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Washington's Latest Special Favor

Of the nation's 143 refineries, one was exempted from the EPA's ethanol mandate. Why?


For a glimpse at the secret, special-favors factory that Washington has become under President Obama, check out this week's big news out of the Environmental Protection Agency. Or rather, look beyond the headlines to the corporate handout hidden within.

The big news was that the EPA issued—finally—its infamous annual quota for renewable fuels. That mandate tells the nation's refineries how much renewable fuel (ethanol) must be blended annually into gasoline, a quota that is becoming a pernicious driver of gas prices. The EPA was supposed to release the 2013 quota last November but decided to leave the industry in panicked uncertainty until now.

The 89-page rule is dull reading, until you get to page 11. Tucked on that page is one short sentence, which reads: "EPA has approved a single small refinery/small refiner exemption for 2013, so an adjustment has been made to the standards to account for this exemption." In English: Of the nation's 143 refineries, one (and only one) lucky player somehow had the pull to win itself a free pass from this government burden. Not only that, the rest of the industry gets to pick up its slack.

An exemption is no small privilege. Congress, in its limited wisdom (and fealty to corn farmers), passed legislation in 2007 requiring that the U.S. use of renewable fuels increase to 36 billion gallons annually by 2022. This year's EPA quota is 16.5 billion gallons, and the requirements keep ratcheting up even though U.S. gasoline use is falling.

This matters because for refineries to stuff ballooning amounts of ethanol into a static gas pool, they must blend it at levels of more than 10%. Since the nation's auto makers have declared they will void the warranties of cars using gas with more than 10% ethanol, refineries face lawsuits. Most have instead turned to buying federal renewable "credits" to make up for the ethanol they don't blend.

As demand for these credits skyrockets, so has the price—jumping from a few pennies a gallon last year to close to $1 a gallon today. Oil refiner Valero has said the credits could raise its cost by a stunning $750 million this year, a hit that will be passed on to consumers. PBF Energy just told investors that its disappointing second-quarter earnings were rooted in the mandate, noting that the $200 million it expects to fork over for ethanol credits this year will exceed the salaries and wages that it pays to operate all three of its refineries.

Some refineries are lowering production simply to mitigate the credit costs. Others are beginning to export products to avoid the mandate. Both moves could tighten U.S. supplies and lead to higher prices at the pump. Most every refinery is hurt by this rule.

So an exemption from today's mandate is far more than a perk—it is a lifeline, an outright payday. Making this indulgence even more curious is that it is being issued by the Obama EPA, an agency that isn't exactly known for doing favors for beastly carbon producers.

So who is the lucky dog? Who could make this happen? That's the best part. The EPA won't say. The agency not only refused to name the refinery in its rule, but also obscured certain numbers in the document to hide the beneficiary's identity. An EPA press officer would not give me the name, citing "confidentiality restrictions."

The agency did send me a 2011 document that shows it granted exemptions at that time to 13 small refineries. But that exemption applied only to 2011 and 2012—and the 13 refineries had been recommended by a public Department of Energy analysis, which laid out reasons for the exemptions. The EPA rule this week said this exemption had been granted under EPA's authority to evaluate refineries on a "case by case" basis. The press officer said DOE was involved in the evaluation.

What was the actual process? It's a worthy question, given that the refinery sector is no stranger to politics. As hard times have hit, politicians have become deeply involved in protecting their home-state refineries. Many are unionized, which raises the question of whether Big Labor engaged in an exemption request.

Dozens of small refineries are being crushed by the mandate, and a number have petitioned the EPA for exemptions. If "disproportionate economic hardship" is the agency's standard, no doubt plenty would qualify. Yet only one got the nod. The rest of the industry is dying to know what is so special about this refinery, especially since the EPA is making every other refinery shoulder its burden.

The public should want to know too. Washington is rife with secret deals that reward select corporate players, and the numbers have only accelerated under this "most transparent" of administrations. If the process by which the EPA issued this exemption was aboveboard, it should have no problem divulging details. Until that time, the public might fairly assume funny business.

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