On barriers to entry and the money trail

By Jason Burroughs

For those that don't already know (it's not a big secret), I have initiated an official "arbitration" against the National Biodiesel Board to break their monopoly on the production of biodiesel in the United States. I'd like to lay out my philosophical and economic case for this action and invite questions and comments. Consider this a high-level overview of issues that certainly deserve in-depth discussion; some issues may not be presented in their entirety for legal reasons, or simply to avoid boring the reader. For context, DieselGreen Fuels collects used fryer oil from restaurants and pays a third party biodiesel producer a "toll" to create biodiesel from our oil. The resulting B100 is sold at retail pumps across central Texas. We are not a member of NBB, but eventually would like to make biodiesel. In order to sell a drop of the stuff, we have been led to believe by NBB that we would be required to enter into contract with NBB, which we have refused to do.

Back in 1998 and 2000, the National Biodiesel Board, with roots in the soybean industry, facilitated health effects testing in order to secure EPA approval for biodiesel to be used as an on-road motor fuel in the United States. Some of the funding came from other organizations, but the final tally is in the 2 million dollar range. There are some important subtleties to the approval, such as the standard actually being for a "blendstock" instead of an actual fuel, which has had major consequences in the industry. For example, in California, because of the blendstock snafu, the state does not recognize B100 as a "regular" fuel, and therefore B100 was only allowed with special permission and a complicated membership/tracking system. Despite this limitation, and others, the approval from EPA was a watershed event. Whether or not someone *could* have completed this testing later, there's no denying that the NBB did it.

This important approval empowered NBB with the legal right to charge others for access to the testing data, with some important limitations. They are allowed to charge a "fair" amount for access, are required to settle disputes through arbitration, and lose the lock in 2013 for Tier 1 and 2015 for Tier 2. You may be wondering about these tiers - the EPA has 3 tiers and required NBB to complete Tier 1 and 2, but not Tier 3. Tier 1 is engine testing and some environmental tests, and is all that's required of a biodiesel producer that makes less than $10 million per year in total revenue. Tier 2 includes animal testing (flooding a rat cage with exhaust until they die or don't die, and then analyzing for cancer). I can't speak to the details of Tier 3, but we are fortunate that EPA has not required it of biodiesel. The fact that the rats in the tests never died, even after breathing the biodiesel exhaust, speaks volumes.

For legal reasons, I will leave out the details of how the fair access fee is supposed to be calculated and how that vastly differs from what NBB charges in dues. Let's move now from the law and numbers to the philosophical issues at stake. So what exactly is a trade association? Generally speaking, trade associations represent the interest of their members in regulatory, technical, and industry matters. They help drive standards, ensure quality and conformance to those standards; establish a critical mass that allows the industry to survive and thrive; and create value for their members by working with outside parties for compatibility and broader acceptance. In the emerging alternative fuels industry, that also means promoting the product to the public at large, defending the industry against critics, and plenty of other things. NBB has been successful in some of these areas and unsuccessful in others. Their track record for marketing is terrible in my opinion; their push of OEMs pretty good; their efforts at driving quality lauded by some and criticized by others.

There is another aspect that any new industry needs - to be recognized and accepted by the political establishment, establish a foothold in Congressional subcommittees and state legislatures, and work to get a level playing field against entrenched companies. The problem with NBB is that, unlike any other industry that I am aware of, market access is effectively blocked unless you pony up to an orgainization that in turn uses your dues largely to lobby for favorable legislation, not to repay the testing debt incurred 8-10 years ago. This simple fact is the core of my argument, and I believe has nothing to do with the merits of NBB as an organization, its leadership, or the value proposition of a trade association in general. A lobbying effort should be a separate and distinct endeavor from market access. Pooling money to fund lobbying efforts should be the full choice of interested parties.

Market access should not be contingent upon funding an organization that prioritizes its lobby efforts on issues that are not uniformally supported by all market participants. Nor should dollars paid to enter the market be directed to firms that have a vested, long-standing tie to a single feedstock and a single component of the overall industry. CASE IN POINT: while many in the industry agree that a subsidy is a good thing, it's clear to most that the subsidy flows upstream to the feedstock provider. A quick study of commodity prices will show that the value of soybean oil and other feedstocks went up substantially when the subsidy passed. So instead of a biodiesel producer getting a huge break in price, the suppliers to the producer have gobbled up most of the funds.

So, to sum up my position: NBB has tied access to the market to financial contributions to issue advocacy that is not limited to issues that all market participants agree upon. Whereas OEM acceptance is an effort everyone in the market can support, soy-focused lobbying in D.C. is not. The result is that NBB, through the misuse of the fuel registration regulations, has unjustly deprived potential biodiesel producers of the right to produce without signing an extremely limiting contract with a very unfavorable (to the producer) cancellation policy and requiring what are in some cases extremely large dues payments. We need to decouple the access to market from the political lobbying, and support the creation of separate lobbying budgets and PACs for groups of market participants with aligned interests.

Furthermore, the cancellation policy is absurd. It locks the signer into a 10 year deal, even after the NBB loses the lock, and opens them up to breach of contract penalties if attempts are made to get out of it. The few lawyers that I've met that have actually read the thing say that it is so invasive as to be unenforceable.

Thus far, I'm out of pocket about a thousand bucks, which is about a thousand bucks more than I had in our legal fund. I hope that supporters of this effort will consider chipping in if costs get much higher and a fundraising effort is begun.

Until 2013, no organization will be able to produce biodiesel without a multi-million dollar contract with NBB - Boy Scouts and churches, non-profits, individuals - no possibility to produce biodiesel in America without jumping through those hoops and making a major commitment to a lobbying organization masquerading as a health effects data sharing. Wouldn't you think that if the NBB really wanted biodiesel to be successful, they would just give everyone access? I believe that we should open this up to the public, encourage small-scale biodiesel production, and free the biodiesel industry from the monster it unwittingly created. Let NBB scale back and provide real value to members, establish a lobbying arm and let producers opt in if they want to lobby. That's an organization I would join and be proud to support.