RALEIGH, NC -- Gasoline marketers have the right to blend their own E10 gasoline, rather than having to buy a pre-blended fuel from refiners, a federal judge says.
The ruling came after a case heard in the U.S. District Court for the Eastern District of North Carolina. Refiners sued to overturn a state law that requires them to make a conventional unblended gasoline available to marketers who want to produce their own E10 fuel and bars them from including any provision in a marketer?s contract that restricts him from receiving the 4.5 cents per gallon federal tax credit for E10.
?The law does not require that only refiners and suppliers can blend in order to monopolize the marketplace,? wrote Judge Louise W. Flanagan. The flexibility that Congress envisioned when it enacted the renewable fuel program ?is manifestly not the flexibility for refiners to develop a system where they blend all of their gasoline with ethanol and sell only blended gasoline to distributors,? she said. She granted granting summary judgment to the North Carolina State Attorney General Roy A. Cooper and the North Carolina Petroleum Marketers Association, which had joined the suit in support of the state.
The American Petroleum Institute and the National Petrochemical Refiners Association maintained that allowing marketers to blend an E10 would lead to fuel quality problems that could damage the reputation of their brands and would stop them from terminating a marketer?s franchise under the Petroleum Marketing Practices Act for adulterating product.
Flanagan rejected refiner claims that their in-line blending at terminals is superior to marketers? ?riskier? splash-blending techniques, saying both systems can led to quality problems. There is no question that blending fuel ?is an imperfect process,? she noted. Refiners could establish guidelines for blending, require random tests of blended product and forbid the use of the brand if a marketer is unwilling to follow the standards or cooperate in testing. Since they can control quality, refiners cannot claim that allowing marketers to produce their own E10 would lead to consumer confusion. Some suppliers had allowed splash-blending before the law was passed, she remarked.
The law also would prevent them from accurately predicting future demand needs because marketers would blend only when it is in their economic self-interest to do so, leading to a danger of supply disruption or shortages, refiners said. But Flanagan said refiners have numerous ways to predict supply needs. For example, many require marketers to inform them of their supply needs one month in advance. Even if shipping gasoline from the Gulf Coast to North Carolina takes 15 to 25 days, they still have mechanisms in place to alleviate run-outs.
Claims that refiners will have to ship multiple products resulting in storage disruptions if the law remains on the books also do not ring true, Flanagan said. The record clearly reveals that refiners ship unblended gasoline to states with and without statutes like North Carolina?s, she said. While they might prefer to ship blendstock only, they currently ship a full-octane gasoline for boating and two-stroke engine customers to North Carolina. They have not shown that they would have storage difficulties, but only speculated that problems could occur, she said.
Refiners also argued that they would not be fully compensated for the brand value of their product. If marketers add 10% ethanol to branded product, they will only be compensated for 90% of the gasoline. Flanagan pointed out that refiners control the price of their gasoline, whether sold branded or unbranded, and can require the marketer to say whether he is going to blend trademarked fuel. They can then use that information to determine their price and supply forecasts.
As for refiner claims that the state law would usurp a refiner?s right to terminate a marketer, Flanagan said product adulteration under the PMPA referred to commingling one supplier?s trademarked fuel with another. The refiners? argument would imply that any company blending renewable fuel under EPA laws would simultaneously be in breach of the PMPA.
Under federal law, each gallon of ethanol is assigned a Renewable Identification Number (RIN) by its producer, allowing EPA to track renewable fuel volumes. Under EPA rules, suppliers must acquire RINS to demonstrate compliance with renewable fuel obligations. �Marketers who blend their own fuel may not sell the RINs they create to refiners, so making it harder for refiners to comply with the federal requirements. Refiners said it was unfair for them to bear the cost the risk of government penalties for failing to produce renewable fuels while they were ?unable to monopolize the benefits created by the Congressional incentive program,? they said.
Flanagan disagreed. Suppliers had not experienced any supply problems due to marketers seeking to buy conventional gasoline and blend their own fuel. Suppliers had excess RINs that they sold into the marketplace from 2008 to 2010 and none of the scenarios painted by refiners has occurred, she said.
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