In his confirmation hearing this morning, Scott Pruitt, President-Elect Trump’s nominee to be EPA Administrator reiterated his support for the Renewable Fuel Standard but specifically declined to oppose shifting the point of obligation for compliance from refiners to blenders and retailers.
Such a move would be a boost to merchant refiners like Valero, CVR Refining, PBF Energy, Philadelphia Energy Solutions, HollyFrontier, CVR Refining and Delta Airlines’ Monroe Energy. Compliance costs for these companies are in the hundreds of millions and for some companies even exceed labor costs.
We wrote in a client note yesterday that investors should closely watch Pruitt’s responses in the confirmation hearing for signals on policy changes that could have meaningful impacts on various sectors and companies.
In the days leading up to the hearing, farm-state Senators have expressed satisfaction in Pruitt’s answers in one-on-one meetings regarding his and President Trump’s support for the Renewable Fuel Standard (RFS).
In the hearing, Senators asked Pruitt to state his position for the record. Pruitt responded that he and President-Elect Trump support the RFS “as intended by Congress” and added that waivers to volume requirements under the 2005 law should be used “judiciously.”
As we forecasted in our client note yesterday, we thought Pruitt would get direct questioning on shifting the point of obligation for RFS compliance from refiners to blenders/retailers. As we said in the note, we believe Pruitt is inclined to support the move in the point of obligation but said that we expected Pruitt to cite the on-going comment period on EPA’s rejection of the Valero petition as a way to avoid giving a direct answer.
That is exactly what happened. We believe that Pruitt declining to answer the question on shifting the point of obligation is a sign that he is open to making the change. It is important to note that EPA can do this through a proposed rulemaking and does not require any approval or action from Congress.
Here is the relevant transcript from the confirmation hearing:
SENATOR DUCKWORTH: If confirmed will you commit to opposing any and all proposals to move the point of obligation under the RFS program from refiners to blenders?
EPA NOMINEE SCOTT PRUITT: Senator, as you know, the EPA is actually involved in a comment period on that very issue. And to prejudge the outcome of that … I would not be able to do that.
There are many aspects of the program, from the trading program to monitoring of fraud in the system that need to be better administered by the EPA. These have been administration issues. The EPA has created uncertainty. We talked about it a couple minutes ago with the Senator [Ernst]. There has been a large amount of investment that has gone into infrastructure because of the 2005 law. Those individuals need to have certainty and confidence that the RFS is going to be enforced and administered pursuant to the desires of Congress.
SENATOR DUCKWORTH: But if you were to do that you would have to answer yes because to move the RFS from refiners to blenders is actually one of these ways that you can undermine the RFS standards as intended by Congress.
From a political standpoint, the Trump Administration wants to show support for the RFS since he won Iowa and other farm states. But in our view, Pruitt and the incoming White House are planning to thread the needle on the issue. They will maintain that you can support the RFS while making the move on the point of obligation. Thus, we saw great emphasis from Pruitt today about meeting the volumetric requirements in the 2005 law and being “judicious” about using waiver authority.
EPA has authority to change the obligated party through a rulemaking because the current framework was established by regulation and not by the 2005 law. EPA ultimately made refiners the obligated party because there were fewer of them and thus easier to regulate as compared to the alternative of thousands of blenders/retailers.
Carl Icahn, Trump’s incoming regulatory adviser, and a major shareholder of CVR Refining, is a leading proponent of shifting the point of obligation and repealing the RFS. Icahn was one of several advisors who interviewed Pruitt and other EPA candidates before Trump selected a nominee. We think Icahn would approve of Pruitt’s answer today.
Refiner stock prices rose after Trump’s election in November. A successful Senate confirmation vote for Pruitt could result in another bump in stocks prices of affected independent refiners. An EPA notice of proposed rulemaking early in the new administration would certainly have an impact on stocks.
