1 August 2 8 , 2013

The Honorable Gina McCarthy Administrator U.S. Environmental Protection Agency 1200 Pennsylvania Avenue, NW Washington, D.C. 20460

Re : Request Dismissal of API/AFPM Renewable Fuel Standard (RFS) Waiver Petition

Dear Administrator McCarthy,
The Renewable Fuels Association (RFA) strongly urges you to reject the petition for a partial waiver of the 2014 Renewable Fuel Standard (RFS) submitted August 13, 2013, by the American Petroleum Institute (API) and American Fuel & Petrochemical Manufacturers (AFPM). As this letter demonstrates, the petition from API and AFPM does not satisfy the requirements of Section 211(o)(7)(A) of the Clean Air Act, which clearly describes the conditions under which the U.S. Environmental Protection Agency ( E PA ) may grant a waiver of the RFS requirements.
In essence, API and AFPM suggest the emergence of the so

- called 10% ethanol “blend wall” prevents them from fulfilling their obligations under the RFS in 2014 and beyond. The petitioners allege that current i nfrastructure cannot deliver, and the current automotive fleet cannot consume, the volume of renewable fuels necessary to meet the RFS going forward. As a result, the petitioners claim that stocks of Renewable Identification Numbers (RINs) will be exhauste d, as obligated parties turn in excess RINs rather than blending physical gallons of renewable fuel to meet RFS requirements above the “blend wall

. ” Upon liquidating RIN stocks, API and AFPM claim that the refining sector will, in a coordinated
manner, con strain supplies of gasoline and diesel fuel, resulting in higher pump prices and “economic harm” for U.S. consumers.
Even if it were plausible, the doomsday scenario outlined by API and AFPM is completely avoidable. Legal, safe, and affordable options exis t for increased ethanol blending, which would, in turn, expand the supply of RINs necessary for RFS compliance in 2014 and well beyond . The petition also ignores the program’s extraordinary administrative flexibility, which allows EPA to adjust volumetric RFS requirements on an annu al basis. I ndeed, EPA has already signaled that it intends to exercise this flexibility in setting the 2014 standards.
In short, the petition from API and AFPM should be seen for what it truly is

— a desperate attempt to protect ma rket share and block increased volumes of cleaner and more sustainable renewable fuels from entering the marketplace. For the reasons discussed below, EPA should act swiftly to reject the petition from API and AFPM.2

1. API and AFPM are not “subject to the req uirements” of the RFS pursuant to Section 211(o)(7)(A) and are therefore not entitled to petition for a waiver
Out of the gate, API and AFPM have a significant problem: they have no statutory right to petition for a waiver of the renewable fuel volume requirement. Under Section 211(o)(7)(A) of the CAA, a valid waiver request may only be brought “by one or more St ates, by any person subject to the requirements of this subsection, or by the Administrator on his own motion.” 1 Not a State or the Administrator, API and AFPM must try to satisfy the last possible criteria

— a “person subject to the requirements of this subsection,” 2

— but they cannot plausibly satisfy this standard.
As trade associations, API and AFPM are not directly responsible for fuel production or import and, as such, are not subject to the RFS’s regulations. Indeed, EPA has specifically explained th at the RFS requirements apply only to a domestic “refiner that produces gasoline or diesel fuel . . . or any importer that imports gasoline or diesel fuel” into the United States. 3 API and AFPM do not meet either of these requirements. As a result, neithe r organization is entitled to apply for a waiver under the CAA. 4
For their part, API and AFPM pay only lip service to Congress’s clear command

— that only States or directly regulated persons may petition EPA for a waiver. They assert that they “represent numerous refiners and importers of transportation fuel and, in that capacity, are ‘person[s] subject to the requirements’ of section 211(o)(2) and entitled to petition for a waiver.” 5 But this claim rests on notions of associational standing that Congress plainly did not incorporate here. Instead, Congress provided that only persons directly regulated by the RFS may petition the EPA for a waiver. Moreover, such a limitation makes eminent sense. This is not a general petition for a rulemaking; this is a specific request for a waiver from a regulatory requirement . If Congress wished to allow entities with only an associational interest to request a “waiver,” one would have expected it to do so in clear terms.
At bottom, despite API and AFPM’s blanket ass ertion, not a single member of these associations has signed on to their letter as a “person subject to the requirements of this subsection.” As a result, they have no statutory right to request a waiver, and EPA should reject their petition on this groun d alone.

2. The petition obscures the fundamental purpose and intent of the RFS.
Beyond the procedural infirmity, API a nd AFPM’s request fails fundamentally on the merits as well. The central purpose of the Energy Independence and Security Act (EISA) of 2007 was to expand the RFS and drive the usage of ethanol and other renewable fuels far beyond their historical role as low

- level fuel additive s (e.g., 10% ethanol blends , or “ E10 ” ). T he need to move beyond E10 in 2014 for the purposes of RFS compliance should hardly come as a surprise to obligated parties. When Congress expanded the RFS to 36 billion gallons as part of EISA , it was abundantly clear to regulated industries that such large volume s of renewable fuel could not be absorbed by the future gasoline market without incremental

1 CAA § 211(o)(7)(A) (codified at 42 U.S.C. § 7545(o)(7)(A)). 2 id. 3 40 C.F.R. § 1406. 4 See CAA § 211(o)(7)(A) (codified at 42 U.S.C. § 7545(o)(7)(A)). 5 API/AFPM Letter at 1.3

changes to the vehicle fleet and fuel distribution infrastructure. Whether it was foreseeable that gasoline demand would drop after passage of EISA in 2 007 is irrelevant; there was absolutely an expectation that the RFS would soon push ethanol consumption well beyond the E10 level

. The renewable fuels industry responded to the passage of EISA by dramatically increasing production capacity and investing in new feedstock and biofuel technologies. The agriculture sector responded by increasing feedstock output and investing in technologies to sustainably increase productivity. The U.S. auto motive industry responded by substantially increasing its production o f flexible

- fuel vehicles (FFVs) capable of operating on fuel blends containing up to 85% ethanol (E85) . Meanwhile, the petroleum industry steadfastly refused to undertake the infrastructure preparations necessary to accommodate the incrementally larger vol umes of renewable fuels required under the RFS.
Moreover, the oil industry could easily rectify what it perceives to be infrastructure deficiencies that purportedly stand in the way of satisfying the RFS. By allowing retailers to install dispensers capable of distributing ethanol blends above E10 , and by allowing storage of approved blends above E10 in existing underground tanks currently mandated by the refiners to store “premium” gasoline , obligated parties could very easily achieve Congress’ laudable goa ls of expanding renewable fuels consumption. Instead, as explained more fully below, there is evidence that the petroleum industry has actively subverted efforts to introduce larger volumes of renewable fuel to the American public.
API and AFPM maintain that the emergence of the so

- called E10 “blend wall” in 2013 essentially caught obligated parties by surprise

. To the contrary, it was quite obvious by early 2009 that the arrival of the

“ blend wall ” would likely occur much sooner tha n was initially expected in 2007 when EISA was signed into law . In fact, in the May 2009 analysis that accompanied EPA’s proposed rule for the RFS2, the Agency wrote, “...under the proposed RFS2 program, we are projec ted to hit the E10 ‘blend wall’

... by 2013.” 6 EPA’s final rule for the RFS2 , published in February 2010, underscored this point again, stating, “...the nation is expected to hit the blend wall in 2013 under our high

- ethanol control case [and] in 2014 under our primary mid

- ethanol control case.... Regard less, to meet today’s RFS2 requirements using increased volumes of ethanol we are going to need to see growth in FFV and E85 infrastructure and increases in FFV E85 refueling rates.” 7
Unfortunately, many obligated parties chose to blatantly ignore the str ong signals compelling them to begin preparations for higher volumes of renewable fuels and to increase investments in storage and distribution infrastructure. Now, the members of API and AFPM seek relief from their renewable fuel blending obligations, arg uing that their failure to prepare for 2014 RFS requirements somehow merits reprieve. EPA should not reward such blatant disregard for resoundingly clear policy si gnals

— and certainly not at a time when the petroleum industry is enjoying record profits.

3. Th e emergence of the so - called “blend wall” is not an acceptable justification for waiving the 2014 RFS volumetric requirements.

6 EPA. May 2009. “ Draft Regulatory Impact Analysis: Changes to Renewable Fuel Standard Program.” E PA

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- 001. 7 EPA. February 2010. “Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis.” EPA

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The petition from API and AFPM requests that EPA partially waive the 2014 RFS requirements based on the arrival of the “blend wall” and the aversion of their member co mpanies to blending ethanol beyond the 10% level

. However, t he occurrence of the “blend w all,” and the related unwillingness of obligated parties to manufacture gasoline blends above E10, does not satisfy the statutory criteria for granting a waiver.
Section 211(o)(7)(A) of the Clean Air Act clearly specifies the circumstances under which EPA may consider waiving annual renewable fuel blending requirements

. In order to grant a waiver, EPA must determine that “...implementation of the requirement would severely harm the economy or environment of a State, a region, or the United States , ” or determi ne that “...there is an inadequate domestic supply” of renewable fuel to meet required blending levels. 8

The purported lack of infrastructure to distribute larger volumes of ethanol above and beyond the “blend wall” is not, in and of itself, a c ircumstance t hat EPA may take into consideration when evaluating whether a waiver is justified. Indeed, the escalating volume requirements of the RFS are meant to drive investment in the installation of new infrastructure that will enable larger quantities of renewable fuels to be distributed to consumers . If EPA were to waive the RFS requirements based on the notion that the necessary infrastructure to distribute larger volumes of renewable fuel “doesn’t exist,” the Agency would eliminate the incentive created by the p olicy to expand renewable fuels distribution capabilities. In this way, the API/AFPM argument that RFS requirements beyond the “blend wall” are unachievable would become a self

- fulfilling prophecy. Clearly, waiving the RFS based on the failure of obligated parties to prepare for the “blend wall” would undermine th e very intent and spirit of EISA . As noted above, obligated parties have had at least four years to prepare for the arrival of the “blend wall ” and to invest in infrastructure to facilitate distribution of ethanol blends above E10. Their failure to do so does not justify a waiver according to the statutory criteria.

4. API and AFPM misconstrue the statutory meaning of “inadequate domestic supply.”
The relief sought by API and AFPM hinges on thei r improper reading of the RFS waiver provisions in section 211 (o)(7)(A) of the Clean Air Act. The statute allows EPA to waive the RFS if it determines that “...there is an inadequate domestic supply.” C learly , the terms “inadequate domestic supply” refer to a shortfall in the amount of renewable fuel that would be needed to meet RFS volumetric requirements. 9 However, A PI and AFPM inappropriately attempt to apply the terms “inadequate domestic supply” to

8 42 U.S.C. 7545(o)(7)(A). 9 See EPA. February 2010. “ Summary and Analysis of Comments.” E PA

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- 003. Pg. 8

- 19 (“... inadequate domestic supply to fulfill the mandates (emphasis added)... ” ; 75 Fed. Reg. 14,698 (“ We also note that it is ultimately the availability of qualifying renewable fuel , as determined in part by the number of RINs in the marketplace, that will determine the extent to which EPA should issue a waiver of RFS requirements on the basis of inadequate domestic supply (emphasis added).” ; EPA. April 2007. “Summary and Analysis of Comments.” EPA 4 20

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- 006. (“ The Energy Policy Act provides that on petition by one or more States, EPA, in consultation with the Departments of Agriculture and Energy, may waive the required aggregate renewable fuels volume obligation in whole or in part upon a suffici ent showing of economic or environmental harm, or inadequate supply. As a result, we believe that a renewable fuel supply problem that affects all (or a large number of) parties can be addressed using this statutory provision (emphasis added). ”5

volumes of gasoline and diesel fuel, which they suggest will be purposely reduced by refiners as a result of the 2014 RFS requirements and “blend wall.” Yet, i n the petition’s discussion of potential supplies of advanced biofuels in 2014, API and AFPM themselves admit that the terms “ domestic supply” are meant to apply to renewable fuels. 10 As discussed elsewhere in this letter, there is no evidence to support the notion that gasoline and diesel fuel supplies will be reduced because of the RFS in 2014; but even if it could be proven that oil companies were shorting the market because of the RFS, a purposeful “inadequate domestic supply” of gasoline and diesel fuel is not a circumstance that meets the statutory criteria for a waiver.

5. EPA’s recent announcement that it intends to administratively adjust 2014 RF S volumetric requirements renders the API/AFPM petition, and the attached studies, moot and irrelevant.
On August 15, 2013 ( two days after API and AFPM submitt ed their petition for a waiver), EPA published its final rule for 2013 renewable volume obligatio ns. In the pre

- amble to the rule, EPA addressed concerns raised by obligated parties about impending 2014 RFS requirements, stating, “EPA anticipates that in the 2014 proposed rule, we will propose adjustments to the 2014 volume requirements, including to both the advanced biofuel and total renewable fuel categories.” 11 The announcement by EPA underscores that the Agency has ample flexibility to modify annual RFS requirements based on the likely availability of qualifying renewable fuels.
EPA’s intent to adj ust the 2014 volumetric requirements renders the API/AFPM petition moot because the market effects and economic “harms” alleged by the petitioners are all based on the faulty assumption that EPA would finalize 20 14 RFS volumes at the EISA levels. In additi on , the conclusions of the NERA study , which serve as the basis for the “harms” asserted by API and AFPM, are further nullified by EPA’s announcement that it plans to adjust the 2014 requirements. Among many other questionable assumptions, the NERA study a ssumes EPA will not exercise its discretion to modify the annual RFS requirements in either 2014 or 2015. Instead, NERA assumes EPA will strictly enforce the statutory RFS volumes from EISA. Among other basic flaws, the NERA study also uses estimates for b anked RINs that are far below data provided by EPA based on actual RIN transactions through the EPA Moderated Transaction System (EMTS). 12
Because the economic studies that support the petition are based on the faulty premise that EPA will not use its autho rity to adjust 2014 or 2015 RFS requirements, the studies’ conclusions should be

r ejected and the “harms” asserted by the petitioners cannot be considered relevant.

6. The basic premise of the waiver petition (i.e., that there are no viable options for obliga ted parties to meet 2014 RFS blending requirements in excess of the “blend wall”) is fundamentally flawed and contradicts recent trends in the marketplace

.

10 API/AFPM Letter at 34 ( “Drawing from the clear language of the section 211(o) waiver provision , only ‘domestic supply’ should be considered when setting the advanced biofuel and total renewable volumes .” ) 11 78 Fed. Reg. 49,823. 12 EMTS data indicate that 2.47 billio n RINs generated in 2012 were available to carry over to 2013. This compares to an assumption by NERA that just 1.85 billion carry

- over RINs for the study’s primary scenario

.6

API and AFPM argue that the E10 “blend wall” is an impenetrable barrier that prevents oblig ated parties from satisfying 2014 RFS requirements with physical gallons of renewable fuel. They suggest surplus RIN credits will be used in lieu of physical gallons to meet RFS obligations above the “blend wall.” API and AFPM portend that once RIN banks a re exhausted, there will be “

... a s hortage of RINs for compliance,” which they suggest “ will in turn limit supplies of gasoline and diesel for U.S. consumption

. ” This tenuous string of arguments deliberately ignores the viability of E15 and E85, which are le gal, safe, economical, and readily available fuel blends. Increasing the use of E15 and E85 would allow obligated parties to easily surmount the E10 “blend wall” and comply with RFS requirements in 2014 and beyond. The petition from API and AFPM intentiona lly obfuscates the facts surrounding the viability of E15 and E85 as options for compliance with the R FS in 2014 and subsequent years.

a. The petition’s disc ussion of E15 is inaccurate, misleading , and omits important information

. As described below, API and AFPM distort the facts surrounding E15 as a viable pathway to RFS compliance in 2014. In addition to disregarding the market place ’s real

- world experience with E15, t he petitioners misrepresent a number of technical aspects related to commercial introd uction of the fuel blend.

i. API and AFPM ignore the marketplace’s real

- world experience with E15 over

the past 13 months.
On July 11 , 2012, the first gallons of E15 were sold at a retail gas station in Lawrence, Kansas. 13 More than 13 months later, an estimat ed 2 million gallons of E15 have been sold to thousands of vehicles built in 2001 or later at approximately 30 retail stations in six states. It is estimated by RFA that roughly 40 million miles have been driven on E15 over the past 13 months. While the vo lume of E15 sold to date is relatively small, it has demonstrated quite clearly that the fuel is safe , effective and economical

. Further, users of E15 over the past 13 months have not experienced the deleterious engine effects suggested by API and AFPM. In fact, there has not been a single reported and confirmed case of engine damage or inferior performance due to E15. Similarly, there have been no reported and confirmed cases of E15 misfueling in non

- approved equipment. And c ontrary to the rhetorical warni ngs from API and AFPM, there have been no liability issues whatsoever associated with the sales and use of E15 over the past 13 months. API and AFPM conveniently omit any discussion of the real

- world experience with E15 to date because it does not suit the ir purposes. Instead, their petition falls back on hypothetical and speculative statements about what “ could happen” to engines and infrastructure if E15 is used. These speculative statements should be dismissed, as real

- world experience with E15 has alrea dy proven them incorrect.

ii. API and AFPM mischaracterize automaker approval and warranty coverage for E15.

13 See http://www.ethanolrfa.org/news/entry/first

- station

- in

- the

- nation

- offers

- e15

- in

- kansas/7

The use of E15 is explicitly approved by the manufactures of approximately 40% of model year ( MY ) 2013 and 30% of MY2012 light

- duty vehicles sold in the United States

. 14 This percentage w ill grow to at least 45% for MY 2014 vehicles, as FFV volumes increase and additional automakers have committed to explicitly warranting next year’s models for the use of E15. 15 The petitioners are correct that E15 is not explicitly addressed in warranty statements and owners’ manuals fo r automobiles built before 2011, but that’s because E15 did not exist as a legal fuel in the marketplace at the time those vehicles were built and the ir warranty statements were printed . Wh y would automaker s warranty their vehicles for a fuel that was not legally approved and not commercially available in the marketplace at the time? Further, as a matter of policy, automakers do not modify or change vehicle warranties retroactively based on changes in the marketplace. Thus, it is simply incorrect to argue that concern about the effect of E15 on engines is the primary reason that automakers have not retroactively warrantied pre

- 2011 vehicles for E15. Rather, the reason automakers have not retr oactively warrantied pre

- 2011 vehicles for E15 is that they don’t retroactively modify warranties for any reason

.

iii. The C oordinating R esearch C ouncil (CRC) study that serves as the petition’s basis for dismissing E15 is profoundly flawed . The CRC r esults ha ve been challenged by scientists fr om the Department of Energy and other entities

. In arguing that E15 “will damage engines and other systems in millions of vehicles,” API and AFPM rely exclusively on the results of a study they co

- funded through the Coordinating Research Council (CRC). The petitioners point out that two of the eight vehicles examined in the CRC study failed engine durability tests on E15 and E20. What they fail to point out is that one of the eight vehicles failed the engine dura bility test when operating on E0 (gasoline with no ethanol).
Upon reviewing the CRC study’s results, the Department of Energy (DOE) stated, “We believe the study i s significantly flawed...” and, “[w] e believe the choice of test engines, test cycle, limited fuel selection, and failure criteria of the CRC program resulted in unreliable and incomplete data, which severely limits the utility of the study.” 16 Among other flaws, the CRC study failed to include E10 as a test fuel, used arbitrary test cycles and crit eria, and failed to establish a proper control group. Further, DOE points out that some of the vehicles selected for the test were under manufacturer recall for known mechanical failures.

14 E15 is explicitly approved in owners’ manuals, gas caps, and/or warranty statements for MY2013 General Motors and Ford vehicles. GM and For d models represent approximately 33% of MY2013 vehicle sales ( http://online.wsj.com/mdc/public/page/2_3022

- autosales.html#autosalesE ). Additionally, E15 is explicit ly approved for use in FFVs produced by all automakers. FFVs produced by automakers other than Ford and GM represent about 7% of MY2013 vehicle sales. 15 Volkswagen recently announced all MY2014 vehicles will be explicitly approved for E15 (see http://www.greencarcongress.com/2013/07/vw

- 20130714.html ). Volkswagen models account for about 3% of U.S. light

- duty vehicle sales.

16 See http://energy.gov/articles/getting

- it

- right

- accurate

- testing

- and

- assessments

- critical

- deploying

- next

generation

- auto8

Notably, the DOE’s own analysis of the effects of E15 and E20 on lig ht

- duty vehicles included 86 vehicles, with each logging up to 120,000 miles. Based on this much more robust sample of vehicles, DOE concluded that there was “...no statistically significant loss of vehicle performance (emissions, fuel economy, and maintenan ce issues) attributable to the use of E15 fuel compared to straight gasoline.” 17 Further, the DOE work “...did not uncover unusual wear that would be expected to impact performance.” 18
API and AFPM completely ignore the results of the DOE study, choosing inste ad to sensationalize the findings of the industry

- funded and fundamentally flawed CRC study. Thus, the petition’s claims regarding E15’s impact on engines should be rejected.

iv. The petition distorts the typical nature of commercial relationships between obli gated parties and downstream blenders and retailers.
At several points in the petition, API and AFPM suggest that most retail gasoline stations today are independently owned, implying that refiners have very little control or influence over fuel offerings and infrastructure at the retail level. Thus, they argue, obligated parties have no way of ensuring the volumes of E15 needed to meet RFS requirements above the “blend wall” will be offered at retail . The argument that obligated parties have little or no c ontrol over retail fuel offerings is absurd and disproven by recent events in the marketplace.
Through franchise agreements and supply contracts, refiners and their midstream partners exert tremendous influence over what fuels are made available for sale at retail gas stations

— so much so that Congress has had to enact legislation to protect retailers from the leverage that refiners have exerted over their franchisees

. In recent months, for instance, it has come to light that some oil companies are requirin g retail stations to carry premium gasoline as part of their franchise agreement. 19 In many cases, franchise agreements that require premium gasoline to be offered prevent the retailer from carrying ethanol blends like E15 and E85 ( even when the retailer p refers to offer those fuels instead of premium gasoline)

. 20 The Federal Trade Commission recently indicated it wi ll investigate allegations that franchise agreements are being used in some cases to eliminate the ability of retailers to sell E15. 21
Clearly, r etail fuel offerings are dictated by fuel producers and blenders upstream. That is, retailers can only sell the fuels that obligated parties manufacture upstream at refineries and blending terminals. It is not at all uncommon for refiners and blenders to m ake changes to their wholesale fuel offering s, and retailers are accustomed to adjusting their business practices to accommodate these changes. For example, Magellan Midstream Partners recently announced it would no longer offer 87 octane “clear” gasoline to wholesale customers in Iowa. 22 As in many other cases where refiners and blenders have

17 id

. 18 id

. 19 See, for example, http://www.ethanolrfa.org/news/entry/rfa

- requests

- multi

- agency
- investigation/ 20 id

. 21 Tracy. T. “ FTC Examines Allegations That Oil Industr y Blocks Greater Ethanol Use.” Wall Street Journal . August 21, 2013. 22 See http://farmprogress.com/story

- e15

- ethanol

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changed wholesale fuel offerings , retailers are expected to adjust quickly and seamlessly to Magellan’s switch away from 87 octane “clear” gasoline

. Retailers would re spond similarly to a decision by upstream refiners and blenders to increase wholesale offerings of E15.

v. The infrastructure costs associated with selling E15 are grossly overstated by API and AFPM

. The petitioners cite joint testimony from the Society of Independent Gasoline Marketers of America (SIGMA) and National Association of Convenience Stores (NACS) suggesting that the cost of outfitting a retail station to sell E15 “...can quickly exceed $100,0 00 per location.” This cost estimate is outrageous and contrary to the real

- world experience with E15 to date. On average, the retail stations currently offering E15 have invested less than $ 10,000 in infrastructure upgrades. For the average gas station, t his

c ost equates to less than $0.01 per gallon of gasoline sales (for context, retail fuel margins were $0.256 per gallon for the week ending August 16, according to NACS 23 ).

b. API and AFPM inappropriately dismiss the viability of E85 as a pathway to RFS comp liance.
In an attempt to hastily reject E85 as a workable solution to the “blend wall,” the petitioners suggest that “there is a very limited market for E85.” While it is beyond dispute that historical usage of E85 has been relatively low, it is unreasona ble to assume such a trend will continue in the future. E85 consumption by FFVs has been low in the past due in large part to the fact that annual RFS requirements could be easily satisfied by consumption of low

- level ethanol blends like E10 in conventiona l vehicles (i.e., non

- FFVs). Beginning in 2014, however, blending E10 alone will no longer be a sufficient means of complying with the RFS. For the first time in the program’s history, the RFS in 2014 obliges regulated parties to increase production and sa les of ethanol blends above E10. Already, the RFS program’s RIN mechanism is working to strongly incentivize increased blending and consumption of E85 to facilitate compliance. In short, past performance should not be used as an indicator of future E85 con sumption by FFVs.

i. Contrary to the claims of API and AFPM, there are more than enough FFVs to

consume exponentially larger quantities of E85 and surmount the “blend wall

. ”
API and AFPM state, “...there are simply not enough flex

- fuel vehicles to use enough e thanol to delay the blendwall.” This statement is categorically false and misleading

. Energy Information Administration (EIA) data show that 15.1 million FFVs were sold from 1998 through 2012. 24 Assuming 2013 FFV production levels were consistent with 2012 rates, approximately 17.6 million FFVs have been sold. Even if it is assumed that all pre

- 2002 FFVs have been scrapped and are no longer in service (based on the average vehicle lifespan of 11 years) , there would still be 15.8 million FFVs on U.S. roadways today.

23 NACS Daily . August 22, 2013. 24 See http://www.afdc.energy.gov/uploa ds/data/data_source/10299/10299_afv_available.xlsx10

Accordingly, the current fleet of FFVs is capable of consuming roughly 8 billion gallons of ethanol annually (10

- 11 billion gallons of E85). This means the current U.S. light

- duty autom otive fleet (i.e., FFVs and non

- FFVs) could consume a total of roughly 20 billion gallons of ethanol

— some 7 billion gallons above the so

- called E10 “blend wall.” Without question, vehicle compatibility is not a limiting factor in expanding ethanol consumpt ion beyond the “blend wall.” The petition’s suggestion that FFVs aren’t available in sufficient quantities to breach the blend wall is false and should be rejected out of hand.

ii. API and AFPM cite an artificially low estimate of the number of retail location s offering E85, and misrepresent the proximity of registered FFVs to E85 outlets

. The petition suggests only 2,300 retail stations are offering E85 today. In reality, E85 is available in more than 2,000 cities at more than 3,080 stations , 34% more than the estimate cited by API and AFPM. 25 Moreover, new independent research shows many FFVs are in relatively close proximity to E85 refueling locations. 26 Approximately one

- third of FFVs are within a five

- mile radius of a station offering E85 , and more than half of FFVs have access to E85 within 10 miles . This is contrary to the petition’s claim that “FFV access to E85 is even more limited than these numbers imply.”

iii. The petition ’ s claims about pricing and consumer demand for E85 belie recent observed trends in the marketplace and economic logic

. API and AFPM suggest E85 is not a viable option for overcoming the “blend wall” because pricing of E85 to offset its fuel economy loss “has not occurred.” This is patently false and contradicts recent observed trends in the marketplace

. API and AFPM cite AAA’s “fuel gauge” report in an attempt to suggest E85 prices are higher than gasoline prices on an energy

- equivalent basis. However, there are obvious flaws with the AAA methodology that render the “fuel gauge” report’s E85 price data inaccurate and meaningless. 27
E85 has approximately 80% the energy content of E10, meaning E85 should be discounted by 20% to offset the theoretical fuel economy loss. Recent data show that, on average, E85 is being priced 20.1% below E10 nationwide, up from 18.8% in July and just 6.1% in January. 28 The current spread marks the largest average discount in more than three years. In states like Iowa and Minnesota where there is a

25 See www.E85prices.com , accessed Aug. 22 , 2013. 26 Babcock, B.A., and Pouliot, S. August 2013. “ Price It and They Will Buy: How E85 Can Break the Blend Wall.” CARD Policy Brief 13

- PB 11. Available at http://www.card.iastate.edu/policy_briefs/display.aspx?id=1187 27 The BTU

- adjusted E85 price reported in the AAA Fuel Gauge Report appea rs to assume E85 has 75.9% the energy content of gasoline. However, “E85” typically contains no more than 83% ethanol by volume and can actually contain as little as 51% ethanol. On average, “E85” contains 70% ethanol by volume and its BTU content is 88,30 0 BTU/gallon

— or 79.2% the energy content of E10 gasoline. This discrepancy alone leads to the Aug. 28, 2013 reported E85 BTU

- adjusted price of $3.75/gallon being overstated by $0.16/gallon. Further, AAA’s retail station sampling procedures are unclear. The statistical robustness of AAA’s sample is not known and it is unclear how many stations are actually surveyed for daily E85 prices. The geography of the surveyed stations is very important, as stations offering E85 in the Midwest typically have lower E85 prices (relative to gasoline) than stations offering E85 in other parts of the country.
28 See www.E85prices.com , accessed Aug. 23, 2013.11

higher

- than

- average distribution of E85 pumps, E85 prices are b eing discounted even further (26

- 27%) relative to E10. 29 At some retail stations, E85 is being priced as much as 37% lower than E10. Clearly, current discount rates are sufficient to offset any fuel economy loss when using E85. 30

Consumer s are responding to recent lower E85 prices by increasing consumption

. While there is no reliable nationwide data tracking E85 sales, at least two state agencies track E85 consumption in their states. Data from both agencies indicate dramatic growth in E85 sales in recent mo nths, as FFV owners have responded to lower relative E85 prices. Minnesota Department of Commerce data show that E85 sales in the state jumped 81% from April to May, the largest month

- to

- month increase since data collection began in 1999. 31 Minnesota E85 sa les reached a 23

- month high in May, according to the data

. Similarly, data from the Iowa Department of Revenue show E85 sales in the state jumped 43% from the first quarter of 2013 to the second quarter. 32
Recent research conducted at Iowa State University found that attractive pricing of E85 can drive substantial increases in utilization. According to the study:

Pricing E85 low enough to generate fuel cost savings has the potential to quickly increase ethanol consumption, perhaps by three billion gall ons over the next year or two. Rather than being a physical barrier to increased ethanol consumption, the E10 blend wall is an economic barrier that can be overcome by increasing the incentive for drivers to use E85 to fuel their vehicles. 33

The Iowa State analysis demonstrates how the RIN market works to lower the effective cost of E85 at the retail level, and explains the interaction among corn, eth anol, gasoline and RIN prices.

Current RIN (Renewable Identification Number) prices are high enough to achiev e modest increases in ethanol consumption above 13 billion gallons and to create incentives to increase the ability to consume lower

- carbon ethanol in 2016 and beyond

. Current high RIN prices create a large incentive for oil companies to increase consumption of E85 because expansion in E85 consump tion will decrease RIN prices. 34

The authors of the Iowa State study conclude that it will be less expensive for oil companies to invest in E85 infrastructure than it would be to continue to pay high RIN pr ices. Indeed, the $600

- 800 million in

29 id

. 30 id

. 31 See http://mn.gov/commerce/energy/images/E

- 85

- Fuel

- Use

- Data.pdf 32 See http://www.desmoinesregister.com/article/20130820/NEWS/130820037/E85

- sales

- rose
- 43

- percent

second

- quarter

- state

- data

- shows 33 Babcock, B.A., and Pouliot, S. August 2013. “ Price It and They Will Buy: How E85 Can Break the Blend Wall.” CARD Policy Brief 13

- PB 11. Available at http://www.card.iastate.edu/policy_briefs/display.aspx?id=1187 34 id

.12

expected 2013 RIN costs cited by Valero would be enough to add some 13,000 E85 dispensers

. 35 This would more than quadruple the existing number of E85 pumps in service.

7. The market responses to the “blend wall” portended by the API/AFPM petition have not occurred. In fact, actual events have been the exact opposite of what was predicted by API/AFPM and the NERA study.
The petition’s assertions of “economic harm” are based on speculation that obligated parties will, in a

c oordinated fashion, reduce production and imports of gasoline and diesel fuel and increase exports in an attempt to limit the number of RINs that must be obtained to demonstrate RFS compliance . API and AFPM argue that this purposeful shorting of the U.S. f uel supply would result in higher retail prices for gasoline and diesel, causing “severe economic harm” to U.S. consumers. These claims are based in large part on the results of the NERA study, which, for reasons already discussed, should be rejected by EP A. AFPM repeated these threats in recent testimony, stating, “If obligated parties are unable to purchase RINs in the open market at an affordable price, the remaining RFS compliance options are reducing gasoline and diesel supplied to the U.S. through a c ombination of reduced refinery runs, reduced imports, and increased exports.” 36

Data from EIA clearly show that none of responses threatened by API and AFPM have actually occurred in the marketplace. Refinery production of gasoline has not been reduced in response to the “blend wall” and higher RIN prices. Instead , the amount of gasoline supplied to the market by domestic refiners has actually exceeded both 2012 levels and EIA projections for 2013 (Figure 1)

.

35 See http://www.reuters.com/article/2013/07/30/bp

- rins

- idUSL1N0G01IT20130730 . In the RIA for the RFS2, EPA estimated the total cost for the installation of three E85 dispensers at one station would be $177,000. Thus, $800 million/$177 ,000 = 4,520 stations @ 3 E85 dispensers = 13,560 E85 pumps. 36 Testimony of AFPM before House Energy & Commerce Committee. July 23, 2013. Available at: http://democrats.energycommerce.house.gov/sites/default/files/documents/Testimony

- Dr evna
- EP

- Renewable

Fuel

- Standard

- Stakeholder

- Perspectives

- 2013

- 7

- 22

- 23.pdf 7,500 7,750 8,000 8,250 8,500 8,750 9,000 9,250 9,500 9,750 10,000

4-Jan 18-Jan 1-Feb 15-Feb 1-Mar 15-Mar 29-Mar 12-Apr 26-Apr 10-May 24-May 7-Jun 21-Jun 5-Jul 19-Jul 2-Aug 16-Aug 30-Aug 13-Sep 27-Sep 11-Oct 25-Oct 8-Nov 22-Nov 6-Dec 20-Dec Thousand Barrels/Day Figure 1. Weekly U.S. Refiner/Blender Net Production of Finished Gasoline
2012 Actual 2013 Projection (EIA STEO) 2013 Actual13

Similarly, U.S. diesel fuel p roductio n — which the NERA study predicted would be severely reduced

— has far exceeded 2012 levels and is above EIA projected levels for 2013 on a year

- to

- date basis (Figure 2).

Meanwhile, exports of finished gasoline and diesel fuel have not increased, as predicted by the NERA study. In fact, year

- to

- date finished gasoline exports in 2013 have been lower than exports during the same period in 2012, when RIN prices were less than $0.04 (Figure 3). Similarly, year

- to

- date exports of diesel fuel in 2013 have b een 11% lower than during the same period in 2012 (Figure 4). 3,000 3,500 4,000 4,500 5,000 5,500

4-Jan 18-Jan 1-Feb 15-Feb 1-Mar 15-Mar 29-Mar 12-Apr 26-Apr 10-May 24-May 7-Jun 21-Jun 5-Jul 19-Jul 2-Aug 16-Aug 30-Aug 13-Sep 27-Sep 11-Oct 25-Oct 8-Nov 22-Nov 6-Dec 20-Dec Thousand Barrels/Day Figure 2. Weekly U.S. Refiner/Blender Net Production of Distillate Fuel

2013 Actual 2012 Actual 2013 Projection (EIA STEO)

0 100 200 300 400 500 600 700

4-Jan 18-Jan 1-Feb 15-Feb 1-Mar 15-Mar 29-Mar 12-Apr 26-Apr 10-May 24-May 7-Jun 21-Jun 5-Jul 19-Jul 2-Aug 16-Aug 30-Aug 13-Sep 27-Sep 11-Oct 25-Oct 8-Nov 22-Nov 6-Dec 20-Dec Thousand Barrels/Day Figure 3. Weekly U.S. Exports of Finished Motor Gasoline

2013 Actual 2012 Actual14

Fur ther, obligated parties have not reduced imports of gasoline and diesel fuel, as threatened by the API and AFPM petition. Year

- to

- date imports of diesel fuel in 2013 have actually increased by 24% over the same period in 2012 (Figure 5)

. Gasoline imports have been slightly lower in 2013 than during the same period in 2012 (Figure 6) , but the decline in imports is explained by the concomitant increase in U.S. gasoline production.

0 200 400 600 800 1,000 1,200 1,400

4-Jan 18-Jan 1-Feb 15-Feb 1-Mar 15-Mar 29-Mar 12-Apr 26-Apr 10-May 24-May 7-Jun 21-Jun 5-Jul 19-Jul 2-Aug 16-Aug 30-Aug 13-Sep 27-Sep 11-Oct 25-Oct 8-Nov 22-Nov 6-Dec 20-Dec Thousand Barrels/Day Figure 4. Weekly U.S. Exports of Distillate Fuel

2013 Actual 2012 Actual

0 50 100 150 200 250 300 350

4-Jan 18-Jan 1-Feb 15-Feb 1-Mar 15-Mar 29-Mar 12-Apr 26-Apr 10-May 24-May 7-Jun 21-Jun 5-Jul 19-Jul 2-Aug 16-Aug 30-Aug 13-Sep 27-Sep 11-Oct 25-Oct 8-Nov 22-Nov 6-Dec 20-Dec Thousand Barrels/Day Figure 5. Weekly U.S. Imports of Distillate Fuel 2013 Actual 2012 Actual15

8. The combination of increased E85 sales, increased E15 sales, carry

- over RINs from 2013, and likely administrative adjustments to the 2014 advanced biofuel standard will allow obligated parties to easily meet their RFS requirements without adverse economi c consequences . As described above, the petition submitted by API and AFPM should be promptly rejected because the alleged “harms” are based on misleading representation and faulty assumptions regarding : 1) the viability of E15 and E85 as pathways to compl iance, 2) the amoun t of carry

- over RINs available, 3) the likely levels of EPA’s final renewa ble volume obligations for 2014, and 4) the response of gasoline and diesel fuel markets to the “blend wall.”

T he events of the last several months have demonstrat ed that higher RIN values are leading to lower E85 prices and markedly increased sales. As demonstrated by the Iowa State study, higher RIN values are likely to enable rapid and dramatic growth in ethanol consumption via E85. In addition, the number of sta tions offering E15 continues to grow ; and 13 months’ worth of real

- world experience has disproven the claims of API and AFPM regarding E15’s effects on engines and infrastructure.
Further, according to EPA data, there are more carry

- over RINs available for compliance with 2013 standards than estimated by the NERA study. In addition, more surplus RINs are likely to be carried into 2014 than assumed by NERA. This will aid obligated parties in complying with 2014 standards. Moreover, EPA has already stated tha t it will propose adjustments to the 2014 volume requirements for both the advanced biofuel and total renewable fuel categories. This development alone renders the petition moot and irrelevant. Depending on the nature of EPA’s adjustments to the advanced b iofuel standard based on the availability of sugarcane ethanol , the amount of ethanol required above and beyond the “blend wall” could be substantially reduced.

0 200 400 600 800 1000 1200 1400

4-Jan 18-Jan 1-Feb 15-Feb 1-Mar 15-Mar 29-Mar 12-Apr 26-Apr 10-May 24-May 7-Jun 21-Jun 5-Jul 19-Jul 2-Aug 16-Aug 30-Aug 13-Sep 27-Sep 11-Oct 25-Oct 8-Nov 22-Nov 6-Dec 20-Dec Thousand Barrels/Day Figure 6. Weekly U.S. Imports of Gasoline 2013 Actual 2012 Actual16

Finally, the gasoline and diesel market responses to the “blend wall” predicted by API and AFPM have not occurred. The re has been no evidence whatsoever to support the notion that lower RIN stocks and higher RIN prices have cause d refiners to reduce gasoline and diesel fuel output , cut imports, and ramp up exports. In fact, gasoline and diesel fuel output has increased, imports have been higher, and exports have been lower or stable

— all while RIN prices have risen steadily in 2013. But the facts have apparently not stopped API and AFPM from resorting to their classic scare tactic

— threaten higher fuel prices even as the oil industry enjoys record profits.
In conclusion, we believe EPA should act swiftly to reject the petition submitted by API and AFPM. The conditions outlined in Section 211(o)(7)(A) of the Clean Air Act under which EPA may grant a waiv er simply do not exist. The RFS is working precisely as intended

— EPA is exercising its authority to adjust annual blending requirements, RINs are sending clear signals to the marketplace to expand renewable fuel s infrastructure and consumption , and RIN ban king and trading provisions are providing compliance flexibility to obligated parties. In short, oil refiners and importers should have no difficulty in meeting their 2014 blending requirements.

* * * * *
Thank you for your consideration of our request to dismiss the petition from API and AFPM. Please contact me at (202) 289

- 3835 with any questions.

Sincerely,

Bob Dinneen President and CEO