Fuels Policy Front and Center

Renewable and alternative fuels remain a hot topic even as gas prices at the pump decline from their late spring peaks. Congress and the Executive Branch continue to debate and implement public policy that is not always aligned. Tough questions are being asked about mandated markets, incentives and funding for renewable fuel research and development. The following is a brief look at some of the key issues currently being debated:

Renewable Fuel Standard

The foundation of the renewable fuel market, the renewable fuel standard (RFS), established a market for first-generation ethanol, biodiesel and renewable diesel; however, other advanced biofuels (primarily cellulosic) have been very slow to commercialize.

• Legislation Introduced - Numerous bills have been introduced to alter the RFS, including measures to reduce the mandate and expand feedstocks and fuels that are eligible to participate. More bills have been introduced to expand the production of flex-fuel vehicles, provide liability coverage for distributers, eliminate the cellulosic waiver credit program and even eliminate the RFS program altogether. The House Energy & Commerce Committee has held hearings to hear from industry and other stakeholders on these issues and will be considering how to move forward either later this year or early in 2013.
• Fraud Investigations - Complicating the implementation of the RFS program are several recent high-profile instances of fraud in the renewable fuel program. These cases have put EPA into the spotlight for how it is overseeing the implementation of the RFS. There are serious questions about who should be held accountable for the fraud. Officials from the oil, gas and renewable fuel industries have been meeting with EPA and the White House to determine an appropriate pathway forward that does not require a new law. Small, innovative companies, in particular, need purchasers to have confidence to invest and realize a return when their fuels are sold in the market. Congress has also gotten involved in the controversy through oversight hearings.
• Senate RFS Study Group - In the Senate, a bipartisan RFS Study Group has been formed and is planning a series of listening sessions to hear from industry, academia and other value chain participants to better understand the impact of the program and how it can be made more effective (if not scrapped entirely). These sessions will help inform staff on a number of key issues, including the development of fuel technologies, secondary impacts of fuels policy as well as the effects on price and safety.

All of these activities are gearing up for what will be an active 2013 in terms of fuels legislation. While the renewable fuels industry is urging stability and certainty in the RFS, there are a number of specific issues that are increasing pressure on Congress to reopen the program. In addition to the fraud issue highlighted above, those issues include:

• Ethanol mandates v. the blendwall - Corporate average fuel economy standards have increased fuel efficiency, reducing the overall volume of transportation fuel being consumed. With the RFS mandating increasing volumes of ethanol, we are quickly approaching a point where the transportation fuel pool will not be able to absorb any more ethanol. Flex fuel vehicle use of E85 (85% ethanol) has not taken off, forcing the EPA to consider higher blends of ethanol in traditional vehicles.
• E15 and liability coverage - While the EPA has approved the sale of E15 (15% ethanol) as a transportation fuel for 2001 and later model year vehicles, fuel distributors are reluctant to sell the fuel out of fear over potential engine damage and the lawsuits to which they could be exposed. Vehicle manufacturers have largely indicated that their warranties will not cover the use of ethanol blends higher than E10. Furthermore, some states have mandated the use of E20, which adds further confusion and uncertainty. So, federal legislation has been introduced to protect fuel distributors and could be considered in the near future.
• Cellulosic waiver credits - The RFS provides the EPA authority to reduce the mandated volumes of cellulosic to address the commercial reality of how much of the fuel is available. In addition, the EPA makes available credits which obligated parties can purchase to represent a gallon of cellulosic biofuel to fulfill the remainder of the mandate. While the EPA has reduced the cellulosic mandate, it has maintained the cellulosic waiver credit, forcing the industry to pay what it calls a tax on "phantom fuels."

Federal Incentives

As we approach the end of the 2012 legislative calendar, the House Ways & Means and Senate Finance Committees are beginning to draft legislation aimed at addressing expired or expiring tax incentives. Among the issues key to the renewable fuels industry will be the cellulosic biofuel producer credit, the biodiesel/renewable diesel tax credits, the alternative fuels tax credit and several other infrastructure-related incentives.

In addition to traditional fuel incentives, lawmakers will consider other potential incentives including accelerated depreciation and expanding access to master limited partnerships. While these programs have not traditionally been thought of as fuel incentives, the allowed expiration of the ethanol tax break has demonstrated Congress's lack of appetite for fuel- or technology-specific incentives.

Department of Defense / Department of Agriculture

With respect to the U.S. Department of Defense (DOD), renewable fuels have seen one step forward and one step back. Just recently, the U.S. Departments of Agriculture and Energy and the U.S. Navy announced funding available for the development of drop-in renewable fuels. This announcement follows a blow to the renewable fuel industry in the House and Senate versions of the Defense Authorization bill, which included a hotly debated provision that would block the DOD from procuring alternative fuels more expensive than petroleum.

In addition, Congress continues to work on a farm bill to reauthorize programs that expire in September of this year. The Senate has passed such a bill, which promotes renewable fuel development while mandating funding for various fuel programs. The House Farm Bill makes funding for these same programs discretionary.