April 23, 2018

Clerk of the Board

California Air Resources Board

1001 I Street

Sacramento, CA 95814

Electronic Submission via https://www.arb.ca.gov/lispub/comm/bclist.php

RE: LCFS18 – Proposed Amendments to the Low Carbon Fuel Standard (LCFS) Regulation and to the Regulation on Commercialization of Alternative Diesel Fuels (ADF)

Dear Clerk of the Board:

Renewable Energy Group, Inc. (REG) appreciates the opportunity to comment on proposed amendments to the LCFS and ADF. REG is a leading provider of cleaner, lower carbon intensity products and services. We are an international producer of biomass-based diesel, a developer of renewable chemicals, and are North America's largest producer of advanced biofuel.

REG utilizes an integrated procurement, distribution, and logistics network to convert natural fats, oils, greases, and sugars into lower carbon intensity products. With 14 active biorefineries, a feedstock processing facility, research and development capabilities, and a diverse and growing intellectual property portfolio, REG is committed to being a long-term leader in bio-based fuel and chemicals.

Through the end of 2017, REG has produced nearly 220 million gallons of biomass-based diesel that has been delivered to the state of California resulting in approximately 2.25 million MT of carbon reduction for the residents of California.

We appreciate the time and energy CARB staff have committed to this rulemaking process over the past few years. We are appreciate the countless public workshops and discussion we have had with CARB staff. We are hopeful that this updated rule-making will continue to set the standard for all other low carbon/clean fuel policies around the world.

As members of both the California Advanced Biofuels Association and the National Biodiesel Board (NBB), we wish to align ourselves with the comments they have submitted. In addition, we have developed additional comments included in the body of this submission which we wish to highlight and emphasize for your additional consideration.

§95481. Definitions and Acronyms

REG appreciates the effort CARB staff made to simplify the animal fat definition. However, we believe it may be more confusing under the proposed changes. Confirming that yellow grease is solely used cooking oil seems contradictory. Does the proposal mean we have to prove that 100% of the yellow grease is used cooking oil for classification as used cooking oil? Or does it mean that there is a way to determine that 50% of the yellow grease is used cooking oil and classify it as such? We have provided suggested edits based on our assumption that the meaning is the latter.

“Animal Fat” means the inedible fat that originates from a rendering facility as a product of rendering the by-products from meat processing facilities including animal parts, fat and bone. “Yellow grease” must be reported under an applicable animal fat pathway if evidence is not provided to the verifier or CARB to confirm the amount of UCO present.

“Yellow Grease” means a commodity produced from a mixture of: (A) used cooking oil, and (B) rendered animal fats that were not used for cooking. This mixture often is combined from multiple points of origin. Yellow grease must be characterized as “animal fat” if evidence is not provided to the verifier or CARB to confirm the amount of UCO present.

“Feedstock First Collection Point” means the facility that aggregates and stores or treats feedstock materials collected from a point of origin. The first collection point may be upstream of the fuel production facility, or, if feedstocks are transported to the fuel production facility directly from the point of origin, the first collection point is the fuel production facility. “First-collection Point” means the facility that aggregates and stores or treats feedstock materials collected from a point of origin.

“Specified Source Feedstocks” means feedstocks that require the chain of custody evidence specified in 95488.8(g)(1)(B) to be eligible for a reduced CI associated with the use of a waste, residue, by-product or similar material. Specified source feedstocks are identified in section 95488.8(g)(1)(A).

REG continues to have concerns around low carbon intensity (CI) fuel producers tracing feedstocks such as used cooking oil (UCO) back to the point of origin and/or maintaining records. We continue to maintain that a risk-based approach to regulating this area is critical. The main focus of regulatory activity should be upon those areas most at risk for meaningful fraud (meaningful meaning having a significant financial impact). Identifying each restaurant contributor of UCO should not be as important as ensuring the aggregator has appropriate records and can verify, based on analysis, the material is indeed UCO. As the European Commission noted in a letter to RED voluntary schemes like ISCC back in 2014, “…the risk of fraud committed at the level of restaurants can be considered to be relatively low. The risk will be higher at later stages of the chain of custody, e.g. for collectors of UCO, traders, or large producers where the waste oil is a considerable source of income. This should be reflected in the auditing rules. Several voluntary schemes have developed approaches where the focus of the auditing effort at the origin is placed on the collectors of UCO.”

REG opposes the current definition of renewable propane because it would exclude REG and other renewable diesel producers’ renewable LPG from the program. Our butane content tends to be higher typically ranging from 4% to 7.5% though it is well under the 30% allowed in Europe. At this time, we are not aware of any attempts at selling renewable LPG as a neat fuel to end transportation users in the United States so it is much more likely to be used as a blendstock at inclusion rates of less than 50%. The final fuel product would still meet the spec used in 13 CCR § 2292.6. Therefore, REG proposes that the definition for renewable LPG/propane be equivalent to the Liquefied petroleum gas (LPG or propane) definition which references a definition in the Vehicle Code to avoid two sets of rules. A few others options include the following:

“Renewable Liquefied petroleum gas (LPG or propane)” means a renewable fuel that has the same meaning as defined in Vehicle Code section 380.

As an alternative to the REG proposal above, CARB could add language requiring the final on-road propane fuel (renewable and/or fossil blend) must meet 13 CCR § 2292.6. This allows components like renewable LPG into the program while still ensuring the spec enforced by the California Department of Food and Agriculture is met.

Delete the renewable propane definition altogether and include it under the Liquefied petroleum gas (LPG or propane) definition.

Use the Vehicle Code section 380 definition until an ASTM spec for renewable LPG is developed.

§95482. Fuels Subject to Regulation

REG strongly supports the addition of alternative jet fuel and renewable propane as opt-in fuels and removing the exemptions for military tactical vehicles and aircraft. We would ask CARB to consider treating locomotives and ocean-going vessels similar to jet fuel (i.e. exempt petroleum fuels and allow for opt-in status for low CI fuels). The case for including marine vessels is compelling as Europe is currently moving to incentivize bio in marine applications

§95483 – 95483.3. Fuel Reporting Entities, Opt-in Entities, LCFS Data Management System, and Change of Ownership or Operational Control

REG supports the drafted rules for alternative jet fuel and renewable propane. In addition, we agree that CARB should not require entities buying below the rack to report to LRT-CBTS unless they export the fuel.

We have concerns with the practicality of 95483(a)(3) Transfer Period. We understand concerns that fuel may transfer with obligation after a CI benchmark has changed, but the potential solution seems to create more problems than solve.

We have concerns around the drafted change of ownership rules and which are elaborated on below.

A deal could fall through and ultimately not occur, but the change in notification would have already been made which would necessitate another change notification which will confuse the issue.

Entities in the deal may not legally be able to disclose prior to completion of the deal. Notification to CARB may violate an NDA, as well as possible state specific laws impact commerce; lastly, such provisions may be impossible to reconcile with SEC reporting requirements for public companies.

Notification to CARB would be of public record that by itself, may impact the ability to close.

If CARB were to require this notification paperwork to occur prior to the next quarterly submission of credits or within some reasonable time frame, say 45 days subsequent to the actual change in ownership, there would be no issue with the requirement.

§95484. Average CI Benchmarks

REG thinks the benchmark for alternative jet fuel being lower than diesel and gasoline will prevent this new opt-in fuel from taking off. CARB should rethink its approach in this area and better affirm its support of the alternative marketplace.

§95485. Demonstrating Compliance

REG believes the agency must define what the interest rate is going to be in 95485(c)(1)(A)(3). As a starter, we suggest prime + .25%.

§ 95486. Generating and Calculating Credits and Deficits

REG requests clarification around 95486(a)(1)(B). Does this mean that parties have to reconcile transactions “without obligation” in addition to those “with obligation”? The market has seems to have “worked out the kinks” in transactions “with obligation”, but those “without obligation” are still very much in a work in progress especially since there was no way to reconcile “without obligation” transactions until a few months ago in LRT. Furthermore, there are still counterparties with small volumes below the rack who are not registered in LRT. Since those counterparties won’t have to undergo audits, REG requests that CARB not withhold credits over unreconciled volumes on transactions “without obligation”.

We conditionally support the buffer account concept with one modification. We would like any credits that are eligible for the buffer account to be first applied to any deficits discovered during verification. For example, if REG Albert Lea runs a higher CI than the FPC allows for, resulting in 500 deficits being created, but REG Newton runs a lower CI than the FPC resulting in 700 credits being created, the 500 credits from REG Newton would cover the 500 deficits at REG Albert Lea since they’re both under REG Inc. with the remaining 200 credits going into the buffer account.

We also request clarification that renewable propane will use propane’s energy density on Table 4 and request that CARB add renewable naphtha to Table 4 as well. CARB may already have data on these products from different RHD producers in their pathway applications. If not, REG is willing to assist in the calculation of these energy densities using real world data.

§ 95486.1 Generating and Calculating Credits and Deficits Using Fuel Pathways

REG remains adamantly opposed to credits being generated on the day after the reporting deadline per (b) unless those deadlines are moved up. We understand the desire to automate the reconciliation process in LRT with a system check, but if those volumes are going to be verified, this system check seems to be duplicative of verification. Furthermore, CARB staff has increased the scrutiny of reporting variances within LRT so we are not sure how much this system check will help.

As noted in prior comments, REG, and likely other stakeholders, have already invested a significant amount of time and resources on education of the timing of LCFS credit revenue recognition in our financial statements relative to fuel sales with both internal and external parties. Currently, there is a 1 quarter delay between fuel activity and credit generation (i.e. Q1 fuel sales generated credits in Q2). Under the proposal being considered, the delay would be 2 quarters (i.e. Q1 fuel sales wouldn’t generate credits until July 1 or Q3).

One day makes a materially significant difference for financial reporting purposes especially considering the new revenue recognition rules being implemented by the Financial Accounting Standards Board beginning January 1, 2018. We would effectively be reporting LCFS credit revenue two quarters after the fuel that generated the credit has been delivered to our customer, creating a timing mismatch and introducing additional complexity in other regulatory filings and risk of confusion in our public financial reporting (i.e. SEC reporting). Therefore, in the strongest language possible, we encourage ARB staff to keep the system as is. Under no circumstances should the reconciliation period stretch beyond 1 quarter.

§ 95487. Credit Transactions

REG is both encouraged and confused by the drafted language under credit transfers in 95487(b). We think (B) is much better allowing for more flexibility. In (C), we recommend the following language:

“Credit Seller Requirements. Seller must initiate the documentation by completing and posting for the Buyer’s review an online Credit Transfer Form (CTF) provided in the LRT-CBTS. The CTF shall contain the following fields:”

The language, “From the date of the credit transaction agreement, within 5 days,” seem to imply that we will have to transfer credits within 5 days of when the agreement is completed which does not align with (B). It also does not align with common trade practices when companies will book a deal, say on February 5, for a transfer occurring during a window like Q3 (July thru September).

How will (C)(8) work? Will there be optional fields when we go to transfer credits in LRT? Will there be a new form in the case of e? Will we have to input the same data for each transfer? For example, we may have more than 5 transfers on the same agreement. Will we provide the same data each time?

Lastly, related to the comments above on adding fields, we recommend allowing credit transfers to be done via Excel and/or XML file to automate the process and reduce errors. Other programs we transact in allow for trades like this to be uploaded via Excel and/or XML file similar to how fuel transactions can done in LRT currently. However, on credit transfers, we have to manually fill out the form each time we do a transfer which leaves the entire process prone to unacceptable levels of human error. We are not aware of functionality in LRT that would allow for one person to prepare a transfer and another to review it prior to transfer. So while this process has not been too onerous so far due to the limited number of fields, adding additional fields that are not straight forward will lead to mistakes. As you know, even if mistakes are realized quickly, an email is automatically sent to counterparties and credits can be accepted within seconds with those mistakes. We again recommend allowing credit transfers to be done via Excel and/or XML.

Lastly, we would like to reiterate our support to CARB for an integrated LCFS Credit market with Oregon and British Columbia similar to discussions and developments within Cap’N’Trade.

§ 95488. Entities Eligible to Apply for Fuel Pathways

REG looks forward to start updating of all of its fuel pathways under CA-GREET 3.0. We hope that we are able to start using them during 2019 though it appears that there could be a significant rush of new FPCs come January 1, 2020. We suggest that CARB have a transition period to help avoid overloading CARB staff with hundreds of simultaneous requests.

§ 95488.4 Relationship of Pathway Carbon Intensities to Units of Fuel Sold in

California.

REG requests clarification for the conservative margin of safety concept. Upon first glance, it appeared that was the max CI number in the case of over generation to be used. For example, if our plant had a 36 CI and a conservative CI of 38 for an average of 37, we would just need to stay under the 38 CI. Upon second glance, it looks like the average CI is the max CI. Going back to our example, we would have to stay under the 37 CI instead of the 38 CI.

§ 95488.8. Fuel Pathway Application Requirements Applying to All Classifications

As noted in the definitions section above, we have concerns with (g) Specified Source Feedstocks. Based upon our reading in (B), we think option (1) will make it difficult for the North American Used Cooking Oil (UCO) market to participate in the LCFS unless we do joint applications with all of our suppliers – which is not reasonable at this time. While registering as an ICC feedstock supplier is an option and we support ISCC as a system to be incorporated into the LCFS program, the current marketplace requires more flexibility for suppliers not currently in that program. Based upon discussions with CARB staff, we don’t think that making all North American UCO suppliers ISCC certified is the intention, but we’re struggling to interpret the rules otherwise. Failing to adequately resolve this issue not only puts small producers out of the market, it could jeopardize significant portions of the US UCO market.

Under (B)(3), we can ensure access to documents and people to contact with the feedstock supplier, but we believe if we are required to provide access to their facilities, a significant portion of suppliers will decline or ultimately opt out, robbing Californians access to lower carbon intensity fuels.

§ 95488.10. Maintaining Fuel Pathways

REG suggests an April 30th deadline versus March 31st for submitting the Fuel Pathway Report to align with finalizing annual reports in LRT. Also, as suggested above, REG believes a company-wide buffer account or a conservative CI would help mitigate concerns with a higher operational CI than the certified CI.

§ 95491. Fuel Transactions and Compliance Reporting,

As noted 95486, REG strongly advocates to keep the credit generation system as is. However, if it is changed so that no credits can be generated until after the reporting period is over, then we strongly recommend changing the reporting frequency and deadlines from 45/45 to 40/40 to avoid financial statement impacts.

95491.1. Recordkeeping and Auditing.

Regarding record retention, REG recommends a bifurcation on the requirements like MRR (95105) where some parties have a five year requirement and some have a ten year requirement versus a blanket ten year requirement for all parties. We recommend five years for all parties except those parties that have been subject to a CARB enforcement action (not just LCFS) or an adverse verification statement. We are not aware of any program where record retention beyond five or even seven years has been needed.

§ 95500. Requirements for Validation of Fuel Pathway Applications, Verification of Annual Fuel Pathway Reports, Quarterly Fuel Transactions Reports, Crude Oil Quarterly and Annual Volume Reports, and Project Reports

On the Triennial Verification section, REG recommends 25,000 credits during a calendar as a threshold to mirror MRR versus 6,000. Related to this, the threshold for reporting to LRT could then be 10,000 credits similar to how the reporting requirements for MRR work.

REG has consistently maintained that CARB should follow well established auditing guidelines by FASB, SEC, or Treasury Dept. We continue to have very strong concerns about firm rotation. Rather than repeat them here, we will simply support the comments submitted by our RFS attest auditors, Christianson & Associates.

§ 95501. Requirements for Validation and Verification Services

Regarding verification services, we would like to be able to have our auditor start reviewing documents as soon as is feasible. We are not sure how possible that is if a notice has to be submitted to ARB every year prior to conducting the audit. For example, under a RFS attest for 2017, REG has the attest start sometime in Q2 2017 to help spread out the testing throughout the year and into early 2018 so that the audit is done by the end of May. This benefits both REG by having quicker feedback to correct issues sooner and our auditors so they can spread the work out more evenly throughout the year.

Regarding site visits, REG thinks an initial site visit is appropriate, but the next site visit shouldn’t be for another 2-3 years unless the risk from the production facility or an FPC goes up. Generally, there is no need to keep visiting the site unless a material change has occurred especially since the RFS engineering reviews do a site visit every 3 years.

Regarding data checks, under (D)(1), REG recommends tracing data back to the Feedstock First Collection Point versus Point of Origin for reasons identified above (i.e. risk for UCO isn’t at restaurant; it is at the point of aggregation).

Thank you for your consideration of our comments. Please feel free to contact us with any questions or comments.

Sincerely,

Curtis Powers, Manager Compliance

Scott R. Hedderich, Executive Director Corporate Affairs

https://ec.europa.eu/energy/sites/ener/files/documents/2014_letter_wastes_residues.pdf

https://govt.westlaw.com/calregs/Document/I5A54795D3A244A0CBE38F008C8D4CB72?viewType=FullText&originationContext=documenttoc&transitionType=CategoryPageItem&contextData=(sc.Default)