HOW RFS QUALITY REQUIREMENTS WILL IMPACT BIODIESEL PRODUCERS Douglas L. Batey and Graham Noyes Stoel Rives LLP 600 University Street, Suite 3600 Seattle, Washington , ,

RFS Overview EPA sets standards for increasing the percentage of renewable fuels for motor vehicles Obligated parties: refiners or importers of gasoline in the 48 states Demonstrate compliance by owning sufficient credits to show the required percentage of their total gasoline imported or produced Credits implemented through Renewable Identification Numbers (RINs) for each batch of renewable fuel

RINs A 38-digit number, containing coded information about the producer and the equivalent number of gallons of renewable fuel represented by the RIN Producers and importers must generate a RIN for each batch of renewable fuel produced or imported Must be listed on product transfer documents, and reported quarterly to EPA. Examples of RIN:

Transferability of RINs Become freely transferable only after separation from the renewable fuel. RINs are separated only by the obligated party or by the blender (if blended into gasoline or diesel) After separation, RINs are freely transferable and may be owned by any party. –Parties holding RINs must be registered with the EPA and must report to the EPA Obligated parties may acquire RINs to satisfy their volume requirements by buying renewable fuel or by buying RINs RINs have VALUE

What About Biodiesel? Biodiesel producers and importers must generate RINs and must register with the EPA RINs for biodiesel (mono-alkyl ester) have a gallon equivalence value of 1.5, non- ester renewable diesel has a gallon equivalence value of 1.7 RINs are separated from the biodiesel when it is blended or exported, and are then freely transferable and can be sold

Biodiesel Quality EPA fuel regulations require that motor vehicle fuels and refiners be registered under 40 CFR part 79 –Testing data is required –Biodiesel typically relies on compliance with ASTM D-6751and testing data of NBB RFS defines “biodiesel” as fuel that is registered with EPA under 40 CFR part 79 and that meets ASTM D-6751 –ASTM D-6751 specifications: flash point, distillation temperature, viscosity, sulfur, copper strip corrosion, cetane, cloud point, carbon residue, free glycerin, phosphorous, etc.

Noncompliance With ASTM D-6751 The fuel would not meet the RFS’s definition of “biodiesel” The RIN would have reported the fuel as biodiesel and therefore the RIN would be invalid. Each party buying or selling the biodiesel or the RIN (after separation) would have acquired, passed on, and reported using the invalid RIN The originator and each transferor of the invalid RIN would have violated the RFS An obligated party may find itself in violation of its annual volumetric requirement for using invalid RINs.

More Consequences A party who causes another party to be in violation will be liable for the violation Violators are subject to a civil fine of up to $32,500 per day of each violation plus any economic benefit or savings from the violation A parent corporation is liable for any violations committed by its subsidiary RESULT: A CASCADE OF REGULATORY PROBLEMS AND POTENTIAL FINES

Quality Problems NREL (National Renewable Energy Laboratory) Completed Biodiesel Quality Control Survey in 2005 Collected 27 B100 samples and 50 B20 samples from various downstream locations 15% of B100 samples did not meet ASTM D6751 Most failed due to glycerin and acid number 18 of the 50 B20 blends contained either less than 18% or more than 22% biodiesel. B20 samples ranged from 9% to 98% biodiesel This survey preceded RIN requirements

2007 Quality Survey Contacted 107 producers Received samples from 56 90% of product in specification Large Volume Producers: 99% in spec Medium Volume Producers: 32% in spec Small Volume Producers: 28% in spec BQ 9000 Producers: 98% in spec

What is BQ9000 Quality Control and Documentation Program Similar to ISO 9000 program Tailored to Biodiesel Industry Administered by BQ 9000 Accreditation Committee Producer and Marketer Categories

EPA Enforcement Biodiesel that does not meet ASTM specification D6751 is not entitled to RIN credit Similarly, non-ASTM specification fuel is not entitled to Blender’s Credit No known EPA enforcement actions for out of specification fuel

What to Do Keep up to date on Developments –Stoel Rives Law Bulletins –NBB website or newsletter Source from high quality suppliers: –BQ 9000 and/or –Large Volume Producer Address Risk Contractually –Responsibility for Fuel Quality –Storage and Handling Requirements –Supplier liability for consequential damages for out of specification fuel