August 8, 2023
I think there needs to be a book like “Alexander and the Terrible, Horrible, No Good, Very Bad Day,” but for adults. Maybe, “Alexander and the Terrible, Horrible, No Good, Very Bad Adulting,” complete with an accurate description of the 40-hour work week, taxes, and what paying student loans feels like. Given recent events, small refineries might be able to relate to either book.
Within the past month, EPA has made a couple of decisions that have gained a fair amount of attention. First, EPA denied 26 Small Refinery Exemptions (SRE) petitions between the years 2016-2018 and 2021-2023. Second, the very next day after denying the SRE petitions, the D.C. Circuit Court dismissed a court case brought by small refineries challenging EPA’s adjusted compliance timeline. Talk about a rough start to your work week.
Let’s talk about the SRE denials first. If you’ve read this blog at all, you know that SREs are comprised of two elements: (1) the petitioning refinery must be considered “small” by the regulations and (2) the petitioning refinery has to show that it experienced a disproportionate economic hardship as a direct result of RFS compliance. It’s this last point that became the center piece of EPA’s published denial decision.
In 2022, EPA denied another 69 SRE petitions. In that decision, EPA detailed how to satisfy the second requirement. Put in EPA’s own words, it gave “abundant explanation and examples to enable small refineries to understand what would be needed to make such demonstration for future petitions.” In other words, in that decision, EPA made certain that small refineries knew how EPA was going to evaluate the second point of the SRE petitions. In particular, EPA (in conjunction with the Department of Energy) specified that it looks for the following things:
- Evidence that a petitioning small refinery paid above-market prices for RINs or discounted its blended fuel price by more than the proportional market price of a RIN.
- Evidence that a petitioning small refinery was unable to pass its RIN costs on to the market because it received a price for its gasoline or diesel below that for a full passthrough of its RIN costs for reasons due to the RFS[1].
So why then, did EPA deny the most recent SRE petitions. In EPA’s own words “[a] petitioning small refinery cannot simply assert – without supporting information – that it received lower prices than those in other markets since the difference may be due to other non-RFS factors such as transportation costs[2].” In EPA’s opinion, none of the petitioning small refineries “face[] a disproportionate cost of RFS compliance when compared to the industry average.
Now let’s talk about the court case decision that was published the very next day after EPA published the denial decision. In Wynnewood Refining Company LLC and Coffeyville Resources Refining & Marketing LLC, v. EPA, (“Wynnewood”), a group of refineries filed suit against EPA for establishing a new compliance schedule. The refineries rested their case on two main points. First, they asserted that EPA did not have the authority to change the compliance deadlines. Second, and in the alternative, the refineries asserted that even if EPA did have that authority, EPA’s changes were “arbitrary and capricious” which means EPA did not have a good reason to be making the change.
Why the need for the new schedule? EPA had issued Renewable Volume Obligations (RVOs) 2020-2022 past the statutory deadline. It also issued the new Set Rules for 2023-2025 past the deadline for the rules to be released. As a result of the late releases, EPA shifted the compliance deadlines for obligated parties, affecting the named refineries. The purpose of this shift was so that obligated parties would not be in the awkward position of having to comply with RVOs for those years before knowing what they were. The shifted compliance deadline was supposed to make compliance easier for obligated parties. Ironic, right?
In an interesting twist, the D.C. Circuit court held that “when EPA issues untimely [RVOs], the [Clean Air Act] does not entitle obligated parties to 13 months’ compliance lead time, nor does it require a minimum 12-month compliance interval[3].” The court further held that EPA did not “act arbitrarily and capriciously in establishing the 2020-2022 compliance schedule[4]” and instead found that the schedule is “reasonable and reasonably explained[5].”
So, why should you care about denied SRE petitions and one measly court case? There seems to be a subtle shift where EPA is beginning to either change or update the way things are done to better facilitate how the RFS functions. In past years, EPA has granted SRE petitions using standards that appeared less transparent. Now, since EPA updated the way its evaluating SRE petitions, the RFS may start seeing less of them granted, which may have an affect on the RIN market.
Will this shift be immediate? You already know the answer to that. Any changes in regulatory procedure and the results that may occur from it take time to see. Until then, we will have to wait and see if small refineries have Terrible, Horrible, No Good, Very Bad days.
[1] July 2023 Denial of Petitions for RFS Small Refinery Exemptions, EPA-420-R-23-007, pg. 5 (July 2023).
[2] Id.
[3] Wynnewood refining company, LLC and Coffeyville Resources Refining & Marketing, LLC, v. EPA, No. 22-1015, pg. 7 (D.C. Cir. Jul. 18, 2023).
[4] Id.
[5] Id.