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EPA Finalizes Renewable Identification Number Quality Assurance Program




by:
Jane K. Murphy
Charles T. Wehland
Jones Day - Chicago Office

 
August 21, 2014

Previously published on August 2014

In an effort to prevent fraud that threatens to undermine the Renewable Fuel Standard ("RFS") program, and to restore faith in the trading system established to facilitate RFS compliance, the United States Environmental Protection Agency ("EPA") published final regulations for a renewable identification number ("RIN") quality assurance program on July 18. This codifies a voluntary program to ensure that RINs are valid and clarifies responsibility for replacing RINs if they are later determined invalid.

RINs are used to track RFS compliance. Pursuant to this program, a designated percentage of gasoline and diesel fuel produced or imported into the United States must be renewable fuel, cellulosic biofuel, biomass-based diesel, or advanced biofuel (collectively, "Renewable Fuel"). A RIN is assigned to each batch of Renewable Fuel. Regulated parties can demonstrate they have met the RFS requirement for each reporting period by either acquiring the Renewable Fuel itself with the attached RIN, or by acquiring RINs alone.

EPA issued the rule in response to several high-profile enforcement cases that invalidated more than 140 million RINs for biomass-based diesel. These cases resulted in criminal charges against individuals and companies that generated fraudulent RINs, and civil enforcement against the refiners and marketers who unwittingly bought the fraudulent RINs and used them to demonstrate compliance. The enforcement actions also spawned a variety of civil lawsuits among participants in the RIN trading market, with plaintiffs seeking compensation from traders and other parties who sold RINs that turned out to be invalid. The rule also addresses what EPA perceived as inequities in the RIN market for small Renewable Fuel producers.

Last year, EPA proposed a quality assurance program for RINs that included standards for ensuring that RINs were valid and for clarifying who is responsible for replacing RINs subsequently found to be invalid. After reviewing comments, EPA finalized a voluntary RIN quality assurance program that provides the RIN user with an affirmative defense to an EPA civil enforcement action citing the transfer or use of fraudulently generated RINs. To obtain the affirmative defense, the party transferring or using the fraudulent RINs will need to establish:

  • The RINs were verified by an independent third-party auditor in accordance with an EPA-approved quality assurance program;
  • The RIN owner did not know or have reason to know that the RINs were invalidly generated prior to being verified by the independent third-party auditor;
  • The auditor or RIN owner informed EPA within five business days of discovering that the RINs in question were invalidly generated;
  • The RIN owner did not cause the invalidity;
  • The RIN owner did not have a financial interest in the company that generated the invalid RIN; and
  • The RIN owner replaced the invalidated RINs with valid RINs.

Putting responsibility for replacing the invalidated RIN on the owner who used it to demonstrate compliance is a significant difference from the more robust auditing option discussed by EPA in the proposed rule. The proposed option would have placed responsibility for replacing the invalidated RIN on the third-party auditor. EPA ultimately decided to abandon this option in the final rule because it wanted to offer an incentive for the RIN owner to provide "significant robust oversight" of the auditors and because of the perceived difficulty that the third-party auditors may have in obtaining sufficient financial assurance to replace invalidated RINs. RINs audited pursuant to the more robust program in the proposed rule between February 21, 2013, and December 31, 2014, however, will remain as validly audited RINs that need to be replaced by the auditor if they are later invalidated.

In order to be approved by EPA, quality assurance plans must include procedures to verify that:

  • Feedstocks used in the production process meet the definition of renewable biomass;
  • The production process is consistent with that in the EPA Moderated Transaction System for the purchase, sale, and transfer of RINs;
  • The renewable fuel produced has been designated for qualifying uses;
  • RINs are separated from the actual renewable fuel; and
  • The renewable fuel has been sampled, as appropriate, to confirm any of the requirements identified above.

An entity must register with EPA prior to conducting any RIN audits in order to qualify as an independent third-party auditor. The registration materials must include documentation that the audit team includes both a professional engineer and a certified public accountant along with professional liability insurance (although the final rule, unlike the proposed rule, does not specify the required level of coverage). Although EPA does not envision that every member of the audit team with be either a professional engineer or a certified public accountant, the engineer and accountant will both need to certify audit reports.

To demonstrate that they are an independent third party, audit teams cannot be owned or operated by any renewable fuel producer (including any employee, subsidiary, or obligated entity). In addition, the auditor must not own, buy, sell, or trade RINs, or have any interest or appearance of interest in any renewable fuel-producing business. If any invalid RINs are discovered during an audit, the auditor must notify both EPA and the generator of the RIN within one day.

The auditors must conduct an on-site visit at the renewable fuel facility at least two times per calendar year (and no less often than once every 200 days) to verify the RINs from that facility. The on-site visit must be overseen by a professional engineer and must include an inspection or evaluation of all physical attributes of the facility necessary to verify compliance with the quality assurance plan elements.

The new rule is effective on September 16. As noted above, the final rule allows for the continued use of RINs that were verified pursuant to either the more robust ("Option A") or less stringent ("Option B") procedures identified in the proposed rule as long as those RINs were verified between February 21, 2013 and December 31, 2014. A key difference between RINs verified pursuant to Option A and to Option B is that the auditor is obligated to replace any subsequently invalidated RINs pursuant to Option A, while the party using the RINs is obligated to replace any subsequently invalidated RINs pursuant to Option B. The validation program ultimately finalized by EPA is relatively similar to Option B.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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Jane K. Murphy
Charles T. Wehland
 
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