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CFTC and EPA sign Memorandum of Understanding on Renewable Fuel Markets

A slowly developing renewable fuels market, several well-publicized fraud cases, and EPA’s delayed volumetric designations that frustrated industry participants have led EPA and the CFTC to a new era of cooperation. On March 17, 2016, the Commodity Futures Trading Commission (CFTC) and the Environmental Protection Agency (EPA) announced that they would share Renewable Fuel Standard data and analysis pursuant to a Memorandum of Understanding (MOU). Under the MOU, the CFTC and EPA can share information and conduct joint or separate investigations into potential fraud, market abuse, deceptive practices, commodity market manipulation, or other violations relating to the generation of, and trading in, Renewable Identification Numbers (RINs).

EPA is responsible for the Renewable Fuels program, under which petroleum marketers must sell a specified volume of renewable fuels each year. The RIN is the currency used to demonstrate compliance. RINs are self-generated as the renewable fuel is produced and sold into the market. The RIN can be “separated” from the fuel and bought and sold on what is now a robust RIN market in the EPA Moderated Transaction System (EMTS).

In recent cases, fake RINs have been created and traded. For example, on March 7, 2016, the owner of a biodiesel company in Texas, Philip Joseph Rivkin, was sentenced to 10 years in prison and ordered to pay $138 million in restitution and forfeiture for faking the production of millions of gallons of biodiesel at his Green Diesel LLC’s Houston facility and selling over 60 million bogus RINs. In 2012, the owner of Clean Green Fuel, LLC, was found guilty of wire fraud, money laundering, and Clean Air Act violations for similar fake RIN transactions.

The worst consequence of these fraud convictions, though, was on the buyer of the fraudulent RINs. The RFS is a “buyer beware” program, and fraudulent RINs must be replaced, at great cost, by the obligated parties. The “Q-RIN,” introduced by EPA in 2014, helps to defeat some fraud potential but not all fuel goes through the “qualification” process.

EPA’s delayed volumetric designations for 2014, 2015, and 2016, not announced until November 30, 2015, caused noticeable changes in the futures markets. In December 2015, Reuters reported that U.S. gasoline futures prices on the New York Mercantile Exchange rose due to the EPA’s increase in requirements for refiners to meet renewable fuel requirements, boosting RINs and making it more costly to blend gasoline.

CFTC and EPA each have a need and interest in the information being shared. The EPA will benefit from CFTC advice on techniques that could be employed to minimize fraud and market abuses as well as conduct appropriate oversight in RIN and renewable fuel markets to fulfill the EPA’s functions. Additionally, the information would increase the CFTC’s understanding of the operation of and participants in the RIN and renewable fuel markets. As any potential fraud or market abuse related to RINs could have an impact on futures prices under the CFTC’s jurisdiction, the CFTC could also be interested in investigating activities in the RIN and renewable fuel markets.

© 2019 Schiff Hardin LLP

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About this Author

Partner

Debra Ann Palmer has been involved in a variety of proceedings before the Federal Energy Regulatory Commission (FERC) and the U.S. Courts of Appeals. She has 25 years of experience advising participants in the electric and natural gas industries on matters related to: Enforcement and compliance with FERC rules and policies Rates and terms and conditions of service Competitive electric and gas markets Electric reliability requirements Regional Transmission Organization (RTO) requirements

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Jane E Montgomery, Schiff Hardin Law firm
Partner

Jane E. Montgomery concentrates her practice in a variety of matters at the local, state and federal levels. Ms. Montgomery regularly: Counsels many companies with day-to-day compliance issues, including air permitting, NSPS, MACT, and solid and hazardous waste issues. In her work, she often encounters difficult elemental mercury, manufactured gas plant, and PCB issues, and she recently has focused on Reform New Source Review (NSR) compliance for utilities. Counsels clients with respect to climate change issues. Such work has included work on carbon sequestration issues, greenhouse gas inventory issues, and offset projects. Advises clients concerning audit programs and other environmental management mechanisms. Represents clients in a variety of civil and criminal enforcement actions, including responses to notices of violation or lawsuits, and in pre-enforcement efforts, such as agency requests for information. Represents clients in other Superfund actions, generally at the cost recovery or allocation phases. Counsels clients on "brownfield" redevelopment issues. Successfully represents clients in water matters, including modification of Army Corps of Engineers permits. Experience as common counsel in Superfund matters has figured prominently in her practice. Ms. Montgomery has represented groups of parties alleged to be responsible for environmental remediation in different situations. For example: In Toledo, Ohio, Ms. Montgomery represented an individual client and, later, a group of parties at the Stickney and Tyler landfill sites. Ms. Montgomery represented the common interests of multiple parties in dealing with federal and state regulators and pressed those interests to successful resolution of complex issues. In another joint defense representation, Ms. Montgomery was part of a team defending a similarly situated industry group in a cost recovery action filed in federal court. The matter involved resolution of difficult factual allocation issues. Ms. Montgomery was selected judge for DaimlerChrysler's Environmental Leadership Award Competition in 2002.

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Kenneth W. McCracken, Litigation Attorney, Schiff Hardin Law Firm
Partner

Kenneth W. McCracken concentrates his practice in litigation, compliance and enforcement matters related to futures, derivatives and commodity products in the financial markets. As a former Chief Trial Attorney in the Division of Enforcement for the U.S. Commodity Futures Trading Commission (CFTC), Mr. McCracken supervised a team of attorneys in investigations and litigations in federal court. He has investigated, litigated and supervised all aspects of financial regulatory matters including market manipulations, trade practice violations, and commodities and securities...

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