
CLIFF STEARNS, Florida JOHN D. DINGELL, Michigan
ED WHITFIELD, Kentucky Chairman Emeritus
JOHN SHIMKUS, Illinois EDWARD J. MARKEY, Massachusetts
JOSEPH R. PITTS, Pennsylvania EDOLPHUS TOWNS, New York
MARY BONO MACK, California FRANK PALLONE, Jr., New Jersey
GREG WALDEN, Oregon BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska ANNA G. ESHOO, California
MIKE ROGERS, Michigan ELIOT L. ENGEL, New York
SUE WILKINS MYRICK, North Carolina GENE GREEN, Texas
Vice Chairman DIANA DeGETTE, Colorado
JOHN SULLIVAN, Oklahoma LOIS CAPPS, California
TIM MURPHY, Pennsylvania MICHAEL F. DOYLE, Pennsylvania
MICHAEL C. BURGESS, Texas JANICE D. SCHAKOWSKY, Illinois
MARSHA BLACKBURN, Tennessee CHARLES A. GONZALEZ, Texas
BRIAN P. BILBRAY, California TAMMY BALDWIN, Wisconsin
CHARLES F. BASS, New Hampshire MIKE ROSS, Arkansas
PHIL GINGREY, Georgia JIM MATHESON, Utah
STEVE SCALISE, Louisiana G.K. BUTTERFIELD, North Carolina
ROBERT E. LATTA, Ohio JOHN BARROW, Georgia
CATHY McMORRIS RODGERS, Washington DORIS O. MATSUI, California
GREGG HARPER, Mississippi DONNA M. CHRISTENSEN, Virgin
LEONARD LANCE, New Jersey Islands
BILL CASSIDY, Louisiana KATHY CASTOR, Florida
BRETT GUTHRIE, Kentucky JOHN P. SARBANES, Maryland
PETE OLSON, Texas
DAVID B. McKINLEY, West Virginia
CORY GARDNER, Colorado
MIKE POMPEO, Kansas
ADAM KINZINGER, Illinois
H. MORGAN GRIFFITH, Virginia
_____
Subcommittee on Oversight and Investigations
CLIFF STEARNS, Florida
Chairman
LEE TERRY, Nebraska DIANA DeGETTE, Colorado
SUE WILKINS MYRICK, North Carolina Ranking Member
JOHN SULLIVAN, Oklahoma JANICE D. SCHAKOWSKY, Illinois
TIM MURPHY, Pennsylvania MIKE ROSS, Arkansas
MICHAEL C. BURGESS, Texas KATHY CASTOR, Florida
MARSHA BLACKBURN, Tennessee EDWARD J. MARKEY, Massachusetts
BRIAN P. BILBRAY, California GENE GREEN, Texas
PHIL GINGREY, Georgia CHARLES A. GONZALEZ, Texas
STEVE SCALISE, Louisiana DONNA M. CHRISTENSEN, Virgin
CORY GARDNER, Colorado Islands
H. MORGAN GRIFFITH, Virginia JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California (ex
FRED UPTON, Michigan (ex officio) officio)
(ii)
C O N T E N T S
----------
Page
Hon. Cliff Stearns, a Representative in Congress from the State
of Florida, opening statement.................................. 1
Prepared statement........................................... 4
Hon. Diana DeGette, a Representative in Congress from the State
of Colorado, opening statement................................. 6
Hon. Michael C. Burgess, a Representative in Congress from the
State of Texas, opening statement.............................. 7
Hon. Lee Terry, a Representative in Congress from the State of
Nebraska, opening statement.................................... 8
Hon. Henry A. Waxman, a Representative in Congress from the State
of California, opening statement............................... 9
Prepared statement........................................... 11
Hon. Brian P. Bilbray, a Representative in Congress from the
State of California, opening statement......................... 13
Hon. Fred Upton, a Representative in Congress from the State of
Michigan, prepared statement................................... 138
Witnesses
Jennifer Case, Chief Executive Officer, New Leaf Biofuel......... 15
Prepared statement........................................... 17
Additional responses for the record.......................... 88
Answers to submitted questions............................... 139
George Andrew Sprague, Owner, Union County Biodiesel Corporation,
LLC............................................................ 21
Prepared statement........................................... 23
Answers to submitted questions............................... 142
Thomas Paquin, President, VicNRG, LLC............................ 30
Prepared statement........................................... 32
Additional responses for the record.......................... 105
Answers to submitted questions............................... 144
J.P. Fjeld-Hansen, Managing Director, Musket Corporation......... 54
Prepared statement........................................... 56
Answers to submitted questions............................... 148
Joe Jobe, Chief Executive Officer, National Biodiesel Board...... 62
Prepared statement........................................... 64
Additional responses for the record.......................... 110
Answers to submitted questions............................... 150
Charles Drevna, President, American Fuel and Petrochemical
Manufacturers.................................................. 73
Prepared statement........................................... 75
Answers to submitted questions............................... 152
Byron Bunker, Acting Director, Compliance Division, Office of
Transportation and Air Quality, Office of Air Radiation,
Environmental Protection Agency................................ 115
Prepared statement........................................... 118
Answers to submitted questions............................... 155
Phillip Brooks, Director, Air Enforcement Division, Office of
Enforcement and Compliance Assurance, Environmental Protection
Agency \1\.....................................................
Submitted Material
Subcommittee exhibit binder...................................... 159
----------
\1\ Mr. Brooks did not present a statement for the record.
RIN FRAUD: EPA'S EFFORTS TO ENSURE MARKET INTEGRITY IN THE RENEWABLE
FUELS PROGRAM
----------
WEDNESDAY, JULY 11, 2012
House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:05 a.m., in
room 2123, Rayburn House Office Building, Hon. Cliff Stearns
(chairman of the subcommittee) presiding.
Members present: Representatives Stearns, Terry, Myrick,
Sullivan, Burgess, Blackburn, Bilbray, Gingrey, Gardner,
Griffith, Barton, Whitfield, Degette, Castor, Markey, Green and
Waxman (ex officio).
Staff present: Nick Abraham, Legislative Clerk; Charlotte
Baker, Press Secretary; Andy Duberstein, Deputy Press
Secretary; Todd Harrison, Chief Counsel, Oversight and
Investigations; Cory Hicks, Policy Coordinator, Energy and
Power; Heidi King, Chief Economist; Ben Lieberman, Counsel,
Energy and Power; Monica Popp, Professional Staff Member,
Health; Krista Rosenthall, Counsel to Chairman Emeritus; Alan
Slobodin, Deputy Chief Counsel, Oversight; Sam Spector,
Counsel, Oversight; Peter Spencer, Professional Staff Member,
Oversight; Alvin Banks, Democratic Investigator; Alison
Cassady, Democratic Senior Professional Staff Member; Brian
Cohen, Democratic Investigations Staff Director and Senior
Policy Advisor; and Alexandra Teitz, Democratic Senior Counsel,
Environment and Energy.
OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. Stearns. Good morning, everybody, and welcome to the
Subcommittee on Oversight and Investigations of the Energy and
Commerce full committee.
My colleagues, today we will examine the Environmental
Protection Agency's handling of fraud in its program to
implement the Renewable Fuel Standard. Specifically, we will
look at the impacts on the biodiesel marketplace from the
fraudulent production and trade in renewable fuel credits, or
Renewable Identification Numbers, RINs, and the impact from
EPA's efforts to address this serious problem.
This hearing is part of the subcommittee's ongoing
investigation into RIN fraud and should spotlight potential
solutions to the most urgent problems confronting the biodiesel
market. This hearing should also serve to identify additional
challenges from fraud within the Renewable Fuels Program in
general.
EPA is responsible for developing and implementing
regulations to ensure that the United States national
transportation fuel supply during a given year contains certain
mandated volumes of renewable fuel. The RIN credit trading
program is designed to add flexibility to the system and
facilitate compliance by petroleum refiners and importers,
known as, quote, ``obligated parties,'' end quote, with
renewable fuel standards that were created under the Energy
Policy Act of 2005 and expanded under the Energy Independence
and Security Act of 2007 to cover gasoline and diesel
transportation fuels.
Now, in recent years a sizeable market for biomass-based
diesel has developed. This market is second only to corn
ethanol in size, producing more than 1 billion gallons of
biodiesel fuel last year.
As we will hear in testimony this morning, unlike ethanol
fuels, the price for RINs is critical to making ends meet for
small biodiesel producers, the marketers who collect and
distribute the fuel, and small blenders of the fuel, especially
travel centers and truck stops. RIN prices have ranged from $1
to $1.50 per gallon of biodiesel, compared to about 2 pennies
per gallon for ethanol.
Unfortunately, my colleagues, when the price for RINs is
relatively high, so is the incentive to game the system. Since
November 2011, EPA has identified some 140 million invalid or
fraudulently created biodiesel RINs generated by three
producers. Additionally, EPA investigations could amount to
tens of millions of more invalid RINs identified.
Just last month, a Federal jury in Maryland found Rodney
Hailey of Clean Green Fuel guilty of selling $9 million worth
of fraudulent RINs to brokers, oil companies, and producers,
and then using the money to go on a spending spree that
included the purchase of luxury cars and high-end jewelry. Mr.
Hailey had generated 32 million credits for fuel that never
existed.
Meanwhile, EPA does not certify or validate the fuel
produced and registered in its systems that track RINs. The
Agency maintains that obligated parties are responsible for
conducting their own due diligence when conducting RINs
transactions. This approach makes sense, to a point; however,
to date EPA has not indicated what is acceptable for due
diligence investigations by the companies.
On top of this uncertainty, EPA effectively penalized
companies that were, quote, ``victims of fraud'' by requiring
them to replace invalid RINs for compliance purposes. As we
will hear from witnesses on our first panel this morning, this
current approach to fraud has thrown the biodiesel marketplace
into turmoil, creating significant uncertainty for small
players, locking some innocent companies out of the markets
altogether.
Clearly there is a problem with the current situation.
Today we will discuss how to fix the problem and how to do so
with appropriate urgency. As we do so, we must recognize the
range of fraud that may occur in the Renewable Fuels Program.
Testimony today will indicate other types of fraud and abuse,
such as with exports, which we should be sure EPA seeks to
address effectively and quickly.
We will hear from two panels of witnesses this morning. On
the first panel we will hear from stakeholders with important
perspectives across the life cycle of a RIN, two small biofuel
producers, a marketer of biofuel, and a blender of the fuel for
a major truck stop chain, all of whom have firsthand experience
with the impact of fraud. We will also hear from respective
representatives of the obligated parties and the biofuel
production industry overall about industry efforts to respond
to fraud risk.
On the second panel we'll hear testimony from two EPA
officials who have been involved in devising compliance
requirements and ensuring those requirements are met.
So I am pleased to learn that EPA appears to recognize the
legitimate concerns of stakeholders and may be amenable to
implementing some of their suggestions. That's a positive sign,
but much, much remains to be worked out, and uncertainty
continues to reign in this market, putting many small operators
at risk.
[The prepared statement of Mr. Stearns follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. With that, I recognize the distinguished
ranking member from Colorado Ms. DeGette.
OPENING STATEMENT OF HON. DIANA DEGETTE, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF COLORADO
Ms. DeGette. Thank you, Mr. Chairman, for holding this
hearing today.
The EPA's Renewable Fuel Standards Program was created and
amended under President Bush, first by the Energy Policy Act in
2005 and then by the Energy Independence and Security Act of
2007. I support this program, and I want it to be a productive
hearing today that results in real improvements to that
program, but all too often, as we have found in the last year
and a half, these hearings have turned into excuses to make
political points and beat up on regulatory agencies, in this
case a little bit blaming the victim, the EPA, for fraud by
some of the other outside private businesses. I hope it doesn't
happen today as we go along, because this hearing in particular
should not be used just to bash the EPA.
Again and again, when we consider environmental protection,
we hear about the need for market-based programs. Industry
wants government out of the way so the magic of the market can
clear up our air and water.
Well, Mr. Chairman, here is a program right here today that
uses a market-based approach. Congress established specific
goals for adding renewable fuels to the fuel supply. The EPA
worked closely with the petroleum sector to develop a flexible
credit-trading program that allows refiners and other obligated
parties to comply with the renewable fuel standard. Under the
program, as the chairman said, they can buy credits on the open
market, which sets prices on the basic laws of supply and
demand.
Now, as in any market, there are bad actors. That's what
happened here. Three companies, Clean Green, LLC; Absolute
Fuels, LLC; and Green Diesel, LLC, sold fraudulent renewable
fuel credits via EPA's trading system. Many big-name oil
companies bought these credits, and EPA did what it was
supposed to do: It uncovered and investigated this fraud and,
as the chairman said, in one case so far filed criminal
charges.
Today we are going to hear from the trade association
representing the petroleum refiners that bought these
fraudulent credits. They want relief from the EPA for the fact
that they were duped. Well, Mr. Chairman, I would submit this
proposition: You can't have it both ways. You can't ask the
government for a market-based compliance program and then blame
the government or ask the government to not fully enforce the
law because you were fooled by the free market.
I want to specifically talk about Mr. Drevna's testimony.
He's the president of the American Fuel and Petroleum
Manufacturers. And I read your submitted testimony. It paints
the petroleum refiners as the real victims. It claims that they
shouldn't be held responsible for the fraud they didn't commit.
Of course, that makes sense without any context. Nobody should
be blamed for fraud that they didn't commit. But while these
refiners didn't commit the fraud, they weren't helpless victims
either.
These are some of the most sophisticated petrochemical
companies in the United States, and, to be honest, if they're
going to participate in a market-based system from which they
benefit, they have a duty to investigate the people who they're
doing business with. That would happen in any private market.
Now, the EPA set clear rules for this market. The
regulations clearly state that fraudulent renewable fuel
credits can't be used for compliance, and they clearly state
that the system is a buyer beware system. This buyer beware
approach was not a secret, but yet the refiners failed to do
basic research on the renewable fuel credits they were buying.
Two of the companies accused of the fraud, I am sorry to
say, Mr. Green and Mr. Barton, they are based in Texas. Now,
presumably many of the Texas-based refiners could have
inspected the facility, knocked on the doors of the companies
that falsely claimed to be producing large quantities of
biodiesel, and concluded pretty quickly that things looked
fishy. An article in The New York Times described one of the
facilities as, quote, ``a few plastic tubes'' in, quote, ``a
tiny ramshackle building.''
So it wouldn't have been hard for these big, sophisticated
refiners to do their due diligence, but they didn't do their
part, and now they are here today saying the EPA is punishing
them unjustly, even though they were in clear violation of the
Clean Air Act standards. Mr. Chairman, these companies should
not be let off the hook for their failure to do their own due
diligence.
I do think, though, that we have a lot to learn from this
hearing. We do need to hear from the affected refiners about
why they did not identify this fraud as apparently they could
have easily done; we need to hear from other sellers of
renewable fuel credits to learn how they are affected; and we
need to hear from the EPA about how the Agency uncovered this
fraud and how to prevent it in the future.
The EPA continues to work with affected stakeholders to
ensure compliance and identify solutions to problems that have
arisen in the wake of the fraud. I hope the witnesses today can
give us a full picture of the challenges they faced in the wake
of these fraud cases and constructive ideas for how the EPA can
help the market recover as quickly as possible.
Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentlelady.
And I recognize Dr. Burgess for roughly about a minute.
We're waiting for the full chairman Mr. Upton.
Mr. Burgess. I can filibuster until he gets here.
Mr. Stearns. You can filibuster. We have two others, Mrs.
Blackburn and----
Mr. Burgess. I will be brief.
OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF TEXAS
You know, the renewable fuel standards law, we had a big
hearing about it yesterday in the energy hearing. Whether we
agree with the merits or not, and many of us do not agree with
the merits, still if it's there, it should be administered
fairly to all concerned.
In my district in north Texas, a number of small businesses
are participants in the RIN program. One company, VicNRG, is
testifying with us here today, and thank you for your
participation, sir.
As a result of the Environmental Protection Agency's poor
enforcement and their lack of due diligence in vetting
fraudulent companies participating in the program, legitimate
businesses are put in a position where they face staggering
economic losses due to a system that--I mean, Lisa Jackson was
here. She was here in this very committee, sitting at this very
witness table, and she said, no, this is a buyer beware
program.
Now, look, this is the same EPA that in the last Congress
assured us that they could properly manage a carbon-based
trading scheme called cap and trade. This program is
infinitesimally smaller, and yet the EPA seems to have fallen
flat on its face.
They have successfully taken everything that was bad--the
EPA has successfully taken everything that was bad about
mortgage-backed securities and brought it to the energy sector.
To place the burden of this poorly administered program on the
backs of honest businesses is unconscionable. I hope our
hearing today will shed light on the problems that the
companies have faced with the trading program and that real
reforms are achieved with what we're going to do today.
I'll yield to whoever is next.
Mr. Stearns. Mr. Terry, the gentleman from Nebraska.
OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEBRASKA
Mr. Terry. Thank you, Mr. Chairman, for holding, I think,
this important hearing.
I am a believer that if we are going to eliminate our
addiction to OPEC oil, that we need to diversify our fuel
portfolio, and that has to include biofuels. Now, of course, I
could be accused, since I come from a Cornhusker State, of
having a bias, of which I do, but the bias is that we need
diversity, and we need biofuels to be part of that portfolio.
There are many that I serve with on both sides of the aisle
that disagree with that statement, and, unfortunately, because
of unquestionable RIN fraud, RINs have become one of the
discussion points on eliminating biofuels altogether. So this
is an important hearing so we can figure out how to fix the RIN
fraud problem that we all know on both sides of the aisle
exists. We are here today to find solutions to this fraud
problem, and I want to thank our panel for being part of a
solution here today.
I yield my time back to the chairman.
Mr. Stearns. We have roughly 2 minutes. Does anyone else on
the subcommittee seek recognition?
Mr. Waxman. Mr. Chairman, I ask unanimous consent that when
the full committee chair comes in, that he be given 2-1/2
minutes.
Mr. Stearns. Sure. All right. We'll reserve that balance,
and, by unanimous consent, so ordered.
I recognize the ranking full chairman, the gentleman from
California, Mr. Waxman.
OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Waxman. Thank you, Mr. Chairman. I'll take a full 5.
Congress established the Renewable Fuels Program to reduce
the country's dependence on petroleum-based fuels and cut
greenhouse gas emissions from the transportation sector. These
are laudable goals. Unfortunately, a few bad actors selling
fraudulent biodiesel fuel credits have created a crisis of
confidence in the biodiesel fuels market that risks undermining
the whole program.
The reported cases of fraud have left petroleum refiners
understandably skittish about purchasing biodiesel credits from
small and unfamiliar biodiesel producers. As a result, through
no fault of their own, many small legitimate biodiesel
producers are struggling to sell their products and make a
profit. Others along the fuel chain, such as the distributors
of biodiesel and credit brokers, are feeling the pinch as well.
We will receive testimony from a few of these affected parties
today, and I look forward to hearing their suggestions for how
to restore certainty and integrity to the market.
We'll also hear from the American fuel and petrochemical
manufacturers. To hear them tell it, they were helpless victims
of this fraud. This is revisionist history. The statutory
renewable fuels provisions allow petroleum refiners to meet
their renewable fuel obligations by purchasing renewable fuel
credits.
In 2007, the Bush EPA set up the required Credit Trading
Program. EPA had two basic options when designing this program.
EPA could have required that each credit be verified by EPA
prior to its sale. This approach is more burdensome, but would
make the government, not industry, responsible if a credit
turned out to be fraudulent. Or EPA could allow the industry
itself to generate and verify the credits, which is how most
markets operate.
EPA consulted extensively with industry stakeholders and
chose the approach with the least amount of government
involvement. The Petroleum Refiners Trade Association endorsed
this approach. But that flexibility for industry carried with
it an important and clear responsibility. The oil refiners and
other obligated parties had to ensure that they were using
valid credits to comply with the law. They didn't.
As we now know, several of the country's largest oil
companies purchased millions of fraudulent renewable energy
credits. This happened because they didn't do the basic due
diligence they would do in purchasing any other product. With
any due diligence they would have quickly discovered that the
accused biofuel producers weren't producing any biofuel at all.
I find it ironic to hear my Republican colleagues criticize
a program that is run by the industry and, more importantly,
criticize EPA for not doing what the program did not intend
them to do.
EPA plays a crucial role in establishing clear rules and
obligations for the credit-trading system, and EPA carried out
this responsibility. But recent events show that the system, as
currently operated by industry and EPA, needs to be improved.
EPA has been meeting extensively with stakeholders to
identify solutions for problems in the renewable fuels credit
market. But it is not just up to EPA. Buyers and sellers must
be active and vigilant participants in the marketplace, and if
things go wrong, the industry can't demand that the government
bail them out by waiving the law.
Market-based approaches to meeting environmental
requirements are often preferable because they are less costly
and less burdensome than traditional regulation, but market-
based approaches are only acceptable if they produce at least
equivalent environmental results. Waiving the requirement for
industry to replace fraudulent credits basically says that if
something goes wrong, the public, not industry, must pay the
price. That kind of response gives market-based approaches a
bad name and is not acceptable.
I hope that today's hearing helps all the affected parties
continue their work toward real solutions that protect the
functioning and integrity of the Renewable Fuels Program. We
can't criticize EPA for a market-based approach, which I
usually hear people on the Republican side of the aisle
support, and now they want to criticize EPA for not running it
the way they would have liked EPA to run it. But EPA followed
the advice of so many, and the Bush EPA turned it over to the
industry itself to monitor the program.
I yield back my time.
[The prepared statement of Mr. Waxman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. The gentleman yields back.
Anyone else seek recognition? We have roughly a little over
2 minutes.
The gentleman from California, Mr. Bilbray.
OPENING STATEMENT OF HON. BRIAN P. BILBRAY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Bilbray. Mr. Chairman, I think it's only fair to point
out that there is so much that the industry can work with that
we give them the infrastructure for the practical application
of the theory of how this is approached.
I think both sides of the aisle should remember that after
9/11 there was a bipartisan effort that saw a need for the
Federal Government and State governments to cooperate at
changing the way we operated so that this country could be
safe. The product of that was REAL ID legislation. We upgraded
the identification to reduce fraud, reduce the risk to this
country, and both sides worked on that.
Something comparable that we may want to talk about here,
and Ms. Case and I were talking about the fact that just as
much as REAL ID helped with national security, maybe the fact
of upgrading the way to be able to identify true renewables as
opposed to those fraudulent ones is to improve the
documentation so that fraud can be detected better in the
process.
In fact, I would ask my colleagues to consider the fact
that maybe what we need here is an E-Verify for environmentally
friendly fuels and the use of technology and computerization as
a way of allowing those who want to play by the rules set by
this Congress and stay within those boundaries to be able to
verify that they are actually within the boundaries.
Just as much as REAL ID brought security to the country,
and just as much as everyone knows that if we want to enforce,
you know, our employment laws, E-Verify is going to be the
vehicle, maybe with this crisis we should look at changing our
procedures and giving the private sector a secure way of
knowing what is truly an environmental fuel and what isn't. And
I'd ask both sides of the aisle to cooperate on this, like we
have done in the past, so that the private sector can play
within the rules that we have set.
I yield back.
Mr. Stearns. Anyone else wishes to speak on this side? If
not, Mr. Green is recognized for 5 minutes. Do you have an
opening statement?
Mr. Green. No, Mr. Chairman, I don't have an opening
statement.
Mr. Stearns. OK. All right. We'll go to our witnesses now.
I say to Mr. Bilbray, I am glad that the subcommittee chair,
Mr. Whitfield from Kentucky, is here to hear your eloquent
presentation. That would be legislation in his purview. We, and
you particularly, would like to lead the charge for this E-
Verify in the RIN program. I think it's an excellent idea, and
I think many of us would support that idea. So----
Ms. DeGette. Mr. Chairman, would that be a new government-
run program?
Mr. Stearns. This is in the early stages.
I ask the gentlelady unanimous consent to let Mr.
Whitfield, who's from Kentucky, introduce Mr. Sprague.
With no objection, Mr. Whitfield, you are welcome to
introduce your distinguished witness.
Mr. Whitfield. Mr. Chairman, thanks very much. And I am
delighted to be here this morning, and I appreciate the
opportunity to introduce a constituent of mine, Mr. Andy
Sprague, who is a farmer, who is an engineer, who is a
biodiesel entrepreneur.
It has been interesting listening to the discussion this
morning, because I'm so delighted that you all asked Mr.
Sprague to testify, because he is not a major oil company, he
is not a gigantic refiner, but he is producing a significant
amount of biodiesel, and the lack of confidence in EPA's RIN
program is particularly troublesome for those smaller people
involved in this business.
So he'll be a spectacular witness. He's quite knowledgeable
in every aspect of this subject matter, and I'm delighted that
he's here with us today to provide his expertise.
Thank you very much.
Mr. Stearns. And I thank the gentleman.
So, Mr. Sprague, you're a spectacular witness, not to put
any pressure on you.
We also have Ms. Case, who is cofounder and CEO of New Leaf
Biofuel located in San Diego, California.
We have Mr. Thomas Paquin, the president of VicNRG, LLC,
which markets and trades commodities in the diesel industry as
well as RINs.
Mr. J.P. Fjeld-Hansen is the managing director of the
Musket Corporation, affiliate company of Love's Travel Stop and
Country Stores, Incorporated. They purchase biodiesel fuel from
a variety of producers and transport it to the Love's Travel
Centers.
Mr. Joe Jobe is the chief executive officer of the National
Biodiesel Board. The National Biodiesel Board is a national
trade association representing the biodiesel industry.
We have Mr. Charles Drevna, president of American Fuel and
Petrochemical Manufacturers. Its members are the obligated
parties responsible for meeting the requirements of the
Renewable Fuel Standard.
So thank you all for your time. I know coming here to
Washington takes you away from your work, so you're very much
appreciated.
We'll start out with you, Ms. Case, for your opening
statement, but I have to swear you in first. So if you'll
please stand.
Before you stand, as you know, the testimony you're about
to give is subject to Title XVIII, Section 1001, of the United
States Code. When holding an investigative hearing, this
committee has a practice of taking testimony under oath. Do you
have any objection to testifying under oath?
It appears none.
The chair would advise you that under the rules of the
House and the rules of the committee, you are entitled to be
advised by counsel. Do any of you wish to be advised by
counsel?
In that case, please rise and raise your right hand.
[Witnesses sworn.]
Mr. Stearns. With that, Ms. Case, we'll welcome you with
your opening statement.
STATEMENTS OF JENNIFER CASE, CHIEF EXECUTIVE OFFICER, NEW LEAF
BIOFUEL; GEORGE ANDREW SPRAGUE, OWNER, UNION COUNTY BIODIESEL
CORPORATION, LLC; THOMAS PAQUIN, PRESIDENT, VICNRG, LLC; J.P.
FJELD-HANSEN, MANAGING DIRECTOR, MUSKET CORPORATION; JOE JOBE,
CHIEF EXECUTIVE OFFICER, NATIONAL BIODIESEL BOARD; AND CHARLES
DREVNA, PRESIDENT, AMERICAN FUEL AND PETROCHEMICAL
MANUFACTURERS
STATEMENT OF JENNIFER CASE
Ms. Case. Good morning. Chairman Stearns, Ranking Member
DeGette and members of the committee, thank you for having me
here to testify today. My name is Jennifer Case. I am the CEO
and one of the owners of New Leaf Biofuel in San Diego.
We began our company in 2006 with the mission to utilize a
former waste stream, used cooking oil, and convert it into an
energy source that would displace some of the petroleum used in
our area and improve local air quality. Since selling our first
batch of biodiesel in 2008, we have experienced some drastic
ups and downs. As with any commodity business, we are at the
mercy of ever-changing markets, which makes planning for the
future challenging. The past few years have been even more
unpredictable with the expiration of the biodiesel tax
incentive, followed by its reinstatement, followed by its
expiration once again.
With each policy change, our ability to price biodiesel
competitively with petroleum diesel is affected. Fuel customers
are eager to use renewable fuels, but not if it means they have
to pay more per gallon.
The saving grace for the biodiesel industry was the
Renewable Fuel Standard. Finally we had a long-term policy put
in place by the Federal Government to ensure that biodiesel
would be part of our energy future. The producers and importers
of fossil fuels would be forced to blend renewable fuels made
in the USA into the fuel supply, and over time the mandate
would increase, which would encourage investment in our
previously uncertain business.
2011 was a banner year for New Leaf Biofuel. We were able
to produce and sell biodiesel with Renewable Identification
Numbers, RINs, for a profit, and we were able to pass savings
downstream to our distributors and the end users of our fuel.
Finally biodiesel was cheaper than diesel. At New Leaf, we
nearly tripled our workforce and finally obtained low-interest
financing to increase production at our local plant.
Things took a devastating turn for our small business
around November of 2011 when the EPA announced that there were
individuals perpetrating fraud in the RIN market. Prior to the
fraud announcement, New Leaf produced biofuel, generated RINs,
and then transferred both the fuel and the RIN to our fuel
distributors, who blended the biodiesel with petroleum diesel
and delivered the blended fuel to customers such as the cities
of San Diego and Chula Vista and the local military bases. The
distributors would then separate or monetize the RIN and sell
them up the chain to the obligated parties.
Once the fraud was announced, my customers were no longer
able to sell New Leaf RINs. Obligated parties now only buy from
top-tier producers, producers who are financially capable of
replacing RINs should they be deemed invalid. Despite the fact
that New Leaf's RINs were generated at a legitimate plant that
had been producing quality fuel for 4 years using approved
feedstocks and technologies, our RINs were suddenly worthless,
as if New Leaf was in the same category as the criminals who
never produced a drop of biodiesel.
The months immediately following the fraud were very
difficult. We had to adjust once again to a market without a
tax incentive, and then we were stripped of the RIN value. Once
again, petroleum diesel was cheaper than biodiesel, and many of
New Leaf's customers switched back to fossil fuels.
2012 was supposed to be a year of growth for New Leaf, but
unless our industry can come together to find a solution that
will get New Leaf's RINs marketable again, our days and the
days of the small biodiesel producers across the country are
numbered.
The Renewable Fuel Standard is a good policy for businesses
large and small. It creates jobs, it encourages the use of
homegrown energy, and it reduces greenhouse gases from the
transportation sector. As with any new policy, especially a
policy this comprehensive, there are going to be issues to iron
out. Clearly we need to figure out a way to avoid more
fraudulent RINs entering the marketplace, and, most
importantly, we need a system that will restore the confidence
in the RIN market so that obligated parties will once again be
willing to buy RINs generated at small plants like mine.
The private sector is already working on solutions that
will likely resolve most of these issues. We have seen a plan
introduced that would provide obligated parties with a
subscription to a service that would allow them access to RINs
produced at plants that have been audited by a third party, and
they will have realtime data available as to the capacity of a
given plant to produce quality biodiesel and RINs.
I believe the various industry representatives on this
panel have the ability and the wherewithal to improve this
system. What doesn't kill us makes us stronger, and with more
due diligence and transparency in the market, biodiesel will be
stronger in the end.
Thank you.
Mr. Stearns. I thank you.
[The prepared statement of Ms. Case follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. Mr. Sprague.
STATEMENT OF GEORGE ANDREW SPRAGUE
Mr. Sprague. Thank you, Chairman Stearns, Ranking Member
DeGette and other committee members. My name is George Andrew
Sprague. I am the owner of Union County Biodiesel along with my
partner, Terry Zintel, who is here with me today. We represent
three biodiesel plants, one that is currently located in
Newburgh, Indiana; one in South Roxana, Illinois; and we have
begun to work with a biodiesel plant that is owned by 300
farmers in Moberly, Missouri. So we employ about 30 people in
our small biodiesel company.
For the purpose of this testimony, I am here, as
Congressman Whitfield said, as a farmer, an engineer and now a
biodiesel entrepreneur. I hate to say it, that part is not
working out real good right now, and that's why we're obviously
here before you.
As small producers and private business owners, we do not
have corporate war chests to weather business and governmental
calamities that occur. When these issues happen, we go to the
bank. And many of you have reviewed issues with the banking
industry, so you know how well that works right now, going to
banks for loans. We have to liquidate personal assets. My
children's college fund is invested in my biodiesel plant.
While that is meant to tug on your heartstrings, and hopefully
it does, it does bring light to the fact that this is a very,
very serious issue, one that can't be taken lightly.
A little bit of history about the RIN fraud program. In
2011, we, like New Leaf, had a banner year. All of our
facilities did well. We were selling our RINs to our customers
via transfer of a wet gallon, and those RINs were being
disposed of to the obligated parties either via brokers or
through direct contracts with the obligated parties.
We had heard the rumblings of problems, of fraud, and that
started to make everyone nervous. Literally January 2nd of this
year, I had customers on the phone calling me saying, we can't
sell your RINs. If we can't sell your RINs, we can't buy your
biodiesel. So literally on January 2nd, we were out of
business.
We did begin a process of our own due diligence with
obligated parties, and were able to make contacts with
obligated parties, and were able to get some obligated parties
receiving our RINs again, and to date we are in business, but
it's not as good as it should be.
As an example of how this problem is very serious, we had 1
customer who sold--or purchased 60 million gallons of biodiesel
from many producers, obviously not from us specifically, who
has yet to buy a gallon of biodiesel this year. That's a large
quantity that's just taken out the markets.
In January, I spoke with my Congressman Mr. Whitfield to
try to get an audience with EPA to discuss this problem, and he
helped me get that audience with several members of EPA who are
on the panel in the second panel. First I would like to say
that my experience with them was very positive. They were very
cooperative, they explained why things were the way they were,
but they also said they're bound by certain rules and
restrictions that they have to operate under as well.
Cutting to the chase, we have a problem. We can point
fingers. We can say who did what, and why we did it, and why we
didn't do it. But ultimately we've got to fix the problem. The
program is not broke. Many people may want to use this as a
reason to abandon the program. This program is not broke.
In late 2011, most of us were quite surprised that it was
working as well as it did. I hate to say this, but from the
private sector, when something in government works really well,
you kind of scratch your head a little bit and go, well, they
did do a good job. So most of us in the industry felt like we
had a good program. Industry-based, it was meeting the needs
that it needed to, but we did have a problem. So hopefully here
today through our testimonies, both written and oral, we can
talk about those.
I think one thing we must admit is that nobody really saw
this coming, and because nobody saw it coming, we really don't
need to be pointing fingers. But the industry is coming up with
an independent third-party verification program that is going
to fix the problem if left to its own accord.
What we hope for is an even playing field, though. EPA
needs to be involved in what the rules of this program are
going to be. The private sector will solve this problem. The
obligated parties, they did not do their due diligence as they
should. We did not get calls from due diligence providers until
late in 2011. That water is under the bridge. But obviously
this independent third-party methodology will fix the program.
So we ask that you consider our testimonies and allow
industry to step forth and fix this problem. Thank you.
Mr. Stearns. I thank you.
[The prepared statement of Mr. Sprague follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. Mr. Paquin.
STATEMENT OF THOMAS PAQUIN
Mr. Paquin. Good morning, Chairman Stearns, Ranking Member
DeGette and members of the subcommittee. My name is Tom Paquin,
president of VicNRG, LLC, headquartered in Keller, Texas. Thank
you for allowing me the opportunity to discuss the current
status of the renewable fuel industry, RIN fraud, and ensure
that there are efforts to ensure RIN integrity.
VicNRG is a marketer and distributor of biofuels and other
commodities. The company provides infrastructure and logistics
solutions that are critical to the distribution of biofuels. We
are a small business that has been expanding our national
footprint by adding transit facilities, rail cars and other
infrastructure assets. Each of our terminals offer high-
quality, full-time employment, and economic benefit extends
well beyond the fence of each of those facilities.
We are also an active participant in the RIN market. Our
leadership in this market has been critical to identifying
fraud and communicating our findings to the EPA. We consider
ourselves a partner with the EPA, and I offer continued
service.
To date, the fraud in the RIN market has resulted in
serious hardship for many in the biofuel sector, including the
ultimate fate of bankruptcy for numerous law-abiding
businesses. Fraudulent RINs created a liability in the industry
in excess of $200 million. Approximately 85 percent of the
biodiesel producers are struggling to keep their doors open.
Some, like R-3 Energy and Green Light Biofuels, have shut down
operations completely. Biodiesel distributors and blenders are
equally threatened with liabilities which they cannot meet.
Unfortunately, the fraud that has currently been discovered
only addresses the low-hanging fruit. The EPA created an
interim enforcement and response policy to restore faith in
what was a dysfunctional RIN-trading system. However, this
policy fails to restore the confidence required. Since the
policy's release, the RIN market has actually become more
dysfunctional. The obligated parties and, by default, marketing
companies like ours cannot purchase fuel from small producers,
just like the ones on the panel today. We cannot do this
because the risk of being held liable to replace RINs is too
great.
Because of these issues, VicNRG proposes the EPA broaden
its interim policy. We feel the EPA has the flexibility and can
use several regulatory approaches to restore confidence. To
improve the situation, we offer the following proposal. First,
we propose that the EPA revise its interim policy as it relates
to invalid RINs so that no further RIN substitution would be
required.
The congressional intent of the RFS is clear, and one of
the key tenets is to build an alternative fuel industry and its
related infrastructure. In fact, it is stated in the U.S. Code
that many factors should be taken into consideration when
setting volumetric goals, to include job creation.
Additionally, the EPA has the ability to average annual
compliance, and according to the National Biodiesel Board's
written testimony, the biodiesel industry exceeded last year's
volumetric targets. One could argue that RFS goals have been
met, and there is no reason to require RIN replacement. RIN
replacement is destroying jobs today, which is 180 degrees out
from the congressional intent. We also feel the EPA must
continue to aggressively pursue and prosecute fraudulent
activity.
Secondly, the EPA should undertake a 2013 rulemaking to
establish a permanent due diligence process and an affirmative
defense. Diligent and innocent companies should not be
penalized for the acts of others. This affirmative defense may
be structured by the EPA to impose reasonable compliance
burdens on industry participants.
Clean Air Act case law establishes limits on EPA's
authority to impose sweeping systems of presumptive liability.
While Congress has delegated expansive powers to EPA to
regulate, it is a fundamental tenet of American law that there
must be at the very least the right to prove oneself innocent
of an offense.
Finally, if EPA is willing to facilitate any of these
remedies, the Agency should consider whether a petition to
waive the RFS would be appropriate in these circumstances. The
economic cost to U.S. businesses resulting from enforcement
policy will force many legitimate companies that are currently
operating out of business and eliminate countless jobs, at
which point a severe harm threshold may have been met.
In summary, to immediately restore confidence in the RIN
market and save tens of thousands of jobs, the EPA must
consider immediate changes in the enforcement of the RFS
program. Specifically, the EPA needs to expand its interim
policy, to define due diligence, provide for affirmative
defense, and eliminate the requirement to replace RINs for
those who are good-faith participants. This is the foundation
necessary to save the system, its associated investment and
ultimately jobs in a struggling U.S. economy.
Thank you.
Mr. Stearns. Thank you.
[The prepared statement of Mr. Paquin follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. Mr. Fjeld-Hansen, you are recognized.
STATEMENT OF J.P. FJELD-HANSEN
Mr. Fjeld-Hansen. Thank you very much. Chairman Stearns,
Ranking Member DeGette, thank you for the opportunity to appear
before the subcommittee today. My name is Jon Peter Fjeld-
Hansen, and I am the managing director of Musket Corporation.
Musket is an affiliate company of Love's Travel Stop & Country
Stores, Inc. Love's today owns and operates a nationwide chain
of 300 travel centers and convenience stores in 39 States.
Love's sells diesel fuel to the Nation's trucking fleets that
deliver goods and services to businesses across the United
States. We are committed to meeting, then exceeding the needs
of our many customers by providing the highest-quality fuel at
competitive prices. Biodiesel blends are an important part of
that commitment.
One of the primary functions of Musket is to manage the
fuel supply, including biodiesel, for Love's. Musket purchases
biodiesel from a wide variety of producers and transports the
product directly to the Love's Travel Centers or to various
bulk facilities for blending into the diesel. In order to
create blending capacity, Musket has completed 76 construction
projects in 25 States since the inception of the Renewable Fuel
Standard. Many of these projects have brought jobs to the
constituents of the members of this committee.
Under RFS2, every properly produced gallon of biodiesel
comes with 1.5 RINs. The value of the RIN is what creates
sufficient value to make biodiesel cheaper than diesel. Upon
blending biodiesel with clear diesel, Musket separates the RIN
from the associated physical gallon of biodiesel and sells
those RINs to obligated parties, which are typically large
petroleum refiners. In short, the RINs create for Musket and
discretionary blenders an economic incentive to provide
biodiesel at a competitive price to our Nation's transportation
system.
Musket believes the value and integrity of RINs are
essential to the implementation of EISA; however, RIN fraud in
its various forms frustrates the purpose of the law and
perpetrates a theft upon those businesses who have invested
jobs and capital in our Nation's biodiesel infrastructure, and
reduces the economic incentive for Musket to make further
investments.
We believe that fraud in the RIN market is damaging to the
legitimate market participants, such as the participants on
this panel, who have invested substantially to bring biodiesel
into on-road diesel within the spirit and letter of RFS2.
To date, EPA has brought enforcement actions alleging the
generation and sale of 130 million fraudulent RINs. As a
participant in the market, Musket has been directly impacted by
fraud. Having bought RINs from Clean Green, Absolute Fuels and
Green Diesel, Musket has incurred significant expenses with
respect to RINs deemed invalid by the EPA. However, Musket has
responded aggressively to the EPA's buyer beware policy by
scrutinizing every producer of biodiesel it transacts with,
every RIN that it separates, and every counterparty with whom
it transacts downstream.
Fraud in the RIN markets takes many forms, though, and
Musket believes there's a problem that is considerably larger
than the above-mentioned cases, namely biodiesel exports.
Musket believes there are many who are exporting biodiesel,
either blended as diesel blend, blended into heating oil or
bunker fuel, or as straight D100 biodiesel, and that they are
not declaring their obligation to retire RINs pursuant to the
rules. Internally we refer to this practice as ``strip and
ship'' to extend to the ``splash and dash'' which we dealt with
a few years back.
Musket believes the magnitude of this exporting activity
far overshadows the fraud cases brought forth today. Although
the statute mentions only gasoline and diesel blend exports
specifically, we believe many people have exploited the lack of
clarity in regard to heating oil and bunker fuel exports
blended--having exported significant volumes of biodiesel
without declaring an obligation to retire the RINs, in blatant
contravention of the spirit and purpose of the RFS.
Since these exporters are not buying the RINs back from the
market, an excess of RINs are left, depressing the RINs, and
this is further threatening the existence of the small
biodiesel producer and undermining the entire purpose of the
EISA.
While some may have ignored the impact of the biodiesel
exports on the market--I'll jump forward a little to the
conclusion since I am running out of time.
To address this policy flaw, we recommend three commonsense
changes for Congress to consider immediately. Require RINs to
be retired immediately upon export of biodiesel and renewable
diesel; require the EPA to coordinate monitoring and
enforcement actions with U.S. Customs and Border Protection and
the Department of Energy; and require all sellers of diesel
sold in the U.S. to disclose the biodiesel content.
Under the current ASTM standard, wholesalers are not
required to disclose biodiesel content up to 5 percent. This
frustrates upstream buyers, blenders and ultimately truck
owners. Accordingly, exporters of ASTM diesel may not know that
they are exporting biodiesel and thereby creating an obligation
to retire RINs.
We believe that if these changes are made, the true intent
of the EISA will be upheld, and the U.S. biodiesel industry
will remain vibrant.
Again, Chairman Stearns and Ranking Member DeGette, thank
you for the opportunity to appear before the committee today.
Mr. Stearns. Thank you.
[The prepared statement of Mr. Fjeld-Hansen follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. Mr. Jobe, you are welcome for your opening
statement. And just pull the mic a little closer, if you don't
mind.
STATEMENT OF JOE JOBE
Mr. Jobe. Chairman Stearns, Ranking Member DeGette and
members of the committee, thank you for the opportunity to
testify today regarding the Renewable Fuel Standard and our
efforts to ensure RIN integrity in the fuel marketplace. I am
Joe Jobe, CEO of the National Biodiesel Board. I represent the
U.S. trade association for the biodiesel industry.
We are pleased to see that Congress is interested in the
success of the Renewable Fuel Standard, which, as you know, was
created just 7 years ago under the Bush administration with
overwhelming bipartisan support here in Congress.
We are here to address a problem today, but the policy
really has been an unquestioned success for the biodiesel
sector. It is stimulating production. Last year, we exceeded
over 1 billion gallons at plants across the country. We have
plants in virtually every State.
Today you would like us to focus our discussion on
improving the EPA's enforcement of the RIN trading. Make no
mistake about it, we take this issue very seriously. As we've
already heard, RIN fraud has caused significant disruptions in
the distribution and marketing of biofuels, and we are
committed to preventing it in the future.
Biodiesel is a renewable diesel replacement fuel made from
an increasingly diverse mix of agricultural byproducts,
including vegetable oils, recycled cooking oils and animal
fats. It is the first and currently the only EPA-designated
advanced biofuel that is produced on a commercial scale all
across the county, meaning that it reduces greenhouse gas
emissions by at least 50 percent. It meets strict fuel
specifications and is used in any existing diesel engine
without modification. It's primarily used in blends up to 20
percent where it actually exhibits premium diesel
characteristics. In fact, the current diesel land speed record
was set just last year using B-20.
Nobody is more interested in eliminating bad actors from
the RFS program than we are, and we have gone to exceptional
lengths in recent months to develop practical private-sector
solutions. We believe the EPA has a difficult job ensuring RIN
compliance, and overall we believe they have done a good job in
cracking down on fraud, as was demonstrated with the recent
conviction of Rodney Hailey in Maryland. We have strongly
encouraged the EPA and other authorities to continue
enforcement action so that the handful of bad actors who have
disrupted the biodiesel marketplace are removed from the system
and punished.
Additionally, we are not interested in seeing obligated
parties being overly fined and penalized for unwittingly using
RINs that they thought were valid. By the same token, however,
we believe obligated parties should be required to exercise an
appropriate level of due diligence before they submit RINs for
compliance, and we're committed to ensuring that actual volumes
of biofuels are produced and sold in the U.S. as envisioned by
Congress. Last year the biodiesel industry exceeded those
targets, and we hope to continue that success in the coming
years.
Perspective is important, and we have to remember that the
biomass-based diesel category in the RFS2 is effectively only 1
year old. Effectively, 2011 was really the first year that the
program was implemented and came online. And the cases of fraud
are isolated cases involving past activity. The vast majority
of biofuel producers are honest companies producing quality
fuels for the U.S. marketplace. What we have seen is no
different from fraud in other financial markets where criminals
have come in and found a way to take advantage of the system.
Looking forward, we believe the EPA's strong enforcement,
along with increased due diligence and the private sector's RIN
integrity efforts, will ensure that this kind of fraud doesn't
happen in the future. Specifically, in the first case to be
prosecuted, Mr. Hailey was quickly convicted last month in
Baltimore and faces up to 32 years in prison. This conviction
should send a strong signal to would-be fraudsters that this
kind of criminal activity will be punished severely.
Separately, NBB responded quickly to allegations of fraud
last year by forming a RIN Integrity Task Force, which includes
a broad cross-section of stakeholders. The task force has been
advising on, among other things, the development of a
comprehensive auditing and realtime monitoring program.
Through the work of the task force, the private sector has
launched the Genscape RIN Integrity Network Dashboard. We are
confident that this third-party verification program that
offers verification in real time electronically will be
effective in protecting the system from bad actors and giving
the market confidence. And I would say that we're hopeful that
this program will respond in sort of an E-Verify way that Mr.
Bilbray referred to.
We're also working closely with both the EPA and obligated
parties to look at whether additional regulatory modifications
can better focus enforcement efforts on bad actors while
ensuring that the goals of the program are met.
To conclude, I want to repeat that we take RIN fraud very
seriously and are committed to eradicating it. As we move
forward, we anticipate continuing to work with our colleagues
from the petroleum sector and the EPA to develop practical
solutions.
We appreciate this opportunity and welcome any questions
you have.
Mr. Stearns. Thank you.
[The prepared statement of Mr. Jobe follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. Mr. Drevna, you are welcome with your opening
statement.
STATEMENT OF CHARLES DREVNA
Mr. Drevna. Chairman Stearns, thank you, Ranking Member
DeGette, thank you, and members of the committee, for allowing
me to testify here today. I am Charlie Drevna, president of
AFPM, the American Fuel and Petrochemical Manufacturers. We are
the obligated parties, my members, under the Renewable Fuel
Standard. As such, we are required to blend ever-increasing
volumes of biofuels into the transportation supply. There are
several nested mandates within the RFS, including this--why we
are here today, the 1 billion gallons of biomass-based diesel.
Each year obligated parties must submit a number of
Renewable Identification Numbers, or RINs, as the Chairman
stated, to EPA to demonstrate compliance with the program. RINs
are created theoretically by biofuel producers and correspond
to gallons, theoretically gallons, of biofuels. RINs can be
separated from the biofuels and act as credits and are bought
and sold, as was mentioned earlier, in a free and open market.
In order to facilitate RIN trading, EPA established the EPA
Moderated Transaction System, EMTS, through which all RINs must
be generated and traded. Only EPA-registered--that is, EPA-
registered--biofuels producers that have submitted third-party
engineering reports are eligible to generate RINs on the EMTS,
although other EPA-registered parties are then able to trade
the RINs, as has been mentioned earlier in the testimony.
Unfortunately, as we now know, some biodiesel producers
have taken advantage of the weak oversight and have generated
RINs without producing any biofuels. While EPA properly issued
Notices of Violation to these so-called bad actors, the Agency
went a step further and actually fined the obligated parties
who unknowingly used these invalid RINs to comply with their
2010 biomass diesel obligations.
In one case, EPA responded to a tip and conducted a site
visit of a registered biodiesel producer. During its visit EPA
found the company did not even have biodiesel production
machinery on site. It then took EPA about a year to issue a
Notice of Violation to that company of 32 million invalid RINs.
However, during its investigation of Clean Green Fuels, EPA
provided no indication to obligated parties that they may be
inadvertently--that they may be buying invalid RINs.
Now, I could give you any number of both criminal and
jurisprudence kinds of analogies here, but I won't bore the
committee with all of them.
In fact, EPA stood by while obligated parties accessed EMTS
data and continued to purchase Clean Green RINs that EPA knew
were invalid. Then to add insult to injury--I may more clearly
say injury to injury--EPA issued NOVs not just to Clean Green,
but also to the obligated parties that purchased these RINs.
Now, the obligated parties go through a wide spectrum; the
biggest of the big companies, the household names, all the way
down to the small refiners and everything in between.
And the free market today is working. It's working so well
that we have a panel here of people saying that they can't get
into the marketplace because the members, my members, are doing
due diligence. They're out there looking at who they can trust
and who they know can get validated RINs.
That's how the free market system is working today, ladies
and gentlemen. We need to fix it. If you want this program to
go on, as many of the Members said, stop pointing fingers. As
you all know, we all have problems. My industry has problems
with the total RFS, but right now this thing is the law of the
land. And to categorize the refiners who were victims as either
lazy or criminal is totally, in my opinion, our opinion,
unfair.
Again, the free market is working because my members are
being very careful who they buy the RINs from. And they are
doing their due diligence. They are assuring each other that
they're complying with the law so we don't get slapped with
going backwards and buying RINs again and paying six-figure
fines.
One hundred forty million gallons of this stuff just
discovered this year, so if the system is working, I'd hate to
see when it is not working, as some of the panelists have said.
Now, we have been discussing with the EPA and the obligated
parties a way to go on this thing, how are we going to get out
of this mess, how are we going to be assured that the program
continues as long as Congress says it should continue. And the
program protects not only small producers of biofuels,
biodiesel, but everyone, everyone along the food chain.
In particular we appreciate the efforts of the next panel,
Mr. Bunker and Mr. Brooks and their staff. We have been working
diligently with them, with others on the panel trying to get a
way out of this thing. But as mentioned previously, we need an
affirmative defense. Now, the affirmative defense can either be
let's work together and go through this system, or the
affirmative defense is going to be the marketplace is going to
say who's going to buy RINs from whom. That's the choice we
have right now.
So, you know, we can get the RINs from somewhere. It
depends upon how we are going to work with Congress, work with
the EPA and work with the other folks.
So the promise of these talks have been no resolution.
We're going into 2013 very quickly. So we have to get this
solved, work together, figure out a way to do it.
Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentleman.
[The prepared statement of Mr. Drevna follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Stearns. I will start with my opening questions. I just
thought I'd put in perspective the question is how long has
this been going on, and perhaps many of you might know better
than I, but a Secret Service agent with Homeland Security
testified under oath that on or about January 2010, and he
names Absolute Fuels and Gunselman and others known and unknown
at times fraudulently created and sold credits for renewable
fuels that were never produced, thus violating the law. So it
goes back to January 2010.
And I guess the question I would have for Mr. Jobe,
recently the Renewable Fuels Association testified before our
Energy and Power Subcommittee, yesterday, in fact, that the RIN
fraud problem is overblown. Do you think that's true or not,
yes or no?
Mr. Jobe. Um----
Mr. Stearns. Yes or no?
Mr. Jobe. Yes.
Mr. Stearns. Do you want me to repeat the question?
Mr. Jobe. Yes.
Mr. Stearns. So you agree with the Renewable Fuel
Association that this whole thing is overblown.
Mr. Jobe. I wouldn't characterize it exactly that way.
Mr. Stearns. No, I'm asking the questions. So your answer
is yes, it is overblown?
Mr. Jobe. Yes.
Mr. Stearns. OK, I just want to--because your opening
statement indicated that. Then as you moved to your closing,
you sort of indicated differently, so I thought I'd put you on
record.
And I think in this case, and it is Mr. Fjeld-Hansen--pull
the mic up a little bit closer to you--and Mr. Paquin can tell
me do you think the problem of RIN is overblown, yes or no?
Mr. Fjeld-Hansen. I think the problem has not fully
surfaced until the export issues have been addressed as well.
Mr. Stearns. So, is your answer yes or no, it's overblown?
Mr. Fjeld-Hansen. I would say it's not overblown.
Mr. Stearns. Not overblown.
Mr. Paquin?
Mr. Paquin. Sir, the situation is not overblown.
Mr. Stearns. OK. And this case, Mr. Sprague, what do you
think about this fraud problem? Do you think--Mr. Jobe thinks
it's overblown. What's your opinion? It is overblown, yes or
no?
Mr. Sprague. Yes, I think it's overblown.
Mr. Stearns. You think it's overblown.
Ms. Case. I think it's a serious issue, but it reflects a
very small amount of the market, so it is overblown.
Mr. Stearns. Does anyone feel a strong compunction that it
is unfair for me just to put you on yes or no, that you would
like to have an opportunity? If so, who would like to say?
OK, Mr. Jobe, can you make it in 30 seconds?
Mr. Jobe. Yes.
Mr. Stearns. Normally if you're the gentleman from
Michigan, Mr. Dingell, who has been chairman of this committee
many years, he gives no opportunity to talk after he asks a yes
or no, but I'm going to give you 30 seconds.
Mr. Jobe. It is a very, very serious issue, and we are
committed to addressing it. I had to answer yes only to the
extent that--only to the extent that it----
Mr. Stearns. You said it is a serious issue. Who else? Mr.
Paquin, did you want to say something? I have a lot of
questions here, but keep moving.
Mr. Paquin. Yes, sir. At this point, yes, it is a
definitely a serious issue. The fraud that is committed up to
this point is significant. And I----
Mr. Stearns. OK. Let me ask Mr. Fjeld-Hansen. Musket
Corporation, I guess, is the second largest truck stop chain in
the United States. Is that true?
Mr. Fjeld-Hansen. That's right.
Mr. Stearns. They're a large player in the market for
biodiesel fuel. Especially as compared in this case to Mr.
Sprague's company, you're the big honcho here. But you say in
your testimony that Musket is still, you are still greatly
affected, just like Ms. Case talked about what has taken place.
In what ways has Musket been impacted?
Mr. Fjeld-Hansen. Well, as you were saying, due to our
size, when we have been in transaction chains of fraudulent
RINs, we tend to be the epicenter of it. We are the ones who
are buying the fuel from the producer. We also are the ones
selling the RIN to the obligated party. And we are also the one
making the investments in the blending equipment. And we are
also the ones selling the fuel to the consumer. So we carry the
quota risk of the consumer, the credit risk of the producer.
Mr. Stearns. So you're involved with all the transactions.
Mr. Fjeld-Hansen. So we are where everything meets.
So our impact from a damage perspective has been that we
have had to replace fraudulent RINs that we had sold to
obligated parties. So whatever damages they incurred, we
replaced RINs at our cost.
Mr. Stearns. OK. Mr. Sprague, in your testimony you state
that the inception of the EMTS program, which, I guess, is a
computer system that the EPA set up, many in the industry
thought that the EPA would be providing oversight, and
guidance, and validation for all RIN transactions, but as
you've pointed out quickly after the fact that EPA--this is not
the case, and that caveat emptor is really what you're facing
when you're dealing with this EMTS program. Is that correct
that you had the impression somebody was looking after this?
Mr. Sprague. Exactly. The general perception in the
industry was through the third-party engineering studies that
were done for each facility to become registered, through the
attestment, through all of the documentation that we provide,
which is quite extensive, that the EPA, for lack of a better
word, was the gatekeeper, and that somehow the system--maybe
that was the flaw that many of us had--somehow, without
actually figuring out how, that the system would remain pure.
I think the obligated parties didn't take their due
diligence job seriously. I don't think the EPA intentionally
didn't provide the oversight that maybe we feel now that could
have been more substantial, but I think we all kind of felt
like the system was sound, and we found that it's not. It has a
few holes that need to be plugged.
Mr. Stearns. All right. My time has expired.
The gentlelady is recognized for 5 minutes.
Ms. DeGette. Mr. Sprague, following up on that, this Clean
Green case was a wake-up call for everybody, correct?
Mr. Sprague. I'm sorry, ma'am.
Ms. DeGette. The Clean Green case was a wake-up call for
everybody that due diligence needed to happen, and people need
to pay attention, right?
Mr. Sprague. That's correct.
Ms. DeGette. OK. Mr. Drevna, I want to ask you a couple of
questions. I understand that numerous companies like
ExxonMobil, Marathon, Shell, Sunoco and Tesoro bought invalid
diesel RINs from Clean Green, which has now been convicted, and
submitted them to the EPA for compliance with their with
renewable fuel obligations, correct?
Mr. Drevna. Yes, ma'am.
Ms. DeGette. And EPA's regulations clearly state, quote,
``Invalid RINs cannot be used to achieve compliance with the
renewable volume obligations of an obligated party or
exporter.'' Is that correct?
Mr. Drevna. The regulations say that, yes.
Ms. DeGette. They say that, yes.
Mr. Drevna. Yes, ma'am.
Ms. DeGette. And, Mr. Drevna, EPA's regulations clearly
say--or I just said that--that they can't be used to achieve
compliance, and so here's my question: Do you know if those
companies that I just talked about, ExxonMobil and the other
ones, were aware of that EPA regulation, yes or no?
Mr. Drevna. Yes, I'm assuming that they did, they do.
Ms. DeGette. I would think so.
And so here's my question: Yes or no, do you know think the
companies have any responsibility to conduct due diligence and
to investigate biofuel producers from whom they are buying
RINs?
Mr. Drevna. I believe that there has to be a system where--
--
Ms. DeGette. Yes or no, do you think they should be
conducting due diligence?
Mr. Drevna. Depending upon what your definition of due
diligence is.
Ms. DeGette. Do you think they should be conducting due
diligence, yes or no?
Mr. Drevna. To a point.
Ms. DeGette. To a point. Only to a point? Which point?
Mr. Drevna. The point where it makes sense.
Ms. DeGette. OK. Do you know whether those companies had
due diligence processes in place before the Clean Green case?
Mr. Drevna. I believe they must have looked at----
Ms. DeGette. Do you know whether they had due diligence in
place?
Mr. Drevna. I cannot address individual companies.
Ms. DeGette. You don't know.
Mr. Drevna. No, I don't know.
Ms. DeGette. OK. Thank you.
Now, do you know if the company's attention to due
diligence has increased since this Clean Green case came up?
Mr. Drevna. As I said----
Ms. DeGette. Yes or no?
Mr. Drevna. Yes.
Ms. DeGette. Thank you.
Now, I want to say to you, Mr. Paquin, due diligence is
important to you, and I think you said in your testimony
improving due diligence is important in the wake of this Clean
Green case, correct?
Mr. Paquin. That is correct.
Ms. DeGette. OK. Now, I think you believe that there are
certain red flags that one can identify in this whole process
to tell if there's fraud in these RINs, correct?
Mr. Paquin. There are red flags and----
Ms. DeGette. Would you be willing to supplement your
testimony--excuse me--would you be willing to supplement your
testimony, Mr. Paquin, to tell us what those red flags could be
as we work along this process?
Mr. Paquin. Actually there are many red flags and
indicators that we can look at.
Ms. DeGette. Can you submit that to this committee? That
would be really helpful.
Mr. Paquin. I can do that.
Ms. DeGette. Thank you very much.
[The information appears later in the hearing.]
Ms. DeGette. Now, Ms. Case and Mr. Sprague, you know, I
listened so sympathetically to your testimony because you're--
just like everybody else, you're victims in all of this because
you're legitimate operators who are trying to operate under
this law, and now your markets have fallen out because you're
small producers, and people are worried, right? Ms. Case, yes
or no?
Ms. Case. Yes.
Ms. DeGette. And Mr. Sprague?
Mr. Sprague. Yes, ma'am.
Ms. DeGette. Now, Ms. Case, you said that when the EPA
announced this fraud, the market fell apart; is that right?
Ms. Case. Yes.
Ms. DeGette. And you also said that there are solutions in
the private sector that had been proposed because everybody's
awareness has gone up since this Clean Green case; is that
right?
Ms. Case. Yes, that's correct.
Ms. DeGette. Would you be willing to supplement your
testimony to talk about some of those private-market solutions
that have been proposed?
Ms. Case. Of course.
Ms. DeGette. Thank you very much.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Ms. DeGette. Now, what can the EPA do to restore the
confidence in the program so you can start selling your product
again?
Ms. Case. I think what we're doing right now, the National
Biodiesel Board's obligated parties and the EPA working
together, for example, on the RIN Integrity Task Force, is
exactly what we need to do. We need to clarify what due
diligence is absolutely. There needs to be more due diligence.
And I think that the EPA just needs to make sure that all the
information gets out there so that we can identify who the
people are who are perpetrating the fraud and eliminate them
from the system so we can move on. The more information we get,
the better.
Ms. DeGette. OK, great.
Now, I'm sorry, Mr. Drevna, I forgot to ask you one
question, and I don't know if you know the answer to this, but
as I said, ExxonMobil, Marathon, Shell, Sunoco, and Tesoro and
others bought these invalid RINs from Clean Green Fuels. And so
my question is Clean Green was the one that was operating in
Maryland with a few plastic tubes in a tiny ramshackle
building. Do you know if those companies did the due diligence
to find out about Clean Green before they bought the RINs?
Mr. Drevna. I can't talk individual companies. I can't say.
Ms. DeGette. Well, I just listed a whole bunch of them.
Mr. Drevna. Well, EPA was there a year before they
announced that there was a lot of fraud.
Ms. DeGette. My question to you, sir, is do you know if
those companies----
Mr. Drevna. No, I don't. No, I don't know. No, I don't.
Ms. DeGette. Thank you very much.
Thank you, Mr. Chairman.
Mr. Stearns. Mr. Terry is recognized for 5 minutes.
Mr. Terry. Thank you, Mr. Chairman.
I came here under a different impression. I thought we were
all getting together so we could figure out solutions here. I'm
kind of stunned actually.
Anyway, a couple folks in a question, I think, by Mr.
Stearns about whether the fraud was significant, just my little
editorial before I ask questions. It may have been
insignificant in the sense of the amount of fraud to the entire
industry, but its consequences have been very, very
significant, so therefore it is significant. And that's what
we're trying to do here today, because as I mentioned in my
opening, this is also then being used as the primary weapon
against biofuels in general. Because there's fraud, eliminate
biofuels. And so we need to have the discussion more about how
do we correct the fraud, because any fraud should be dealt with
swiftly and harshly.
Anyway, now I'll get to a couple of my questions. Mr.
Paquin, I understand, though, that in validation you did your
work and discovered fraud. Could you be more specific in what
remedies then you brought to the table?
Mr. Paquin. Yes, sir, absolutely.
First of all, I want to correct the record. The first RIN
fraud case was not in 2010 for Clean Green. Actually when I was
the president of Paquin Energy & Fuel in 2009, we actually saw
the first fraud case. So in July of 2009, we discovered through
our due diligence process that some of the numbers we were
receiving for renewable credits did not make sense. They were
rounded off, and those numbers just appeared to be inconsistent
with any product we saw in the marketplace. In 2009, a local
prosecutor actually immediately prosecuted an individual and
limited the fraud to about 100,000 total dollars.
Mr. Terry. This is a local prosecutor.
Mr. Paquin. This was a local prosecutor.
Mr. Terry. And someone informed the local prosecutor of
what they discovered?
Mr. Paquin. Yes, sir. At Paquin Energy & Fuel, when I was
the president there, we immediately called the EPA as well as
the local prosecutor to see if we can get some of the financial
and some of the money back from the company. They responded
immediately and, like I said, limited that case to about
$100,000 total liability. He was convicted of a felony, so the
case was successfully prosecuted.
Fast forward to Clean Green in 2010. Our company once again
went through an extreme due diligence process and identified
the fact that Clean Green was not producing product. We
actually sent someone on site. They looked at that facility and
identified the fact that it was nonexistent. We reported that
to the EPA in July of 2010 and again in a meeting in August of
2010.
I will also say that the due diligence process that we
execute, we rely on other individuals just based on information
from brokers, the total amount of fuel that's used, and we also
pass on that information to obligated parties. So they--and, in
fact, default will rely on us to tell them and give them what
due diligence we've done as we purchase and resell RINs.
So I think that's an important distinction to make that
there is a significant due diligence process in the marketplace
currently; however, it's nearly impossible to root out all the
criminals who actually defraud other people and individuals in
the system. That's why affirmative action or affirmative
defense is extremely important as we move forward so an
innocent, good-faith company has the ability, like ours who
went out and did the due diligence, doesn't have that extreme
liability.
Mr. Terry. I appreciate that.
Ms. Case, I appreciate your position in the market. You had
mentioned in your testimony, and so did Mr. Sprague, that when
there is something like this fraud controversy, it tends to
impact the smaller producers more significantly. Tell us
specifically how it affected you and why you think it affects
the smaller producers, in 42 seconds.
Ms. Case. Sure. We sell--prior to the fraud we sold our
RINs with the fuel, so our distributors would be the one who
would actually separate the RIN and sell it up the chain to the
brokers or to the obligated parties.
Once the fraud occurred, the ultimate owner of that RIN, an
obligated party, doesn't know New Leaf. They've never been to
my plant. They don't buy fuel directly from me. They would just
get the RIN through some brokers. So once the fraud was
discovered, they just put a stop to buying any RINs from any
producers they didn't know about.
When the due diligence kind of got more intense, there were
auditors that were sent out to verify that a plant like ours is
in existence, and the marketplace has allowed at this point to
start getting RINs moving again. However, obligated parties are
still focusing on the plants that have the financial backing to
replace those RINs, or maybe an intermediary, a broker, who can
put their balance sheet on the line to say if these RINs do
turn out to be invalid, they can replace them.
Nobody is going to look at my company and think I could
replace $5 million worth of invalid RINs if they turn out to be
invalid, so therefore obligated parties are still not buying
directly from me. There are some market things that have been
put together, verification purposes--for verification purposes,
and I think eventually they will again.
Mr. Terry. Thank you.
Mr. Stearns. Mr. Green, you're recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
My colleagues, I appreciate your being here today. And
unlike the chairman, I don't get to run over my 5 minutes, so
I'm going to ask for a yes or no answer on my first question.
Conception. Do each of you agree that there should be some
sort of affirmative defense for obligated parties as warranted,
recognize that may depend on some sort of agreed due diligence
criteria? If you could just answer yes or no.
Ms. Case, would that bring stability to your market.
Ms. Case. I believe so, yes.
Mr. Sprague. Yes, absolutely.
Mr. Paquin. Yes. It has to extend to all participants.
Mr. Green. Mr. Fjeld-Hansen?
Mr. Fjeld-Hansen. I'm not certain about it. I think the
buyer beware is actually working quite well, and proper
prosecution is going to clean up a lot of this.
Mr. Stearns. Mr. Jobe?
Mr. Jobe. Yes.
Mr. Drevna. Absolutely.
Mr. Green. And I guess my concern is that we've heard the
questioning, and we'll get to the EPA panel in a few minutes,
but for almost a year the EPA knew there was a fraudulent
access out there, and didn't ring the bell, and said it is
buyer beware. I'm just shocked that we're saying, wait a
minute, Congress created this program, and yet we don't want
some follow-up by someone other than a private sector to do it.
It should be also verified. And I think due diligence with some
kind of affirmative defense may be what we are looking for.
Mr. Drevna, do you think that the risk for invalid RINs
could be significantly minimized if the EPA approved a third-
party independent auditor that visited the facilities
unannounced?
Mr. Drevna. Well, that's the question, Congressman Green,
about what due diligence is and what it isn't. We can't go out
and look at 50,000 or how many different producers are out
there. We need something that says, OK, we're in this together,
we have to have an affirmative defense, we have to define what
that due diligence is.
Now, we have been going back and forth with EPA, and
actually we've been going forth with EPA, we haven't gotten a
lot anything back--I mean, good conversation, but we haven't
gotten anything back from the good folks at EPA about what they
believe would be a due diligence, you know, how many boxes do
you have to check in order for you to qualify for that
affirmative defense? That's where we are right now.
Mr. Green. And I know and my ranking member is a good
friend. Obviously your members are big boys. They can take
care--and big ladies, too, I guess. They can take care of
themselves. But the problem with these RINs is that you may not
know from that purchaser you're buying from where it actually
came from because these are traded. You know, it's almost like
if I buy stock, no telling who else has had that stock. And
that's my concern.
Does anyone else on the panel want to answer on do you
think that the risk for invalid RINs would be significantly
minimized if the EPA approved a third-party independent auditor
that visited the facilities? Anybody else have a response?
Mr. Sprague. I would like to make a comment on that, sir.
We in the private sector have lots of audits by lots of
different agencies, IRS, State and local, so we get audited a
lot. By no means are we fearful of having that auditor come in.
The question is is it really needed, and is it going to
accomplish anything?
My greatest fear is that we create a bureaucracy to where--
--
Mr. Green. We already got one at EPA.
Mr. Sprague. Yes, I guess that's true--where we create even
more bureaucracy inside a program that was meant to be a
private-sector, market-based type of approach. So my comment to
that is that's not necessarily, in my opinion, needed, and
that's just an opinion.
The one thing that----
Mr. Green. If somebody else on the panel may want to
respond, because I'm down to a minute 15. Anybody else?
Mr. Fjeld-Hansen. Thank you.
You know, when you look at a lot of these increase or some
kind of a process like you're talking about, an audit, I don't
think we want to put a system in place that relieves people of
liability. Everyone who's entering into this industry are doing
it because of some kind of business idea or plan and some kind
of return metrics, and with those come certain risks. You're
mentioning all the traders that are in this----
Mr. Green. I only have a couple seconds. I need to ask Mr.
Drevna, why is it critical for EPA to act by January 1st of
2013?
Mr. Drevna. We don't want to see a redux of 2000, what we
saw in 2012, Congressman Green. We have to have certainty out
there. And in order to--you know, just a couple weeks ago the
FBI raided another place. We don't know how many more are out
there right now. We need to have certainty that whatever we do
is going to be satisfactory, or, as I mentioned earlier and
then probably in opposition here, the free market is working
right now because we're not buying RINs from people we don't
trust.
Mr. Green. Well, and that's the concern, because without
that certainty you're hurting a lot of companies, and maybe we
really need somebody that's a traffic cop saying this is OK so
some of these companies could actually participate.
Mr. Chairman, thank you for your patience.
Mr. Stearns. Thank you.
Dr. Burgess, you're recognized for 5 minutes.
Mr. Burgess. I thank the chair for the recognition.
Mr. Sprague, I was particularly taken with your testimony
that--your observation that there were a lot of forms to fill
out, there were a lot of people that you had to reply to. And
it was your impression, whether it was rightly or wrongly, that
someone really didn't have their hand on the tiller as far as
all of this was concerned. Did I discern that correctly?
Mr. Sprague. Yes.
Mr. Burgess. And, Mr. Paquin, you have pointed out how as
early as 2009 saw the numbers didn't add up. Were you the one
that then alerted a local prosecutor?
Mr. Paquin. Well, in 2009, Paquin Energy & Fuel alerted the
local prosecutor as well as the EPA at that time.
Mr. Burgess. So I guess what I'm having trouble with here
is EPA gave the impression that they were in charge. They gave
you the impression, Mr. Sprague, that you got to fill out all
this stuff, you got to do all these things in order to be in
compliance, so surely there is a penalty or there is a
problem--if a problem is found, they are going to fix it in
short order. Did you have that impression?
Mr. Sprague. That was definitely the impression. And I will
go back to a comment Mr. Jobe said that this program is
effectively 1 to 2 years old, and with any--with any system
there is going to be problems, corrections. If anything, it's
my opinion that the problem that is occurring is there's not a
mechanism to address problems that are unforeseen.
Mr. Burgess. Well, that's your impression today, but when
you were filling out all those forms, having to answer all
those questions, it really looked like the heavy hand of Big
Brother was on this program, didn't it?
Mr. Sprague. That is a true statement.
Mr. Burgess. And that would have been my impression coming
at it from the same angle, that here you have the heavy hand of
the Federal Government, you'll have the full weight of the
Department of Justices, inspector generals, Federal
prosecutors, who know else, if you come in and do this
incorrectly, so you better cross all the Ts and dot all the Is.
Wasn't that your impression?
Mr. Sprague. Yes.
Mr. Burgess. And so it was kind of a shock.
I don't know, Ms. Case, did you have the similar impression
when you applied for this program?
Ms. Case. You know, on one hand yes. Obviously we had an
engineering review. We had someone come out to the plant and
make sure we had the technology in place. But on the other
hand, you know, I'm sure in hindsight there could have been
more. That's the benefit of hindsight.
Mr. Burgess. Yes, but even at that level, could you have
ever envisioned that someone could put a barrel in a church
parking lot with a couple of hoses coming out of top and say,
hey, I'm in the biodiesel business?
Ms. Case. No, but I don't think like a criminal.
Mr. Burgess. Yes, and that's a lot of our problems.
But here is the problem: You guys entered into this. You
risked your own capital, your own time. You could have been
doing other productive pursuits. I don't know whether it was a
desire to make money or a desire for social justice, but you
did what the government asked in producing these, and then in
turn--I mean, you're--honestly, you're the bottom of the food
chain. Mr. Drevna, his big boys and girls. They will be taken
care of, they'll handle it, they can absorb those losses. But I
don't know if you are at liberty to tell us, how did that
affect your balance sheet, Ms. Case? What personally has been
put at risk in your world from this?
Ms. Case. It's been difficult, I can tell you that. Like I
said, we had a good year last year, and this year has not been
so good.
Mr. Burgess. Well, can you give a range; do you feel like
on a personal level you lost $1,000 or $10,000 or 100,000?
Ms. Case. I can't speak to the exact dollar amounts, I
don't have that with me. I can say that if you look at the RIN
values right now as to where they were last year, and then you
take a pretty significant percentage off of that, you'll see
about what I'm getting for a RIN right now, whereas last year
at this time we were all on a level playing field, my RIN was
worth the same as a large-producer RIN.
Mr. Burgess. So you're the one having to provide the
discount in order to salvage the program.
Ms. Case. Absolutely.
Mr. Burgess. Mr. Paquin, can you give us an idea of the
range of the losses that your company--you're kind of midlevel
in this range. There are very small guys and very big guys.
Mr. Paquin. Yes, sir. After going through an extensive due
diligence process, and without the opportunities and an
affirmative defense to show our innocence. We are looking at a
range of a 6- to $10 million loss of which we don't have. Our
40 employees will probably go away if that occurs. However, I
think we can come up with solutions in order to move forward.
Mr. Burgess. So if you have solutions, you can save 40 jobs
in your company.
Mr. Paquin. I think the industry can save tens of thousands
of jobs if we have an immediate solution and EPA actually
adjusts its interim policies to allow for an immediate due
diligence.
Mr. Burgess. And, Mr. Drevna, just a quick follow-up. I'm
not sure that I completely understood. And, now, has the EPA
defined what due diligence is so going forward we all know?
Mr. Drevna. No, sir, that's the problem right now. We've
been trying to figure out what due diligence would be, having
meetings with the assembled masses here going forward. But to
date it's been, you know, tell us what you think due diligence
is, and they'll look at it, and we don't hear anything back.
Mr. Burgess. Well, we've defined the problem, and I hope we
can apply a little pressure to get this done for you.
Mr. Drevna. If I may, sir, there is a program out there
that we've been living with since 1995 under the RFG program.
It's a good template, why not look at it, the RFG survey.
Mr. Burgess. OK, we'll look at that. Thank you.
Mr. Sullivan [presiding]. Ms. Castor, you're recognized for
5 minutes.
Ms. Castor. Thanks very much.
Well, thank you all very much for being here today. I think
your testimony on the renewable fuels standard and the young
biodiesel market has been very illuminating, and I really feel
for what has happened with these crooks and bad actors that
have entered into the market and caused so much damage to your
companies.
I wanted to focus on some of the big picture, though, on--
it's very interesting that almost everyone here said, Congress,
continue on with renewable fuel standards; that the overarching
goal there of creating jobs, of addressing--reducing greenhouse
gas emissions, thereby addressing these extreme weather events,
is important; and really reduce--decreasing our country's
reliance on foreign sources of energy.
Except Mr. Drevna. Yes, you're right, I read your testimony
where it says the renewable fuel standard is a broken policy in
need of dramatic reform. I think you're in the minority, from
the research I've been doing and the testimony here today.
Ms. Case, notwithstanding these crooks that entered into
the market, would your company be profitable without the
renewable fuel standard?
Ms. Case. No.
Ms. Castor. And, Mr. Fjeld-Hansen, how has the Musket
Corporation--I wasn't familiar that you had such a--what is it,
300 locations all across the country. We're doing
transportation fuels. How has the Musket Corporation benefited
from the renewable fuel standard?
Mr. Fjeld-Hansen. Well, as a retailer we are there to
provide the fuel that our customer wants, so I think our
customers have benefited.
Ms. Castor. You need to bring your microphone a little
closer and turn it on.
Mr. Fjeld-Hansen. And also turn it on.
No, as a retailer the benefit of this is really coming to
the customer more than anything where a lot of the value
created from the renewable fuel and also whatever emissions
benefits they have will be transferred to the customers. So we
are kind of in the middle of the chain where it's additional
fuel that we can offer to our customer.
Ms. Castor. Well, I know you're not saying the RFS is
perfect, because these fraud cases have raised very significant
concerns about the market impact of this fraud, and we need to
learn the lessons now in order to prevent this fraud from
occurring again. And I'm very pleased that the National
Biodiesel Board and the petroleum refiners have been working to
set up a third-party certification system that will help buyers
verify the validity of the RINs before they purchase them.
Mr. Jobe, can you describe the auditing process that
biofuels producers have to undergo to qualify as a certified
producer under this program?
Mr. Jobe. Yes, thank you.
Prior to working in this job, I was actually a fraud
investigator, I did training at the Federal Law Enforcement
Training Center in Glencoe, Georgia, where some of the Secret
Service agents also train.
So we started working on this program back in October of
last year in anticipation of EPA enforcement actions, and one
of the conclusions that we came to fairly quickly was that we
were going to need to address this problem in a very reasonable
timeframe, in a very tight timeframe, because it was going to
jeopardize, financially jeopardize, a whole lot of people,
including my members, including Mr. Drevna's members, and
everyone at this table.
And so we decided that a legislative fix was not--would not
work in the proper reasonable timeframe; that even a regulatory
fix was not what was needed, because regulations move at
glacial speed. We needed the private sector to step forward
with a private-sector fix. That's why we got with Mr. Drevna's
organization. We formed a task force that was cochaired by an
obligated party and a biodiesel producer and had a cross-
section of all of the stakeholders, and advised and encouraged
the development of the program.
They even developed the audit plan for the initial audit.
So it's a two-phase program. First is an initial audit where
actual audit teams go on site and audit the RINs that have been
existing. And then the second phase is installation of special
software with special data-collection algorithms and monitoring
equipment, tank monitors, flow meter monitors, infrared camera
devices, all of these sending realtime data to the software
reconciling the data, and all that data then made available to
obligated parties to use that information to do their due
diligence.
We're confident that--and our members have taken--they're
spending tens of thousands of dollars to do this and to put
equipment on site.
Ms. Castor. Then are you confident that the producers will
continue legitimate and high-quality operations after they
receive that certification because of that investment?
Mr. Jobe. Absolutely.
Ms. Castor. And you also testified along with others that
the EPA, businesses and key stakeholders are in serious
discussions about how third-party verification systems like
this one would work and how it would fit into EPA's enforcement
approach. Have you--how would you characterize EPA's response
to stakeholder concerns, and have they been a willing
participant in the discussion?
Mr. Jobe. The EPA participated as guests on all of our--on
many of our task force meetings. They reached out. They were
very responsive to us when we reached out to them. They reached
out to us separately, and they've been very responsive.
I will also just share, as far as the enforcement action,
having done fraud cases, of course everyone would have liked
things to have happened faster, but having prosecuted fraud
cases, you have to get all of your facts very, very straight
before you allege something about someone because you can ruin
their reputation. So we think that this first prosecution case
has gone on a relatively reasonable timeframe.
Ms. Castor. Thank you very much.
Mr. Sullivan. Thank you.
We recognize Mr. Bilbray for 5 minutes.
Mr. Bilbray. Thank you, Mr. Chairman.
First of all, I think--I was just sitting here realizing I
think the ranking member and I were the only ones around back
in the '90s when we fought to get biodiesel equity and able to
get a blender's credit back in those old days. I remember the
battle over that, and I----
Ms. DeGette. We were in our teens then.
Mr. Bilbray. Yes, yes.
So we have come a long way on a lot of issues. I am just
concerned that we don't recognize that what our intentions were
with the renewable fuel standard may not have grown or evolved
the way we wanted to. And I really wanted to say I do agree
that there are changes need to be made, and reform is not a bad
word in a lot of episodes. But I think here we need to learn
from our successes and our failures.
One of the places I think has been successful is the
biofuel industry overall has provided a usable material with
the BTUs, the energy that is needed, at the same time of
avoiding environmental problems that some other aspects of the
renewable mandate have applied. I mean, California, you
actually have renewable fuels being outlawed for environmental
reasons, and you've got renewables that are actually going to
have to be imported because our domestic-produced renewables
are not compatible with their greenhouse mandates. And so but I
think there are the opportunity to learn from some of this.
The question I have for those of you that--especially the
little guys that have to work with us. Those of us in
government, the big guys always can accommodate one way or the
other. It is the little guy who gets squeezed out by mistakes
by big government. So how can we help the little guy?
Mr. Jobe, the issue of tracking who is a true credit--and
this is really kind of near and dear to me, because when we
were talking about so-called cap and trade, didn't have any
cap, we were talking about international offsets. And I saw
shysters going down to Latin America actually cutting deals
with teak growers for stuff that wasn't going to reflect
reality, but was going to make people money because they get
shipped over.
How do we do something like what we're trying to do with
our drug tracking of a pedigree so that a consumer can know
that they have--that what they are buying is actually going to
be credited under the Federal program? Do you have any ideas or
have been thinking about that?
Mr. Jobe. Yes. And I appreciated your suggestion earlier
about E-Verify and the analogies there, because I really think
that the private-sector solution that we've developed in
conjunction with the obligated parties, the blenders, the
marketers, the retailers, and large, small and medium-sized
biofuel producers, I think it is very similar and will work
like that because it is going to initially audit the RINs that
have been generated, and then it will be monitoring in real
time so that an obligated party or other stakeholder can,
through a subscription service--and the obligated parties on
our task force actually believe that it's going to save the
obligated parties money to pay for this subscription because
they have auditors in--they have multiple--all of them have
multiple auditors on the same site right now--but if they could
just buy a subscription and look at data that's being monitored
in real time, it would be very, very powerful. So I really
think that's a form of an electronic realtime verification that
you can look at a particular RIN and see that it's been
monitored.
Mr. Bilbray. From the consumer's point of view, the
purchaser, right now when it comes to illegal employment, we
put the burden on the employer to check with an old I-9 system
that has been so fraudulent that everybody knows it's just a
scam for basically people who want to break the employment
laws. But with E-Verify we are trying provide, as the President
has expanded it, a vehicle for a consumer, the employer, to be
able to check to make sure they are legally performing an
activity.
Do you see an opportunity by using some kind of information
that works to give the consumer the ability to know what they
are actually buying and what they are getting for the dollar?
Mr. Drevna. That's a great point, Congressman Bilbray. And
to Mr. Jobe's thought, you know, the concept sounds really
good, and always the devil's in those details, and we are
working very closely.
One of the concerns we have, it can't be just one company.
There has to be an EPA-approved, registered--any number of
people. Let the free market decide who you want to go to to
make sure that you can check your boxes and get it done. And
the more entities that are involved in that, the better
because, again, you can't just have one company saying, we're
doing all this.
Mr. Bilbray. No, I think Ms. Case would be the first one to
say if you pick one company, you're going to be the--you're
going to be left out, and some big guy is going to be in line
for all the business. So I guess the two things you can agree
on from both ends of the aisle, I got a constituent down at the
end, but I think that we don't want to have that government
pick one player, because that player tends to be the big guy
who's got the lobbyist in Washington or is able to play. And
the essential part of this program is the little guys being
able to participate because they're closest to the community.
Ms. Case. The point I would make with the work that we've
been doing on the task force is that if all of our RINs are
looked at on an even playing field, and the obligated party can
look at the subscription service and see that I'm actually
producing fuel at my facility, they would be more likely to buy
my RINs, and that's why it's important for that system to be
put in place.
Mr. Bilbray. Thank you. And thank you for taking that 10-
hour flight round-trip to come out to testify.
I yield back.
Mr. Sullivan. Mr. Markey, you are recognized for 5 minutes.
Mr. Markey. Thank you, Mr. Chairman, very much.
Yesterday I asked Jack Gerard, the president of the
American Petroleum Institute, whether he supported the policy
we've had in place in the United States over the last 37 years
to prohibit exports of American crude oil. He apparently
doesn't support that policy anymore. Even as American soldiers
are fighting and dying to protect oil supplies in the Middle
East, he thinks that it's the American Petroleum Institute--or
we should really now just call it the World Petroleum Institute
because that's really who he is representing--thinks that we
should seriously consider exporting American crude oil.
Last week the Carlisle Group purchased the Philadelphia
refinery that was for sale, the oldest and largest oil refinery
on the east coast. The previous owner, Sunoco, had planned to
close the facility next month, leaving 850 workers unemployed.
Instead the refinery will now be upgraded, and an additional
200 jobs will be created.
Now, why has that occurred? Well, in the past the
Philadelphia refinery used high-priced imported Brent crude,
which is more than $14 more expensive on the world market than
domestic oil produced here in the United States. So the new
strategy is to develop the infrastructure to bring in lower-
priced, domestically produced oil from North Dakota and
elsewhere to make 50 percent of its refined product.
Mr. Drevna, if we allowed unrestricted exports of crude
oil, wouldn't that decrease the incentive to invest in domestic
refineries here in the United States because it would be more
dependent upon imported, higher-priced Brent crude at $14 a
barrel higher?
Mr. Drevna. Mr. Markey, I wasn't here yesterday to hear Mr.
Gerard's testimony, but I can say that if we allow the access
to all of our crude oil, and natural gas and natural gas
liquids, if we open up--have the President open up the Keystone
XL pipeline, not tomorrow or next week, within a few short
years, we could have a serious discussion about what are we
going to do with the excess crude oil that we have and the
excess natural gas.
Mr. Markey. Thank you, Mr. Drevna.
The problem is that we already had that conversation here,
and the head of the pipeline, the Canadian pipeline, the
Keystone pipeline sat here, and I asked him just 3 months ago
would he agree that the oil coming through the Keystone
pipeline from Canada would stay in the United States.
Mr. Drevna. Oh, and it will.
Mr. Markey. No, he said he would not agree to that. The
head of the Canadian pipeline said he would not agree to it. So
my concern is that it will come through the pipeline, get
refined, and then just sent off to China. So why would we
have----
Mr. Drevna. First, Mr. Markey, I thought this hearing was
about invalid RINs, but if we are going to have this
discussion, we're more than willing to talk to you and your
staff going forward.
Mr. Markey. I understand. Well, it is all part of kind of
the same subject that, you know, is being opened up here in
terms of the way in which we fuel our country.
So what we have here for this hearing is essentially a sort
of ethanol eBay or biodiesel bazaar. Buyers can register,
sellers can register, but no one ever said the sellers were all
going to be scrupulous, and clearly they weren't.
When your companies buy real estate, whether it is
refineries or factories or office space, do they make sure the
seller actually owns the property and that there are no liens
or other problems with it before closing in on the
transactions? Meaning what about the companies--what about when
companies buy actual biodiesel? Isn't it true that most
companies have audit programs in place before fuels are
purchased to ensure that the fuels being bought or sold meet
environmental and other specifications? Whoever wants to take
that question. Mr. Paquin.
Mr. Paquin. Sir, when someone receives a wet gallon of
biodiesel, they can actually look at the diesel and take a
sample of it. In the current EPA system, moderated system,
there is no way to look at that to see if it is valid or not,
if it is a physical product. So if I were to buy a product from
one of the producers to my right and blend that product, I
would actually be able to see it. So I think that's a distinct
difference between the two facts.
Mr. Markey. Well, I have documents from several companies
that indicate that they do have checklists to catalogue the
type of fuel, the type of technology, the purity of the final
product, and all sorts of other information that should be used
to validate a purchase. And so I'm just wondering what the
thoroughness is of the industry just in ensuring that frauds
are not being perpetrated in the same way in real estate or
anything else that those checks are in place.
Mr. Paquin.
Mr. Paquin. Yes, sir. And I would say that there's probably
not another company in the entire industry that has a more
thorough due diligence process currently than ours. We have
recognized the majority of the fraud that has occurred in this
industry.
I will say, however, that it is extremely difficult to
catch and find out who is trying to defraud you. They can make
up fake documents. They can lie to you on the phone. You can
show up to a facility that looks like it's operating. There are
several ways in which one can be defrauded. I think that's why
it is extremely important----
Mr. Markey. Let me just ask this very quickly. Yes or no,
do you all agree that EPA should have the funds it needs to
crack down on any company that violates regulations or defrauds
other companies?
Ms. Case, do you think the EPA should have those revenues
to crack down on fraud, yes or no?
Ms. Case. I don't feel like I have enough information to
answer that.
Mr. Markey. Mr. Sprague, yes or no, should the EPA have
those policemen on the beat?
Mr. Sprague. The private sector will monitor itself, in my
opinion. No. The answer is no.
Mr. Markey. OK.
Mr. Sullivan. Mr. Griffith, you're recognized for 5
minutes.
Mr. Griffith. Thank you, Mr. Chairman.
Mr. Drevna, biofuels eBay is the way that this was
described, but in reality wouldn't your companies have been
better off if they had been purchasing over eBay because eBay,
once it discovers an actual fraud, takes the sale off the
market; is that not true?
Mr. Drevna. I have never purchased anything on eBay, sir,
but I understand that is correct.
Mr. Griffith. And so in reality, if I understand it
correctly, the EPA actually knew for over a year that the Clean
Green was just a shack with barrel with tubes coming out of it.
Is that--I'm listening to testimony.
Mr. Drevna. That is correct. That is my understanding
again. They saw nothing and reported nothing to us.
Mr. Griffith. And so they didn't put up any kind of a
warning this company is suspicious, or under investigation, or
being looked at?
Mr. Drevna. No, Mr. Griffith. The first time we heard about
it is when we got issued an NOV and a potential fine.
Mr. Griffith. And, Mr. Paquin, you indicated that there was
a prosecution in 2009, and it was a felony that was reduced
down to an amount of $100,000 to make it easier for local
prosecutor, and your company at the time, the company you were
with, notified both the EPA and the local prosecutor. The local
prosecutor took action. Did the EPA take any action?
Mr. Paquin. Sir, the EPA--the only action that I recall is
to say that we were unable to use those RINs, and the rest of
the facts I think are correct.
Mr. Griffith. And did the EPA notify anybody else in the
industry that this was a company that was under investigation
before the conviction?
Mr. Paquin. Sir, I don't recall any Notice of Violation for
that case, nor do I think the EPA issued one for that case.
That was handled by the local prosecutor.
Mr. Griffith. And do you know was there any kind of an EPA
notification postconviction of the fraudulent perpetrator?
Mr. Paquin. I think the word got out through the industry
itself, although apparently limited, because the other people
who testified here claim Clean Green in 2010 was the first
case. However, those of us that were close to that and lost
money at that time were aware of it.
Mr. Griffith. And what jurisdiction prosecuted, if you
recall?
Mr. Paquin. It was in Alabama, sir. And I want to clarify
one other thing as well. It was in conjunction with other
officers of that company that had reported the fraud to the
local prosecutor. I don't want to show that we made that actual
call itself, although we did have a lawyer who may have made a
call as well, but it was a group of people working the case at
the time.
Mr. Griffith. Mr. Fjeld-Hansen, without--and I know you
didn't say you were against it, but without an affirmative
defense would you instruct your buyers to buy Ms. Case's RINs,
or would you instruct them to not purchase from somebody that
didn't have the necessary financial wherewithal to reimburse
you should they later be disqualified by the EPA?
Mr. Fjeld-Hansen. I think, again, philosophically if you
believe in market forces and that things will find some kind of
equilibrium, I think we are going down the right path now with
prosecuting people. I think the next guy who is going to make a
RIN out of his garage is going to think about it much more than
Rodney Hailey did.
Also, I think on the enforcement side----
Mr. Griffith. You think that the right step is to prosecute
the wrongdoers and not reinvent the system?
Mr. Fjeld-Hansen. Yes. I think we want to--the resolution
first is to keep the system intact as it is, but put more--and
I didn't get to respond to the gentleman from Massachusetts,
but put more money into enforcement and investigation. And I
think those monies will be recouped easily in formal fines.
Mr. Griffith. And I would be happy to ship money out of the
anticoal programs into enforcement on this one.
That being said, Mr. Drevna, back to you, is anybody
looking at what happens if there is not enough renewables in
order for American domestic supply to be used, because with the
corn crop failing this year as a result of the weather
conditions, is there a possibility or is anybody looking at the
possibility that we may not have enough biofuels out there to
meet the requirements, and thus some of the American production
will actually have to be exported because it couldn't be sold
in the United States?
Mr. Drevna. A couple--if I may address a couple of things
for that, Mr. Griffith. First of all, the panel here is
focusing, rightfully so, on their particular business, their
particular little one-fourth of the renewable fuel standard.
The refining industry has obligated parties for four different
we call them buckets, OK? This is one. This is a year or 2 old.
Everything is going fine, but we've got 6, 7, 8 percent of the
RINs fraud, but everything is OK.
On the ethanol side you got an E-10 blend wall we're going
to hit. The auto manufacturers, the engine manufactures,
whether it's a handheld power equipment or chainsaw, or mower,
are saying, we're not going to warranty anything over E-10. EPA
said, OK, it's OK to use E-15. On the cellulosic side, where
there is a whole story in itself, where we're supposed to buy
fuel that doesn't exist, and we can't--so we can't buy it, and
we're fined for it.
So when I say--and, you know, I guess it was Ms. Castor or
somebody said unanimous agreement minus one on the renewable
fuel standard, and in my testimony when I said this thing has
some serious problems, this program has serious problems. We're
sitting here intertwining a free-market atmosphere with a
mandate. They don't jive.
Mr. Griffith. I have to yield back my time. Thank you, Mr.
Chairman.
Mr. Terry [presiding]. You don't have time.
The chair recognizes the gentlelady from Tennessee for 5
minutes.
Mrs. Blackburn. Thank you, Mr. Chairman, and I'm going to
try to sum up quickly and not take 5 minutes.
Mr. Drevna, I think that we would agree with you many times
free markets and mandates don't mix. What becomes particularly
problematic is when the Federal Government tries to have a
controlled situation where they are going to emulate free-
market components, and then they slap these mandates on it, and
it quickly becomes a mess. You all have certainly seen that in
the RIN program, and we're here today reviewing it because we
need to find some answer to this and figure out what did or
didn't work.
Mr. Drevna and Mr. Jobe, I know you all have been
negotiating with the EPA on trying to work this out. How are
those going?
Mr. Drevna. They need to go faster. Where as I said
earlier, we're looking at EPA is supposed to come out with a
regulation--it was supposed to be out the end of June, still
isn't out--volumes for 2013.
Mrs. Blackburn. Are you going to have something in place
that will help with the January 2013 season?
Mr. Drevna. If EPA can bless it, we will try, but we have
to have EPA blessing.
Mrs. Blackburn. Do you feel like you are on track to hit
that or not?
Mr. Drevna. It's a slow track.
Mrs. Blackburn. Mr. Jobe, do you want to add anything to
that?
Mr. Jobe. I agree. It's a slow track. We have been engaged.
We're committed to trying to find common ground and solutions.
We have some differences in position that we're trying to work
through.
Mrs. Blackburn. OK. Can you quantify those differences? Are
they things where you're poles apart?
Mr. Jobe. So we have--we were approached by the groups. We
have discussed the groups. They've said, we would like a
regulatory solution to transition from a strict-liability
structure to an affirmative defense, meaning we can use our due
diligence to defend ourselves to show that we----
Mrs. Blackburn. OK. Let me talk about due diligence then
for a moment, because, Mr. Paquin, you talked about that a
little bit. I want you to list for me what would be the best
practices in due diligence that you wanted to say this is the
list of boxes that have to be checked with an affirmative
answer in order for this transaction to proceed. Do you have
that? Can you say, ``This is our list''?
Mr. Paquin. Ma'am, I can submit a list in our opinion.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Paquin. I would also like to add, though, to that that
even if you do go through that list, there still has to be the
affirmative defense on the back side to show that in good faith
you have moved forward in an attempt to do the right thing.
Mrs. Blackburn. Right. And we understand that.
Mr. Jobe, if you had such a list that was well-defined and
industry best practice standards, would that help?
Mr. Jobe. Yes. And our task force developed that list, and
we're sharing that with the EPA, and they're working on that.
Mrs. Blackburn. Would you share it with us?
Mr. Jobe. Absolutely. And they're working on what's called
the quality assurance plan. We're working all together to
develop what that would be.
So if I may, you asked about the differences. We said we
agree that an affirmative defense, to be able to show your due
diligence to defend yourself, that's a fair and reasonable
request, and we want to be fair and reasonable and operating in
good faith, so we agree with that.
But we have some differences when we get into the details,
because the petroleum folks are saying, well, we want the EPA
to certify and preapprove third-party validation programs and
multiple third-party validation programs, and anything that
participates under that will be deemed valid even if it's
invalid. So we have concerns about that.
Mrs. Blackburn. OK. Anyone want to add any other comment?
We have 52 seconds left.
Mr. Paquin, go ahead.
Mr. Paquin. Yes, ma'am, thank you.
I think the National Biodiesel Board and the AFPM have done
some great work for some of the due diligence process, and the
process is moving forward. We can see the timing, however, has
taken so long that we're not at a solution yet. That's why I
think it's even more important and imperative that the EPA has
an interim policy, or they modify their current interim policy,
in order to solve issues today so we can save tens of thousands
of jobs. If we don't do that now, and we wait for these two to
talk and discuss and talk more and then discuss and talk more,
we are going to have all of our small producers out of
business, and the industry is going to crumble.
Mrs. Blackburn. OK. Is the EPA a help or a hindrance in
this process?
Mr. Drevna. In my opinion, Mrs. Blackburn, they have been a
referee. They haven't come back at us on anything. They've been
working with us, but it's always thrown back at us.
Mrs. Blackburn. The slow walk. OK.
Mr. Paquin. Ma'am, we view the EPA as a partner. We think
that the EPA has the ability to solve this immediately. We just
need to use those regulatory measures that they have available.
Mrs. Blackburn. Thank you. I yield back.
Mr. Terry [presiding]. Thank you.
First of all, the gentlelady from Colorado has a request.
Ms. DeGette. I move to strike the last word.
Mr. Terry. The gentlelady is recognized.
Ms. DeGette. I just wanted the record to be clear. I
thought this was an excellent panel and excellent testimony,
kind of clarifying the issues, and I just want my position to
be clear, which is I'm not opposed to an affirmative defense. I
actually think it's a good idea, so long as we come up with
clear requirements on the due diligence. And I think that's
what Mr. Paquin and others on this committee are saying.
So I want to thank everybody for their testimony, Mr.
Chairman, and I thought it was a really excellent panel.
Mr. Terry. Thank you.
Does the gentleman from Texas have a request?
Mr. Burgess. Yes. I have an a unanimous consent request to
ask one additional follow-up question of Mr. Jobe.
Mr. Terry. Is there any objection? Hearing none----
Mr. Burgess. Mr. Jobe, is this something that could be done
administratively at the EPA, or would this require legislative
action on the part of the House and Senate and President, which
takes a long time?
Mr. Jobe. To answer your question, not a legislative fix,
but a combination of what we've come up with in a private-
sector solution, and then looking at ways that we can--on a
regulatory basis that we can make the program better.
Mr. Burgess. So the EPA needs to quit slow walking, and you
don't need legislative action.
Ms. DeGette. I'm going to object to further questions.
Mr. Terry. OK. Nice try, though.
The gentleman from California, do you have----
Mr. Bilbray. To strike the last word. One question.
Mr. Terry. Without objection.
Mr. Bilbray. Mr. Markey really sparked a concern I have,
and I would ask, I guess, Mr. Jobe and the representative of
the industry, if the corn crop fails, as some are worried now,
and there is not enough ethanol to fulfill the renewable fuel
mandate 10 percent, what happens to that domestically produced
oil that may not be able to be sold in the United States?
Mr. Drevna. Congressman, right now we're about at E10. I
think there's enough capacity in the ethanol industry to keep
it at E10. The question is how expensive is it going to be.
Mr. Bilbray. OK. So you think we do have a----
Mr. Drevna. Plus we get imports.
Mr. Terry. I'm sorry, we're going to keep this to your
promised one question.
Mr. Jobe, the gentlelady from Tennessee, you answered that
there are some documents regarding your standards, and she
asked to you produce those. You have 30 days. We would
appreciate that. That would be very helpful.
[The information follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Terry. But that concludes the testimony from our first
panel. I would agree with the gentlelady from Colorado, I
thought each of you were excellent and provided us great
insight. A very successful first panel. You leave with our
gratitude and thanks for being here today. Thank you.
We'll take a few seconds to let our first panel leave and
gather their papers, and then we'll go to our second panel,
which includes the main testifier, Mr. Byron Bunker, Acting
Director of Compliance Division, Office of Transportation and
Air Quality, Office of Air Radiation. He is accompanied by Mr.
Phillip Brooks, Director, Air Enforcement Division, Office of
Enforcement and Compliance Assurance, U.S. Environmental
Protection Agency.
As I understand, Mr. Bunker will be the primary person to
testify, and Mr. Brooks will be there to assist if there's a
dropped ball or something.
But as you two understand how O&I works, you know that the
testimony that you're about to give is subject to Title XVIII,
section 1001 of the U.S. Code, so when holding an investigative
hearing, this committee has the practice of taking testimony
under oath.
Do you have any objections--and since one will be providing
assistance to the other, we need both of you to answer the
question. Do you have any objections?
Mr. Bunker. No objection.
Mr. Brooks. No objection.
Mr. Terry. All right. Then the chair advises you, if you
will stand, that you are under House rules and the rules of the
committee. You are entitled to be advised by counsel. Do you
desire to be advised by counsel during your testimony here
today?
Mr. Bunker. No.
Mr. Brooks. No.
Mr. Terry. No. Both saying no.
In that case, will you please raise your right hand and
swear, and I will swear you in.
[Witnesses sworn.]
Mr. Terry. Both having affirmed.
Chairman, you may sit down, Mr. Bunker. You can go ahead
with your 5-minute testimony.
STATEMENTS OF BYRON BUNKER, ACTING DIRECTOR, COMPLIANCE
DIVISION, OFFICE OF TRANSPORTATION AND AIR QUALITY, OFFICE OF
AIR RADIATION, ENVIRONMENTAL PROTECTION AGENCY, ACCOMPANIED BY
PHILLIP BROOKS, DIRECTOR, AIR ENFORCEMENT DIVISION, OFFICE OF
ENFORCEMENT AND COMPLIANCE ASSURANCE, ENVIRONMENTAL PROTECTION
AGENCY
STATEMENT OF BYRON BUNKER
Mr. Bunker. Committee members, Ranking Member DeGette----
Mr. Terry. Is your microphone on?
Mr. Bunker. Thank you.
Members of the subcommittee, we appreciate the opportunity
to appear before you today. I am Byron Bunker from EPA's Office
of Transportation and Air Quality, and I will deliver the
statement on behalf of EPA, and both I and Phil Brooks, my
colleague from EPA's Office of Enforcement and Compliance
Assurance, will be happy to answer your questions.
Biofuels play an important role in reducing our dependence
on foreign oil, decreasing greenhouse gas emissions, and
improving rural economies. In July 2010, in compliance with the
Energy Independence and Security Act, EPA began implementing
revisions to the Renewable Fuel Standard Program, commonly
called the RFS.
The Energy Independence and Security Act established new
annual volume standards for renewable fuel, reaching a total of
36 billion gallons in 2022, including volume standards for new
categories of renewable fuel. If EISA's mandate is fully
implemented, the RFS program would displace about 7 percent of
projected annual gasoline and diesel fuel consumption in 2022.
This would decease oil imports by $41.5 billion and provide
additional energy security benefits of $2.6 billion. The
program is also expected to reduce transportation greenhouse
gas emissions equivalent to the emissions from 27 million
vehicles per year.
EPA developed the implementing regulations for the RFS
program through extensive collaboration with renewable-fuel
producers, fuel distributors, petroleum refiners and other
parties to ensure that the program would be compatible with the
existing fuels market and business practices in that market.
The RFS regulations allow petroleum producers and importers
subject to the program known as obligated parties to
demonstrate compliance with renewable fuel volume requirements
in one of two ways. They can do so either by acquiring the
required volumes of renewable fuels together with the renewable
fuel credits known as Renewable Identification Numbers, or
RINs, or by acquiring the RINs without fuel. EPA instituted
these options in response to requests from refiners for
flexibility and to implement the statutory provisions for a
credit program.
As the committee is aware, EPA is pursuing criminal
investigations and civil enforcement proceedings against
companies suspected of fraud and of violating the Clean Air Act
in connection with the RIN market.
While the focus of EPA's enforcement has been on fraudulent
RIN generators, the RFS regulations do not allow invalid RINs
to be used for compliance with the renewable volume obligations
mandated by the program. Obligated parties are the parties
ultimately responsible for ensuring the program's volume
requirements are met, even if they comply solely by acquiring
RINs. If an obligated party acquires invalid RINs, those RINs
cannot be used to demonstrate compliance with the program as
this would undermine the requirements established by Congress.
EPA has also instituted an interim enforcement policy to
provide a clear message that obligated parties who unknowingly
use invalid RINs to meet their compliance obligations, and who
timely remove those invalid RINs from their compliance reports,
will be offered an opportunity to resolve violations at a very
modest and capped amount.
Since the enforcement actions became public, the regulated
community has begun to improve its due diligence and
acquisition of RINs. In addition, a number of private
companies, as you heard in the first panel, are now offering
services designed to verify the validity of RINs for potential
purchasers.
EPA has also reached out to the oil industry and biofuel
producers to discuss ways to improve the RFS program and RIN
validity in particular. All parties in our discussion share a
common goal to improve the RFS program in a way that's fair to
all parties, and that meets the renewable fuel volume targets
envisioned by Congress. EPA believes the discussions so far
have resulted in a number of promising options for
consideration, including a proposal to establish a third-party
verification system to help ensure that RINs are valid.
In closing, EPA understands the seriousness and urgency of
the fraudulent RIN issue and has been diligently working with
industry to alleviate uncertainties in the renewable fuels
market for obligated parties and producers alike. EPA's goal
now is the same as it has always been: successful
implementation of the RFS established by Congress. We are
working closely with affected and interested stakeholders to
explore potential options for improving the RFS. We are
committed to taking action to make necessary adjustments to the
program in a timely manner.
We appreciate the opportunity to testify today. Thank you.
Mr. Terry. Thank you. We appreciate your testimony here
today.
[The prepared statement of Mr. Bunker follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Terry. And at this time the chair recognizes the
gentleman from Texas, Mr. Burgess, for 5 minutes.
Mr. Burgess. I thank the chair for the recognition and
thank Mr. Bunker for being here.
You heard the testimony of the first panel, and we really
appreciate you sitting in and hearing that, because I think
this is an important part of today's activities. I heard you
use the words ``serious'' and ``urgent'' in your summation, and
I will take you at your word that you meant the two words that
you spoke.
I guess really the question now that remains after hearing
the testimony, and hearing your testimony and the questions and
answers from the previous panel, what is it going to take to
get the EPA to do what's necessary to make sure this program
has integrity, to bless the program, and give an affirmative
defense to those people we had at the table today?
Mr. Bunker. So as I said in the testimony, and as you heard
from the panelists in the first panel, we are actively working
with all the parties. I think you heard both there is
considerable agreement among the parties that and some issues
remain to be seen, I think.
Mr. Burgess. With all due respect, because I know time is
limited, their phrase ``referee'' was used in conjunction with
the EPA's activity. Someone else used the term ``slow walk.''
You know, honestly, serious and urgent mean serious and urgent.
You got people who are hurting here. The poor lady from San
Diego at the end of the table, I mean, she's basically in
possession of a nonperforming asset right now. As a small
businessman I know what that means. It means you are going
broke, and you put your own money on the line, and now you
can't sell the product. So that's like having a see-through
office building. It is a bad deal, and your cash flow is in
serious jeopardy, and you are probably not going to survive for
long if that's not fixed.
So serious and urgent, we got to get past the slow walking
part. I can't emphasize enough, you got to help these guys now,
and it is serious, and it is urgent.
This isn't the biggest program administered by the EPA,
it's not the biggest program in the Federal Government, but
it's important. And we got real people out there. Mr. Paquin
testified that there are 10,000 jobs on the line. I mean, look,
wouldn't the President have liked to have another 10,000 jobs a
week ago Friday? That's a yes or no question. I'll answer for
you: Yes, he would.
How do we get to the point--well, you're right now what?
You're operating under what, an interim rule, an interim
policy?
Mr. Bunker. I think we're mixing two pieces. The interim
policy is an enforcement policy, but what everyone is talking
about is changing the regulations that we put in place in 2007
and 2010. So this would be a new regulatory program. We would
make amendments to that proposal.
Mr. Burgess. How quickly can that be done?
Mr. Bunker. The goal the industry has is to be ready for
the start in January 2013, and I think that's a reasonable
goal. But how we accomplish that, all the pieces that have to
be done between now and then are great. As you heard from the
panel, there's a lot of work to be done, and I think that's a
goal we should work towards.
Mr. Burgess. Well, with all due respect to the Agency, and
I do want you to--I mean, I take that serious and urgent, and I
take seriously the fact that you say that this is going to
happen. But would the committee be out of line for asking you
to--I don't want to take the pedal off the metal on this one.
We got to work on this for these guys. So I'm going to suggest
you report back to the committee within 90 days on the progress
that you're making concerning resolving the problems in the
industry.
Mr. Bunker. I understand the request. Yes.
Mr. Burgess. Could we have the Office of the Director and
the Administrator confirm this action within 14 days' time to
the committee?
Mr. Bunker. I will follow back and ask, yes.
Mr. Burgess. Will you transmit that request?
Mr. Bunker. Yes, I will.
Mr. Burgess. All right.
Mr. Chairman, thank you for your indulgence. I am going to
yield back my time.
Mr. Terry. The gentleman yields back his time.
The gentlewoman from Colorado, Ranking Member DeGette, is
recognized for 5 minutes.
Ms. DeGette. Thank you, Mr. Chairman.
Mr. Bunker, I think you heard from Mr. Burgess that we're
all concerned about these small producers, and I guess in the
way that the program has been--the RIN program has been
structured, can the EPA require people to buy RINs from the
small producers?
Mr. Bunker. No. There is no mechanism----
Ms. DeGette. And that's because it's a market-based system;
is that correct?
Mr. Bunker. That's exactly the case.
Ms. DeGette. And so I think what people are saying to us is
we need some certainty that these RINs are going to be valid,
correct?
Mr. Bunker. I think it's basically they want to have the
same standing as all the producers.
Ms. DeGette. Right. But having the same standing as all the
producers would mean there's some certain level of certainty
that the RINs are OK, right?
Mr. Bunker. That's exactly correct.
Ms. DeGette. And the EPA's credit-trading program has been
a buyer beware program from the beginning. Everybody that
participated knew that that was the construction of it,
correct?
Mr. Bunker. It was clear from the start, yes.
Ms. DeGette. Now, has the EPA ever certified and validated
the credits bought and sold in the RIN market?
Mr. Bunker. The Agency has not.
Ms. DeGette. The program's not set up that way; is that
right?
Mr. Bunker. That is correct.
Ms. DeGette. So if we wanted to set it up so that the EPA
was certifying certain RIN providers, that would require a
whole 'nother program to be established within the EPA; is that
correct?
Mr. Bunker. And different oversight and a number of other
aspects would be different.
Ms. DeGette. Different oversight. And it would really be
going away from the market-based solution that we're trying to
achieve; is that right?
Mr. Bunker. We would be picking the winners and losers, I
think.
Ms. DeGette. You'd be picking which people did it, and it
would be a whole new program. And it would give certainty, but
it would be taking that more into a government program and away
from a market-based program; is that right?
Mr. Bunker. I think that's an accurate characterization.
Ms. DeGette. OK. Now, I want to know if the EPA has ever
represented to people that they intended to certify or validate
any credits that were bought and sold in the RIN market?
Mr. Bunker. Not to my knowledge.
Ms. DeGette. OK. Now, here's a really valid question that I
thought was raised, though, in the last panel, which is even
though it's a buyer beware system, people are upset that after
this fraud was discovered, the EPA waited a year to let people
know. Why did the EPA wait a year to let people know?
Mr. Bunker. Maybe I should have explained before. The
reason we have the two panelists is Mr. Brooks is from our
enforcement office.
Ms. DeGette. Oh, good. Maybe Mr. Brooks can tell us why the
EPA waited a year.
Mr. Brooks. Yes, Congresswoman.
The time lapse from the initial discovery, we got a tip, we
sent inspectors out, we had to follow up on some information.
And what we did was we brought in the criminal prosecutors,
because it was obvious to us that we weren't dealing with the
run-of-the-mill kind of civil enforcement issue that my shop
handles.
So we brought in the criminal specialists. They brought in
the Department of Justice. And at that point Criminal takes the
lead when there are concerns about flight risk, destruction of
evidence and seizure of assets. So in this case all of those
things were at play, and the Criminal Division took the lead.
Ms. DeGette. So there was a criminal investigation going
on, and it's your testimony that it took a year to secure the
evidence they needed so that they could then do their
prosecution; is that correct?
Mr. Brooks. Well, what I understand from this is, of
course, what the Criminal Division tells us, and they asked us
to hold off. And we acted as soon as they said----
Ms. DeGette. So you held off because the Criminal Division
told you to hold off; is that correct?
Mr. Brooks. Yes.
Ms. DeGette. OK. So I'm trying to ask simple questions
here, because I think it's a valid concern that people have.
Mr. Brooks. Yes.
Ms. DeGette. Now, there's been a lot of discussion about
this affirmative defense, and my first question is, Mr. Bunker,
what do you think of the idea if there was a--if you and the
industry agreed on a due diligence process, if they checked all
those boxes, would your Agency object to an affirmative defense
then?
Mr. Bunker. I don't want to prejudge any outcome, but it's
plainly one of the pieces that's fully in front of everyone and
being robustly discussed. So I don't want to imply I know the
outcome from that, but it seems clear----
Ms. DeGette. But it's on the table, it's one of the things
on the table?
Mr. Bunker. Very much so, yes.
Ms. DeGette. And that's my next question is does the Agency
have the legal authority through rulemaking to establish an
affirmative defense, or do you need congressional legislative
action to do that?
Mr. Bunker. No. We think the existing authority we have
under the act allows us to do so.
Ms. DeGette. That's good to hear. Thank you very much.
Mr. Terry. Thank you. Good questions.
We'll go to--next on the list would be the gentleman from
California Mr. Bilbray.
Mr. Bilbray. Mr. Bunker, I think you and everybody else
that's required to enforce either a law or regulation
understands that when the Legislature passes a law, there's
always the assumption of discretionary enforcement. There's
always the assumption that an intelligent way of applying the
regulation or law will be the mode used. Maybe that's a big
mistake we make. But my concern here is talking about one of
the victims in the process, and that is the person who has
purchased with good faith a bogus product.
My concern is that, and let's be very frank about that, the
Agency has a burden to bear here because of recent history. I'd
like to think that you're not going--you're not addressing the
concerns of the people who were purchasing bogus products and
actually victimizing them again with an attitude of we can't
let anybody slip through because somebody might take advantage
of the system.
To be blunt with you, I'm concerned that there might be a
mindset of let's crucify one guy on the front gate, and anybody
who would try to buy these bogus things purposely will be
scared to death.
My question really is how can you not reflect to these
victims that we knew a year ago that you were probably
purchasing bogus, but because our prosecution system needed to
work through 12 months, we see you as somebody that should not
have enforcement or should not be denied what you legally with
good intention purchased?
Do you follow what I am saying is that you knew these
certain consumers probably were doing this in good faith.
You've got an investigation, and that's totally understandable
that you've got to hold off a year until everything wraps. But
doesn't that give you an obligation to go back and cut some
slack for the people that you knew were purchasing at the time
you were doing the investigation?
Mr. Brooks. Should I answer that question?
Mr. Bilbray. Yes.
Mr. Brooks. I think you're absolutely right, and that's
what we did. When we sent out the Notice of Violation, we sent
it out and said, you----
Mr. Terry. Can you pull your mike closer to you?
Mr. Brooks. When we sent out the Notice of Violation, what
we told folks was you need to correct your accounts, you need
to remove the invalid RINs because they're invalid, you can't
use them for compliance. We didn't make a penalty demand.
Instead what we did was we met with everybody. We met with
every single one of these guys, and we talked about the
circumstances. And what we learned was is that the vast
majority had not done any due diligence.
Now, I'm not pointing fingers at them, but they didn't.
They had a different business plan, they thought that was good
enough, but they didn't do what was required.
Mr. Bilbray. Mr. Brooks, let me just say this. If you're
investigating a counterfeiter, and you know he's producing it
for a year, but because for the good of the general public you
allow the $100 bills to continue to go out, and people in good
faith invest their life savings in money that's not worth a
cent, don't you think there's a little bit of obligation of the
general public that is getting the general good of that year
delay to go back and say, ``We'll hold you harmless for this
because we knew about it, and this was a sacrifice all of us
should bear, not just you''?
Do you follow what I am saying is that you're actually
sitting there telling somebody that you're just a victim of not
only the bogus operation, but you're a victim of our process,
and we're not going to make you whole or not even going to
mitigate it.
Mr. Brooks. Congressman, I think that what you're saying
makes sense. I think it's what we did. The feedback that we got
from the obligated parties was that they thought that we were
being reasonable. We came up with a penalty structure that
instead of $37,500 per day per violation was 10 cents a RIN. So
we had some guys that paid 440 bucks.
Mr. Bilbray. But that is like saying that the people that
are a victim of counterfeit isn't going to be prosecuted as
counterfeiters when the fact is they're losing value down the
line. So I appreciate the fact that you've gone there, but I am
worried. And let's be really frank about it. The Agency has a
responsibility that you do not have the mentality of crucifying
people that may not be too guilty, but you've got to make your
point. And I think you have a greater obligation than a lot of
other agencies right now to show you're trying to be
cooperative and understanding.
And for the record, I hope my wife was watching this
hearing, because it's the one time she'll ever hear somebody
say that I had a good point. So thank you very much.
I yield back.
Mr. Terry. That's probably a true statement.
The gentleman from Texas Mr. Green is recognized for 5
minutes.
Mr. Green. Thank you, Mr. Chairman, and I don't know how to
follow my friend from San Diego. But I appreciate you being
here.
Mr. Bunker, it is my understanding a series of meetings has
been taking place with representatives of the biodiesel
producers, refinery sector, blenders, advanced biofuel
producers and potential RIN validators. I've also heard these
negotiations yielded to an agreement on several points: One, a
solution to the RIN fraud issue in the form of a rulemaking is
appropriate; two, a more robust certification and validation
program for biodiesel RIN producers is called for; and, three,
a participation in such a program that would allow the EPA to
shift from a strict liability to an affirmative defense that
could be asserted by an obligated party.
I'm glad to hear EPA is working with the stakeholders to
expeditiously fix the problem, and I've been monitoring the
issue. You know, Congress can pass a law. It would be much
better if everybody sat down and worked on it, because I don't
know if we can do something by the end of December of this
year.
I just want to update--get an update on where the process
is. Do you think the negotiations can be finished by the end of
this year and something in place from the EPA?
Mr. Bunker. So I think you're very well informed on where
we are and kind of the context of those. I think that's a fair
and accurate condition that we're in. And we certainly are
working towards that goal of having something that can work for
the 2013 year. Whether it's totally finished by then or we have
a process that accommodates that, I don't know how we
accomplish that goal, but I think that's a reasonable goal that
we can work toward.
Mr. Green. OK. Can EPA actually decide now to provide an
affirmative defense for a purchaser? Do you have the authority
to do that?
Mr. Bunker. Sir, we have the authority. I think it will
take a rulemaking process to change our regulations. I don't
think we can do that with another administrative process, but I
think we can do it through rulemaking.
Mr. Green. OK. Believe me, if Congress tells EPA to do it,
it would be much quicker if you did it on your own instead of
us passing legislation.
Conceptually the EPA would commit to providing a legal
defense that companies that unknowingly purchased RINs and
submit compliance, fraudulent RINs. I recognize you feel that
depends on due diligence. Would the EPA commit to approving
some form of criteria that would constitute due diligence for
obligated parties?
Mr. Bunker. That's very, very much on the table, and I
think it's in front of everyone to figure out what role each
party plays in this process. I think the first panel really did
a good job of characterizing the breadth of interests here, and
I think we have to find a way for each party to play their role
in that. And that's what we're working through.
Mr. Green. And again, we know we have a timeline, the end
of this year, before we get into 2013. EPA considered
increasing verification requirements for biofuels RIN
generators to ensure the integrity of the marketplace. Have you
done that?
Mr. Bunker. I think largely that's been done through third
parties that are into the market now and providing that service
to make a more frequent process than the EPA process.
Mr. Green. OK. Does that include a physical independent
audit to verify that RIN generators produced the biofuels they
claim?
Mr. Bunker. Most of them are doing it by some kind of
monitoring or by visiting facilities and an audit function, as
you described.
Mr. Green. I know my colleagues already talked about the
Clean Green Fuels, visiting Clean Green Fuels in July of 2010,
and it took a good amount of time. And I appreciate your
response on why the investigation and action didn't go forward
because of the criminal prosecution. But weren't the companies
that purchased those false RINs fined and also told they had to
go buy more, you know, RINs?
Mr. Brooks. Yes, Congressman. Do you want me to answer
that?
Mr. Green. Yes.
Mr. Brooks. Yes. Thank you.
There are two aspects to that. Did they have to replace the
RINs? Yes, because they were invalid, so they couldn't use
them, and that's what the regs say.
And the second aspect is did they pay a penalty. And, yes,
the regulations placed an affirmative obligation. Unlike, say,
counterfeit currency where you're just out the value of the
money, this system has an affirmative obligation on the
obligated parties so that we can meet the congressional
mandate. It's basically the ``skin in the game'' kind of aspect
that says they're going to be careful with what they do and use
only valid RINs.
But in light of all the circumstances, as have been pointed
out here, we talked to them, and we came up with what we
thought was a fair penalty, and obviously they thought so, too,
because we resolved the issue.
Mr. Green. Well, I would encourage you to work on getting
those negotiations and the rulemaking started before we get
into the fall, knowing the problems we'll have, because it's
really important. Some of us would not have voted for this
legislation if it hadn't have been for the first time in 30
years we could vote to increase CAFE standards. And it seemed
like some of those compromises we have to make here may be
coming back and biting us, particularly in this situation.
Mr. Chairman, thank you.
Mr. Terry. Thank you, Mr. Green.
The gentlelady from Tennessee is recognized for 5 minutes.
Mrs. Blackburn. Thank you, Mr. Chairman, and thank you for
staying with us for the hearing.
Mr. Brooks, I got to tell you, when I hear you talk about
the penalty, I think about these individuals that were on that
first panel. You know, when they hear you say this, basically
what they're hearing is you can tell people what you're going
to do to them; it's just you can't tell them what they need to
do. And I think you've got things backwards. And you focused on
the penalty, but getting the due diligence piece right and
letting them know exactly what to do, what compliance looks
like, is where you guys are dropping the ball.
Now, from the first panel we heard Mr. Jobe and Mr. Drevna
and Mr. Paquin talk about they can define due diligence.
They've got a list of what would be industry best practice
standards and review. They're waiting on you to sign off on
this, to take an action. They defined your participation
basically as being a referee. You've heard frustrations with
slow walking.
So, how long is it going to take you to sign off on an
accepted industry standard of best practices; how long is it
going to take you to do that to provide some guidance?
Mr. Bunker. Thank you. If you don't mind, I'll answer that.
That's sort of my responsibility for delivering that piece.
There's a couple of pieces I would like to speak to.
I think there is a broad understanding in industry for how
the due diligence could be done. As you said, several parties
have brought forward ideas. I think they've shared them with
this committee. They've certainly shared them with the Agency.
The part that we are in, I am not going to say it is
inaccurate to say we are a referee at this point. Many of the
parties have different views of how each of them fit into that
due diligence work. They agree what work needs to be done, but
what role each party in the chain plays in that is an important
question for all of those parties, and, of course, for the
Agency. So we're working to understand the pros and cons, the
trade-offs that come from----
Mrs. Blackburn. Mr. Bunker, please. You know, how long? I
mean, they've talked about your slow walking. We're talking
about a deadline coming up. How long is it going to take? Do
you need 2 weeks? Do you need 30 days? How long is this going
to take to make a decision? Somebody's got to bring some
leadership to bear at some point.
Mr. Bunker. That's a very fair question, and I appreciate
that.
This group, the stakeholders, basically the parties that
you heard from, they came to the Agency and proposed some kind
of concept to start this work in June '12. That was the first
time they came in with this kind of proposal. So in less than a
month, it's mushroomed into a very productive, very useful
dialogue to move this forward. So I don't think it's accurate
to call it slow walking.
I do think the goal of having something for the 2013 year
is a good goal and one we can work towards.
Mrs. Blackburn. Are you going to meet the deadline?
Mr. Bunker. I think there's too many variables for me to
give it a firm deadline.
Mrs. Blackburn. Let me ask you this. I am going to run out
of time, and I'm trying to be sensitive to that. The interim
enforcement policy that you have, why don't you adjust that so
that the actions of the bad actors are not going to negatively
impact your small businesses and smaller participants in the
marketplace? As you're focused on the long term, and Dr.
Burgess talked with you about that, why don't you go in here
and make an adjustment to your interim enforcement policy?
Mr. Brooks. Thank you.
We're engaged in a conversation right now that I think
informs how we think about enforcement, but there are--some of
the requests are not as transparent as they might seem. A lot
of the requests are for forgiveness of what the law required,
say, for 2010, 2011 RINs that were invalid.
The concern that we're trying to focus on right now is what
can we do to help the system so that the folks who are actually
producing the fuel out there have an opportunity to sell this
stuff? And it apparently depends on confidence. And that's why
I've spent a lot of time talking with the National Biodiesel
Board and producers and a lot of these other folks about what
is it that can be done so that there is enough comfort out
there. It's really the comfort of the obligated parties that's
the focus of this.
Now, they know that if they went through these kind of
processes, they don't have to worry about whether they get hit
for penalties, because they know that--you know, they talk to
their best lawyers in the country, right, and the best lawyers
in the country will tell them, look, if you've gone through a
system like this, EPA is not going to bother with you about
whether you have done due diligence. You clearly have. So they
can solve that problem.
But really, I think, the focus is on the future here, on
how it is that we can make sure that we've got a level playing
field so that the small producers have the same opportunity to
sell as the big guys.
Mrs. Blackburn. Well, what you're going to see happen is
that your small guys are out of business, and you only have a
few producers. Maybe that's what your goal is, I don't know.
I yield back.
Mr. Terry. All right. Thank you.
At this point the gentleman from West Virginia.
Mr. Griffith. Western Virginia.
Mr. Terry. Southern Virginia--western Virginia.
Mr. Griffith. Thank you, sir. Thank you, Mr. Chairman.
There may be different shades to what you're hearing here
today, but I think both Democrats and Republicans want to get
this problem solved. I'm a little frustrated, and I will always
be frustrated with Washington, at least I hope I will be,
because having come out of the Virginia Legislature, we could
deal with all kinds of problems in 60 days and go home. Dr.
Burgess asked you all to deal with this problem, see if you
could deal with it in 90 days and go home.
This first panel indicated by and large they need an
answer. They're willing to work with you, you know. And you may
be missing it a little bit when you say that, you know, they
seemed to be happy. One, you're dealing with the end product
users and not the people who are trying to sell the RINs. Two,
you know, if you have the right to cut off both their right and
their left hand, and you only cut off their right hand, they
may be happy you didn't take the left hand, or vice versa, but
they're still not real happy about it.
You know, you all need to come up with a fix for this.
There's a problem. Nobody wants to scrap this program. I
haven't heard that from at least any of the folks up here.
That's not the issue. The issue is how do we make it fair for
everybody. And, unfortunately, based on what I've heard from
the testimony today and yesterday, I'm not sure some of these
companies will make it to January of next year.
And I got to tell you, you know, things like what is due
diligence and that kind of stuff, you know, come by the office
this afternoon, and we'll figure that out. I mean, we ought to
be able to put that definition down in a few hours. I don't
understand why it takes the Federal Government so long to come
up with simple things when you have a couple hundred years of
case law out there. And I understand the EPA is different and
doesn't have that length of history, but, you know, you can
borrow from other people.
So I ask you to do that, and I ask you to get back to Dr.
Burgess and let him know within 14 days or let this committee
know within 14 days if you can do that in 90 days, because I
just don't know that these folks can make it.
It's interesting, and I've only been doing this--I'm one of
the freshmen, and I've only been doing this a little while
compared to some of the other folks, but when you see people
from the panel before stay and the panel from yesterday show up
to hear what's going on, this is a big issue to them. And some
of these companies won't survive if you all don't fix it.
You have the power to fix it. If you need our help, I think
I speak for everybody on this committee, we're happy to help
you. If you think you need a change in the code, bring it to
us, we'll make that change. And we can get it done, I hope--I
don't know about the Senate, but we can get it done in a
relatively reasonable period of time.
So I ask you to do that, because I think you are just
glossing over when the companies that bought the end product
are happy, clearly the companies that are making it aren't,
when they are doing the legitimate thing, and it really does
strike against the American sense of fairness when you know
that there's a bad actor out there, and you let people go get
harmed and let their businesses be put in jeopardy.
So I don't really have any questions. I do appreciate you
all being here. And I do appreciate, very much so, that you all
came to hear the first panel. But they seemed like reasonable
people to me that you all ought to be able to get this thing
worked out on. And I think everybody would agree that if you
make a little mistake to correct the big problems that we've
had, we can fix that easier if we have to do that next year.
Sometimes you just have to act. You can't always be 100
percent certain that that act is going to be perfect. But if
you fix 95 percent of the problem, I think these folks would be
happy.
Mr. Chairman, if anybody wants the rest of my time?
Ms. DeGette. I do.
Mr. Terry. Yes, the gentlelady from Colorado.
Mr. Griffith. I yield to the gentlelady from Colorado.
Ms. DeGette. Thank you so much, Mr. Griffith.
I just have a quick question for you, Mr. Brooks, because
the law says that it's a strict liability standard if there's
fraudulent RINs, correct?
Mr. Brooks. Yes, Congresswoman.
Ms. DeGette. But yet I think I heard you say the EPA has
enforcement discretion--if someone is using these invalid or
fraudulent RINs unknowingly, or knowingly, they have discretion
about what the enforcement is; is that right?
Mr. Brooks. We have inherent discretion.
Ms. DeGette. You have discretion, so you can throw the book
at them, or you cannot take an action at all; is that right?
Mr. Brooks. I think there are parameters. Obviously there
are congressional goals that we have to adhere to. There are
some hard edges on the regulations. But essentially you're
right.
Ms. DeGette. All right. So you had said that the Agency
decided with the people who were using the invalid RINs that to
go ahead with a penalty, but not as strict a penalty as you
could have, right?
Mr. Brooks. That is correct.
Ms. DeGette. And something piqued my interest. You said
that was because they hadn't done due diligence.
Mr. Brooks. That's correct.
Ms. DeGette. Can you explain what you found in terms of the
due diligence by the companies?
Mr. Brooks. I could sum it up this way: The vast majority
of the players had simply relied on their contract of purchase,
and so they had an indemnity agreement, right? And so rather
than ask, ``Are these good RINs?,'' they were satisfied with
the purchase document that said, ``If they're not good RINs,
I'm coming back to you.''
Ms. DeGette. And they're not doing that anymore, are they?
Mr. Brooks. They are not to my knowledge.
Ms. DeGette. Thank you.
Mr. Terry. Thank you.
The gentleman's time from western Virginia has ceased, and
I recognize myself for 5 minutes.
So in that regard, carrying on Diana's questions, what is
the current definition of due diligence, and is that part of
what is going to be worked on in the next few months?
Mr. Bunker?
Mr. Bunker. Yes. I think broadly it's understood it's a
process to both look at the facility and look at both the
feedstock that goes into a facility and the production that
goes out, and if you do effectively a mass balance, an energy
balance, a waste products balance, that you can have high
confidence those volumes exist.
And I think actually to the question that was asked before,
I think getting that resolved among the parties, what are good
parameters, that's actually the easy part. It's each party's
role then in fulfilling those that where there is differences
of opinion among the industry partners.
Mr. Terry. And that will be part of the process that you
engage in in the next few months to make sure that that is more
clearly set out in the language, and they know their
obligations.
Mr. Bunker. Exactly. That's the most important piece.
Mr. Terry. In that respect I think it was Mr. Jobe from the
biodiesel board or biofuels board--biodiesel board--that
mentioned that they have already drafted their industry
standards in this respect. Have you seen those yet?
Mr. Bunker. Yes. We both participated in this RIN Integrity
Task Force that was described, and they've shared both their
phase 1 and phase 2 programs. We think those are good programs,
and there are several others in the industry that are similarly
structured, different approaches in some cases. All seem very
good, frankly.
Mr. Terry. Well, will those type of industry standards then
be adopted at the completion of your efforts, or at least the
negotiated language changes?
Mr. Bunker. Yes, I think that's the big question. I think
it's generally assumed that we should leverage those third-
party systems; don't create a new government system that is one
size fits all, but let the market choose the participants
that--basically mitigate risk in a way that satisfies people
that are at risk. That seems to be everyone's goal.
So you heard there were some people that think that should
be fully in the private sector and not be part of the
government at all, and some people that frankly think it needs
to be basically leveraged in the regulations. And that's what
we're working through quickly is to figure out the how.
Mr. Terry. Well, we appreciate you working quickly. I think
one of the messages that you've heard from this panel here
today or the Members sitting up here is that this is a time-
sensitive matter. And we go do agree with the January 1st,
2013, goal.
So in that regard could you walk us through what
procedures, what work really has to be done between now and
January 1st so that we've got that document of here's the rules
or whatever technical language you want to use?
Mr. Bunker. Yes. So we will have to go through a notice and
a proposal process, a public comment, and then a final action.
I think what's still open----
Mr. Terry. What's the timeline in between each one of
those. Don't those have 30- and 60-day requirements?
Mr. Bunker. So the minimum requirement, I think, after it's
in the Federal Register is at least 30 days. I can check the
numbers. And we usually have to give a 30-day period for
comments. And when you add all those pieces up, it may not be
possible to have a final action in advance of January 1. I
don't know if that can happen. But it may well be that we can
have the system in place.
One thing we should think about is the actual compliance
for 2013 will be February of 2014. So the Agency has a very
clear message of what you need to do, what the process is. And
everyone starts doing that process maybe January 1, maybe in
December, and then we have a final action that decides what's
the outcome of having done that process. They will have already
fulfilled the elements of the work that is done up front.
So it's my belief we could have a process that both follows
our regulatory process in the fullness of a notice and comment,
but also gives some path to people to implement early by being
transparent about where it's going.
Mr. Terry. And I think you've stated it, but I want it more
clearly as your final comment here, and we close, but you
understand, the Division understands, that inaction right now
is hurting the small producers. Would you agree with that?
Mr. Bunker. We absolutely do. We said that's a big issue
for us, absolutely.
Mr. Terry. Very good. Then not a question, but a comment.
Mr. Burgess, Dr. Burgess, mentioned 90 days to have something
ready for us, kind of, I would assume, just at least the
skeleton. But Diana, the ranking member, and our side are
discussing having a second hearing about that 90-day period,
because we want to make sure this stays on track. So it is
important to us.
Mr. Bunker. I understand.
Mr. Terry. She said 120 days. We'll figure that out. That's
part of our negotiations.
So at this time I ask unanimous consent to enter into the
record our subcommittee binder.
[The information appears at the conclusion of the hearing.]
Mr. Terry. In conclusion, I would like to thank our two
witnesses here today. Both of you were very helpful. I remind
Members that they have 10 business days to submit questions for
the record, and I ask that the witnesses agree to respond
promptly to those questions, if submitted.
All right. Thank you. The subcommittee is now adjourned.
[Whereupon, at 12:51 p.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
[all]