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UPDATE 3-EPA settlement with bankrupt Philadelphia refinery roils biofuels market

(Adds comments from Senator Grassley, analysts)

By Jarrett Renshaw

PHILADELPHIA, March 13 (Reuters) - The U.S. Environmental
Protection Agency's decision to grant a bankrupt Philadelphia
refiner relief from the nation's biofuel laws drew critics on
Tuesday who say it sets a bad precedent.

The EPA and the Carlyle Group-backed Philadelphia
Energy Solutions refinery agreed on Monday that the refiner will
have to satisfy only roughly half of its $350 million in
outstanding compliance obligations under the U.S. Renewable Fuel
Standard (RFS). The RFS requires refiners to blend biofuels such
as ethanol into their fuel or buy credits from those that do.

Independent refiners, including some as large as Valero
Energy Corp, have long complained about the RFS
standards, saying it has boosted costs as the price of credits
rose from just a few cents in 2012 to more than $1 at times in
2013 and 2016.

However, biofuels companies say the standards are critical
to Midwest farmers and help produce cleaner, home-grown fuels
like ethanol. Industry representatives were bothered by the EPA
settlement, arguing it rewards a mismanaged company and
represents a bailout.

"I am very troubled at the precedent this sets and there are
discussions underway whether the EPA has the legal standing to
grant the relief. We are exploring our options," said Michael
McAdams, head of the Advanced Biofuels Association.

President Donald Trump has called several White House
meetings to change the program.

The EPA has signaled that it is willing to exempt a larger
number of small refineries from the program, limiting the number
of potential buyers and putting even more credits into the
Republican Senator Chuck Grassley, of Iowa, said the
settlement raises a couple questions: "How are the RIN
obligations being treated compared to the other obligations of
PES? Does this set an unfair precedent for other refiners that
continue to act in good faith to comply with the law?"

PES was given relief on about half of its outstanding
obligations. The company, which lacks blending facilities,
entered into bankruptcy owing 467 million credits from 2016 and
2017, with only 210 million credits in hand, the filing showed.

PES did not return requests for comment, but a coalition of
merchant refining groups says the settlements shows the EPA
believes rising credit costs are a threat.

PES does not have to go into the market and buy some 250
million in compliance credits covering 2016, 2017 and part of
2018, and PES can turn over its available credits to the EPA,
and is excused from any shortfall, a huge win for the refiner.

"There’s no denying it - the EPA settled in a way that was
beneficial to the bankruptcy and this particular firm. It sends
a bad signal about what the EPA will accept in the future," said
Scott Irwin, agricultural economist at the University of

PES has blamed its financial woes on the cost of buying the
credits.. But other factors played a role in the
bankruptcy, including the withdrawal of more than $590 million
in dividend-style payments from the company by its investor

Private equity firm Carlyle rescued the refinery from
shutting in 2012, putting up $175 million for majority control.
Most of the dividends paid to the investor group were backed by
loans taken against the refinery's assets.

Monday's settlement alleviates fears that the refinery was
going to be exempt from the program moving forward or be allowed
to dump millions of credits onto the market, traders said.

The EPA will now require PES to buy credits semi-annually,
rather than annually. That makes it more difficult for the
refinery, the largest on the U.S. East Coast, to build up a
large short position or defer its obligations and risk getting
into a hole, as it did in 2017.

Prices for renewable fuel (D6) credits for 2018 were at 39
cents on Tuesday, little changed from a day earlier, having
already lost 40 percent in the last two weeks. Prices for 2017
are selling at an unusual discount versus the 2018 prices in the
wake of the PES settlement, traders said.
(Reporting by Jarrett Renshaw and Ayenat Mersie
Editing by Susan Thomas and Lisa Shumaker)

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