FEATURED ONLINE EXCLUSIVE: 3/29/2017
Change in Point of Obligation Could Result in Loss of Retail Industry Support for Higher Blends, RFS
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Recent efforts led by billionaire investor and refinery owner Carl Icahn and the Renewable Fuels Association (RFA) to shift the burden of complying with biofuel quotas from refiners to fuel blenders have drawn attention to gasoline retailers’ role in the supply chain.
The biofuels industry is paying close attention to retailers because they are a gateway to delivering higher blends into the marketplace.
Under the current structure of the Renewable Fuel Standard (RFS), retailers have an economic incentive to sell higher ethanol blends at a competitive price. Today E15 retailers are able to market a higher octane, lower-priced fuel — E15 — which brings in customers to their stores.
But if the point of obligation changes from oil refiners to further down the supply chain, industry insiders say retailers — which include some of biofuels’ biggest partners in campaigns like Prime the Pump and influential voices in Washington — will lose their economic incentive to sell higher ethanol blends.
For farmers, the rollout of higher blends means greater demand for corn. But if the shift in obligation decreases overall market demand for ethanol, it would negatively affect corn procurement. Today, POET buys corn from more than 25,000 farmers.
The change overall could wreak havoc on the biofuel industry, translating to higher retail fuel prices for consumers and stagnating retailer buildouts for higher blends. “The fundamental question is, what route delivers the most additional gallons for us into the marketplace?” says Mike O’Brien, Vice President of Market Development for Growth Energy.
There is widespread support among retail partners to retain the current structure of the point of obligation. Sheetz, Kum & Go, Protec Fuel and Minnoco, along with the National Association of Convenience Stores (NACS) and the Society of Independent Gasoline Marketers Association (SIGMA), all oppose changing the structure.
That alignment is an indication that those retailers recognize a change would negatively impact their business, says Tim Columbus, partner at Steptoe & Johnson LLP in Washington and general counsel for NACS and SIGMA. “We are not lined up on it for fellowship,” he says. Rather, it’s an issue of market demand.
Retailers like those in NACS and SIGMA see renewables as a path that, under the current RFS structure, make the retail market more competitive and more cost effective for consumers. “Some groups actively oppose E15. SIGMA and NACS are not that way. They vote for the consumer and for the market. The current market structure lets them serve customers at the most cost-effective way possible,” says Columbus.
A change in the obligated party would only benefit a select few merchant refiners — and create opposition of the RFS elsewhere across the industry, many say. As more parties become obligated — including fuel marketers, convenience stores, trucking companies and railroads — this could create confusion for many within the industry and potentially even draw resentment toward the RFS.
While today the structure of the RFS prompts retailers to blend higher blends, if they view the RFS in a negative light, it may be viewed as detrimental for business.
“Fuel retailers have traditionally been some of the biggest advocates in support of the RFS. A change in the compliance mechanism could potentially cause retailers to adopt a negative stance towards the RFS due to the increased cost and complexity,” says Jim Pirolli, Vice President of Fuels for Kum & Go.
“One major concern I’ve heard from small and large fuel retailers is that if refiners have no obligation, refiners could sell whatever blend they want in the marketplace,” says O’Brien with Growth Energy. “From a bigger retailer standpoint, if the obligation moves to them, they have the regulatory costs of tracking all of it. … The small retailers are stuck with whatever fuel comes at them. They won’t have a lot of say about what the blend looks like.”
Many retailers, such as Kum & Go, have invested in infrastructure to support selling higher ethanol blends. But a shift in obligation may call into question the long-term economic viability of those efforts.
At best, the change would stagnate E15 distribution growth, especially due to what would inevitably be a long rulemaking process by the Environmental Protection Agency (EPA), which oversees the RFS. The agency has said it may take up to 18 months for a rulemaking and four years to enact the rule to change it. Retailers may go into stall mode during that period.
“If this were to happen, many retailers would have to re-think their procurement and supply program, as well as their long-term strategy on offering biofuel blends,” says Pirolli. “We have been part of a tremendous effort to bring these great new biofuel blends to market. We’ve had to navigate ambiguous regulations, mis-information, and the task of helping consumers understand, and care, about what fuel they are putting in their cars. It would be very disappointing if this were to go away due to a change in the point of obligation.”
Retailers Key Partners in Prime the Pump, Advocacy Efforts
In the push to have higher ethanol blends at the pump, non-branded, high-volume gasoline retailers have been pivotal in the efforts to bring E15 and other higher blends to the marketplace.
When the Prime the Pump campaign began about three years ago, organizers met resistance from branded retailers to bring E15 to the marketplace. Instead, they found a path working with those non-branded, high-volume regional retailers to install blender pumps at retail locations.
Today, Prime the Pump works with about 10 of the largest retail chains in the U.S., including Sheetz, Kum & Go and Minnoco. The Prime the Pump campaign continues to grow, with 500 percent growth last year in the number of retail sites selling E15. Today, there are retail locations in 29 states that sell E15 usually between 3 to 10 cents below regular gasoline.
Retailers have embraced E15 and higher blends, and recognize the competitive benefits of offering a lower-priced fuel, says O’Brien with Growth Energy. “They have been strong advocates for us in our efforts to get higher blends into the marketplace.”
Retailers have also been influential advocates in Washington. They provide another important voice in the conversation that addresses what it takes to sell fuel to the marketplace, says Rob Walther, Vice President of Federal Advocacy for POET.
“It’s one thing to hear it from ethanol producers. It’s another thing for a retailer who makes their profit from selling fuel to come in and say, consumers want to buy ethanol. It better fleshes out the narrative and better explains the issue to members of Congress who have never heard it before.”
Current Structure Allows Incentives for Higher Blends
Pirolli with Kum & Go says the current model works and remains the most efficient and effective method to ensure biofuel blending compliance.
“In business, we’re always looking to take out any type of activity that adds any burden or ambiguity to a process,” he says. “With point of obligation, we’re already there. We have the most direct way to measure the refined products as they enter our fuel supply, which is used to measure the renewable fuel supply change.”
Under a new system, a significant burden would fall to the fuel marketers with very little benefits. For retailers, this change would mean both an increase in cost of components and cost of execution, such as administrative costs.
From a larger retailer perspective, if the obligation moves to them, they would be in charge of regulatory compliance. Many retailers are not set up to support complying with EPA regulations. Single-store operators account for about 63 percent of all convenience stores, according to the 2017 NACS/Convenience Industry Store Count.
Those added costs would inevitably translate to higher fuel costs for consumers.
“It will drive up the cost of fuel because of the additional staff and complexity to manage the RINS from the fuel distribution point,” says Steve Walk, Chief Operating Officer for Protec Fuel. “With that there’s the cost of business.”
Biofuels industry leaders — including POET and Growth Energy — continue to oppose any changes in the RFS point of obligation. For those industry leaders and others, one key argument in favor of retaining the RFS is that the program continues to achieve its objective.
It’s a point worth reminding to those on both sides of the aisle, Columbus says.
“This program has been in place for 10 years. There are people who love this program and people who hate this program. There’s one thing you can’t deny: The program has achieved the objectives of the people who passed the bill. Their objective was to displace historic, petroleum-based fuels with renewable energy that’s homegrown. In 2017, that’s changed now. All the incentives have worked to drive that result. If you change that, you’re going to change the results and change the incentives for people.”
