Airline joins battle over biofuels

Delta Air Lines, which paid $150 million for a Philadelphia refinery last year in hopes of controlling fuel costs, is hitting turbulence in the form of U.S. biofuel mandates.

Through its year-old refinery unit, Monroe Energy, Delta is mounting its own legal and lobbying challenge to the 8-year-old renewable fuel standard, joining a battle led for years by the oil industry’s top trade groups.

Monroe has filed a lawsuit in the U.S. Court of Appeals for the District of Columbia Circuit broadly challenging the renewable fuel requirements the Environmental Protection Agency established for 2013. Refiners have until June 30 to prove they have complied with this year’s biofuel quotas.

The EPA sets the annual targets under the renewable fuel standard, which requires refiners to mix steadily increasing amounts of ethanol and other alternatives into the nation’s gasoline and diesel supplies — up to 36 billion gallons in 2022.

For every gallon of biofuel they incorporate, refiners generate compliance credits called renewable identification numbers. Refiners that don’t meet their annual biofuel quotas can buy the credits instead on an open market.

Because Monroe is a “merchant refiner” that generally sells unblended products to wholesale marketers, it doesn’t produce its own credits by blending in renewable fuels and instead must buy the credits to satisfy the mandate.

As a result, Monroe says in its Oct. 4 federal court petition, it must spend millions of dollars acquiring compliance credits at what it alleges are artificially inflated prices. Although renewable identification numbers were trading below a quarter each last week, prices had climbed above a dollar earlier this year.

“This is money Monroe will never get back,” the company said.

Monroe is in a distinctly different category from other oil industry players challenging the standard, including the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers. Those trade groups represent a wide variety of oil industry voices, mostly companies that have their own blending capacity.

The court has consolidated the legal challenges into a single case that probably will be argued in early March. The Biotechnology Industry Organization, Growth Energy, the Renewable Fuels Association and other biofuels backers have asked to intervene in the case on the side of the EPA.

Even as its 2013 renewable fuel quotas are being tested in court, the EPA on Nov. 15 formally proposed the 2014 targets, reducing the mandated biofuel volumes for the first time in response to oil industry concerns that the rules had become unworkable.

Unless the EPA makes major changes in its final rules next June, the proposed 2014 targets are sure to be challenged in court too, this time by biofuels backers who say the agency exceeded its legal authority in lowering the numbers beyond Congress’ goals.

In proposing to reduce the volume requirements for 2014, the EPA is attempting to blunt oil
refiners’ fears of approaching what they call a “blend wall,” the point at which they would have to mix a higher proportion of ethanol into fuel than has been approved for use in all cars and trucks.

But refiners still face plenty of uncertainty, given the ongoing and potential legal challenges, as well as continued volatility in the market for renewable identification numbers.

The issue has bedeviled Delta and Monroe, following the airline’s April 2012 purchase of the Trainer refinery complex near Philadelphia from Phillips 66. Under the deal, Delta agreed to swap the refinery’s gasoline, diesel and other products for jet fuel produced elsewhere by Phillips 66 and BP.

In reporting its second-quarter earnings, Houston-based Phillips 66 said it benefited from selling compliance credits because it has the facilities to blend biofuels.

Delta, however, blames renewable fuel standards costs for its $51 million loss on the Trainer refinery during the second quarter and may be on track to spend more buying the renewable identification numbers than it paid for the plant in the first place.

Monroe’s chief financial officer, Frank Pici, said the scenario illustrates that the renewable fuel standard is creating winners and losers in the oil industry, with Monroe decidedly in the second camp.

The big beneficiaries, he said in written comments filed with the EPA in June, are vertically integrated refiners that can blend biofuels, and small refiners eligible to seek exemptions from the renewable fuel requirements.

“The losers are those refiners, like Monroe Energy, that are much smaller operators than the integrated refiners, must purchase virtually all RINs needed for compliance and yet do not qualify for small refiner hardship relief,” Pici said.

Even before heading to federal court, Delta and Monroe Energy had asked the EPA to take measures to reduce the burden on refiners that it said bear a disproportionate burden for the rising price of compliance credits.

All told, Delta spent $1.4 million to lobby lawmakers and executive officials on the renewable fuel standard and other issues during the second and third quarters of this year, according to disclosures filed with Congress.

Monroe’s legal challenge, if successful, potentially could force the EPA — or provoke Congress — to shift the onus for renewable fuel compliance from refiners to blenders that can generate compliance credits.

The EPA has suggested in the past that it might someday change its officially designated “obligated party” under the renewable fuels policy, potentially shifting the burden to blenders.

In legal filings, Monroe insists that the 2013 quotas are “arbitrary and capricious,” because they would disproportionately affect the company and other independent refiners that “must obtain all or most of their compliance credits on the secondary market.”

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