February 1, 2023
Being the resident millennial has its challenges and disappointments. For example, no one, not even one person, has offered me a participation trophy just for showing up to work. My parents say that’s what a salary is, but that’s not the same thing. Given recent events, perhaps no one understands being challenged and disappointed quite like EPA. To be more specific, recently, the 5th Circuit Court of Appeals ruled that a few of EPA’s denials of Small Refiner Exemptions (SREs) are stayed.
The facts of the case are fairly straight forward. Calumet Shreveport Refining LLC (“Calumet”) and the San Antonio Refinery LLC (“TSAR”) filed for SREs for the compliance years 2016 -2021. EPA’s June 2022 decision denied 69 SREs, including those filed by Calumet and TSAR. Calumet and TSAR then filed for an appeal of EPA’s decision to deny these SREs. The court ruled in Calumet and TSAR’s favor, and granted the appeal, resulting of stay in EPA’s order for SREs to be denied.
To be clear, a stay does not mean that the denials are over-turned. It means that the court has “pressed pause” on EPA’s actions. In the court’s own words, a stay “merely prevents the EPA from applying its new standard to deny the refiners’ requested exemptions until the court can determine, on the merits, whether the new standard can legally be applied.”[1] This means, the crux of the case doesn’t hinge on whether the court invalidated EPA’s denials, but rather the standard EPA used to determine whether the SREs for the petitioning refineries should be granted.
As many of you are aware, in order to receive an SRE, the petitioning refinery had to be “small” as defined by the regulations, and it has to show that complying with the regulatory requirement to purchase and retire RINs would cause disproportionate economic harm. In order to determine whether or not the petitioning refinery was truly experiencing disproportionate economic harm, EPA uses a scoring matrix. Basically, if a small refinery had a certain score they would meet the disproportionate economic harm criteria and be able to be granted an SRE. EPA has used the same scoring matrix since 2011 and as a result, small refineries that typically petition are intimately familiar with how EPA uses the scoring matrix.
Much to the disappointment of the refineries, in 2021, EPA changed how they score the disproportionate economic harm requirement. Using this new method, EPA denied all SRE petitions beginning with the compliance year 2016 – 2021. The significance is that EPA implemented this new matrix in 2022, but applied it against the years 2016-2021. Put in the words of TSAR and Calumet, “EPA’s new interpretation of ‘disproportionate economic hardship’ led to an unlawful retroactive application of a new standard.”[2] TSAR and Calumet also argue that EPA’s denial of the pending SREs was “arbitrary and capricious.”[3] In other words, EPA is doing this without legal justification.
EPA contends, that because the petitions were all pending, applying the new matrix was appropriate and not retroactive. EPA also argued that this case shows that small refineries abuse the SRE process, which is not the intent of the regulations. To be more specific, EPA argues that “TSAR and Calumet gambled on receiving a discretionary exemption instead of planning to meet their RFS compliance obligations…”[4] …them’s fighting words…
The 5th Circuit did not share that opinion, which is why the case turned the way it did. In the court’s eyes, “[w]hile they are certainly not entitled to exemptions ad infinitum, TSAR and Calumet were entitled to have their pending petitions evaluated under consistent ground rules, i.e. in view of ‘fair notice, reasonable reliance, and settled expectations.’”[5] So, to sum it up, while TSAR and Calumet should be fairly evaluated, you can’t change the rules when you have always done things this way and expect reliant parties to be adequately informed.
Will this precedent stand? I think it’s important to keep in mind that this is a circuit court decision and not a Supreme Court precedent. The significance is, while this decision is binding within that circuit, it does not necessarily mean that it’s a binding decision on other circuits. That being said, there is some persuasive authority here, which means that other circuits may follow what the 5th Circuit has decided, but they are not required to do so.
Should the industry be concerned about a massive “recall” of SRE denials? That’s a question that I don’t have a good answer to. On the one hand, given that the crux of the case hinges on how EPA analyzed one factor of the SRE petition, it doesn’t mean that the denial doesn’t stand. It means that EPA has to re-evaluate these types of petitions under the “old” matrix framework. It is feasible that some SREs may still be denied under the old framework. On the other hand, given the fact that these two small refineries (and probably many others) were familiar with how to prove a disproportionate economic hardship, it is also possible that refineries will receive an SRE for petitions filed prior to 2021.
Will the future of the RFS just be a bunch of SRE denials? Unfortunately, I don’t have a way to see the future. I am hoping, however, it won’t be as disappointing as the millennial reputation tends to be.
[1] Calumet Shreveport Refining, L.L.C.; San Antonio Refinery, L.L.C., v. EPA, no. 22-60266, 10 (5th Cir., Jan. 2023).
[2] Id. at 6.
[3] Id. at 6.
[4] Id. at 5.
[5] Id. at 7