(Adds statement from Pennsylvania Senator Toomey, additional background, details, quote from law professor, biofuels association)
NEW YORK, Jan 22 (Reuters) - Philadelphia Energy Solutions, owner of the largest U.S. East Coast refinery, said on Monday its plan to get out of bankruptcy hinges on whether it can shed existing biofuel costs under the country's renewable fuel laws.
The plan revives a debate between U.S. refiners and ethanol producers over renewables policy, and could spur actions from other struggling refiners should the U.S. Environmental Protection Administration allow PES to reduce its biofuel obligations.
The Trump Administration could also wade deeper into the fray should the Pennsylvania refinery, which has some 1,100 workers, face closure.
PES told its employees on Sunday it would file for Chapter 11 bankruptcy, pinning its financial difficulties on renewable fuel laws, Reuters reported. In its bankruptcy filing on Monday, the company said it does not have enough cash to comply with the laws for 2016 and 2017.
But PES has also seen its debt grow after its backers took out a $550 million loan used for dividend-style payouts.
PES said its biofuels obligation for 2016 and 2017 totals about $185 million. The company also plans to sell $150 million worth of credits to help emerge from bankruptcy.
Regulatory liabilities are generally given high priority in bankruptcy proceedings, making getting out of such obligations difficult. However, the government has provided relief in past cases, particularly when there is a political dimension, experts have said.
The U.S. Renewable Fuel Standard (RFS) is a Bush-era law that requires refiners to blend biofuels like ethanol into their fuels or buy credits from those who do. Those credits used to trade at a nominal price of just a few cents, but have soared in recent years.
Stephen Lubben, a professor at Seton Hall Law School, said other struggling refiners may also attempt to offload these obligations if the PES bankruptcy gives the refiner relief.
"The EPA will look closely to make sure this is not a sham to leave them holding the bag," said Lubben. He said a debtor that cannot comply with such rules usually has to liquidate. If you want to restructure, the business coming out the other side has to comply.
The bankruptcy plan would be in jeopardy if the bankruptcy court forces the company to comply with its existing RFS obligations, PES warned.
Critics have argued the company's woes are due to a flawed program, while supporters of renewable fuel laws have said the refiner's troubles stem largely from a lack of access to relatively cheap crude oil supplies.
"Blaming the RFS is a better story than admitting strategic mistakes related to crude oil markets. But its a smokescreen," said Brooke Coleman, executive director at the Advanced Biofuels Business Council. "Jobs matter, but the RFS is simply not the issue at PES."
In 2017, refiners including Valero Energy Corp and CVR Refining, through the latter's majority owner Carl Icahn, tried to get the Trump Administration to shift the cost obligation for the credits down the supply chain to blenders like Shell or gas station operators like Wawa.
That effort failed after lobbyists representing ethanol producers intervened, but the battle may now be revived.
"The mechanism for enforcing the RFS is the primary cause for this bankruptcy filing and it must be fixed," said Pennsylvania's Republican Senator Pat Toomey in a statement.
The bankruptcy comes six years after private equity firm Carlyle Group LP and Energy Transfer Partners Sunoco Inc rescued PES from financial distress, in a deal supported by tax breaks and grants that saved thousands of jobs.
Shortly after the sale, Carlyle Group issued the controversial $550 million term loan, with the bulk of the proceeds going to investors in the form of dividend-style payouts.
(Reporting By Jarrett Renshaw, additional reporting by Tom Hals; Editing by Meredith Mazzilli)