When Delta Air Lines bought a Philadelphia refinery last year, it hoped to save on jet fuel.
But the acquisition came with a whole lot more baggage, putting the airline and its new refining subsidiary, Monroe Energy, on the hook to comply with federal mandates to blend more renewable fuel into the nation's gasoline supply.
Through Monroe, Delta is now fighting the renewable fuel quotas the Obama administration's Environmental Protection Agency established for 2013, saying in legal filings that it is "powerless" to comply with the mandates.
Biofuel boosters say that's a situation of Delta's own making.
At issue is the 8-year-old renewable fuel standard that forces U.S. refiners to incorporate an annually increasing amount of biofuels into the nation's diesel and gasoline supply, up to 36 billion gallons by 2022. Monroe Energy's challenge of the EPA's specific quotas for 2013 before the D.C. Circuit Court of Appeals could help dictate the agency's handling of the mandate and spur lawmakers to make bigger changes.
Although the oil industry has mounted its own legal challenge on similar grounds, Delta's fight is unique.
Unlike a broad similar legal battle being waged by the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers, the Monroe Energy case may hinge on the relatively obscure notion of blending infrastructure.
The way the EPA oversees the renewable mandate gives an edge to integrated refiners that own their own blending facilities and equipment to mix renewable fuels with petroleum blend stock to form finished fuel.
That's because the renewable fuel standard forces refiners and importers to acquire transferrable credits known as "renewable identification numbers," or RINs, to prove they have complied. But only blenders can generate those credits -- one for each gallon of renewable fuels mixed into petroleum blend stock.
Infrastructure lacking
If a refiner doesn't blend in enough renewable fuels to satisfy annual quotas -- either by choice or because it doesn't have the blending infrastructure in the first place -- it can go shopping for the credits from blenders or financial traders who buy and sell them.
Monroe Energy is in that camp, along with other independent "merchant" refiners, such as San Antonio-based Valero Energy Corp., which despite being the nation's third-largest renewable fuel producer, doesn't have blending infrastructure and can't generate its own credits. Valero generally sells unblended products to wholesale marketers.
In its lawsuit, Monroe says it is unfairly forced to purchase all the renewable identification numbers it needs to comply with the renewable fuel mandate, effectively facing "penalties due to structural conditions beyond their control."
"The RIN program perversely penalizes independent refiners for market conditions that they are powerless to change," Monroe said in written arguments, filed with the D.C. Circuit Court of Appeals on Dec. 9. Periodic price spikes earlier this year cause "a disproportionate economic impact on Monroe for which no relief is available."
Another view
But biofuels boosters say Delta and Monroe had plenty of other options, beginning when the airline bought the Trainer refinery complex near Philadelphia from Phillips 66 last year. Instead of buying blending infrastructure at the same time, Delta essentially picked up a merchant refiner that could not generate its own credits.
Paul Winters, a spokesman for the Biotechnology Industry Organization, which is intervening in the lawsuit on behalf of the EPA, said Delta and Monroe had other options.
"The problem with what they're arguing is that Delta created the circumstances that prevent compliance with the (rules) when it bought the Trainer refinery and formed Monroe," he said.
Various strategies
Other independent refiners have adopted a variety of strategies for dealing with volatile credit prices.
For instance, Dallas, Texas-based Alon USA is buying the compliance credits under fixed-price contracts. Another Dallas-based refiner, HollyFrontier Corp., said it is using "various approaches" to blunt its exposure to the "extremely volatile" credits.
Monroe Energy's legal challenge has been combined with the API and American Fuel and Petrochemical Manufacturers' lawsuits, with the case likely to be argued in the spring. The two oil industry trade groups take broader aim at the EPA's handling of the 2013 quotas, saying they were based on improper fuel demand projections and that targets for cellulosic biofuel were "unrealistically high."
The trade groups also argue that the EPA violated federal laws when it gave Alon's Krotz Springs refinery in Louisiana a hardship exemption from the 2013 mandates. That exemption wasn't included in a draft proposing the 2013 mandates, effectively depriving other refiners from weighing in on Alon's possible waiver, they said in joint written arguments to the court.
Reduction proposed
The EPA is moving on a separate track to complete renewable fuel targets for 2014. In November, the EPA proposed requiring refiners to use 15.2 billion gallons of renewable fuels in 2014, some 3 billion below the amount mandated in federal statutes.
Biofuels boosters have threatened their own lawsuit against the 2014 quotas, unless EPA makes changes to push the mandates higher.
Copyright 2013 - Houston Chronicle
