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.
RFS Regulatory Structure
Pursuant to the Clean Air Act ("CAA"), EPA has substantial investigative and enforcement authority to regulate all aspects of the RFS program, including developing and revising the regulations; interpreting and issuing guidance; and most importantly, investigating, enforcing, and meting out punishment for violations. EPA's investigations and enforcement actions to date have focused on alleged activities that undercut the integrity of the RFS program. Specifically, EPA has prioritized review of activities that interfere with the achievement of the underlying policy goals: (1) to improve energy security by ramping up biofuels production to 36 billion gallons annually by 2022; and (2) to reduce GHG emissions by prescribing and tracking preferred feedstock sources for those biofuels.
A small number of key regulatory provisions govern RFS compliance. All of the requirements summarized in this alert pertain to RFS2 and are found in Title 40 of the Code of Federal Regulations, Subchapter M, Section 80.1400, et seq. The corresponding regulations for RFS1 are found in Subchapter K, Section 80.1100, et seq. In most respects, the RFS2 regulations track the previously existing RFS1 regulations. In some areas, however, there are significant distinctions between the RFS1 and RFS2 regulations. Thus, to the extent that an EPA investigation straddles the time period covered by RFS1 and RFS2, each allegation must be analyzed within the applicable regulatory structure.
The federal regulations establish the acts that are prohibited under the RFS program, including improperly generating RINs, creating or transferring invalid RINs, failing to acquire sufficient RINs to meet a Renewable Volume Obligation ("RVO"), or meeting an RVO with valid RINs where the corresponding fuel is ultimately used in a non-qualifying use. A regulated entity is prohibited from causing another person to commit a violation or to fail to meet any requirement under the regulatory subpart. These rules are comprehensive and complex, and require a close review. The regulations clearly establish who is liable for violations under the program. Any person who violates the regulations may be liable. In addition, any person who causes another to violate or to fail to meet a requirement may be liable. Parent companies are liable for any violation by any of its subsidiaries, and each partner to a joint venture is jointly and severally liable for any violation committed by the joint venture operation.
Violations are enforced under strict liability, meaning that neither mental state nor intent is required as an element to prove the violation occurred and that the alleged violator is subject to penalties. EPA need only show that the regulation required a certain action or inaction, and that the alleged violator failed to conform to that obligation. There are no reported cases reviewing EPA's authority to impose strict liability under the RFS; however, EPA has been highly successful in court reviews of other CAA enforcement actions where the standard is strict liability. For example, during the period when unleaded gasoline was introduced, there were a series of enforcement actions against retailers who improperly sold fuel with excessive lead concentrations through unleaded pumps. In addition to the retailer, EPA's regulatory regime extended strict liability to the branded wholesale supplier for the station even if the wholesale supplier could prove that it did not supply the contaminating fuel to the retailer. Generally speaking, courts upheld EPA's ability to impose this strict and vicarious liability, but there were some court-imposed limitations to EPA's authority that may become significant in RFS cases as well.
Any person found liable of violating the RFS is subject to a maximum civil penalty under the CAA in the amount of $37,500 for each day of violation. For example, failing to meet RVO requirements or causing another person to fail to meet RVO requirements may constitute a separate day of violation for each day in the compliance period. Penalties under the CAA typically also include the amount of economic benefit or savings afforded the violator as a result of the non-compliance.
The CAA affords EPA broad powers to investigate non-compliance and to enforce alleged violations. Using the strict liability legal standard, EPA can assert that a person subject to RFS is liable and demand penalties simply by showing that the company did not conform to the regulatory obligations. Neither intent nor knowledge on the part of the alleged violator is required for liability to be imposed and upheld. Proof of a violation is often readily provided to EPA by the regulated entity after the entity is compelled to do so in response to an EPA request for information.
EPA utilizes its broad investigative power to request information from regulated entities in order to evaluate and determine whether a person is in violation of applicable air quality regulations—in this case those implementing the RFS. EPA has explicit authority to enter the premises, review records, require sampling, and request information necessary to determine compliance with the CAA. To assess compliance with RFS, EPA may issue written requests for information to regulated entities seeking paper records required to be kept under the rules. The information requested can be voluminous and difficult to access or assemble. EPA typically provides a short deadline for response.
Receipt of a request for information is serious. The request must be addressed promptly, and a response must be prepared carefully. Failure to timely respond to EPA may result in civil penalties. Failure to respond truthfully, accurately, and completely may result in criminal sanctions. A response may simply require the straightforward submission of forms or reports, or may require legal analysis of the underlying requirements and level of compliance demonstrated by the records. In any case, a response takes time and resources. The high stakes require that the respondent exercise due diligence. Often EPA is willing to extend the time to respond; however, a company should be prepared to demonstrate good faith to conform or good justification for an extension.
In any response to a federal government request for information, and particularly in the case of EPA's enforcement-oriented investigative requests, the company must understand the meaning of the information provided in relation to the regulatory requirements, and be aware of the compliance status illustrated by the response. EPA will use the information provided against the company and in support of its allegations. Once EPA receives a response, it may review the material promptly or postpone review for months or years. Generally, EPA is subject to a five-year statute of limitations, prompting the agency to assert its claim for penalties under the CAA within five years of EPA becoming aware of the violation. This statutory deadline, however, can be overcome in certain instances, such as when a claim is made by EPA for injunctive relief or when EPA alleges that a violation is continuing.
EPA Enforcement Actions
The CAA provides four enforcement responses for EPA to utilize when violations are detected. EPA may issue an administrative penalty order, so long as the total penalty amount does not exceed $295,000 and the violation occurred no more than 12 months prior to initiation of the action. EPA may issue a compliance order requiring the regulated entity to cure the violation. EPA may also request that the Department of Justice initiate a civil judicial action in the federal court where the business is located. And finally, EPA may request that the Department of Justice commence a criminal action.
In the first two types of responses, EPA staff and attorneys lead the prosecution and are involved in the inevitable settlement discussions. In the latter two types of responses, lead roles in the enforcement discussions are typically taken by Department of Justice attorneys, who rely upon EPA staff and attorneys for substantive input. In any case, conversations with EPA at this stage can become adversarial quickly. An entity subject to RFS and targeted for enforcement must develop a sound strategy for response, including an internal comprehensive assessment of the current compliance status and prompt attention to cure any deficiencies.
Entities subject to RFS may proactively conduct internal compliance audits to self-detect and self-police any deviations from the regulatory requirements. This voluntary activity extends beyond the attestation requirement set forth in RFS2. A compliance audit could provide more in-depth evaluation of the company's understanding and implementation of the complex rules governing feed stock compliance, RIN generation, RIN tracking, RIN trading, RIN retiring, or recordkeeping. In the event that deviations are detected in the course of an RFS compliance audit, a company may be afforded some relief from EPA enforcement if the violations are properly self-disclosed to EPA. Under EPA's policy, entitled "Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations," and published April 11, 2000, environmental violations disclosed properly and cured expeditiously can be afforded certain enforcement relief. Instances of applying this policy to RFS violations are not yet known; however, the policy is certainly broad enough to include RFS violations of CAA requirements that are self-detected, properly disclosed, and promptly corrected.
Penalties claimed by the federal government for violations of the CAA, including RFS regulations, are negotiable. Generally, EPA will attempt to recover any economic benefit afforded the violating company, as a result of the non-compliance, in an effort to level the playing field with companies who comply. EPA will also assess "gravity" penalties to capture the real or perceived impacts of the violation on the environment, on public health, and, in the case of RFS2, on the ability of the U.S. to achieve the two underlying goals of the Energy Independence and Security Act of 2007 ("EISA").
Responses to requests for information must be filed with a certification by a company officer. This certification attests that, under penalty of law, the officer is familiar with the information in the responsive documents and attachments, and that the information is true, complete, and accurate to the best of the person's knowledge and belief. There are significant penalties for knowingly submitting false statements and information including criminal provisions under 18 U.S.C. Sections 1001 and 1341. The officer making such a certification needs to thoroughly understand the nature of the certification as well as the substance of the response.
It is too early to describe the magnitude of penalties EPA may pursue in RFS enforcement matters, but the statutory maximum is severe. EPA typically collects penalties well below the statutory maximum, but five-, six-, and seven-figure fines for CAA violations are common.
The NOVs issued by EPA against Clean Green Fuel and Absolute Fuels establish that the agency is intensifying its program of RFS enforcement. Due to the underlying goals of energy security and GHG reduction, the RFS program is complex and the burdens it places on participants are significant. Given EPA's expansive authority under the CAA and the RFS, participating companies are well-served to develop a thorough understanding of the program, as well as its constantly evolving compliance obligations. In the event that a company receives a request for information or notice of violation from EPA, it is necessary to revisit compliance status immediately and with a heightened focus on the EPA's area of inquiry to determine the appropriate response and meet the demanding response requirements.