EPA Proposes to Overhaul Fuels Regulatory Program and Implement Revised One by End of 2020

On April 13, 2020, EPA released its 506-page proposal to overhaul the fuels regulatory program through "streamlining" compliance and reporting provisions and removing or revising outdated requirements.¹ Although aspects of the proposal are largely a simplification and consolidation of existing Part 80 regulatory requirements in a new Part 1090, the proposal deserves close review from stakeholders given the breadth of its coverage (almost all gasoline, diesel, and oxygenate regulations), the potential implications of revised fuels emissions compliance mechanisms (out with the Complex Model, in with per-gallon RVP regulation), new regulatory definitions, broadened language regarding "prohibited acts" that raise enforcement questions, a new fuels survey and attest engagement requirements—the list goes on.

Overall, EPA anticipates the rules will save regulated parties $32.9 million per year, and potentially save consumers more due to improved fuel fungibility, without a "measurable impact" on emissions or air quality. The proposal is the culmination of multiple years of discussion drafts of the regulations and stakeholder meetings. It fits neatly within the Trump administration's deregulatory agenda, though EPA career staff have long sought to implement many of its changes.

Given the timing—in the midst of a crisis in the fuels markets and a global pandemic—the proposal should not be overlooked by the regulated community, particularly because the revised regulations are slated to take effect January 1, 2021. This anticipated deadline makes for an extremely compressed timeline for EPA to review and respond to comments on the proposal, promulgate a final rule, and for the regulated community to prepare for the revised regulatory regime, which will include new inspection and compliance demonstration protocols, new compliance reporting forms and more. EPA solicits comment on all aspects of the proposal, including whether additional lead-time is necessary for parties to adjust. Once the proposal is published in the Federal Register, stakeholders will have 60 days to submit comments. Below we briefly summarize the proposal's top 10 key changes that warrant close review of EPA's explanation of the revisions as well as the proposed regulatory text.

1. Regulatory Definitions: As EPA notes, "[h]ow it define[s] key terms in the regulations has a significant effect on how regulated parties comply with the regulations."² EPA proposes updates to a number of regulatory definitions that govern parties and products that are subject to various aspects of the fuels regulatory program from the most basic issue of what is "gasoline" to revised definitions of "fuel manufacturer" as well as new definitions and requirements applicable to certain "blender pumps." Careful review of these regulatory definitions and their implications for parties across the fuel distribution system is necessary.

2. Reformulated Gasoline (RFG) Performance Standards: EPA's RFG regulations currently require regulated parties to use the Complex Model to demonstrate compliance with 11 distinct parameters in order to certify RFG batches. The proposal removes this requirement and instead requires all RFG to comply with a 7.4 psi RVP per-gallon limit. In doing so, EPA proposes to "translate" the statutory Clean Air Act VOC reduction requirements into an equivalent per-gallon RVP standard, along the way eliminating RFG performance standards that allowed for averaging of VOC reductions across batches. The transition to a simplified per-gallon RVP standard for RFG will allow for greater fungibility of gasoline between RFG and non-RFG markets. Although EPA aims to simply maintain the status quo with respect to emissions standards stringency, this aspect of the proposal may face increased scrutiny from the NGO community.

3. National In-Use Gasoline and Diesel Survey Program: One of the more significant new initiatives in the proposal is a nationwide survey program to assess gasoline and diesel quality at the retail level. The new survey would replace existing surveys applicable only to RFG, E15, and ultra-light sulfur diesel. Participation in the survey would be mandatory for parties in the E15 distribution system as well as for any gasoline manufacturer that wants to account for downstream oxygenate characteristics in compliance calculations (as summarized below in #8). A benefit of participation in the survey would be the ability to use an affirmative defense for downstream violations of fuel quality standards.

4. Prohibited Acts and Liability Provisions: EPA is proposing to revise and consolidate Part 80's disparate provisions regarding prohibited acts and liability into a handful of simple, extremely broad statements, including: "Any person who violates any requirement of this part is liable for the violation,"³ and "[n]o person may violate any prohibited act in this part or fail to meet a requirement . . ."⁴ The proposed rules also broadly state that "[n]o person may cause another person to commit an act in violation of this part." In an enforcement context, these sweeping articulations provide the agency the widest possible latitude. The proposal would retain Part 80's liability provisions that parent corporations, joint venturers, and partners are liable for subsidiary, joint venturer's or partner's violations.

5. Confidential Business Information (CBI): The proposal puts regulated parties on notice that EPA intends to consider certain "basic information" it collects as ineligible for protection from the Freedom of Information Act under Exemption 4 applicable to sensitive commercial/financial information and trade secrets. EPA asserts these changes are appropriate in light of the Supreme Court's decision in Food Marketing Institute v. Argus Leader Media, 139 S. Ct. 2356 (2019), and related Department of Justice guidance, which provide that information will only be considered "confidential" if parties receiving it provide some assurance it will remain secret. Here, EPA proposes to notify the regulated community that specific types of information will not be maintained as secret. Specifically, for a variety of regulatory requests, including hardship petitions (that would allow refiners exemptions from fuel quality standards) and testing and R&D exemption requests, the information subject to release includes: the party's name and facility; the general nature of the request and relevant time period, as well as, once adjudicated, whether EPA granted relief and any related conditions. Citizens groups and others seeking to understand more about the nature and extent of exemptions the agency grants will likely comment favorably on this aspect of the proposal.

6. Winter Gasoline Flexibility in RFG Areas: EPA is proposing to allow all winter gasoline to be used in RFG areas, without recertification as RFG. This change would increase gasoline fungibility without decreasing gasoline quality as there is no functional difference between winter gasoline in RFG areas and non-RFG areas.

7. Downstream Oxygenate Accounting: EPA proposes to level the playing field for conventional gasoline (CG) and conventional blendstock for oxygenate blending (CBOB) refiners by requiring refiners of both RFG/RBOB and CG/CBOB to test a hand blend (a small sample of BOB and oxygenate) in order to take advantage of downstream oxygenate addition in sulfur and benzene compliance calculations. Under existing regulations, a CG/CBOB producer had difficulty proving volumes of downstream oxygenate were blended into fuel, and only RFG/RBOB producers were allowed to use a hand blend to demonstrate oxygenate characteristics. In the proposed rules, all gasoline manufacturers could take advantage of addition of downstream oxygenate in compliance calculations provided they participate in the survey program described above and in a new national sampling oversight program.

8. Oxygenate Blending Flexibilities: EPA is also adding flexibility for oxygenate blenders to recertify batches of BOB with different amounts of oxygenate if blender can true up the sulfur and benzene characteristics of the fuel to account for any lack of downstream oxygenate dilution. In other words, if an upstream party assumed a blendstock would be blended with 10 percent ethanol, and the blender opts to produce E0 instead, it must account for the discrepancy in benzene and sulfur through purchasing credits. EPA proposes default values of 11 ppm sulfur and 0.68 volume percent benzene.

9. Simplified Reporting and Revised Attest Engagement Requirements: The proposal aims to eliminate reporting requirements for a wide range of gasoline parameters that EPA determined are no longer necessary for tracking and demonstrating compliance with the fuels regulations. As simplified, the proposal retains only four main parameters for gasoline reporting: RVP, sulfur, benzene, and oxygenate type. The revised rules would also slightly modify the content of annual compliance reports, require fewer batch reports, and would allow independent auditors that are registered with EPA to submit annual attest engagements. Additionally, the proposal slightly expands the scope of the attest requirements.

10. In-line Blending Waivers: EPA proposes to expand the in-line blending program to allow both RFG and CG refiners to participate for all gasoline parameters. Under existing rules, CG refiners could only use an in-line blending waiver for sulfur compliance. Under the proposal, both RFG and CG refiners must complete an annual audit in order to take advantage of the in-line blending waiver, and all parties must resubmit applications for existing waivers. Due to the time required for refiners to resubmit and for EPA to process the applications, for this aspect of the rule, EPA is allowing refiners to operate under existing Part 80 waivers until January 1, 2022.

Notwithstanding disruptions associated with the coronavirus, the fuels streamlining proposal is one of many initiatives EPA aims to finalize by the end of the year. Although the proposal does not establish new fuels standards, the array of changes are not insignificant, and it warrants the regulated community's careful consideration.

© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.