December 11, 2023
Did you know that if you totaled up all the birds and pear trees given in the song “The Twelve Days of Christmas”, there would be 184 birds and 12 trees? Speaking of gifting others, the 5th Circuit Court of Appeals recently gave refiners the “gift” of withdrawing EPA’s denial of small refinery exemptions (SREs) for six different refineries.
How did this “gift” come to be? In 2022, EPA made headlines twice when it retroactively overturned SRE petitions that had already been granted. In April 2022, EPA retroactively denied 36 SRE petitions from 36 different small refineries that had been granted for the 2018 compliance year. In June 2022, EPA again retroactively denied SRE petitions, but this time for 69 petitions from 33 different small refineries that had originally been granted between 2016 – 2021. The 5th Circuit collectively referred to these petitions as “Denial Actions,” but I’m going to call them denials.
So, why the suit? Among the denials, Calumet Shreveport L.L.C. (“Calumet”), TSAR, Ergon Incorporated (“Ergon”), Placid Refining L.L.C. (“Placid”), and Wynnewood Refining Company L.L.C. (“Wynnewood”), sued EPA for the SREs they had overturned from the April 2022 EPA denial decision[1]. These refineries also sued EPA for SREs denied in the June 2022 denial. Specifically, Calumet had SREs overturned for the years 2019 – 2020; TSAR for 2019-2021; Ergon for 2019-2020; Ergon-WV for 2019 – 2020; Placid for 2019-2020; and Wynnewood for 2017 – 2021. Basically, these refineries (the “petitioning refineries”) sued EPA to reverse the denials.
The petitioning refineries based their case on three main points: (1) the denial of the above-listed SRE petitions are impermissibly retroactive; (2) EPA’s interpretation of the Clean Air Act is contrary to law; and (3) EPA acted arbitrarily and capriciously by failing to engage in reasoned decision-making. Now, if you’re the type of person that only makes it to, say, day 3 of the 12 days of Christmas you *could* skip to the last paragraph at this point. Just know that making it to day 3 means you would only get 10 birds and 3 trees. For those of us that want the bird zoo AND the mini orchard, let’s start with the first point, that EPA’s denial actions were impermissibly retroactive.
In order to determine whether the EPA’s denial actions were impermissibly retroactive, the 5th Circuit had to “balance the ills of retroactivity against the disadvantages of prospectivity[2].” In doing so, the 5th Circuit started looking at first part of the analysis: balancing the “ills of retroactivity[3].” Specifically, the 5th Circuit considered whether the petitioning refiners had justifiably relied on EPA’s practices when applying for their SRE petitions. EPA used the same scoring matrix and 2011 Department of Energy (DOE) study for the better part of a decade. According to the 5th Circuit, “[t]hat is exactly the type of ‘well-established’ agency practice that forms the basis for justifiable reliance[4].” Therefore, in the court’s own words “EPA cannot ‘surprise’ [petitioners] by penalizing [them] for ‘good-faith reliance’ on the agency’s prior positions[5].” The “ills” here are that the petitioning refiners justifiably relied on EPA’s near decade of policy to their eventual detriment.
Remember though, the 5th Circuit had to look at two things: in addition to balancing the ills, it also had to balance them against the disadvantages of prospectivity. The first thing the court noted was that EPA failed to “identify a single benefit of retroactive application[6].” To conclude their analysis, the 5th Circuit noted that “[t]he result of the balancing test could not be more obvious: There is no legitimate benefit EPA can gain from retroactive application[7].” In essence, EPA’s retroactive actions were impermissible, as concluded by the court. This seems problematic for EPA.
But, let’s move on and talk about whether EPA’s interpretation of the Clean Air Act was contrary to law. While the petitioning refineries presented four different arguments to the 5th Circuit with regard to this specific point, only one was successful and that’s the one that I am choosing to focus on.
In 2021, in response to a Supreme Court decision, EPA changed its scoring matrix. Starting in 2021, EPA required the petitioning small refinery to show that RFS compliance costs were the sole cause of that small refinery’s disproportionate economic hardship (DEH). In this case, however, the petitioning refineries contended that EPA’s construction of the statue was unreasonable, and the 5th Circuit agreed[8]. The statue says that EPA, in considering an SRE petition must consider the 2011 DOE Study and “other economic factors.” The court called EPA’s interpretation “misguided,” pointing out that the “ordinary or natural meaning” of the text “other economic factors” as contained in the statutory language would have to include more factors than just compliance costs. Put more succinctly, the court concluded “EPA’s interpretation is unreasonable. The statute’s text cannot plausibly be read to say that RFS compliance costs must be the sole cause of the [DEH][9].” So, we’re up to two strikes against EPA at this point, just in case you were keeping track.
In their final point, that EPA’s denials were arbitrary and capricious because EPA relied on the RIN-passthrough theory, the petitioning refineries contend ran counter to the evidence before EPA. Just as a quick point of clarification, EPA’s RIN passthrough theory states “[the] market-based design of the RFS program and the RIN-based compliance system have equalized the cost of compliance.” According to EPA, there were two finding that supported its RIN-passthrough theory: (1) the price per RIN at any given point in time is identical for all refineries nationwide; and (2) the market prices for fuel and RIN costs correspond, which means refineries could make up the cost by increasing their fuel prices, passing the cost of the RIN onto their customers. The 5th Circuit agreed with the refineries, calling EPA’s conclusion that refineries could pass on the cost “…so implausible as applied to petitioners that it cannot be ascribed to a difference in view or agency expertise[10].” The court further disagreed with EPA saying “[u]unsubstantiated agency speculation does not overcome petitioners’ proven inability to purchase market-rate RINs ratably[11].”
The petitioning refineries also contend that EPA’s failure to provide sufficient guidance as to the information small refineries should submit as part of their exemption petitions under EPA’s new interpretation and RIN passthrough theory[12]. In this aspect, the 5th Circuit disagreed with the petitioning refineries saying “…courts cannot compel agencies to act[13].” The 5th Circuit further clarified by noting that EPA’s “…control over its timetables is entitled to considerable deference[14].”
So, why does this case matter? I just got done telling you a whole bunch of things that the court said, but what does it mean? Essentially, this case stands for the premise that EPA can’t use a “moving target” to evaluate SREs. For example, if EPA is going to start using the matrix from 2021, then it needs to apply it to the petitions from 2021 going forward. Additionally, retroactive actions are very difficult to uphold. Issuing denials for 5 years of SREs after they have already been granted probably isn’t going to work out very well in court, as EPA recently found out.
All that being said, this is by no means a final decision. The Renewable Fuel Association, Growth Energy, the American Coalition for Ethanol and National Farmers Union jointly issued a statement in reaction to the decision. While no one has said that they will appeal the 5th Circuit decision, it certainly is a possibility. Until the Supreme Court hears this case and issues an opinion, the petitioning refineries and EPA can live to fight another day.
So, what happens now? Now we wait to see what the courts or affected parties gift us with next…maybe a bird zoo or a miniature orchard? #alternativechristmasgifts.
[1] Calumet Shreveport Refining L.L.C.; Placid Refining Company L.L.C.; Ergon Refining, Incorporated; Wynnewood Refining Company L.L.C., v. EPA, No. 22-60425, 6 (5th Cir. Nov. 2023).
[2] Id. at 16.
[3] Id.
[4] Id. at 17.
[5] Id. at 17
[6] Id. at 20.
[7] Id. at 20.
[8] Id. at 21.
[9] Id. at 24.
[10] Id. at 27.
[11] Id. at 29.
[12] Id. at 29 – 30.
[13] Id. at 30.
[14] Id. at 30.