Now That the Rules Have Changed

Now That the Rules Have Changed

May 17, 2013

In April 2013, the Environmental Protection Agency published a final rule governing the allocation of HCFC-22, more commonly referred to as R-22, for the years 2012 to 2014. It is the EPA’s charge to set production and importation limits for this refrigerant, with the ultimate goal of phasing down the refrigerant to zero by the year 2020. After establishing these limits each year, the EPA establishes allocations among certain companies, who in turn make the product available for commerce. Typically, allocation rules occur in five-year increments. However, because of a court decision, the EPA was forced to redo the allocation rule for 2012–2014. This is where things get interesting.

When the EPA went back to the drawing board for the 2012 to 2014 allocation rule, it had become apparent that there was too much R-22 inventory in the system. In fact, the manufacturers and importers of R-22 did not produce the full amount that the EPA had
authorized in 2010, deeming it more cost effective to not make the product, as opposed to having excess inventory continue to grow and saturate the market. It was widely assumed that the EPA would take an aggressive stance in reducing the R-22 allocation in 2012 to 2014.

Because the EPA had to redo their previous allocation rule, they were unable to complete the rule before 2012 began (it was not even proposed until Dec. 31, 2011) and were forced to issue No Action Assurance letters, or waivers, as it is illegal for companies to manufacture or import R-22 unless there is either a rule or a waiver. This waiver stated that allocation would be limited to 55 million pounds, or the maximum reduction proposed by the EPA in their allocation rule part 2. This represented a 35 percent reduction from where the now-vacated rule had previously placed the limits. HARDI commented to the EPA that one of our concerns would be if the EPA were to finalize an allocation rule that provided for greater levels of R-22 than the waiver, some distributors may have their inventory devalued overnight. File this away for later.

So, the 2012 waiver provided a drastic reduction that immediately caused price spikes and some uncertainty, but as the year progressed, and the EPA still failed to complete the allocation rule, a funny thing happened; there was no shortfall of R-22 inventory. Sure, the price went up, and folks may not have been able to buy as much inventory as they used to, but I never heard of an instance where a distributor was unable to meet the needs of a customer.

As 2012 came to a close, and the EPA still had not completed its allocation rule, the industry prepared for another waiver in 2013, with cuts potentially taking the production and import limit to 45 million pounds nationally. The EPA then took one step further and produced a waiver, which limited the production and import to 39 million pounds, with the caveat that they may add approximately 6 million more pounds, at a later date. Again, prices increased, but there still seemed to be no vast shortage of R-22 in the marketplace.

So, much to our surprise, in April, with the publishing of the final allocation rule, the EPA threw a curveball at the industry and issued a final rule with less reduction in refrigerant than had been planned. Not only were the reductions less than many had forecast, the new rule actually allowed more R-22 to be produced in 2013 than in 2012, which seems to fly in the face of a “phase-out.” The EPA’s decision particularly put distributors in a difficult position. Those who purchased inventory under the guidance of the EPA’s waiver (with its strict reductions) now find themselves operating in a market where nearly 20 million more pounds of R-22 has hit the market, potentially devaluing inventories and imposing significant and unnecessary financial harm.

Listen, I understand that the circumstances with which the EPA had to draft this rule were less than ideal. Changes were made during this process that I think will benefit the industry as we go on and, for that, I think we should applaud the EPA. That said, there are two fatal flaws with this final rule.

The first is that the EPA did not reduce more significantly the amount of R-22 in the system over the next two years when it had become apparent that more was necessary and our industry could handle it. The second and most important is that the EPA used its “Non-enforcement letters” as a means to tightly govern the marketplace and then, through its final rule, loosened the very market that it helped create. HARDI warned of this scenario more than a year ago and the EPA failed to heed our warnings.

The end game for R-22 has not changed. In 2020, there will be no more virgin R-22 refrigerant manufactured or imported for use in the United States. This rule offered an opportunity to make the phase-out a little more orderly. Unfortunately, something for which we should be applauding, a significant reduction in the amount of R-22 in the supply chain, has left a bad taste in everyone’s mouth.

Jon Melchi is HARDI’s government affairs manager. Contact him at 614/345-HEAT (4328) or [email protected].