[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


BACKGROUND ON RENEWABLE IDENTIFICATION NUMBERS UNDER THE RENEWABLE FUEL 
                                STANDARD

=======================================================================

                                HEARING

                               BEFORE THE

                      SUBCOMMITTEE ON ENVIRONMENT

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 25, 2018

                               __________

                           Serial No. 115-158
                           
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]                           


      Printed for the use of the Committee on Energy and Commerce

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                    COMMITTEE ON ENERGY AND COMMERCE

                          GREG WALDEN, Oregon
                                 Chairman
JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
  Vice Chairman                        Ranking Member
FRED UPTON, Michigan                 BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
MICHAEL C. BURGESS, Texas            ELIOT L. ENGEL, New York
MARSHA BLACKBURN, Tennessee          GENE GREEN, Texas
STEVE SCALISE, Louisiana             DIANA DeGETTE, Colorado
ROBERT E. LATTA, Ohio                MICHAEL F. DOYLE, Pennsylvania
CATHY McMORRIS RODGERS, Washington   JANICE D. SCHAKOWSKY, Illinois
GREGG HARPER, Mississippi            G.K. BUTTERFIELD, North Carolina
LEONARD LANCE, New Jersey            DORIS O. MATSUI, California
BRETT GUTHRIE, Kentucky              KATHY CASTOR, Florida
PETE OLSON, Texas                    JOHN P. SARBANES, Maryland
DAVID B. McKINLEY, West Virginia     JERRY McNERNEY, California
ADAM KINZINGER, Illinois             PETER WELCH, Vermont
H. MORGAN GRIFFITH, Virginia         BEN RAY LUJAN, New Mexico
GUS M. BILIRAKIS, Florida            PAUL TONKO, New York
BILL JOHNSON, Ohio                   YVETTE D. CLARKE, New York
BILLY LONG, Missouri                 DAVID LOEBSACK, Iowa
LARRY BUCSHON, Indiana               KURT SCHRADER, Oregon
BILL FLORES, Texas                   JOSEPH P. KENNEDY, III, 
SUSAN W. BROOKS, Indiana                 Massachusetts
MARKWAYNE MULLIN, Oklahoma           TONY CARDENAS, CaliforniaERR67*UL 
RICHARD HUDSON, North Carolina           RUIZ, California
CHRIS COLLINS, New York              SCOTT H. PETERS, California
KEVIN CRAMER, North Dakota           DEBBIE DINGELL, Michigan
TIM WALBERG, Michigan
MIMI WALTERS, California
RYAN A. COSTELLO, Pennsylvania
EARL L. ``BUDDY'' CARTER, Georgia
JEFF DUNCAN, South Carolina

                      Subcommittee on Environment

                         JOHN SHIMKUS, Illinois
                                 Chairman
DAVID B. McKINLEY, West Virginia     PAUL TONKO, New York
  Vice Chairman                        Ranking Member
JOE BARTON, Texas                    RAUL RUIZ, California
TIM MURPHY, Pennsylvania             SCOTT H. PETERS, California
MARSHA BLACKBURN, Tennessee          GENE GREEN, Texas
GREGG HARPER, Mississippi            DIANA DeGETTE, Colorado
PETE OLSON, Texas                    JERRY McNERNEY, California
BILL JOHNSON, Ohio                   TONY CARDENAS, California
BILL FLORES, Texas                   DEBBIE DINGELL, Michigan
RICHARD HUDSON, North Carolina       DORIS O. MATSUI, California
KEVIN CRAMER, North Dakota           FRANK PALLONE, Jr., New Jersey (ex 
TIM WALBERG, Michigan                    officio)
EARL L. ``BUDDY'' CARTER, Georgia
JEFF DUNCAN, South Carolina
GREG WALDEN, Oregon (ex officio)
  
                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................     1
    Prepared statement...........................................     3
Hon. Paul Tonko, a Representative in Congress from the State of 
  New York, opening statement....................................     4
Hon. Greg Walden, a Representative in Congress from the State of 
  Oregon, opening statement......................................     5
    Prepared statement...........................................     6
Hon. Frank Pallone, Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................     6

                               Witnesses

Brent Yacobucci, Energy and Minerals Manager, Congressional 
  Research Service...............................................     8
    Prepared statement...........................................    10
Sandra Dunphy, Director, Energy Compliance Services, Weaver and 
  Tidwell, LLP...................................................    26
    Prepared statement...........................................    28
Paul Niznik, Senior Consultant, Argus Media Incorporated.........    44
    Prepared statement...........................................    45
Gabriel E. Lade, Assistant Professor of Economics, Iowa State 
  University.....................................................    46
    Prepared statement...........................................    48
Corey Lavinsky, Director Oof Global Biofuels, S&P Global Platts 
  Analytics......................................................    66
    Prepared statement...........................................    68

                           Submitted Material

Statement of the Renewable Fuels Association.....................   102
Transcript of the Subcommittee on Oversight and Investigations' 
  hearing entitled, ``RIN Fraud: EPA's Efforts to Ensure Market 
  Integrity in the Renewable Fuels Program'' \1\

----------
\1\ The information can be found at: https://docs.house.gov/
  meetings/IF/IF18/20180725/108610/HHRG-115-IF18-20180725-
  SD099.pdf.

 
BACKGROUND ON RENEWABLE IDENTIFICATION NUMBERS UNDER THE RENEWABLE FUEL 
                                STANDARD

                              ----------                              


                        WEDNESDAY, JULY 25, 2018

                  House of Representatives,
                       Subcommittee on Environment,
                           Committee on Energy and Commerce
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:15 a.m., in 
room 2322 Rayburn House Office Building, Hon. John Shimkus 
(chairman of the subcommittee) presiding.
    Members present: Representatives Shimkus, McKinley, Harper, 
Olson, Flores, Hudson, Walberg, Carter, Duncan, Walden (ex 
officio), Tonko, Ruiz, Peters, McNerney, Cardenas, Pallone (ex 
officio), and Loebsack.
    Staff present: Samantha Bopp, Staff Assistant; Kelly 
Collins, Legislative Clerk; Jerry Couri, Deputy Chief Counsel, 
Environment; Wyatt Ellertson, Professional Staff Member; 
Margaret Tucker Fogarty, Staff Assistant; Adam Fromm, Director 
of Outreach and Coalitions; Jordan Haverly, Policy Coordinator, 
Environment; Mary Martin, Chief Counsel, Energy & Environment; 
Sarah Matthews, Press Secretary, Energy & Environment; Drew 
McDowell, Executive Assistant; Brannon Rains, Staff Assistant; 
Austin Stonebraker, Press Assistant; Hamlin Wade, Special 
Advisor, External Affairs; Everett Winnick, Director of 
Information Technology; Jean Fruci, Minority Energy and 
Environment Policy Advisor; Tiffany Guarascio, Minority Deputy 
Staff Director and Chief Health Advisor; Caitlin Haberman, 
Minority Professional Staff Member; Rick Kessler, Minority 
Senior Advisor and Staff Director, Energy and Environment; 
Alexander Ratner, Minority Policy Analyst; and C.J. Young, 
Minority Press Secretary.

  OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Shimkus. I'd like to call the Subcommittee on the 
Environment hearing to order and recognize myself for 5 minutes 
for an opening statement.
    And, really, before I start going through some prepared 
text, I want to allow the interested parties that are--oh, is 
that Whitfield there? Former member of the committee. And I see 
Kenny Hulshof, former member of the House. Good buddy of mine. 
So a lot of other friends out there. To interest groups, we 
plan to legislate and we are about ready to go on an August 
break and I would encourage you to educate, especially members 
of the subcommittee, take the time during the break and visit 
with them as we try to move forward.
    To my colleagues on both sides, I would encourage you to do 
your homework on your free time so that when we come back we 
can really have a good discussion. I would like to have a 
really open process as we go through--actually put down 
original text and then go through some--a markup that wouldn't 
be preordained but we would work through some of the processes.
    So that's just an editorial comment, and then I will start 
with my prepared opening statement.
    Today's hearing continues this subcommittee's ongoing 
efforts to examine the future of our nation's transportation 
fuels. One of the most significant programs that influences 
transportation fuel in America is the Renewable Fuel Standard, 
today's topic of discussion. More specifically, the focus on 
this hearing is to provide members the opportunity to better 
understand Renewable Identification Numbers, frequently 
referred to as RINs.
    RINs are the main component of the Renewable Fuel 
Standard's tradable credit system and serve as its compliance 
mechanism. RINs are attached to renewable fuel gallons at the 
time of production and they are separated when that renewable 
fuel is blended into the Nation's nonrenewable fuel supply, at 
which time the blending party can use the RINs to comply with 
the RFS or they can trade the RINs to another party. Obligated 
parties, typically refineries, must submit RINs to the EPA on a 
yearly basis to demonstrate compliance with annual renewable 
fuel obligations. So that's a mouthful.
    The purpose of today's hearing is very much educational in 
nature and is intended to promote greater understanding of how 
RINs fit into the overall Renewable Fuel Standard. In order to 
chart a legislative path forward, it is critical that the 
subcommittee first gather the facts and comprehend the various 
complexities of the RFS program.
    With an emphasis on getting clear objective information and 
answers about RINs, we have invited a panel of witnesses who 
can provide independent impartial testimony based on their 
extensive and varied experience working with RINs.
    Witnesses that are joining us today include Brent 
Yacobucci, the Research Manager for the Energy and Minerals 
Section of the Congressional Research Service, who has analyzed 
and written on the RFS since the program's inception; Sandra 
Dunphy, the Director of Energy Compliance at Weaver and Tidwell 
LLP and a nationally recognized RINs expert who provides RFS-
related services to a diverse range of clients; Paul Niznik, an 
energy consultant with Argus Media who specializes in RINs and 
will help demystify the factors affecting RINs prices--
demystify; Dr. Gabriel Lade, an Assistant Professor of 
Economics at Iowa State University who has authored multiple 
academic publications on the RFS, which have been cited by a 
wide range of RFS-related stakeholders and industries; and 
Corey Lavinsky, the Director of Global Biofuels with Standard 
and Poor's, who will explain how the RIN market works in 
comparison to other commodity and environmental markets.
    I'd like to thank these witnesses for their attendance and 
participation and I look forward to hearing their perspectives 
on a number of subjects, such as what factors are influencing 
the RINs market, how the current RINs system impacts various 
types of stakeholders including consumers, and the prevalence 
and circumstances of RIN fraud.
    While understanding that the topic of this morning's 
hearing can bring about strong viewpoints, my hope and intent 
is that this hearing will result in a constructive and 
productive dialogue that will further this subcommittee's 
effort to improve the Nation's transportation fuel policies.
    And with that, I have 40 seconds remaining. Anybody wishing 
for that time? Seeing none, I'll yield back the balance of my 
time and yield to my friend the ranking member of the 
subcommittee, Mr. Tonko, for 5 minutes.
    [The prepared statement of Mr. Shimkus follows:]

                Prepared statement of Hon. John Shimkus

    Good morning. Today's hearing continues this Subcommittee's 
ongoing efforts to examine the future of our nation's 
transportation fuels. One of the most significant programs that 
influences transportation fuel in America is the Renewable Fuel 
Standard (RFS), today's topic of discussion. More specifically, 
the focus of this hearing is to provide members the opportunity 
to better understand Renewable Identification Numbers, 
frequently referred to as RINs.
    RINs are the main component of the Renewable Fuel 
Standard's tradable credit system and serve as its compliance 
mechanism. RINs are attached to renewable fuel gallons at the 
time of production and they are separated when that renewable 
fuel is blended into the nation's non-renewable fuel supply, at 
which time the blending party can use the RINs to comply with 
the RFS or they can trade the RINs to another party. Obligated 
parties, typically refineries, must submit RINs to the EPA on a 
yearly basis to demonstrate compliance with their annual 
renewable fuel obligations.
    The purpose of today's hearing is very much educational in 
nature and is intended to promote greater understanding of how 
RINs fit into the overall Renewable Fuel Standard. In order to 
chart a legislative path forward, it is critical that the 
Subcommittee first gather the facts and comprehend the various 
complexities of the RFS program.
    With an emphasis on getting clear, objective information 
and answers about RINs, we have invited a panel of witnesses 
who can provide independent, impartial testimony based on their 
extensive and varied experience working with RINs. Witnesses 
joining us today include:
     Brent Yacobucci--the Research Manager for the 
Energy & Minerals Section of the Congressional Research Service 
who has analyzed and written on the RFS since the program's 
inception;
     Sandra Dunphy--the director of Energy Compliance 
at Weaver and Tidwell LLP and a nationally recognized RINS 
expert who provides RFS-related services to a diverse range of 
clients;
     Paul Niznik--an energy consultant with Argus Media 
who specializes in RINs and will help demystify the factors 
effecting RINs pricing;
     Dr. Gabriel Lade--an Assistant Professor of 
Economics at Iowa State University who has authored multiple 
academic publications on the RFS which have been cited by a 
wide range of RFS related stakeholders and industries; and
     Corey Lavinsky--the Director of Global Biofuels 
with Standard and Poor's who will explain how the RIN market 
works in comparison to other commodity and environmental 
markets.
    I'd like to thank these witnesses for their attendance and 
participation and I look forward to hearing their perspectives 
on a number of subjects, such as what factors are influencing 
the RINs market, how the current RINs system impacts various 
types of stakeholders including consumers, and the prevalence 
and circumstances of RIN fraud.
    While understanding that the topic of this morning's 
hearing can bring out strong viewpoints, my hope and intent, is 
that this hearing will result in a constructive and productive 
dialogue that will further this Subcommittee's efforts to 
improve the Nation's transportation fuel policies.

   OPENING STATEMENT OF HON. PAUL TONKO, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mr. Tonko. Thank you, Mr. Chair, and thank you to our 
witnesses for joining us this morning.
    This is the latest in this subcommittee's series of 
hearings on our nation's use of transportation fuels and the 
renewable fuel standard program.
    Today, we will examine renewable identification numbers, or 
RINs. As you know, RINs are unique 38-digit codes given to each 
gallon of biofuel produced or imported into the United States. 
These credits are used to comply with the RFS. At the end of 
each year each obligated party must haven RINs to demonstrate 
it has met its renewable volume obligation.
    RFS compliance can be achieved in two ways--either by 
purchasing the required volume of biofuel and blending it into 
the fuel supply to obtains RINs directly or by purchasing the 
required number of RINs on the open market.
    The debate over the future of the RFS cannot be separated 
from the performance of the RIN marketplace. Earlier this 
Congress, we received testimony on RIN price volatility and 
heard some stakeholders support for a RIN price cap. According 
to press reports, these have been among the issues considered 
by members working on RFS reform, and while the RIN market 
certainly has had price spikes, I do not think we should ignore 
the political figure's ability to impact market stability.
    With each White House meeting or EPA announcement, the RIN 
market can be put into flux. Over the years, the RFS has 
experienced administrative issues in both Republican and 
Democratic administrations such as missed RVO deadlines that 
have impacted its ability to provide for that market certainty.
    The latest example, which I have voiced my concerns about 
in the past, is former EPA Administrator Pruitt's excessive use 
of small refinery hardship exemptions. In the past 2 years, 
nearly 50 exemptions, representing approximately 2.25 billion 
RINs worth of obligation have been granted in virtual secrecy. 
We still do not fully know whether these exemptions were 
justified, whether those obligations were reallocated to larger 
refiners, or how these waivers may have impacted RIN prices in 
the biofuels market.
    Secret exemptions are not good for the sake of a healthy 
market and the lack of transparency is extremely troubling, 
although it is reflective of standard operating procedures 
within the RIN marketplace. While RIN transactions are reported 
to EPA's moderated transaction system, there are legitimate 
concerns that the market lacks meaningful transparency.
    Very little information on RIN transactions is made public 
and the market is not subject to scrutiny by regulators similar 
to other commodity markets. This has led to numerous reported 
issues of RIN fraud in the past and leaves the door open for 
potential market manipulation. Publicly available data may not 
be sufficient to even know if market manipulation is indeed 
occurring. That is a problem.
    I know members of this committee hold a wide range of views 
on the RFS. But regardless of your position, I hope that we can 
agree that there should be sufficient transparency and 
oversight of this marketplace in order to ensure that it is 
functioning and functioning properly.
    Thank you again for being here. I look forward to the 
discussion.
    And with that, Mr. Chair, I yield back.
    Mr. Shimkus. Gentleman yields back his time.
    The chair now recognizes the chairman of the full 
committee, Chairman Walden, for 5 minutes.

  OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. Walden. Thank you, Mr. Chairman. Thanks for holding yet 
another hearing on this overall topic. We appreciate it.
    This is the fifth hearing on the future of transportation 
fuels and, as we have heard, this morning's topic is Renewable 
Identification Numbers known as RINs.
    And I would argue if we gave a test about what RINs are and 
how the market works, perhaps within this room but I am sure 
outside of this room, even our most learned members might not 
test so well. So that's why we are having this hearing. It's 
not to pit one side against the other or rip off Band-Aids or 
anything else. It is to learn, to better inform our work so 
that we can address the issues before this committee.
    So I won't restate how RINs works. We have done that 
already. But there are nuances. This does affect markets and 
therefore it affects consumers, and we are going to put 
consumers first.
    So this hearing is intended to be educational, and for 
those of you of a certain vintage, some of you may remember 
something called encyclopedias like World Book or Britannica. 
There are people here who are nodding and people who are 
scratching and others are going right to Google.
    This hearing will help the Environment Subcommittee better 
fill out its set of books on transportation renewable fuels 
more generally. Why? Well, as I've said before, it is my desire 
to move legislation that will pave the future of transportation 
fuels into the next decades in the United States and in order 
for this to happen it's important that we understand what RINs 
are and how they fit into the renewable fuel standard, a 
program that in 2017 spurred the production of 15.8 billion 
gallons of ethanol and 1.6 billion gallons of biodiesel in the 
United States.
    That said, this hearing is not meant to drive a preordained 
policy or to settle scores. It is intended to help members 
understand the program so they can make informed decisions when 
the time comes for us to legislate.
    So I want to thank our witnesses for being here. We 
appreciate it. You've been asked to join us not just for your 
extensive knowledge base on the complicated matter but also for 
your demonstrated ability to be both informative and objective 
when it comes to communicating the fundamental elements of the 
RINs program.
    So I look forward to hearing your testimony today. And so 
we will proceed. I want to thank the chairman and other members 
of this committee who have been working overtime on the broad 
set of issues related to renewable fuels and how this committee 
can move forward.
    So we will move forward. Hearings are part of doing our due 
diligence in business and we won't be talked out of them and we 
are here today to hear from all of you.
    So thank you very much, and with that, Mr. Chairman, I 
yield back.
    [The prepared statement of Mr. Walden follows:]

                 Prepared statement of Hon. Greg Walden

    Thank you for yielding to me, Mr. Chairman. I will be 
brief.
    Today, the Environment Subcommittee is holding its fifth 
hearing on the future of transportation fuels. This morning's 
topic is Renewable Identification Numbers, also known as RINs.
    RIN credits are used for compliance with the Renewable Fuel 
Standard, but also can be traded, making RINs both a compliance 
tool and a commodity.
    Each gallon of qualifying, produced biofuel is assigned a 
RIN, a group of 38 digits that identify the fuel producer, the 
year the fuel was produced, and the type of fuel. RINs are 
``attached'' to the fuel and, once the biofuel has been blended 
or sold, the RINs are detached. At the end of each year, either 
the biofuel producer--based on a predetermined compliance 
obligation formula--submits its required RINs to EPA, purchases 
RINs from other RIN holders to meet their regulatory 
obligations, or the biofuel producer sells excess RINs like 
other commodities.
    There is, however, much greater detail and nuance to RINs. 
Most of these nuances and other issues are foreign to most of 
us as well as most Americans. That's where this hearing comes 
into play.
    This hearing is intended to be educational in nature. For 
those of you of a certain vintage, you will remember 
encyclopedia collections--such as World Book or Britannica. 
This hearing will help the Environment Subcommittee better fill 
out its set of books on transportation and renewable fuels more 
generally.
    Why? Well, as I have said before, it is my desire to move 
legislation that will pave the future of transportation fuels 
in the United States, and in order for this to happen it is 
important that we understand what RINs are and how they fit 
into the Renewable Fuel Standard--a program that in 2017, 
spurred the production of 15.8 billion gallons of ethanol and 
1.6 billion gallons of biodiesel in the United States.
    That said, this hearing is not meant to drive a pre-
ordained policy or to settle scores. It is intended to help 
members understand the program so that they can make informed 
decisions when the time to legislate comes.
    I want to thank our witnesses for agreeing to be with us 
today. You have been asked to join us not just for your 
extensive knowledge base on this complicated matter, but also 
for your demonstrated ability to be both informative and 
objective when it comes to communicating the fundamental 
elements of the RINs program. I look forward to hearing your 
testimony and learning from your experience.
    Thank you again Mr. Chairman for this time. I yield back 
the remaining amount of time that I have.

    Mr. Shimkus. The gentleman yields back his time.
    The chair now recognizes the ranking member of the full 
committee, Congressman Pallone from New Jersey, for 5 minutes.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. Thank you, Mr. Chairman.
    Today we are here to talk about the renewable 
identification number, or RIN. The RIN market provides a 
mechanism to bridge the gap between biofuel supply and demand 
created by the renewable fuel standard mandate. And the market 
allows parties blending more than their required gallons of 
biofuel to sell their excess RINs to parties that blend less 
than their required gallons.
    When the market functions properly, it lowers the cost of 
compliance for all participants in the renewable fuels 
standards program. But it must be fair, transparent, and well 
regulated.
    It should also primarily serve the interests of RFS 
participants, not the interests of speculators. Well, that's 
how things are supposed to work. But today, they are not 
working and I believe much of the recent vocality in the RIN 
market can be attributed to the way the Trump administration 
has operated the RFS program.
    Press reports of the on again off again RFS negotiations 
conducted by the White House over the past year or so have 
driven RIN prices up and down, depending upon the headline of 
the day.
    No new RINs were created or removed from the market in 
these meetings and no changes to the program were made if the 
price fluctuated enough to create losses or gains for everyone 
involved in the program over the course of the last year.
    Now, former EPA Administrator Pruitt also nearly doubled 
the number of small refinery waivers that were granted last 
year, which lowered the price of RINs. It appears that some of 
these waivers were granted to refineries not experiencing 
financial hardship which is required under the law. If that's 
the case, then former Administrator Pruitt intentionally 
misused this waiver authority to manipulate the RIN market and 
undermine the RFS, and the lack of transparency and 
accountability in the waiver program raises serious questions 
about how this program is being managed.
    Market mechanisms can work well. They can lower compliance 
costs as long as they are not manipulated, which is what I fear 
is happening under this administration. And I guess we will 
find out more about it today. I don't know if anybody else 
wants the time. Otherwise, I will yield back, Mr. Chairman.
    Mr. Shimkus. The gentleman yields back his time.
    We now conclude members' opening statements. The chair 
would like to remind members that pursuant to committee rules, 
all members' opening statements will be made part of the 
record.
    We appreciate you all being here today. I've kind of done 
the initial formal introduction in my opening statement. So 
I'll just turn to you. Your full statements are submitted for 
the record. You'll have 5 minutes.
    Again, this isan educational process. So I am not going to 
be Attila the Hun with the gavel. But as you see the clock tick 
then kind of know that we should get to the end so that we can 
get to members' questions.
    So with that, I'd like to recognize Mr. Brent Yacobucci 
from CRS for 5 minutes.

  STATEMENTS OF BRENT YACOBUCCI, ENERGY AND MINERALS MANAGER, 
CONGRESSIONAL RESEARCH SERVICE; SANDRA DUNPHY, DIRECTOR, ENERGY 
  COMPLIANCE SERVICES, WEAVER AND TIDWELL, LLP; PAUL NIZNIK, 
  SENIOR CONSULTANT, ARGUS MEDIA INCORPORATED; DR. GABRIEL E. 
LADE, ASSISTANT PROFESSOR OF ECONOMICS, IOWA STATE UNIVERSITY; 
COREY LAVINSKY, DIRECTOR OF GLOBAL BIOFUELS, S&P GLOBAL PLATTS 
                           ANALYTICS

                  STATEMENT OF BRENT YACOBUCCI

    Mr. Yacobucci. Good morning, Chairman Shimkus, Ranking 
Member Tonko, and members of the subcommittee.
    My name is Brent Yacobucci. I am the Energy and Mineral 
Section Research Manager for the Congressional Research 
Service. Congressional guidelines on objectivity and 
nonpartisanship require that I confine my testimony to 
technical, professional, and non-advocate aspects of matters 
under consideration and that I limit myself to areas within my 
knowledge and expertise. Although I can discuss policy options 
and potential ramifications, the service does not take a 
position on pending or proposed legislation.
    I've been with CRS for 19 years, providing analysis on 
alternative fuels, automotive design, and transportation-
related provisions of the Clean Air Act. I have a Bachelor's 
degree in mechanical engineering from the Georgia Institute of 
Technology and a Master's degree in public policy from the 
George Washington University. I am a member of the Society of 
Mechanical Engineers, the Society of Automotive Engineers, and 
the Society of Petroleum Engineers, although today I am 
representing only CRS.
    The Federal Renewable Fuel Standard was established by the 
Energy Policy Act of 2005 and expanded in 2007 by the Energy 
Independence and Security Act. The RFS requires the use of 
renewable biofuels in transportation. For 2018, the mandate is, 
roughly, 19.3 billion gallons. Within the larger mandate, there 
are sub-mandates for advanced biofuels including biomass-based 
diesel and cellulosic biofuels.
    The RFS is a market-based program in which obligated 
parties, typically refiners, must submit credits to cover their 
obligations. These credits, renewable identification numbers, 
or RINs, can be bought or sold like other commodities. In 
general, for each gallon of renewable fuel produced, one RIN is 
generated. A RIN is a 38-character number issued by the biofuel 
producer or importer at the point of production or import. Each 
qualifying gallon has its own unique RIN. The characters 
signify various attributes to the batch of fuel, including the 
decode, which identifies the category of fuel and which part of 
the RFS that fuel satisfies--D3 for cellulosic biofuel, D4 for 
bio-based diesel, D5 for advanced biofuels, and D6 for 
unspecified biofuel--typically, corn-based ethanol.
    From the beginning of the RFS program there have been 
concerns with RIN generation and the RIN market, in part to 
address concerns over errors, inaccuracies, and potential 
fraud, when EPA finalizes rules for the RFS in 2007, sometimes 
referred to as the RFS 2, EPA also established a new EPA-
moderated transaction system, or EMTS. EPA maintains that 
obligated parties must exercise due diligence, and under their 
buyer beware system, those purchasing RINs must certify the 
validity of those RINs on their own. They are generally 
responsible for any invalid RINs they pass on to others or 
submit to EPA for compliance. At times, RIN prices have been 
volatile. Most RINs are initially bought and sold through 
private contracts. But in the spot market for RINs in 2013 spot 
prices for conventional ethanol RINs--the D6 RINs--rose 
dramatically before dropping even more rapidly.
    Stakeholders have identified various factors as potentially 
causing the price increase, including whether submission 
amounts of ethanol can be blended into gasoline to meet the RFS 
mandates and the extent to which non-obligated parties are 
speculating in RIN markets.
    Further, some stakeholders have suggested that a few actors 
could be actively working to manipulate those RIN markets. 
Concerns have been raised about the volatility of RIN prices on 
the secondary market and the potential effects on the costs 
faced by gasoline blenders and oil refiners, particularly those 
refiners without the infrastructure to blend, as well as the 
effects on consumer fuel prices.
    The complex interactions among the prices for various 
commodities makes such analysis difficult. Stakeholders who 
propose various options to address some of these concerns 
including limiting the participation of non-obligated parties 
in the markets and in the EMTS, establishing a price cap for 
RINs, requiring more public real-time reporting for RIN 
training data, and granting the Commodity Futures Trading 
Commission authority to regulate the RIN market similarly to 
other agricultural commodities.
    Each of these options could affect agricultural and biofuel 
producers, gasoline suppliers, blenders, and consumers. But it 
is beyond the scope of this testimony to address economic 
effects.
    I thank the subcommittee for its time and I am happy to 
answer any questions you have.
    [The prepared statement of Mr. Yacobucci follows:]
    
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    Mr. Shimkus. Thank you very much.
    The chair now recognizes Ms. Dunphy for 5 minutes. Thanks 
for being here.

                  STATEMENT OF SANDERS DUNPHY

    Ms. Dunphy. Thank you very much, and good morning.
    Mr. Chairman, Mr. Ranking Member, and members of the 
subcommittee, my name is Sandra Dunphy and I am a Director in 
the Energy Compliance Services Group of Weaver and Tidwell, a 
certified public accounting firm ranked among the 40 largest 
CPA firms in the U.S. My area of expertise is the RFS program.
    Weaver is the largest provider of attestation services 
under the EPA's gasoline and diesel programs and Weaver was the 
first auditor that the EPA approved under the RFS quality 
assurance plan program. In 2017, we verified more than 1.1 
billion RINs and we are currently auditing about 50 renewable 
fuel producers. Weaver has a diverse client base for these RFS-
related services--renewable fuel producers, importers, 
exporters, blenders, and consumers.
    Our clients also include gasoline and diesel refiners and 
importers. These companies are classified as obligated parties 
under the RFS program because they must acquire RINs to comply 
with the renewable fuel blending targets set annually by the 
EPA.
    Because of this diverse base of customers, Weaver takes a 
neutral position on the RFS regulations. My comments to you 
today are intended to provide useful information as you explore 
potential revisions and updates to the RFS regulations, not to 
advocate for any particular position or provision.
    Today, I've been asked to describe some of the nuances or 
inconsistencies that exist in the regulations so that that will 
be focus on my remarks today.
    In order for companies to make the necessary investments in 
new technologies and renewable fuel production facilities, they 
need clear consistent long-term policies and regulations and, 
of course, they need financial incentives. Under the RFS 
program, that financial incentive comes primarily from RINs. If 
new technologies and fuels can meet the stringent feedstock 
production process and finished fuel requirements of the RFS, 
then RINs are the reward. But if any part of those feedstocks, 
processes, or fuels fails to meet the requirements, no RINs can 
be generated and facilities cannot acquire the funding needed 
to get built.
    Let me provide just a few examples of things that are 
currently either not allowed or where the regulations are so 
stringent that few if any facilities can comply. Some of the 
things currently not allowed, fuels that require two separate 
facilities to be produced--for example, one facility converts 
wood, straw, grasses, or municipal solid waste, feed stock into 
some type of liquid, and another facility, such as a petroleum 
refinery, turns that liquid into a finished fuel, then fuel 
cannot generate RINs.
    Bio gas used to produce electricity that is then used to 
power motor vehicles, here the pathway exists in the 
regulations but has not yet been implemented. Renewable fuels 
used in ocean-going vessels is not available for RINs. By 
comparison, renewable fuel used in jet planes that leave the 
U.S. are eligible for RINs.
    Here are examples of some feed stocks with stringent 
requirements that often disqualify their fuels from earning 
RINs: sawdust and wood chips from a lumber mill, waste wood 
pulled from construction and demolition debris, old railroad 
ties, and disease and insect-infected trees generally don't 
qualify.
    Tree thinning and forest floor logging residues are also 
very difficult to use, even if sustainable harvested. Bio gas 
from digesters located at farms or wastewater treatment 
facilities that take in a variety of wastes, some cellulosic 
and some non, are only allowed to make noncellulosic RINs if 
they cold process any amount of noncellulosic material. Being 
able to make only noncellulosic RINs often kills a project.
    The fuels of the future depend on a renewable fuels 
producers' ability not only to generate RINs but on the type 
and quantity of RINs that can be made for each gallon of fuel. 
This dependency holds true for both standalone renewable fuel 
production facilities and for petroleum refineries wanting to 
co-process renewable feed stocks in their facilities.
    The RFS regulations, by their very nature, dictate winners 
and losers in the renewable fuel market. Whatever changes you 
may propose to the RFS regulations, I encourage you to seek 
clear, predictable, practical standards and take advantage of 
RINs as a powerful market incentive toward change.
    Again, thank you for the opportunity to testify today and 
for your work in reviewing how RINs can help incentivize 
production of the best fuels for the environment and the 
American consumer.
    Weaver stands ready to assist your committee in any way 
possible as you consider different options for accomplishing 
these goals.
    Thank you.
    [The prepared statement of Ms. Dunphy follows:]
    
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    Mr. Shimkus. Thank you very much.
    Now, next I'll turn to Mr. Niznik. You're recognized for 5 
minutes.

                    STATEMENT OF PAUL NIZNIK

    Mr. Niznik. Mr. Chairman, Mr. Ranking Member, and members 
of the subcommittee, my name is Paul Niznik. I am a Senior 
Consultant for Argus Media Incorporated.
    I would like to thank you for the opportunity to testify 
this morning on RINs prices and fuels markets.
    Argus Media is a global commodity price reporting agency 
with over 40 years of experience providing a broad range of 
industries with objective and independent market assessments. 
Billions of dollars of commodity prices are based on Argus 
published indices which are produced in over 20 offices spread 
across global market hubs.
    Argus provides its services to entities within the 
petroleum, biofuel, and power markets, among others. In my role 
as a consultant, I provide strategic planning services, 
investment due diligence and market research specifically in 
biofuels and RINs markets.
    Research on historic price data demonstrates that most RINs 
price behavior can be explained in the context of four main 
factors: the RFS rules, commodities prices, fuel quality 
regulations, and other incentives on the national and state 
level.
    Historically, changes seen in any of these areas can have 
quantifiable effects on RIN prices. In my experience with 
clients, at every level of participation in the market, 
understanding the logic of RINs price behavior creates 
opportunities for investment and opens chances to optimize 
business efficiency.
    Uncertainty around potential changes to the RFS or the 
policies disrupts the logic of the market and creates RINs 
price movements and volatility not normally seen under similar 
market conditions.
    Likewise, policy clarification and long-term guidance have 
decreased RINs price volatility and returned the markets to 
logical behavior in the past, such as the issuance of guidance 
by EPA on the intention for annual RFS rulemaking in 2015 after 
a multiple year lapse.
    RFS price volatility, driven by policy news, as well as 
policy uncertainty, are the two largest complaints about the 
RFS that I hear from my clients, both RIN buyers such as 
petroleum refiners, and RINs generators such as biofuels 
producers.
    Thank you for the opportunity to testify. I look forward to 
answering questions from members of the committee.
    [The prepared statement of Mr. Niznik follows:]
    
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    Mr. Shimkus. Well, you get a gold star for short 5 minutes 
there. So thank you very much.
    I will now turn to Dr. Lade. You're recognized for 5 
minutes.

                   STATEMENT OF GABRIEL LADE

    Mr. Lade. Chairman Shimkus, Ranking Member Tonko, and other 
members of the committee, thank you for the opportunity to 
participate in today's hearing.
    I am an Assistant Professor of Economics at Iowa State 
University, a Visiting Assistant Professor in the Dyson School 
of Applied Economics and Management at Cornell University, and 
a Faculty Affiliate at the Center for Agricultural and Rural 
Development, a public policy and economic research institute at 
Iowa State University.
    To these roles, I bring my expertise in environmental 
economics and policy analysis. In recent years, I have 
particularly focused on state and Federal policies that 
increase the production and use of renewable transportation 
fuels including the renewable fuel standard.
    I published several peer reviewed and outreach articles on 
RIN price determinants and their impacts on downstream consumer 
markets, and this is the topic on which I will speak today, 
though I will note that all my views expressed are my own and 
do not reflect those of the entities that I am associated with.
    RIN markets serve a vital role in enforcing the renewable 
fuel standard. Key questions have arisen around the operation 
and integrity of RIN markets, particularly since 2013, due to 
observed volatility. These include have RIN markets operated as 
intended by the enacting legislation, what changes can improve 
the RIN market and limit volatility, and what impact would 
administrative or legislative changes to the RFS have on RIN 
markets and biofuel demand in the United States.
    In the written testimony that I submitted to this 
committee, I summarized RINs' accounting and economic purpose 
as well as review the empirical evidence on RIN price 
determinants and their impacts on downstream market prices. I 
also address potential effects of proposed changes to the RFS 
program, their likely impacts on RINs, and their implications 
for biofuel demand in the United States.
    I want to emphasize four points from my testimony here. 
First, RINs serve a vital accounting role in RFS compliance. 
However, their economic role is even more important. RIN prices 
adjust to ensure that congressional biofuel blending mandates 
are met each year and are a key market signal about the value 
of investing in biofuel production and distribution 
infrastructure.
    Second, several features of RIN markets suggest that they 
are efficient. Prices adjust quickly to changing compliance 
cost expectations and market fundamentals, and most RIN price 
volatility since 2013 can readily be attributed to ever 
changing biofuel blending targets and uncertainty around future 
mandates. However, publicly available data is insufficient to 
fully determine whether the market is efficient or free of 
manipulation. Greater transparency would allow researchers and 
regulators to study these issues, and further transparency 
would make attempt to manipulate the market more difficult and 
costly.
    Third, we all know that fuel retailers and refiners are not 
driven out of business every time states raise their fuel 
taxes. Instead, consumer prices at the pump increase typically 
by the full amount of the tax. Fuel providers pay the tax bill 
but consumers ultimately bear the tax cost. The same situation 
arises in RIN markets. The empirical economics literature 
continues to show that wholesale fuel prices on average rise 
one for one with refiners' RIN costs. This means that so long 
as refiners offset their RFS compliance obligations as they 
accrue them, on average, they're fully compensated for their 
RIN costs through higher wholesale gasoline and diesel prices.
    Finally, recent actions by the Environmental Protection 
Agency likely undermined RIN markets. RIN markets are designed 
to provide a signal about the value of biofuel production and 
distribution in the United States. That signal becomes 
unreliable when EPA decisions are unpredictable and lack 
transparency.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Lade follows:]
    
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    Mr. Shimkus. Thank you very much.
    Now I will turn to Mr. Lavinsky. You're recognized for 5 
minutes. Thanks for being here.

                  STATEMENT OF COREY LAVINSKY

    Mr. Lavinsky. OK. Good morning, Chairman Shimkus, Ranking 
Member Tonko, and other members of the subcommittee.
    Thank you for inviting me to speak today. I am grateful for 
the opportunity to share information for this hearing.
    My name is Corey Lavinsky and I am with S&P Global Platts 
handling global biofuels analytics. S&P Global Platts is a 
leading provider of energy and commodity market data. We 
provide news, market commentary, fundamental data and analysis, 
thousands of daily price assessments, and analytical tools to 
help customers spot and seize opportunities with confidence.
    I've been analyzing biofuels markets for nearly 10 years 
during which I have seen conventional biofuel RINs rise from 
pennies apiece to as much as $1.40.
    RINs, which are currently hovering around five-year lows, 
are of great interest to our clients and to the agricultural 
biofuels and petroleum industries in general.
    RINs are the currency of the renewable fuel standard--the 
RFS. Refiners and importers that are subject to the RFS prove 
compliance with their renewable volume obligations by retiring 
RINs at the end of each compliance year.
    Obligated parties can obtain RINs by physical blending or 
by purchasing them on the open market. RINs are typically 
traded on a bilateral basis and off exchange. Independent 
pricing organizations like S&P Global Platts have shined a 
light on the opaque markets by publishing RIN price 
assessments.
    Some RINs are more versatile than others and can be used to 
satisfy multiple mandates. For instance, a D4 RIN with the 
production of biodiesel can be used to satisfy three of the 
four mandates. The most common RIN, a D6 RIN, generated from 
corn ethanol, can only be used toward the total renewable fuel 
mandate.
    Adding to flexibility, all RINs have a two calendar year 
lifespan. Unused RINs can be carried over to the next year with 
some limitations.
    The government publishes extensive aggregated monthly data 
on RIN generation and renewable fuel production. It's also 
responsible for making decisions on small refinery hardship 
exemptions.
    Exemptions lower the number of RINs needed to satisfy the 
annual mandates. Currently, small refinery hardship exemption 
decisions are not make public. This makes analyzing RIN supply 
and demand challenging.
    Earlier this month, S&P Global Platts and other news 
organizations broke news as to how many small refinery 
exemptions were issued.
    In a letter to Senator Grassley, the government confirmed 
that it had granted 19 out of 20 waivers for 2016. Further, for 
2017, 29 of 33 petitioners were granted exemptions with the 
four remaining still pending.
    In total, 48 exemptions have been granted over the past two 
years with a total exempted renewable fuel volume obligation of 
approximately 2.25 billion RINs.
    Recent court decisions have also had an effect on RIN 
supply. A few cases including one that was decided by the 
Fourth Circuit Court of Appeals last Friday have overturned 
denials of waiver petitions.
    In Ergon-West Virginia vs. EPA, the court vacated a denial 
of the small refinery exemption, saying that it was arbitrary 
and capricious. If this decision opens the door to more 
litigation that leads to restatement of retired RINs, supply 
demand in prices would be affected.
    When compared to other policy-driven environmental 
commodity markets, a key distinguishing characteristic of the 
RINs market is that it is a floor and trade system rather than 
a cap and trade system.
    This ensures that a minimum volume of biofuels is blended 
into the transportation pool. Cap and trade sets a cap for 
behavior that the government seeks to limit and penalizes 
companies that exceed the cap.
    On the other hand, under the RFS, the government sets the 
floor and companies are penalized if they don't blend enough to 
meet their RVOs or do not acquire a sufficient amount of RINs 
in lieu of blending.
    RINs of the same year and category are priced the same 
anywhere in the country. RINs do not have the same 
complications across state lines that renewable energy 
certificates often have.
    Unlike the RINs market, renewable energy certificate 
policies are set by individual states and require electricity 
suppliers to account for a certain percentage of the final 
sales customers with particular kinds of renewable power.
    Renewable energy generation creates certificates which are 
regional tracking systems. Individual states decide targets and 
which types of certificates can be used for compliance.
    Thank you for the opportunity to provide the statement at 
such an important time. I welcome any questions you might have.
    [The prepared statement of Mr. Lavinsky follows:]
    
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    Mr. Shimkus. Thank you very much and I thank you all for 
your testimony and we'll now move to the question asking 
portion of the hearing. I will begin the questioning and 
recognize myself for 5 minutes.
    I understand RINs are used by obligated parties to 
demonstrate compliance with the renewable volume obligations 
set by the EPA and that those volumes are based upon energy 
information and administrative numbers and projections.
    Ms. Dunphy, are those Energy Information Administration 
projections and, by extension, the RVOs based solely on past 
biofuel production levels or do they reflect realistic growth 
in biofuel production capacity?
    Ms. Dunphy. Thank you, Mr. Chairman.
    The annual RVOs are set by EPA using the EIA forecast for 
gasoline and diesel demand for the coming year, and if you 
think of the way the allocations work among the refineries, the 
EPA's job is to come up with a percentage that each refinery 
can use to calculate their obligation and there's a percentage 
for each of the four compliance categories that they multiply 
how much gasoline and diesel they may buy.
    To come up with that, they forecast what renewable fuel is 
going to be available for introduction into the U.S. market. 
That becomes the numerator of the fraction. The denominator is 
gasoline and diesel. You come up with a percentage for all four 
categories.
    So it actually is a forward looking fraction, if you will, 
that creates this percentage that the oil companies use in the 
next year.
    Mr. Shimkus. Thank you.
    Mr. Lavinsky, in your testimony you note that in your 10 
years of analyzing biofuels you have seen RIN prices go from 
pennies to as much as $1.40.
    What usually causes such changes to the price? Is it market 
related or more affected by regulations and policy actions?
    Mr. Lavinsky. Thank you for your question.
    Historically, large movements in RIN prices can be tied to 
spikes in ethanol prices due to higher feedstock costs. Higher 
mandates also contribute. In 2013 when RIN prices reached their 
peak, corn prices were over $7 per bushel and they're currently 
only around $3.25 now, and while ethanol prices were about 
$1.18 per gallon more than they are now. There are usually 
small policy bumps in prices each year as new mandates are 
proposed in the spring and finalized around November. But 
they're not comparable in size to the spike 5 years ago.
    Currently, the low RIN prices now are the result of a 
record domestic ethanol production and consumption and this 
abnormally high RIN bank.
    Mr. Shimkus. Thank you. Some stakeholders had expressed 
frustration with the transparency of the RIN market--I think 
we've heard that today from some of you all--including what 
information is available to the public, when it's available, 
and what information is deemed confidential business 
information and who is trading in the market, among other 
concerns.
    Is there a RIN market transparency issue and, if so, 
quickly, what would be some of the benefits of a more 
transparent market?
    And this is for the whole table. So Mr. Yacobucci, if you 
would start and then we'll just go down the table.
    Mr. Yacobucci. Certainly, there is limited information 
that's available. For example, EPA maintains a spreadsheet of 
literally thousands of companies that are required to comply 
with various fuel requirements under the Clean Air Act.
    It is difficult from that current database to figure out 
which RIN participants are individual trading companies versus 
subsidiaries of a large company and so being able to suss out 
who is performing, trading, and participating in the MTS as an 
independent third party versus a subsidiary of a biofuel 
company or an oil company with refining. Those sorts of 
information are very difficult to suss out currently.
    Mr. Shimkus. OK. Let me go to Ms. Dunphy.
    Ms. Dunphy. Yes. The other----
    Mr. Shimkus. And I only have a minute left so try to be 
real----
    Ms. Dunphy. Yes. Other panelists are probably more expert 
on this----
    Mr. Shimkus. OK.
    Ms. Dunphy [continuing]. But there are private contracts 
where the RINs transact on the intraday basis. So it's not 
public information.
    Mr. Shimkus. OK. Mr. Niznik.
    Mr. Niznik. Yes. Argus Media is a price reporting agency 
that tracks data and marketplace transactions.
    We track RINs transactions from real market participants' 
reporting of actual trades. So that's how we gather data on 
pricing.
    Mr. Shimkus. OK.
    Mr. Niznik. And still, even at that level, we can't have 
the understanding of full volumes of the marketplace at any one 
given time that would be able to elucidate any issues on market 
manipulation.
    Mr. Shimkus. Dr. Lade.
    Mr. Lade. I echo a lot of the other participants' 
statements here. However, I would say, more on the transparency 
side it's really the policy signal that has been driving much 
of the volatility recently.
    Mr. Shimkus. Mr. Lavinsky.
    Mr. Lavinsky. Some companies occasionally report that they 
received a waiver in the public filings. So sometimes we get 
additional information through the public filings that wouldn't 
otherwise be available.
    Mr. Shimkus. That's awesome. Thank you very much.
    I yield back my time and turn to the ranking member, Mr. 
Tonko, for 5 minutes.
    Mr. Tonko. Thank you, Mr. Chair, and Mr. Yacobucci, thank 
you for your work with CRS.
    EPA signed a memorandum of understanding with the Commodity 
Futures Trading Commission in 2016. As I understand it, only 
EPA has the authority over the RIN market. Is that true?
    Mr. Yacobucci. Currently that is the case that EPA has the 
only regulatory authority. Congress has not granted CFTC 
specific authority to regulate that market.
    Mr. Tonko. Thank you. So rules that govern other markets--
regulations prohibiting speculative practices like spoofing 
where a buyer initiates an order for a commodity they do not 
intend to complete for the purposes of influencing the price of 
that commodity--do not apply to the RIN market. Is that 
correct?
    Mr. Yacobucci. As I understand it, but this is more out of 
my area of expertise. I am not as familiar with CFTC 
regulations.
    Mr. Tonko. Is there any way to track this type of thing 
with EPA's monitoring system?
    Mr. Yacobucci. Certainly that has been one of the 
criticisms is because there is such limited data publicly 
available that it's hard to tell, again, who's participating 
and what actions they might be taking.
    Mr. Tonko. Thank you. And if Congress were to subject this 
market to a regulator, would the CFTC be the most appropriate 
regulator?
    Mr. Yacobucci. I would defer to Congress on their decisions 
on that.
    Mr. Tonko. Thank you. Proper functioning of markets 
requires transparency and market participants need to have 
reliable information about prices and supplies.
    You point out in your testimony there is little public 
information on the volume or price of RIN trades. This doesn't 
sound very transparent to me.
    How can buyers and sellers be sure they are trading at a 
fair price?
    Mr. Yacobucci. I would defer to some of the other witnesses 
on that question.
    Mr. Tonko. OK. Anyone on the panel want to take a stab at a 
comment there?
    Mr. Niznik. Well, the price-reporting agencies do have the 
ability to do price discovery and most of the transactions that 
occur, both from buyer and seller, are usually benchmarked to 
RINs prices published by either my company or, if I am being 
generous, Mr. Lavinsky's company also, and those are private 
price discovery agencies, though, requiring subscriptions.
    Mr. Tonko. Anyone else want to comment on that?
    Mr. Lavinsky. I am part of the analytics team, not the 
pricing team, but I can discuss it with them and provide you 
with an answer for the record after the hearing.
    Mr. Tonko. Thank you. And Dr. Lade?
    Mr. Lade. I would argue that most of the uncertainty is 
around trading volumes rather than the price.
    Mr. Tonko. Thank you.
    RINs are created and sold within a compliance year with 
some limited ability to carry over some RINs into the next 
compliance year.
    What effect does a delay in the release of the annual RVO 
have on the RIN markets? Anyone?
    Ms. Dunphy. I will go ahead and try to answer that, sir.
    Mr. Tonko. Thank you.
    Ms. Dunphy. So the RVO, more recently in the last couple of 
years, have come out on a timely basis--by November the 30th is 
what's required by law.
    Mr. Tonko. Thank you. And we are referring to the RIN 
market as if there is only one type of RIN. But, of course, 
that's not the case.
    RINs attach to biodiesel or advanced biofuels trade at 
different prices than RINs or conventional ethanol. What is the 
effect of RIN prices on the development and production of 
advanced biofuels?
    Mr. Niznik. I will answer that. I work on due diligence for 
people who are investing particularly in advanced biofuel 
projects.
    For advanced biofuel projects that might use an advanced 
RIN or a D4 RIN or a cellulosic RIN--those are the top three 
category RINs, the advanced biofuel RINs--the variability in 
that area and, more importantly, on certainty of the policy 
moving forward are critical because none of those projects can 
go forward without the RFS RINs price incentive making those 
fuels possible to be blended in the marketplace economically.
    Mr. Tonko. Thank you. Has RIN market volatility affected 
all biofuel markets to the same degree?
    Mr. Niznik. No, it has not, sir. The biofuel markets for D4 
RINs from biodiesel are more stable than the biofuel markets 
for D6 RINs from ethanol primarily because of D4's ability 
within the rules to replace the costs of a D6. They are a 
market setter.
    When the D6 RIN is short, you replace them with a D4 RIN so 
that if it's a short D6 marketplace, the D6 RIN is now suddenly 
at the D4 price. But the D6 marketplace is long and 
oversupplied, then it can drift downward to another level and 
so volatility can be higher in that space.
    It almost has a binary value. Essentially, under current 
market conditions if you had more than enough D6 RINs, the D6 
RINs would be essentially around 3 cents or zero because it's 
very, very economical to blend ethanol to gasoline.
    But when that marketplace is short because of the 
regulations or otherwise, it will jump up to the D4 price.
    Mr. Tonko. Thank you, and I yield back, Mr. Chairman.
    Mr. Shimkus. Clear as mud, right? Clear as mud. You got 
that.
    [Laughter.]
    Mr. Niznik. That's how it is. Sorry.
    Mr. Shimkus. The chair recognizes the chairman of the full 
committee, Chairman Walden, for 5 minutes.
    Mr. Walden. Yes. Thank you for this enlightening 
discussion.
    I am sitting here wondering what all this costs consumers 
but we'll get to that at another time.
    As an Oregonian, we've had a lot of talk about biomass and 
what we can do with the wastes from the forests and all--and I 
know, Ms. Dunphy, in your testimony you talked about the 
inconsistencies and barriers that prevent some renewable fuels 
from qualifying for RINs.
    Do you think we are missing out on some opportunities to 
better integrate woody biomass into the fuel supply due to the 
way the RFS regulations are written?
    Ms. Dunphy. Yes, and I think history has proven that. We 
only have one company today in the U.S. after all these years 
of the program using woody biomass as a feedstock to produce a 
renewable fuel that makes RINs.
    Mr. Walden. Well, that is something we'll look at, I guess. 
Probably have to change it congressionally, right? Is that 
something----
    Ms. Dunphy. I think we need clarification in the current 
regulatory language to enable EPA to determine which of the 
woody biomass feedstocks falls under the existing categories.
    So the pathways exist today but they need clarification.
    Mr. Walden. OK.
    Mr. Yacobucci. And I would just add that there is a much 
more complex definition of what qualifies as qualified biomass 
under the 2007 law than was in the original 2005 law and that 
has added to that complexity. So there are regulatory 
definition issues but there's also the statutory definition as 
well.
    Mr. Walden. I remember those debates on this committee when 
some of the advocates for this tried to argue that woody 
biomass of a Federal forest was somehow not renewable energy 
but if it was on the other side of the line--the same trees 
falling different sides--then it would be and it had no 
scientific basis. It was all political and results in this 
complicated mess.
    Mr. Lavinsky and Yacobucci, what are the key challenges you 
see facing this RINs market now and what do we need to do here, 
if anything, from your perspectives.
    Some may not want to suggest policy so I will ask it in the 
other way. What are the challenges facing the RINs market?
    Mr. Lavinsky. I would say one challenge is managing the 
opposing opinions as to whether RIN obligations need to be 
reallocated from the granting of small refinery waivers.
    Small refinery waivers are mostly issued after the year has 
ended and obligated parties have already submitted their RINs 
and compliance.
    So, to date, waivers have been issued retroactively. 
Retired RINs have been reinstated. But RIN obligations have not 
been reallocated.
    Mr. Yacobucci. And I would just add to that, it's not just 
the small refinery exemptions. It is the timeline for 
rulemakings.
    It is the level that EPA sets because under the statute the 
EPA has the authority to lower the targets from what they 
were--the targets set in law. All of these different pieces, 
whether it's the specific waivers against the overall caps, 
individual waivers for companies, whether you're talking about 
refiners, you're talking about biofuel producers, all the 
participants in the market have raised issues in one form or 
other about uncertainty and that's what drives a lot of this, 
and Mr. Niznik has talked about how that's affected the markets 
and there's just all these questions about what is the current 
demand for fuel, given the different levels as they change.
    Mr. Walden. So for any of you, what's your assessment with 
how well the EPA has overseen the RINs market and 
implementation and where is there room for improvement there?
    Ms. Dunphy. So I think the EPA does a pretty good job at 
administering the regulations as they were written. But the RIN 
market oversight is missing. There's really not any oversight 
of the trading activity of RINs by the----
    Mr. Walden. Anywhere? Is there anywhere?
    Ms. Dunphy. Not to my knowledge.
    Mr. Walden. Should there be?
    Ms. Dunphy. That's your call.
    Mr. Walden. Oh, I see how this works. Yes.
    Anybody else want to weigh in on that topic, about the 
EPA's oversight and what we should or shouldn't do?
    Mr. Niznik. There's some hardworking folks down there and 
they are administering----
    Mr. Walden. Oh, yes.
    Mr. Niznik [continuing]. And they're administering very 
well. If you look at the public record on the rulemakings you 
can see a lot of input from multiple departments, some of which 
I've worked with under consulting before and there's a broad 
base of information being put into the decision making from 
both the USDA and EIA at every step.
    So the ability to make a good decision as best as humanly 
possible is there, in my opinion, based on the regulations and 
the review process necessary to do so. Whether or not the 
ultimate human decision at the end is qualifiably good is up to 
this body, Mr. Chairman.
    Mr. Walden. Well said. Thank you. All right. That's my 
time. Thank you, Mr. Chair.
    Mr. Shimkus. The chairman yields back his time.
    The chair now recognizes the gentleman from California, Mr. 
McNerney for 5 minutes.
    You don't want to go?
    Mr. McNerney. I do. I just thought that the ranking member 
of the full committee was here. Thank you.
    Well, I hear from the testimony this morning that the RINs 
volatility is due to three factors. One is commodity prices, 
one is uncertainty in the market, and the other is fraud. Is 
there anything I am missing in that list?
    Mr. Niznik. There are other fuel quality regulations and 
state and local incentives for biofuels usage or petroleum 
usage that can weigh in onto the RINs price.
    Mr. McNerney. So it might be good then to have Federal 
standards that override state rules?
    Mr. Niznik. If you want another civil war.
    [Laughter.]
    Mr. Shimkus. Would the gentleman yield?
    Mr. McNerney. Sure.
    Mr. Shimkus. But isn't that like when a state might provide 
an incentive through a local percentage or tax incentive or 
something that--it's not just a fuel incentive. It could be 
just in a policy incentive?
    Mr. Niznik. Yes, sir. That's what I am talking about. 
Either a tax that is for production, taxes that are for sales 
can weigh very heavily and on the national level one of the 
most important factors on RINs price is the biodiesel blenders' 
tax credit, which can come back retroactively or can come back 
actively in any given year, depending on the actions of this 
body.
    Mr. McNerney. OK. Thanks. Reclaiming my time.
    Some of the solutions I hear are transparency, rational 
consistency, referring to Ms. Dunphy's list of items, and 
clear, predictable simple rules.
    Are there other factors that would be helpful?
    Ms. Dunphy. If you can do clear concise long-term rules 
that would make everyone in the market very happy.
    Mr. McNerney. So how has the volatility of the past 3 years 
compared to prior years before that?
    Mr. Niznik. Are you saying price volatility, sir?
    Mr. McNerney. Right. RINs price volatility.
    Mr. Niznik. Actually, RINs price volatility was relatively 
calm, I would say, during 2016 and 2015. But at the end of 
2016, with the administrative change, there's been a large 
amount of policy uncertainty-driven price behavior.
    Mr. McNerney. But you mentioned that the EPA's guidance 
helped stabilize the market.
    Mr. Niznik. In 2015. Yes, sir.
    Mr. McNerney. Oh, so that's----
    Mr. Niznik. That's the last time things got kind of 
rational for a while. Yes, sir.
    Mr. McNerney. OK. Thank you. I didn't understand that.
    So how much have the small refinery waivers contributed to 
the volatility?
    Ms. Dunphy.
    Ms. Dunphy. So small refinery waivers, as has already been 
said, are given retrospectively. So they are granted after the 
compliance year is over with.
    So to some extent the news of the waivers did impact the 
market, which--because they weren't aware of the waivers prior 
to those most recent announcements. But the waivers themself 
are retrospective. So individual waivers don't have an impact 
on the market when they're granted.
    Mr. McNerney. OK. Thank you.
    Dr. Lade, you testified that the consumer prices go one to 
one--consumer price impacts--but are all refineries impacted 
similarly or do some refineries impacted more drastically by 
RINs' market than others?
    Mr. Lade. The empirical evidence to date is that all 
refiners are--in the economics literature all refiners are 
affected similarly and I've looked at--again, more data and 
more research is necessary, particularly looking at markets and 
there are members of the academic community looking at that.
    But by and large, there's been a consistent consensus that 
on average these wholesale prices are adjusting to compensate 
for refiner costs.
    Mr. McNerney. Aren't the large refineries able to produce 
their own RINs? Aren't they affected less, or even make a 
profit off RINs?
    Mr. Lade. Correct. However, you're either going to produce 
your own RINs in house if that is the most cost-effective way 
to comply with this or you--if it's not cost-effective for you 
to comply then you will purchase RINs from those who can 
produce RINs even cheaper than this.
    And so this is the beauty behind the market-based mechanism 
here that it allows parties to decide whether it's more cost-
effective to get into the biofuel business or to just purchase 
RINs from people who are better at producing biofuel.
    And so either way, that cost is borne. It's just whether 
it's borne through biofuel production or through RIN purchases.
    Mr. McNerney. Yes, but the problem in my mind is that the 
large producers are producing RINs and selling them so they're 
getting a double benefit whereas the small refiners are having 
to buy RINs. So they're paying for it.
    Mr. Lade. That's a great point. Similar as to the side 
where when you're having to pay for these RINs and you then are 
compensated for that through higher wholesale gasoline prices.
    Whether or not these oil refiners who are producing RINs 
upstream through biofuel production, whether they actually get 
to keep that depends on what happens to downstream consumer 
prices and work of my own has shown that ethanol prices are 
actually being--this incentive is being passed through to 
consumers.
    Therefore, it wouldn't actually be impacting those 
refiners. The consumers are benefiting from the RINs on the 
ethanol side.
    Mr. McNerney. OK. I don't quite follow that, but I will 
yield back my time.
    [Laughter.]
    Mr. Shimkus. I love this hearing. So the gentleman yields 
back his time.
    The chair now recognizes the gentleman from West Virginia 
for 5 minutes.
    Mr. McKinley. Thank you, Mr. Chairman. Just a point of 
personal privilege. I would like to recognize in the audience--
he was my mentor when I joined the Energy and Commerce 
Committee--Ed Whitfield back there. Thank you. Thanks, and you 
have showed you have not deviated one bit from your interest in 
energy. So thank you for coming.
    Mr. Lavinsky, you kind of took the wind out of my sales. I 
wanted to talk about that Fourth Circuit--the ruling on Friday, 
because it overturned the previous denial from the EPA for 
Ergon, which is just a boutique refinery in West Virginia, and 
they've been burdened with this. Think about for all of us to 
understand this, here we have a boutique refinery, 23,000 
barrels a day, and they're faced with the same issues that, 
like, Marathon is. Marathon refinery. It's a hundred times 
larger.
    That doesn't seem right. We should be able to differentiate 
between these and provide these hardship grants, waivers, for 
some of these small--think, a hundred times larger, because we 
know that for Ergon in West Virginia it's the third biggest 
expense they have behind raw materials and labor, and what 
they--the biofuels industry has argued that granting these 
small refineries like the one at Ergon this hardship exemption 
was going to result in demand destruction.
    So I want to go to Ms. Dunphy and say in a kind of a yes or 
no, if you could, please, do you believe that granting these 
small refinery hardship exemptions result in less renewable 
fuel being included?
    Ms. Dunphy. So as I mentioned earlier, the small refinery 
waivers are granted retrospectively. So the compliance year has 
already passed.
    But every refiner assumes that they're going to be an 
obligated party during that year and they will continue to 
blend renewable fuels and buy RINs as needed because they don't 
know that they're going to get the exemption at the 12th hour 
when they go to report to the EPA by March the 31st of the 
following year.
    So I suggest that you all definitely talk to the small 
refineries in the U.S. and ask them if they have changed their 
blending policies because they think they're going to be 
exempted for the year and I think you will find that they have 
not changed their blending policy. They continue to blend. They 
continue to purchase RINs. What they do is focus on current 
year RINs rather than the 20 percent prior year.
    So if they get the exemption they still will be able to use 
the current year RINs in the next year. So that puts more RINs 
into the market. We understand that. But does it destruct the 
demand of the current year?
    I would say that if you look at the RIN data through June 
we are at the same production level that we were in 2017 and we 
are halfway toward meeting the 2018 compliance RVOs. So whether 
that will hold true for the entire year I don't know.
    Mr. McKinley. The EIA had come out--I saw some information 
yesterday on the EIA that said that actually the blending over 
the first part of this year--there was 6 months, 7 months--we 
are actually up over last year--that actually we are 
increasing.
    So despite having all of these small refinery exemptions, 
is this a confirmation that small refinery exemptions do not 
destroy the demand for renewable fuel?
    Ms. Dunphy. We should remember that refiners would probably 
blend ethanol regardless of whether there was an RFS or not 
because ethanol represents a very good source of octane. It 
helps them meet their gasoline, sulfur, and benzene 
requirements.
    So they have an incentive to blend ethanol and they're 
going to do that. So I would say that the data through 6 months 
for the EMTS data that's published that anyone can see--it's 
public information--shows that we are on track with last year.
    Whether that will continue through the rest of the year, I 
can't predict.
    Mr. McKinley. Thank you.
    Mr. Yacobucci.
    Mr. Yacobucci. Just one open question is whether or not a 
prior year's waiver creates a supply, potentially--and 
increased supply of carry forward RINs that a refiner can use, 
because a refiner can use either this year or last year's RIN 
to meet this year's obligation and that's the question going 
forward is if there's more of last year's RINs available what 
does that do to the market?
    I think that's still an open question.
    Mr. McKinley. Let's stay with you just for a minute.
    With the original intent of this RFS and RIN program, have 
we achieved that objective that we set out on that or have we 
created a confusing and costly commodity system? What would be 
your opinion?
    Mr. Yacobucci. In terms of congressional intent, I wouldn't 
speculate. I will say that there are no congressional findings 
or specific stated goals in the statute.
    And so various players have attributed various goals to the 
program, whether that is increasing agricultural production, 
raising farm incomes, reducing imports of fuel. Certainly, 
increased biofuel use has displaced petroleum use. There have 
been economic benefits to agricultural states from the program.
    If you consider those to be the goals of the RFS, then yes, 
they have been successful. Is the program complicated? 
Certainly.
    Mr. Shimkus. The gentleman's time is expired.
    Mr. McKinley. My time has expired. I yield back.
    Mr. Shimkus. The gentleman yields back his time.
    The chair now recognizes the gentleman from Mississippi, 
Mr. Harper, for 5 minutes.
    Mr. Harper. Thank you, Mr. Chairman, and thank you each for 
being here. It is a topic every time I read it I think I come 
away and study it--I come away more confused than when I 
started that study. So thank you very much.
    Mr. Yacobucci, if I could ask you and I certainly agree 
with what Mr. McKinley has said. But I wanted you to just try 
to educate me as best you can.
    Give me a brief explanation of the terms RIN long and RIN 
short so I can understand that.
    Mr. Yacobucci. I would defer to Mr. Niznik on that. It's 
his term.
    Mr. Harper. OK. Mr. Niznik.
    Mr. Niznik. I apologize for confusing the committee. I come 
from the trading world, which has got its own language.
    Mr. Harper. Yes.
    Mr. Niznik. When we say long, we mean over supplied.
    Mr. Harper. OK.
    Mr. Niznik. And when we say short, we mean under supplied. 
So to apply that to Ms. Dunphy's statement from before, if 
previous year obligations got waivered under a small refinery 
exception and those RINs were suddenly dumped back into the 
market, it could cause a case of long or over supply of RINs 
that weren't expected to be in the market.
    Mr. Harper. OK. So explain why some companies are RIN long 
and some are RIN short a little further so that--if they have 
an over supply----
    Mr. Niznik. Yes. You would say they're over supplied for 
what they might need for their obligation for this year.
    Mr. Harper. OK.
    Mr. Niznik. So they may say oh--or if they perceive they 
will be long--and this is more important is the perception--if 
they perceive they're going to be over supplied then they're 
not willing to pay a certain price. They're going to depress 
the market price because they're less interested in a purchase.
    Mr. Harper. And certainly when you're looking at some of 
the smaller refineries, for instance, and all of these waivers 
are done retrospectively, as Ms. Dunphy pointed out--the way 
that it's set up--what would happen if all of a sudden they 
were done prospectively.
    You have been getting them each year and you just planned 
ahead. You knew, hey, you have done that--probably going to be 
like that next year--we are going to go ahead and tell you now 
on the front end. How would that impact it, Ms. Dunphy?
    Ms. Dunphy. According to the regulations today, the EPA 
would take that into consideration. In the fraction I mentioned 
earlier where the renewable fuels are the numerator and 
gasoline and diesel demand is the denominator.
    Today, those small refineries are in there because the EPA 
doesn't know that they're not going to be exempted.
    Mr. Harper. OK.
    Ms. Dunphy. If they get exempted, they come out of the 
denominator. That makes the overall fraction greater for all of 
the other obligated parties who don't qualify under that small 
refinery.
    So, obviously, Mr. Niznik, jumping back to that, companies 
that are RIN long obviously have a competitive advantage over 
the those that are RIN short?
    Mr. Niznik. Yes. So that's a business strategy that they 
may employ to be--to take advantage of the rules as they're 
written, just like someone might take advantage of the tax code 
or any other code. Yes.
    Mr. Harper. Sure. All right. Well, let's talk for a minute 
regarding RIN fraud, and I know that's an issue. What instances 
are unreported and what other types of fraud are possible in 
the future and what are the implications of this fraud? Who 
would like to answer that?
    Ms. Dunphy.
    Ms. Dunphy. I will go ahead and answer that.
    So the RIN fraud cases have decreased in number over the 
years and many of the RIN fraud cases involve a period of time 
when the RFS was relatively new to the market, so 2010, 2011, 
2012.
    I would say the current instances of potential RIN 
invalidity relate to exports of renewable fuel for which RINs 
are not retired because remember that renewable fuel can be 
blended into petroleum, gasoline, or diesel and that blend can 
be exported from the United States and calculating how much 
renewable fuel is in that blend is difficult.
    But yet, it's required under the regulations that a certain 
amount of renewable fuel RINs be retired.
    I would say RIN fraud of the future it's all about 
feedstock and use of the fuel.
    Mr. Harper. OK. Explain that a little further.
    Ms. Dunphy. OK. So RIN fraud, basically, doesn't happen on 
the use side. It happens at the generated side. So if I use a 
feedstock that does not qualify, I shouldn't be making RINs.
    If I take the feedstock that qualifies and I use a process 
and I produce a fuel but I put it into an ocean-going vessel, 
for example, I am supposed to retire those RINs or I shouldn't 
have made them in the first place.
    So I see the RIN fraud potential of the future being 
feedstock or use, but it's much less today than it was in the 
past.
    Mr. Shimkus. Gregg----
    Mr. Harper. Thank you.
    Mr. Shimkus [continuing]. Mr. Lavinsky wanted to respond to 
that question.
    Mr. Harper. Yes.
    Mr. Lavinsky. Thank you very much.
    Now, one other thing--when you asked for what occurrences 
occurred in the past, is that a few years back--a handful of 
individuals and companies would generate and sell RINs for 
biodiesel that they did not produce----
    Mr. Harper. OK.
    Mr. Lavinsky [continuing]. And that's how they got the RINs 
in their hands and sold them off and put them into the market.
    Mr. Harper. Thank you. Now I yield back.
    Mr. Shimkus. The gentleman yields back his time.
    The chair now recognizes the gentleman from Texas, Mr. 
Olson, for 5 minutes.
    Mr. Olson. I thank the chair, and welcome to our five 
witnesses. A special howdy to the one Texan on the panel, 
Sandra Dunphy. She lives in Kingwood, Texas, where Ted Poe is 
her congressman, and my colleagues worry about me bragging 
about the Houston Astros, World Series champions. Rest 
assured----
    Mr. Shimkus. Who? Who?
    Mr. Olson [continuing]. I can't brag about them. Ms. Dunphy 
can brag for me and she will, she will, she will.
    Ms. Dunphy. Happy to.
    Mr. Olson. An Astros repeat aside, over the years we've 
heard stories about fraud in the RIN markets. One story I read 
was titled, ``The Fake Factory that Pumped Out Real Money,'' 
about a company that made out of thin air 60 million gallons of 
biodiesel. Wow.
    Ms. Dunphy, you said that RINs fraud is much less than 
today, to Mr. Harper's question. Can you talk about the steps 
that have been taken to prevent RINs fraud and whether you 
think more is needed like you talked about with Mr. Harper, 
please?
    Ms. Dunphy. Yes.
    Mr. Olson. Also you're on deck too, Mr. Yacobucci.
    Ms. Dunphy. Yes, sir. Happy to.
    So the making RINs out of thin air, there's two things that 
really transformed the marketplace since the time that all of 
this happened.
    The first was the EPA initiated a quality assurance plan 
program, which is optimal for producers to participate and they 
hire a company like mine to come in and audit what they're 
doing to make sure they're complying with the rules and we 
probably have the most stringent quality assurance plan out 
there in the marketplace today.
    The second thing that happened was because the obligated 
parties had to replace RINs and pay penalties, they do today 
and started doing even then a much better job at due diligence. 
So they will research all of the producers of the RINs who they 
are going to use for compliance.
    Mr. Olson. Thank you.
    Comments, Mr. Yacobucci?
    Mr. Yacobucci. One thing I would just note is there's 
necessarily a time lag when the fraud occurs to when we 
necessarily even know about it.
    EPA is doing its various inspections, looking at their 
data. State inspectors may be going out to these different 
facilities. And then EPA needs to make a decision with the 
Justice Department whether or not this is simply a civil 
violation of the Clean Air Act because Title 2 of the Clean Air 
Act where the RFS exists only employs civil violations or 
whether there is criminal action, in which case there's a whole 
additional amount of time where the Justice Department needs to 
do their own investigation.
    And so as I said, there's necessarily this time lag and so 
in some of the cases that we are hearing about most recently 
still go back to that earlier time because they involve wire 
fraud, tax fraud, and other sorts of things that are outside of 
EPA's purview and rest with the Justice Department.
    Mr. Olson. Thank you. The next question is for you, Mr. 
Lavinsky. This is no news, but there has been some serious 
volatility in RINs prices in recent years.
    What sticks out in my mind January of 2013 to March of that 
same year RINs prices were about 1 to 2 cents in January, 
spiked up to almost over $1 2 months later in March. A local 
refiner back home, on paper, lost $600 million in value just 
because of the RINs issue.
    But now the price is low and that's great. But can you talk 
about the swings and what drives these RINs swings and how we 
could prevent them or moderate them?
    Mr. Lavinsky. I could talk about historically. Like I said 
earlier, historically the big spike that occurred in 2013 was 
associated with super high ethanol prices and feedstock costs. 
Corn was $7 per bushel, more than twice as much as it is now.
    So having the really high ethanol and having an increase in 
the mandate that year--I believe there was a 9 percent increase 
in the mandate from 2012 to 2013.
    So there was a combination of an increase in the mandate 
coupled with sky-high ethanol prices and feedstock costs and 
that's what drove that huge spike in RINs, which is 
incomparable.
    It has not repeated itself. There has been volatility over 
the last 3 years but nothing like it was in 2013.
    Mr. Olson. Another question--do you think market 
transparency can add the clarity to what happens in a few years 
when EPA takes over the settling the mandates? Do you think 
that market transparency helps EPA out or hurts them? How can 
we prepare for EPA taking over in a couple of years?
    Mr. Lavinsky. Just speaking generally without speaking 
about the EPA, speaking generally, transparency helps everybody 
out because it's easy to determine how many RINs are out there, 
what the true supply and demand are, and if everybody knows 
what the RIN bank is and how many RINs are on the market then 
it's easier to pick a price that's fair for everybody.
    Mr. Olson. Thank you.
    And one final question, Ms. Dunphy--will the Astros repeat 
World Series champions?
    Ms. Dunphy. Absolutely.
    Mr. Shimkus. The gentleman's time has expired.
    [Laughter.]
    The chair now recognizes the other gentleman from Texas, 
who's been deep diving on this issue with me all this Congress, 
so Mr. Flores for 5 minutes.
    Mr. Flores. Mr. Chairman, thanks for holding this hearing. 
As has been said before, this is the fifth in a series of 
hearings that we've had as we look at our nation's 
transportation fuel system.
    I think that America needs to be a world leader when it 
comes to producing efficient vehicles and also having the fuel 
system that will properly power those as we move forward, and I 
appreciate this subcommittee's work as we look forward to 
examine the market and regulatory environments that impact our 
nation's fuels as we move further into the 21st century.
    Some of the reflections that I've had that I've learned so 
far that were interesting, coming out of this hearing, Ms. 
Dunphy's comment that even though we've had the small refinery 
exemptions with the--the EIA numbers show that ethanol demand 
has still been higher than--or at least equal to last year--
than even with that small refinery exemption. So that's been 
interesting.
    Ms. Dunphy, as we all know, many of the statutory 
provisions and requirements of the RFS programmers sunsetted 
after 2022. In your view, what does the RIN ecosystem look like 
after 2022?
    Ms. Dunphy. I think that's a really good question. 
Certainly, Congress gave EPA more latitude at that point in 
time for how they structure the program, going forward.
    But they do need to take into the consideration the things 
you ask them to look at--the RFS impact on the economy, on 
infrastructure, on air quality, water quality, employment, et 
cetera, et cetera, and to be honest with you, I think that the 
EPA, in setting standards year after year after year, it's 
quite burdensome to the staff and it takes a lot of their 
resources to do that--that they otherwise are not helping their 
constituents to try to register and do things correctly under 
the program.
    So somehow make it a more simple program and easier to 
administer.
    Mr. Flores. Would you agree that the ecosystem becomes much 
less transparent and much cloudier? There's no certainty 
whatsoever after 2022 for pretty much every player in this 
market, whether you're a farmer growing the corn or whether 
you're a refiner, even an automaker, because you don't know 
what kind of fuels you're going to have. Would you agree that--
--
    Ms. Dunphy. I would tend to agree that there's a lot of 
concern as to what will happen to the program after that point 
in time.
    Mr. Flores. All right. Since uncertainty is bad for the 
market, to the extent that Congress can help create that 
certainty we are better off, I would think.
    Does anybody disagree with that?
    OK. Second question--Mr. Lavinsky, as you pointed out, 
government policy--and Mr. Niznik said the same thing is that 
government policy impacts RIN prices.
    Can you give me examples of how government policy has 
impacted RINs prices versus how government policies impacted 
any other energy commodity? You can pick the one that you're 
most comfortable with.
    Mr. Lavinsky. OK. Well, policy, I guess, with biofuels, 
with, certainly, the mandates. The mandates of government 
policy and they--according to the RFS they're supposed to go up 
every year and as they go up it requires companies to do more 
blending.
    Mr. Flores. OK.
    Mr. Lavinsky. And that has an impact on RIN prices. With 
regard to the other types of programs, I am part of a larger 
group that includes a team on emissions. I probably would refer 
that question to them and provide you with a full answer.
    Mr. Flores. OK. Yes, if you can answer that supplementally 
that would be great.
    Mr. Yacobucci, what impact, if any, has the RIN market and 
RIN prices had on advanced biofuel production?
    Mr. Yacobucci. I think it's probably worth turning that 
question around a little bit and I think it's more important to 
say that the RIN market for cellulosic fuels has responded to 
EPA's repeated reductions in that part of the mandate.
    So you have these different subcategories--the cellulosic 
biofuel category, which was originally scheduled in the statute 
to be the lion's share--16 billion gallons out of the 36 
billion gallons that would be required in 2022. But each 
successive year EPA has made very drastic reductions in----
    Mr. Flores. And that's because we don't have a way to 
produce it. Yes, I mean----
    Mr. Yacobucci. Because----
    Mr. Flores [continuing]. The technology is not there. But 
have RIN prices helped to encourage advanced biofuel 
production?
    Mr. Yacobucci. I would refer to my colleagues, if they may 
comment.
    Mr. Flores. OK.
    Mr. Niznik. Yes.
    Mr. Flores. Mr. Niznik, they have? OK. All right.
    It looks like I am down to 3 seconds so I am going to yield 
back the balance of my time. Thank you.
    Mr. Shimkus. The chair thanks the gentleman.
    The chair now recognizes the gentleman from Michigan, Mr. 
Walberg, for 5 minutes.
    Mr. Walberg. Thank you, Mr. Chairman, and thanks to the 
panel for being here.
    And Ms. Dunphy, I refuse to ask you the question that 
Representative Olson left for me to ask you about Verlander and 
Cy Young.
    [Laughter.]
    It just goes on and on, the discussion today. As a 
theologian, thinking through the Creation story I don't 
remember that in any of the 7 days that the RIN was created. I 
will have to go back to the fall of man and see if that was the 
forbidden fruit. We'll see what happens.
    But Ms. Dunphy----
    Ms. Dunphy. The RIN was right after the mosquito.
    [Laughter.]
    Mr. Walberg. Right after the mosquito. OK. I will check 
that out, too.
    According to EPA, since December of 2010 it has issued 37 
notices of violations regarding RIN fraud. A couple of years 
ago, EPA issued regulations creating a quality assurance 
program aimed at cleaning up some of the RIN fraud problems.
    Do you believe that the quality assurance program has done 
a good job of eliminating the problems?
    Ms. Dunphy. I think it's done a very good job. But it is a 
voluntary program. A producer has to be willing to participate 
in the program as an auditor.
    We are available to producers but they contact us to say 
hey, I want to participate in the program. It's not an across 
the board program.
    As much as Weaver would love that, because we'd get more 
work, but it's on a case by case basis, basically, and I think 
the QAP has helped reduce RIN fraud, yes.
    Mr. Walberg. Well, are there then other areas of RIN fraud 
that need to be addressed that are missing now? What might you 
propose to address this?
    Ms. Dunphy. I think that probably the easiest is the export 
of renewable fuels for which RINs are not retired and I know 
that EPA is working hard with Homeland Security to look closer 
at exports to determine if they contain renewable fuel.
    Mr. Walberg. OK. The RIN market is different than any other 
commodity trading markets. Some have suggested that installing 
a governing structure to oversee it would help increase 
transparency and decrease fraud.
    How much buyer beware still exists in the RINs marketplace?
    Ms. Dunphy. I think there's still quite a bit, especially 
for the advanced biofuels. As those transactions are being 
negotiated, it's the only transactions where the seller must 
tell the buyer who the renewable fuel producers are of the 
RINs, whereas on D6 or corn ethanol RINs it's pretty much 
everyone will accept them.
    So the companies have blocked lists in EMTS. This is 
probably something we haven't talked about. But refiners doing 
their due diligence have the option to block certain producers 
and so therefore RINs from those producers can't come into 
their EMTS account and they use this feature of EMTS after 
doing due diligence on the marketplace on the producers.
    Mr. Walberg. Added to that, would a governing body be 
helpful and why?
    Ms. Dunphy. I do believe it probably would be helpful. But 
it would be an enormous task to set up a RIN training platform 
that was administered by either EPA or another body because 
there are different vintages of RINs. There's the different 
producers of RINs and there's different RIN codes themself. So 
it would be somewhat complex, but it's possible, I guess, and 
it would be helpful.
    Mr. Walberg. Mr. Niznik, I saw you respond to that. Would 
you like to add something here?
    Mr. Niznik. I would like to add, for the record, since this 
is a public record and it should be true, that I am a member of 
the State of Texas also and please pass on a note to Mr. Olson 
to that effect, that he had more representation here than he 
thought before.
    I would agree that there have been multiple attempts, I 
must say, to put RINs on trading boards, both the Chicago 
Mercantile Exchange and its previous incarnations and then the 
International Commodity Exchange--ICE.
    Both Argus and, I believe, Platts have participated in 
trying to be paper benchmarks--to try to be a benchmarkable RIN 
that you could trade as a future and I would say, without 
speaking for Mr. Lavinsky's company, that it hasn't been 
particularly successful in the private sector to attempt to do 
something that would assure some sort of broader transparency 
on a board-traded commodity level.
    Mr. Walberg. OK.
    Ms. Dunphy, I see I have 8 seconds left. So I would 
probably better not open it up. But I thank you.
    I yield back.
    Mr. Shimkus. The gentleman yields back his time.
    The chair now recognizes the gentleman from Georgia, Mr. 
Carter, for 5 minutes.
    Mr. Carter. Well, thank you, Mr. Chairman, and thank all of 
you for being here today. I appreciate it, although I will have 
to admit it is as clear as mud. It's pretty tough sitting here 
trying to figure out is this really necessary.
    Seriously. Ms. Dunphy, you look like you want to answer 
that.
    [Laughter.]
    Ms. Dunphy. Trying to figure out how to answer that 
question fairly diplomatically, and keep my job--yes.
    Mr. Niznik. We make a lot of money because of this 
complex----
    Mr. Carter. Yes, I know. It's just----
    Mr. Niznik. Thank you. By the way----
    Mr. Carter [continuing]. If we created something just to--
--
    Ms. Dunphy. Yes.
    Mr. Carter [continuing]. Just to create something.
    Ms. Dunphy. The more complex the regulations the more work 
we have.
    Mr. Niznik. Yes, my kids are going to go to college because 
of you all. Thank you.
    Mr. Carter. I think at the end of the day I think Thoreau 
is just turning over in his grave right now, just--yes. 
Simplify, simplify, simplify, and I am just trying to figure 
out.
    But in all seriousness, I will ask questions about it. I am 
just interested, Mr. Yacobucci, you mentioned in your testimony 
that there's been concerns with RIN generation since the 
program's inception and that there's duplicate counting and 
fraudulent RINs on the market.
    How can it be manipulated? I don't really understand how 
you can manipulate it.
    Mr. Yacobucci. To the first question, I will say yes, there 
have been concerns going forward. EPA's stated goal of when 
they came out with the RFS 2 and the EMTS was to address some 
of those questions.
    Whether or not the current system has succeeded, it's still 
an open question. To your original question, is it necessary, 
if you want a market-based system you do need a market. There 
are simpler systems you could come up with. But they may not 
provide the flexibility that a market does. So that's a trade-
off.
    In terms of your question about how fraud can occur, I 
think Ms. Dunphy has gone through a list of some of those 
topics. I wouldn't speculate on ways going forward folks could 
do it.
    But, certainly, the ways that EPA has listed are production 
that has not actually happened where basically a company has 
just on paper said they have produced fuel that they haven't 
produced, companies that have produced fuel that doesn't 
actually qualify because of the feedstock requirements but 
they've attested that it has, and companies that have exported 
fuel that's otherwise not eligible because in any case where a 
fuel isn't eligible those RINs need to be retired and if 
they're not retired then, those RINs are invalid.
    Mr. Carter. OK. Well, you mention in your testimony also 
that there are two markets. There's a primary market and 
there's also a secondary market, and that secondary market, as 
I understand it, that's where the owners buy and sell the 
excess RINs.
    Mr. Yacobucci. Correct.
    Mr. Carter. Can the secondary market impact the primary 
market?
    Mr. Yacobucci. I would believe so but I will refer to my 
market folks.
    Mr. Niznik. We don't tend to look at it as primary and 
secondary markets. The RINs are all traded sort of evenly. They 
don't have any distinguishing characteristics that would attach 
them to other markets.
    So from a price reporting agency standpoint, they're the 
same market.
    Mr. Carter. Can they have an impact on the price of fuel?
    Mr. Niznik. They do, yes. So, in fact, we report an 
aggregate cost of RINs as it would be affecting any gallons 
sold in the United States. We call it the RVO per gallon cost. 
Currently, that's around 4 cents per gallon of petroleum and 
fuel sold.
    Mr. Carter. Hmm. OK. Yes, sir.
    Mr. Lade. However, if I could speak to that----
    Mr. Carter. Please.
    Mr. Lade. So that is the cost on the gasoline blended into 
fuel. However, almost all fuel in the United States contains 10 
percent ethanol and RIN is actually reducing the cost of that 
ethanol.
    So as RIN prices rise, that tax or the RVO cost on the 
gasoline is nearly exactly offset by the reduction in the costs 
on the ethanol side. And so consumer prices for almost all fuel 
that's consumed in the United States, which is 10 percent 
ethanol, 90 percent gasoline, remains by and large, unaffected.
    Mr. Carter. OK. Good. Well, thank you. I appreciate that.
    Ms. Dunphy, I want to ask you because I represent the 
entire coast of Georgia. So ocean-going vessels are of interest 
to me and you--I know you had a discussion with another member 
about ocean-going vessels and about the renewable fuel that's 
used in those.
    And I just wanted to ask you, can you explain to me why 
it's necessary to retire RINs when it comes to fuel for an 
ocean-going vessel?
    Ms. Dunphy. It's a bit of a mystery to all of us, to be 
honest with you. But transportation fuel is gasoline or diesel. 
It's motor vehicle, locomotive, marine fuel in the U.S.
    If you put it in an ocean-going vessel, that's usually 
going to be a higher sulfur fuel like a bunker fuel, and that 
was not a transportation fuel. So, therefore, even though you 
put in a renewable fuel and it's displacing a high-sulfur 
product, the RINs were to be retired. That was part of the 
regulations.
    Mr. Yacobucci. Which were driven by the statutory 
definitions in the----
    Ms. Dunphy. Right. It's in the law. It's in the law.
    Mr. Carter. Do we need to change the statutory definition?
    Ms. Dunphy. It's in the law.
    Mr. Yacobucci. Basically, you have three categories of fuel 
that qualify. Highway transportation fuel, heating oil, and jet 
fuel are basically the three fuel components or three fuel 
categories that qualify to generate RINs. All other fuel 
categories are exempted by the statute.
    Mr. Carter. Brilliant.
    Mr. Chairman, I yield.
    [Laughter.]
    Mr. Shimkus. Just yield, not surrender, right?
    The chair now recognizes the very committed, patient, and 
long-suffering Mr. Loebsack. If he was on a good subcommittee, 
he could have spoken an hour ago. But he's waiving on, has 
great interest in this. You're recognized for 5 minutes.
    Mr. Loebsack. Well, thank you, Mr. Chair, and thank you for 
letting me waive on, and quite honestly, as a former professor, 
I would have loved the testimony.
    I've been trying to read as much as I can but, 
unfortunately, as a political science professor, not an 
economics professor.
    But I am an alumnus of Iowa State so I am actually going to 
pick on you today. How do you pronounce your last name again?
    Mr. Lade. Lade.
    Mr. Loebsack. Lade. OK. Thank you so much.
    This is an incredibly complex subject. There's no doubt 
about it. As I said, I was a political science professor, not 
an economics professor. So this stuff is not easy for me, I 
have to say.
    But I do want to say at the outset that recent comments by 
EPA Administrator Wheeler the last couple days have been pretty 
disheartening and were not reassuring to those of us from 
biofuels country, if you will. Some of the things that he said 
continue the policy of Administrator Pruitt, whether it has to 
do with waivers or on the E15 issue or whatever the case may 
be.
    I just want to say that for the record at the outset that I 
am not very encouraged by the new administrator when it comes 
to biofuels production. But I think I will talk to Mr. Carter 
later. He had a good point--do we really need all this, in some 
ways.
    Actually, I could be wrong but I think the quickest and 
easiest way to address RIN prices would be if the obligated 
parties simply would blend more biofuels and I think that the 
RIN system was created in the first place because there are 
going to be folks who didn't want to blend biofuels.
    Is that correct, basically? Create a market for RINs? If we 
just simply blended more biofuels we wouldn't have to worry 
about RINs. Is that correct, Professor Lade?
    Mr. Lade. The entire purpose of the market is--or of the 
policy is to get the market to do something that it would not 
do without the policy. And so yes, whenever RIN prices are high 
that signals that the market would not do or would not blend as 
much biofuels as it would without the policy.
    Mr. Loebsack. Right. Thank you.
    Also we could remove current EPA restrictions on the Reid 
vapor pressure. I think we could do that and get more biofuels 
into the system.
    And I did look at your testimony, Professor Lade. I was a 
little bit confused with the final part of it there when you 
talked about what effect E15 might have on all of this. Can you 
sort of elaborate on that a little bit?
    Mr. Lade. Absolutely.
    So it's really difficult to say what an E15 and RVP waiver 
would do to RIN prices because we are not quite sure of what it 
would do to overall biofuel demand.
    If consumers begin to switch over to E15 quite a bit, then 
it would absolutely put downward pressure on RIN prices. 
However, this is a new fuel. Consumers are uncertain about 
whether they can even put it in a lot of their vehicles.
    And so there are a lot of reasons to believe that there 
would maybe be some limited--even with year round offering at 
some fuel stations there would be limited consumer demand on 
that side, which means not that much extra biofuels or ethanol 
is going into the system, which would not resolve this RIN 
price problem.
    Mr. Loebsack. Right.
    Mr. Lade. And so while it's certainly, potentially, over 
the long run and if E15 infrastructure were to roll out and 
consumers, as they learned that this was a viable fuel--that 
it's something that they could put into all of their cars if 
it's priced competitively, that could certainly have that 
intent.
    In the short run, I have my doubts. But, again, this is in 
uncertain territory because this is a new fuel that we really 
don't know much about.
    Mr. Loebsack. Well, I am going to ask you to project on--a 
little bit more with respect to E15 because when you were 
talking about RIN prices and their effects on gas prices, you 
were talking about E10.
    Can you speculate at least some with respect to E15?
    Mr. Lade. Correct. So when RIN prices rise, like I said, 
the higher cost on gasoline is nearly fully offset by the lower 
cost on ethanol as RIN prices are increasing.
    As you increase the percentage of ethanol in that gasoline, 
that lower cost on ethanol actually starts to drive the retail 
prices down. This is exactly how the market-based mechanism is 
going to put more biofuel blending into the system.
    And so you will see, as RIN prices rise, greater and 
greater discounts on E15 relative to E10 and that's exactly how 
you get consumers to move their hand over about 15 inches and 
fill it with E15 instead.
    Mr. Loebsack. Right. Right.
    Mr. Lade. And so RINs are vital to stimulating that demand 
and so that's where it's kind of difficult to predict that. It 
depends how responsive consumers are and how quick they are to 
switch over.
    Mr. Loebsack. Got it.
    And then one last question--as we all know, in response to 
refiner complaints about RINs, EPA has secretly issued 48 small 
refinery waivers, and I know there's some question about this. 
I am glad I came when that was being addressed by Ms. Dunphy.
    And some of the refiners are neither small nor experiencing 
economic hardship. These secret waivers, one can argue about 
what the effects of them but some would argue up at 2 billion 
gallons of demand destruction and cutting the consumption by 
over 2 billion gallons.
    What do you think the impact of all this might have on RIN 
prices then?
    Mr. Lade. I think we've seen the impact that it's decreased 
RIN prices as it necessarily--if these allocations are not 
reallocated it necessarily means that less biofuels are needed 
to meet the requirements from EPA.
    Mr. Loebsack. Well, I want to thank all of you and thank 
you, again, Mr. Chair, for letting me waive on.
    Mr. Shimkus. Well, next time get on a better committee and 
you can question earlier.
    Mr. Loebsack. I will do the best I can. It'll help me for 
November.
    Mr. Shimkus. So we've been asked to do a second round of 
questions. I hope you don't mind that. I think the folks who 
are here, obviously, are interested in addressing that.
    So with your permission, the folks here would go a second 
round. We don't think it'll take that long. So I want to thank 
Mr. Tonko for agreeing to that.
    So I will recognize myself for 5 minutes for a second 
round. I want to make sure we clarify this small refinery 
exemption, because what I am hearing is that they're blending 
already at 10 percent. This exemption comes at the end.
    So my question is--maybe Ms. Dunphy--what's the remedy? Is 
there a remedy for these small refiners? If they've been 
blending most of the year, they get the exemption, what do they 
do? Throw a party? What do they get for that?
    Ms. Dunphy. Well, if they've already retired RINs then 
they'll seek EPA's permission to get those RINs back again, and 
as we've talked about, that does come back into the market.
    It has replenished the RIN bank, OK. So remember, as Mr. 
Yacobucci pointed out, the oil companies can use 20 percent 
prior year RINs to satisfy their current year compliance.
    The RIN bank had declined. It got down to as low as 9 
percent. So that means there's more pressure on current year to 
have the RINs and get them in your hand.
    As the RIN bank has been replenished, because these small 
refinery exemptions have been granted, the number of prior year 
RINs comes back into the market and replenishes the RIN bank 
overall, reducing the concerns that we won't be able to meet 
this year's compliance.
    Mr. Shimkus. All right. Thanks.
    The spike that was talked about--we talked about high 
prices, high volumes. But I think another factor was in the EPA 
there was increased regulation in that year also and increased 
regulation increases higher prices. So there was three 
variables that I just wanted to make sure we put on the table.
    There's proposals floating out there on a RIN cap. What 
would that do to this market? Anyone want to address that?
    Mr. Niznik. It would cause Senator Chuck Grassley to 
explode.
    [Laughter.]
    Mr. Loebsack. And Congressman Loebsack as well.
    [Laughter.]
    Mr. Niznik. But also it would just end the market 
functionality that Professor Lade talked about and it would, 
certainly, impair the ability of RINs to do some of the 
functioning that they've been talking about doing in terms of 
stimulating production and having the marketplace respond to 
the volumetric requirements that the EPA would put out each 
year.
    If it just was kept at 5 percent, it wouldn't matter 
whether EPA asked for more or less.
    Mr. Shimkus. Right. Dr. Lade.
    Mr. Lade. So I would----
    Mr. Shimkus. Quickly.
    Mr. Lade. Quickly, I would push back a little bit on that. 
It depends critically what the RIN price cap is because that 
then determines how much of a discount you can give to biofuels 
and how much of an incentive you can give to biofuel 
consumption.
    So if a RIN price cap is 10 cents, then absolutely no one's 
going to use E85 or E15 most likely, given market prices.
    Mr. Shimkus. Right.
    Mr. Lade. However, if a RIN price cap is set 60 cents to a 
dollar, all else being held equal in this regulation, that 
could serve a very stabilizing role because what we've seen is 
that EPA has responded to high RIN prices by adjusting mandates 
and that's led to a lot of this volatility.
    If, instead, EPA said no, we will cap RIN prices at this 
level and you can come to us to buy paper credits after RINs on 
the private market have reached above this level, they no 
longer need to use that option to adjust RIN prices through 
mandates, which has led to a lot of volatility. So----
    Mr. Shimkus. Thank you. Let me go, because I've got 2 
minutes or a minute and a half. I've got three questions.
    Mr. Yacobucci, you talk about engines and that's a part of 
your world. What is the most efficient engine as far as octane? 
Do you know?
    Mr. Yacobucci. So, there's a lot of discussion about this 
right now. To get to your question, if one were to increase the 
compression of engines, you could squeeze out more efficiency 
from that engine.
    Mr. Shimkus. What would be Iran?
    Mr. Yacobucci. There's a lot of discussion for that but, 
certainly, a higher octane number fuel would allow for greater 
efficiency if you tuned the engine to do so. If you just put 
higher octane fuel in----
    Mr. Shimkus. Right. No. No. We are talking about--part of 
our debate--and Mr. Flores with me--as you get your best engine 
engineers, you get your best petrochemical engineers, and you 
create the most efficient engine for a next-generation vehicle, 
because I think that's kind of what we are----
    Mr. Yacobucci. But there's a trade-off between the energy 
content. For example, ethanol has a lower energy content. So 
even if you're burning it more efficiently you may be getting 
fewer miles per gallon versus the cost to the engine.
    Mr. Shimkus. I am not--you're the smart guy--but that's not 
what we were being told with the engineers and the engineering 
of a high-compression high-octane engine.
    I wanted to address, in my 7 seconds remaining--there is 
also a proposal out there that talks about a D8 RIN, which 
would be above the blend wall.
    Anyone hear that and what's your thoughts on that? Mr. 
Niznik.
    Mr. Niznik. Yes, I investigated that for a company that 
asked me to research the concept, and it would change the 
current shape of the RFS but it would overcome one of the 
internal hurdles of the RFS--blocking expanded ethanol usage.
    So right now, I confused the group before talking about how 
the RIN from ethanol right now is essentially capped at the 
price of the next category up RIN because of the 
replaceability.
    If you took it out from underneath that umbrella and that 
cap and gave it its own category the RINs price mechanism has 
proven very efficient in other categories, forcing those fuels 
into the marketplace.
    So if you wanted to provide an opportunity specifically for 
one type of fuel and you made a new RIN category just for that 
type of fuel and put a mandate on it, I am convinced that, 
based on market history, you could get the amount blended you 
wished.
    Mr. Shimkus. And my time is way expired. I appreciate my 
colleagues. The chair recognizes the gentleman from Texas, Mr. 
Flores, for 5 minutes.
    Mr. Flores. I am assuming the ranking member doesn't----
    Mr. Shimkus. I am sorry.
    Mr. Tonko. Dr. Lade, yes.
    Dr. Lade, in your written testimony you state that 
volatility isn't always caused by speculators and that 
volatility in a market can attract speculators, presumably, 
because all the fluctuations present opportunities for profit.
    You also indicate that EPA's management of the program 
including delays in setting RVOs are sources of volatility in 
the RIN market.
    Is that accurate? Is that----
    Mr. Lade. Correct.
    Mr. Tonko. OK. What about the changing headlines following 
the efforts of the White House, several senators, and some RFS 
stakeholder discussions about reforming the RFS?
    Would those headlines have any effect on RIN prices?
    Mr. Lade. Likely, if they believe that that could lead to 
credible changes in the mandates coming out of EPA. And so what 
really the market is trying to do is figure out how much extra 
biofuel they need to push in, particularly beyond the E10 blend 
wall because that's where all the real costs come into this.
    It's much more expensive to push ethanol and biodiesel and 
be on this E10 blend wall and that's where the market is trying 
to guess is how much they need extra beyond that. So to the 
extent that some news organization reports that the mandate may 
be increasing or decreasing that would certainly have that 
impact as you're trying to guess what's going to come out.
    Mr. Tonko. OK. Thank you.
    In your testimony, you discuss several studies that looked 
at the potential effect of RIN prices on bulk wholesale and 
retail prices for fuel.
    Refiners claim they cannot pass high RIN prices on to their 
consumers. But these studies suggest that they can.
    Mr. Lade. Correct.
    Mr. Tonko. The discussions in your written testimony seems 
to conclude they often can but it isn't a certainty. Would you 
please explain the potential reasons why a refiner might not be 
able to pass on high RIN costs?
    Mr. Lade. So the studies that speak to this look 
particularly at bulk wholesale fuel prices. So those that are 
on large traded commodities markets and a lot of those serve as 
benchmark prices throughout the entire wholesale system.
    However, there could certainly be differences in, say, at 
blending stations and wholesalers when you're blending in 
Illinois, Iowa, New York, et cetera.
    And so there are certainly studies beginning to look at RIN 
pass through to those to see if the same thing that you see on 
these larger tradeable market are really translating down to 
the markets that refiners may be selling into and so far it's 
still inconclusive on that.
    However, so far, the academic literature has continue to 
find these prices being reflected in wholesale prices.
    Mr. Tonko. OK. Thank you.
    With that, I yield back. Thank you, Mr. Chair.
    Mr. Shimkus. The gentleman yields back his time. The chair 
now recognizes the gentleman from Texas, Mr. Flores, 5 minutes.
    Mr. Flores. Thank you, Mr. Chairman. Thank you for the 
second round of questions.
    One of the other takeaways that I didn't mention in my 
first round of questions was that I think each of you agree 
that ethanol has a place to play in the fuel markets of the 
future, primarily because of the octane and some of the 
environmental characteristics that it has, and that's the 
reason that Mr. Shimkus, Mr. Welch, and I are working on 
legislation that doesn't adversely impact the ethanol markets.
    One of the things that I've heard from different 
constituent groups is that there are some disruptions in the 
biodiesel market because of the way the D4 ran as embedded in 
the nesting structure.
    This is somewhat subjective on your part but I would like 
to know what feedback you all have in terms of the market 
impact on D6 prices if we were to de-nest D4s and have D4s 
trade totally--be useable only for the biodiesel market.
    If you feel comfortable commenting on that I would like to 
know what your thoughts are.
    Mr. Niznik. I am an old biodieseler myself so I can----
    Mr. Flores. I am glad you're from Texas, too.
    [Laughter.]
    Mr. Niznik. Thank you, sir. So the D4 RIN really isn't a 
victim to any other RIN. It's the 500-pound gorilla RIN right 
now.
    Mr. Flores. Right. Right.
    Mr. Niznik. So its behavior right now is unfettered and the 
historical record shows that it does a really great job. In 
fact, if there's one RIN that's working in the RFS, it's the D4 
RIN.
    Mr. Flores. Right.
    Mr. Niznik. So when it goes up just a little bit, the 
market signals blend more and producers produce more and it 
works great.
    But when you have the nested structure, if you have a 
particular interest in other fuels working and they're 
underneath there, then no, it's not as good.
    So I would suspect that if you designed a system of 
separate unnested RINs that----
    Mr. Flores. Just D4, though.
    Mr. Niznik. Yes.
    Mr. Flores. I am just talking about D4.
    Mr. Niznik. You're just talking about D4s. I don't think it 
would change at all for the D4s. I think they would continue.
    Under the current circumstances, they move very freely with 
the exception of worrying about the recurring dollar a gallon 
biodiesel tax credit, which is outside of the RFS system but, 
again, a policy thing.
    Mr. Flores. How would the D6 RIN change if we de-nested the 
D4?
    Mr. Niznik. Well, then perhaps it could rise to the 
occasion that it needs to incentivize infrastructure, usage in 
fuels.
    We don't really know how high a D6 RIN needs to be to, for 
instance, inspire more E15 use or even E85 use because under 
the time of the program it's always been butting heads against 
the D4 price, right. So we've never seen a free shot at it.
    I've done research, for instance, on E85 usage, which has a 
lot of ethanol in it. But every time I did it, again, I 
couldn't say hey, what would happen to this. I didn't have any 
market data on where the customers needed to be incentivized.
    Mr. Flores. Mr. Lavinsky, do you have any thoughts on this 
issue?
    Mr. Lavinsky. Not that has----
    Mr. Flores. OK.
    Mr. Lavinsky. He's covered it well.
    Mr. Yacobucci. I would just add that, and Mr. Niznik can 
correct me if I am wrong, but that the biodiesel RIN drives--
because it's the majority of the advanced biofuel RINs, the D5 
RINs, that it drives that market.
    If you took it outside of the advanced biofuel pool then 
there would certainly be some effects there because that is the 
primary supply for the advanced biofuel as well.
    So it depends on whether you mean de-nesting it from the 
overall mandate, the D6 mandate, or whether you mean taking it 
out of the advanced biofuel pool.
    Mr. Flores. OK. That's a good point. OK. That's something 
we as policymakers need to keep in mind.
    Ms. Dunphy, any thoughts on that?
    Ms. Dunphy. Well, today, because of the nesting, when 
there's a shortage of D6 RINs versus the mandate, that his 
fulfilled with higher--other types of advanced biofuel RINs.
    So if you look at it from that perspective, that total 
renewable fuel category is dominated by corn ethanol.
    Mr. Flores. Yes.
    Ms. Dunphy. But if there's not enough D6 RINs to fulfill it 
then that category gets filled with advanced biofuel RINs, 
which are greater greenhouse gas-reducing fuels----
    Mr. Flores. Yes.
    Ms. Dunphy [continuing]. Which is kind of the overall 
objective of the law is to have greater greenhouse gas-reducing 
fuels.
    So you would lose that added volume that the biodiesel--the 
D4 RINs fulfil in that D6 space. So there's some demand loss 
there if they don't have that space to grow into.
    Mr. Flores. Dr. Lade.
    Mr. Lade. Yes. I would just like to reiterate that was my 
main point was that you would have demand loss on the biodiesel 
side because you wouldn't be producing more of it to compensate 
for the lack of D6 RINs.
    So that you're over meeting these mandates for the D4 in 
order to fill in what you can't push through with E85 or E15 
right now. Taking that out would remove that option and make 
the market meet--pass the blend law with E85 or E15 instead.
    Mr. Flores. And, again, hypothetically, what would happen 
to diesel prices if you de-nested the D4 and set it aside by 
itself?
    Mr. Niznik. The RFS is borne--the price of the RFS 
compliance of RINs is borne equally in the marketplace by 
either gasoline or diesel.
    Even if they do, for instance, pay more to blend one 
particular biofuel and one type of petroleum versus another--
let's say ethanol biodiesel--they tend to, on the petroleum 
cost side, aggregate all the costs and pass it through evenly. 
That's what the historic price data shows.
    Mr. Flores. OK. Thank you. My time is expired.
    I yield back.
    Mr. Shimkus. The gentleman yields back his time.
    The chair thanks the gentleman. Before we conclude, my 
wife's family farm is in South Dakota.
    So I was up there for 4th of July--a family reunion--and 
then took a drive to North Dakota and then back through South 
Dakota and probably one of the weirdest guys that would take a 
picture of every retail location that I filled up with gas.
    And what's instructive there is that they have--yes, I 
know, it's sad----
    [Laughter.]
    And I have them. I can show them to you. They're right on 
here. But, and we always got to remember retailers, too. This 
is the whole debate and there are pumps in the Dakotas that 
have E0 because of motorcycle riders and boaters and stuff.
    But the delta price difference for the same level is, like, 
30 cents cheaper because of the ethanol--the depression of 
prices because it's a cheaper mix.
    But there's just so many things that we got to think about. 
I will show you those pictures, if anybody wants to see them.
    Mr. Niznik. I do the same thing. I have the same hobby.
    Mr. Shimkus. You are sick.
    Ms. Dunphy. And I did the same thing last weekend on the 
way to San Antonio and took a picture of the Buc-ee's pumps.
    Mr. Shimkus. There you go. Thank you.
    [Laughter.]
    Seeing there are no further members wishing to ask 
questions or make stupid statements for the panel, I would like 
to thank all of our witnesses again for being here today.
    Before we conclude, I would like to remind members 
interested in the RIN fraud issue that I would point you to 
letter two, the Subcommittee on Oversight Investigations 
hearing transcript on RIN fraud. 2012? Thank you.
    And I also would like to ask for unanimous consent to 
submit the following documents for the record: the letter from 
Renewable Fuels Association and then the Subcommittee on 
Oversight and Investigation hearings on the transcript on RIN 
fraud \*\.
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    \*\ The information has been retained in committee files and can be 
found at: https://docs.house.gov/meetings/IF/IF18/20180725/108610/HHRG-
115-IF18-20180725-SD099.pdf.
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    [The information appears at the conclusion of the hearing.]
    Mr. Shimkus. And pursuant to committee rules, I remind 
members that they have 10 business days to submit additional 
questions for the record. I ask that witnesses submit their 
responses within 10 business days upon receipt of the 
questions.
    Without objection, this subcommittee is adjourned.
    Thank you very much.
    [Whereupon, at 11:13 a.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
    
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