By Chris Prentice

(Reuters) - U.S. regulators should alter a much-debated biofuels program that disadvantages small fuel retailers, said the chairman of a newly-formed coalition, joining the likes of refiners including Valero Energy Corp, which have made a similar push.

The Renewable Fuel Standard (RFS) gives an unfair advantage to large petroleum retailers and sidelines smaller ones, Bill Douglass, the founder of Texas-based Douglass Distributing and Chairman of the Small Retailers Coalition, said in a letter to Janet McCabe, the Environmental Protection Agency's (EPA) acting assistant administrator for air and radiation.

The EPA oversees the RFS, setting annual targets as to how many gallons of ethanol and other renewable fuels need to be blended with gasoline and diesel. Oil refiners and importers are required to prove compliance with the policy by either blending biofuels or buying paper credits, known as RINs, from companies that are in compliance.

Higher annual targets and soaring prices for RINs have prompted Valero and other refiners to press the agency to consider pushing the obligation to comply with the program to later this year.

The EPA is considering a petition from refiner Valero to consider altering the RFS to push the onus of proving compliance from oil refiners further downstream to companies that blend the fuels.

The fact that small retailers are joining refiners in the push is significant. Large fuel retailers have historically opposed the change. Companies like fuel retailers, which blend fuels, benefit from selling RINs to obligated parties such as refiners.

Those profits could soar this year as prices of the credits have jumped to highs not seen since 2013 on supply worries due to more ambitious targets for biofuels, fueling the complaints from refiners. Biofuels supporters note that the higher profits from blending biofuels help justify the costs to overhaul infrastructure to introduce the new fuels.

But the "windfall profits" from selling RINs gives large fuel retailers an unfair advantage over smaller ones in a business that is largely about scale, Douglass said in the letter dated July 28.

"The current system needlessly tilts the playing field toward large retailers," Douglass said.

In May, the EPA proposed targets for biofuels use in 2017 that disappointed both biofuels producers and oil companies alike.

The more than decade-old RFS has been stymied by regulatory delays and has been the subject of years-long lobbying battle between so-called Big Corn and Big Oil.

(Reporting by Chris Prentice, editing by G Crosse)