Fraud cases leave biodiesel industry reeling

Biodiesel producers told a congressional panel Wednesday that they're struggling to stay afloat in the aftermath of fraud cases uncovered in Baltimore and Texas, and a spokesman for petroleum refiners faulted the Environmental Protection Agency for slow response to a crisis he said has cost the industry $200 million so far.

Members of the House Energy and Commerce oversight subcommittee pressed Environmental Protection Agency officials to work quickly to resolve problems caused by millions of bogus biodiesel credits being sold under the renewable-fuel program administered by the federal agency.


"You all need to come up with a fix for this," Rep. Morgan Griffith, a Virginia Republican, told a pair of EPA officials appearing before the subcommittee in Washington. "I'm not sure some of these companies will make it to January."

The hearing comes nearly two weeks after a federal jury in Baltimore convicted Rodney R. Hailey, 33, founder of Clean Green Fuel, of wire fraud and money laundering for selling $9 million worth of credits for biodiesel fuel he never produced. The Perry Hall man faces sentencing in October. Since Hailey was charged last fall, the EPA has issued violation notices against two Texas companies, in Lubbock and Houston, accused of selling about 100 million biodiesel credits without producing a gallon of the fuel.


Under the renewable-fuel program, petroleum refiners are required to either make a certain amount of biodiesel themselves or support its production by buying credits representing the renewable fuel, which is made from plant materials, recycled cooking oil or animal fat. The program was launched by Congress in 2005 to help wean the United States from imported oil while also generating less-polluting fuel.

Since uncovering the fraud cases, the EPA has cited the buyers of phony biodiesel credits, requiring them to purchase replacements and fining them a total of $3.7 million. The credits, known as "renewable identification numbers" or "RINs," now sell for more than $1 apiece and provide an essential subsidy to make biodiesel competitive with diesel fuel made from petroleum, according to industry officials.

The upheaval has disrupted the credit market, with refiners wary of buying credits from a company they don't know or deem too small to make good on millions of dollars' worth of credits.

The CEO of New Leaf Biofuel, a small producer in San Diego told lawmakers her company, which converts used cooking oil into diesel, has lost customers since the fraud cases surfaced.

"Without the ability to sell RINs, our businesses will continue to lose cash flow and many of us will be forced to shut our doors," Jennifer Case said in testimony prepared for the hearing.

Thomas Paquin, president of VicNRG, a Texas-based marketer and distributor of biofuels, estimated that 85 percent of the nation's biodiesel companies are struggling to keep their doors open because 10 percent to 20 percent of the credits sold last year are now considered invalid. He noted that his company reported to the EPA in 2010 that Clean Green Fuel was not actually producing biodiesel after sending someone to Baltimore to check it out.

The EPA sent two inspectors to Baltimore in July 2010, but Hailey told them he'd stopped production recently and sold his equipment. Though Hailey could not produce records of his fuel production or sales, the EPA did not act then. Hailey was charged by federal prosecutors in October 2011.

Charles Drevna, president of the American Fuel and Petroleum Manufacturers, faulted the EPA for allowing refiners to continue to buy phony credits while its investigation proceeded. He said federal officials are now punishing the victims of the fraud by forcing them to buy replacement fuel credits, which now cost many times what they did originally. Refiners are naturally avoiding doing business with anyone they don't know, he said, unless and until the agency changes its rules to shield them from future scams.


Byron Bunker, acting compliance director for the EPA's office of transportation and air quality, said the agency has tightened its reporting and verification requirements. Philip Brooks, an EPA civil enforcement official, said regulators were constrained from going public about Clean Green Fuel because of the criminal investigation. But Bunker noted that the agency had made clear from the start of the program years ago that buyers of biodiesel credits are ultimately responsible for their validity.

Bunker said EPA officials have been meeting with biodiesel producers and refiners to review other reforms, including setting up a system for independent verification of the credits. He said the agency hopes to issue new regulations soon, though Drevna and biodiesel industry officials said the talks have been going very slowly.

Democratic members of the committee, meanwhile, suggested that petroleum refiners forced to shell out for costly replacement biodiesel credits have only themselves to blame for not exercising "due diligence" in checking out the companies they were buying from.

"Unfortunately, a few bad actors ... have created a crisis of confidence in the biofuels market that risks undermining the whole program," said Rep. Henry A. Waxman, a California Democrat.

The complaints Wednesday echo comments made after the Clean Green Fuel trial by a top executive of Ocean Connect, the New York brokerage that bought the lion's share of the Baltimore company's phony credits.

Eric Rubury, the company's chief operating officer, said Ocean Connect relied in part on recommendations of others in doing business with Clean Green Fuel. He noted that Conoco Phillips, a major oil company, was buying the Baltimore firm's credits.


Since charges were filed last fall against Clean Green's founder, Rubury said, Ocean Connect has been sued by the companies to which it sold invalid biodiesel credits. Ocean Connect, in turn, has sued the EPA for its handling of the program. Meanwhile, Rubury said, the scandal has hurt his company's bottom line.

"Because of this entire catastrophe," he said, "the reality is that few parties wish to do business with Ocean Connect."