Graham Noyes
Graham Noyes is Of Counsel in the Energy Development practice group and joined the firm after seven years in the commercial sector of the biofuels industry. While in the commercial sector, Graham was an executive at two of the leading U.S. biodiesel companies and garnered a wide range of practical experience in energy sector issues, including developing and refining business models, early stage capital, venture capital fund-raising, debt and equity structures, corporate organization and management issues, integration of clean fuels into existing fuel and energy markets, infrastructure and logistics issues, commodity markets and trading, regulatory and legislatively driven markets, technical specification requirements, joint venture relationships, refined products supply and distribution, petroleum and power generation industry practices, strategic positioning, federal grant financing and public relations.
BioEnergy Law Alert: EPA Issues Notice of Violation to Absolute Fuels
On February 2, 2012, the Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV") of the Renewable Fuel Standard ("RFS") to Absolute Fuels, a company located in Lubbock, Texas. The NOV alleges that between August 31, 2010, and October 11, 2011, Absolute Fuels generated over 48 million Renewable Identification Numbers ("RINs") and that all of these RINs were invalid. This EPA action is likely to have a substantial impact on the overall RIN market and could be followed by related NOVs to other market participants.
The Absolute Fuels NOV represents the second major enforcement action by the EPA under the RFS. The first action alleged invalid generation of over 32 million RINs by Clean Green Fuel. The Clean Green Fuel action proceeded with a criminal filing by the U.S. Attorney for the District of Maryland and was followed by the EPA's filing of 24 NOVs against the companies that utilized the Clean Green Fuel RINs for compliance with RFS obligations. EPA did not allege that the obligated parties that received the Clean Green Fuel RINs had any knowledge or reasonable basis to have knowledge regarding the RINs' invalidity. This alert provides an analysis of the regulatory basis for these EPA enforcement actions.
EPA Enforcement of RFS2 Heats Up
The Environmental Protection Agency (EPA) is exercising its authority and enforcing the requirements of the Clean Air Act’s renewable fuel standard (RFS) program. The EPA issued twenty-four notices of violation on November 7, 2011, to petroleum refiners, importers and exporters of renewable fuel.
Following a filing last month of criminal charges of wire fraud, money laundering, and violations of the Clean Air Act (CAA) against an individual, Rodney R. Hailey, the EPA issued civil notices of violations (NOVs) to the entities that relied upon the allegedly invalid Renewable Identification Numbers (RINs) generated by Mr. Hailey. The companies involved are obligated parties under the RFS program and thereby, subject to Renewable Volume Obligations (RVOs) designed to demonstrate compliance with the renewable fuel standards set by Congress -- 36 billion gallons by 2022.
Stoel Rives issued a legal update on these matters, among the first enforcement actions initiated by the EPA under the RFS2 requirements. The entire update can be read here.
Sustainable Aviation Fuels Northwest Releases Report
The Sustainable Aviation Fuels Northwest (SAFN) is the first stakeholder effort to review the challenges surrounding the production of sustainable aviation fuels and to develop a regional solution.
The initiative was launched in July 2010 by Boeing, Alaska Airlines, the Ports of Portland, Seattle and Spokane– and Washington State University. Climate Solutions, a Northwest clean-energy nonprofit, managed the stakeholder process that included a wide range of groups across aviation, biofuels production, environmental advocacy, agriculture, forestry, federal and state government agencies, academic research and technical consultancies. Stoel Rives was proud to be a participant in the process and to provide specific input regarding incentives, and the Renewable Fuel Standard.
We hope that you find the report useful and informative, see http://www.safnw.com/ for further information.
Budget Compromise Looks OK for Projects in DOE Loan Guarantee Pipeline
The current version of the budget compromise provides relatively good news for projects seeking DOE loan guarantees. During the past several months, renewable energy projects in the DOE’s Loan Guarantee pipeline have been exposed to substantial uncertainty as a result of the budget crisis in DC. The developers of these projects have previously invested substantial resources to apply to the program which would become wasted effort if the program funds evaporate as the projects wait for DOE approval. The Loan Guarantee Program Office led by Jonathan Silver was clearly aware of this issue and prudently allowed all open solicitations to expire in early 2011 without issuing any new ones. The renewable energy project developers’ concern has been that the budget deal would involve a substantial claw back of previously appropriated funds that have not yet been committed to projects.
The battle is not yet resolved but the current compromise is encouraging for these projects. There is a claw back of $18.183 billion in uncommitted funds but these were funds appropriated under provisions that required that the Credit Subsidy Cost to be paid by developers. The Credit Subsidy Cost was the bane of the Loan Guarantee Program as it essentially required the program applicant to cover the present value risk that the project would default on the loan. The Stimulus Bill solved this problem and greatly increased the attractiveness of the Loan Guarantee Program by appropriating funds to cover the Credit Subsidy Cost. Similarly, the current budget compromise appropriates an additional $1.183 billion in funds and allows these funds to be utilized to cover Credit Subsidy Costs. Thus, while the provision claws back funds, these are funds that were not attractive due to program limitations whereas new funds are appropriated to the preferred program. In addition, the proposed legislation imposes an Office of Management and Budget certification of compliance requirement as a control on the program.
The current bill is HR 1473 and is likely to be voted on later this week and thus is still subject to amendments. To obtain the latest details and access to the bill, see the Open Congress site at http://www.opencongress.org/bill/112-h1473/show
Good News and Bad News for DOE's Loan Guarantee Program
There has been a wave of good and bad news this past week regarding the DOE's Loan Guarantee Program. On the positive side, Secretary Chu announced on Friday that the Department would be adding an additional compliance period for the Innovative Solicitation. The current deadline for the Part I application under the program is August 24th. Secretary Chu announced the applications would be accepted until October 5th thus providing six more weeks of time to applicants. Secretary Chu did not extend the Part II deadline and cannot extend the September 30, 2011 start construction deadline as that deadline was established by the Stimulus Bill itself. Still, the extension was generally viewed as a respite and perhaps an indication of a willingness to further extend the program.
On the bad news side, the Senate approved the FMAP state aid bill to avert teacher layoffs and pay for Medicaid which is to be funded in part by taking $1.5 billion in funds that the Stimulus Bill appropriated to the DOE Loan Guarantee program. Clearly driven by Pay-Go requirements, this is a reminder of the $2.0 billion fleecing that the Loan Guarantee Program suffered when Cash for Clunkers program was passed. While it has been promised that the funds will be restored, the fact that the Cash for Clunkers funding has not yet been restored raises concern about whether the restoration will occur.
EPA Issues Proposed RFS2 Rules for 2011
The EPA has issued proposed RFS2 rules for 2011 that provide some indications that the agency is dedicated to jump starting the advanced biofuels industry. Most notably, the EPA held fast to an overall mandate of 13.95 billion gallons of renewable fuel. While the agency intends to deviate downward on cellululosic biofuels with a cut of 90% or more anticipated, the proposed rule maintains the overall Advanced biofuel mandate at 1.35 billion gallons and the Biomass-based diesel requirement at 800 million gallons. Thus the agency is paying significant attention to the existing capacity of the biodiesel industry despite the lack of approval for the blender's credit six months into the year. Biofuel supporters hope that this policy gap will be addressed shortly or that RIN values will continue to increase for Biomass based diesel.
The proposed rule contains two other notable components: tentative but retroactive RIN credit for canola, sorghum, pulpwood and palm oil biofuel producers; and a petition process for foreign countries to avoid the onerous feedstock obligations that now apply in favor of the aggregate approach available within the US. The referenced feedstocks have been under consideration by EPA for Life Cycle Analysis since prior to the original RFS2 Final Rule was released but the work has still not been completed. The severe challenge for this group of biofuel producers is that EPA has previously indicated that RIN generation would trigger only when the pathway was certified. EPA's proposed new flexibility is an improvement but still falls short of providing full RIN value for these producers due to the lag time and uncertainty associated with the approach. The proposed petition process for foreign countries is an apparent attempt to level the playing field for foreign producers who now must trace and certify feedstocks such as soy and corn in a manner not required within the US.
The rules will be published in the Federal Register shortly and the public comment period will likely run to approximately August 13th.
Discussion on Kerry Lieberman and EPA with William Brent
Here is a Q&A I did with William Brent, the head of Weber Shandwick’s cleantech practice and blogger at www.mrcleantech.com:
WB: I asked my friend Graham Noyes of law firm Stoel Rives who focuses his practice on bioenergy projects, federal energy incentives and carbon monetization for his thoughts on the Kerry Lieberman bill.
Q (WB): What was your main takeaway from the bill?
A (GN): Some context first. There’s a massive potential hammer out there on GHG emitters in terms of the risk of regulation under the Clean Air Act (CAA) by the EPA, which has already issued an endangerment finding that found GHGs to be a danger to public health and welfare, thereby making the EPA obligated to regulate GHG's under the CAA. So the wheels are turning forward at the EPA to regulate GHG. That’s what the EPA will do if nothing else happens. So it’s really surprising that Kerry Lieberman imposes what I think to be much stricter limitations on the EPA than the status quo.
In that sense the bill is very favorable to those industries that have the most to lose from GHG regulation, because it essentially weakens the regulatory landscape for GHG intensive industry when compared to what the EPA is likely to do. That’s why we have the strong industry support lined up for the bill. What’s odd is that we have universal Republication opposition (from a party known for its pro-business stance), and near universal Democratic support (from a party known to support more environmental protections). That is a fundamental disconnect.
The 800 lb gorilla in the room is the EPA's ability to utilize the CAA if the Kerry-Lieberman bill stalls. That’s a really interesting regulatory and political landscape for this thing to play out.
Q: Can you be more specific on how Kerry Lieberman is easier on emitters?
A: We don’t know what the EPA will do precisely in order to get its targets in the endangerment finding. Emissions levels, cost implications for regulated industries – we don’t know. But it’s easy to imagine a scenario in which the EPA ratchets down harder and harder on these emissions to get the problem under control, specifically the PPM concentration of CO2 in the atmosphere.. By contrast, Kerry Lieberman has a slow front-end phase-in (with only some industries included in the first years), price collars and very substantial offset programs to lower the economic impact, none of which the EPA would necessarily do. Most people expect the EPA would be more onerous than Kerry Lieberman.
Q: Is legislation or regulation better at the end of the day?
A: The Clean Air Act was not designed for GHGs, but for what we usually think of as pollutants- emissions that are directly unhealthy. CO2 is not something people worry about breathing, it’s the indirect risk of global warming caused by the escalating CO2 levels that triggerred the finding. CO2 is also more ubiquitous than other pollutants hence the tailoring rule actually reduces scope of CAA enforcement.
The EPA would regulate by mandate, not by consensus. If we can’t get legislation passed and the EPA begins enforcement, there will be a lot of criticism about over-reaching and strangling industry. EPA would take a lot of heat for this.
Q: Some argue that EPA will take much longer to regulate than legislation.
A: I don’t necessarily think so. This legislation requires extensive rule-making that will take a long time to happen, consider the RFS2 delay. And the EPA won’t build in phase-in limits like Kerry Lieberman. If EPA moves ahead on its present course, I think it would have a faster impact on emissions than the bill.
Ultimately, I think this landscape will spur a deal with a surprising alliance.
What are the top three ramifications on business from this bill?
The bill would establish a long-term value to CO2e reductions. This will benefit all renewable energy projects and support US offset projects in methane capture, agriculture and forestry that make good GHG sense.
RFS2 Deadlines are Rapidly Approaching
Several deadlines relating to the implementation of RFS2 are rapidly approaching and should be strictly followed by renewable fuel producers to avoid loss of the value of RINs under the new system. Producers who miss the registration deadline of July 1, 2010 will be unable to generate RINs until they have completed the registration process and 60 days have passed. Thus, a producer who completes registration on July 2 will not be able to generate RINs until September 1.
All producers must provide the following registration documents to EPA by the July 1 deadline:
- Engineering Review of the Facility – this must be done by a third-party qualified engineering firm and meet RFS2 requirements.
- Process Heat Fuel Supply Plan – this plan is required, as process heat is one of the aspects of plant performance that EPA considers in evaluating GHG performance.
- Records of actual production or copies of applicable air permits to allow EPA to determine the facility’s baseline volume.
For producers who use yard waste, food waste or the biogenic portion of municipal solid waste as their feedstock, a feedstock plan must also be submitted.
Additional RFS2 compliance information is available on the RFS website: http://www.epa.gov/otaq/fuels/renewablefuels/.
In addition to the registration requirements, deadlines are also approaching regarding the technical amendments EPA promulgated to RFS2, published in the Federal Register on May 10 at Volume 75, No. 89, page 26026. The EPA published these amendments, some of which have generated controversy, through the use of a direct final rule. To request a public hearing, commenters must provide notice to EPA by May 25, 2010. Adverse comments must be filed no later than June 9, 2010. Further details and the technical amendments are available at http://www.epa.gov/otaq/fuels/renewablefuels/regulations.htm
Secretary Chu Announces $80M for Biofuels
DOE Secretary Chu's announcement today regarding $80 million of ARRA funding for biofuels is potentially a positive development for the long-term development of the biofuels industry. What is worrisome from a practical perspective is the division of funding. The National Alliance for Advanced Biofuels and Bioproducts, centered in St. Louis, received $44 million to develop a systems approach for the sustainable commercialization of algal biofuel and bioproducts. The National Advanced Biofuels Consortium, based here in the Pacific Northwest, received up to $34 million to develop infrastructure compatible biomass-based fuels. Meanwhile eight infrastructure projects received up to $1.6 million to support expanded fueling infrastructure for ethanol blends. While the Administration is ahead of the curve in recognizing the importance of long-term support for the development of advanced biofuels, it is overlooking the increasingly challenging environment in first generation biofuels. Simply put- and purely in my opinion- there will be no second generation of biofuels if the first generation does not again thrive. The ethanol industry has hit a blend wall that the EPA has not been willing to help them overcome in the short term. Adding $1.6 million in E-85 infrastructure is but a chip in that wall when one considers the massive costs involved in building a national infrastructure. On the biodiesel side, the current industry has not yet received an extension of its tax credit and was already facing severe challenges. The investors who supported the expansion of the first generation biofuels industry are still tracking their investments and the policy support for the industry. While government funding will further the development of the science of advanced biofuels, private sector involvement will be essential to the ultimate commercialization of these fuels. To accomplish its ultimate goals, the Administration will need to begin to address these issues in a systematic manner.
Stoel Rives is Pleased to Support the Efforts of the Evergreen Team
The goal of the award-winning Evergreen production team is to document, promote and present the clean technology story to audiences of decision makers, regulators, citizens and students in Washington State, the Pacific Northwest and international markets.
In December 2009, the Evergreen team traveled to Copenhagen to document the efforts of the Washington delegation at the United Nations Climate Conference. Videos from this trip, including a report from the Summit for Mayors, conference updates, interviews and "Voices on the Street, are available at http://evergreenfilm.org/home.html.
Stoel Rives is pleased to support Evergreen's effort to promote Washington State as an international leader in clean technology and behavioral change. Learn more about Evergreen at http://evergreenfilm.org.
