July 21, 2021
In its final pirouette of this last dance, the United States Supreme Court (SCOTUS) finally ruled on Holly Frontier et al. v. Renewable Fuels Association et al. from the 10th Circuit. While the decision was not the sweeping win some Renewable Fuel Standard (RFS) participants were hoping for, it could have been worse.
As you might recall, the case before the SCOTUS centered on three refineries being granted Small Refinery Exemptions (SREs). To recap, here are the facts for each refiner that landed this case in the Supreme Court:
- Holly Frontier Cheyenne, LLC (“Cheyenne”): Cheyenne had been granted an exemption for the year 2012 but had not petitioned for an extension of the exemption for the years 2013 and 2014. However, in 2017 Cheyenne petitioned for an exemption for the compliance year 2016. The Department of Energy (“DOE”) recommended to EPA that Cheyenne should not be a granted an exemption. EPA, however, granted an exemption for the compliance year 2016 in full.
- Holly Frontier Woods Cross Refining, LLC (“Woods Cross”): Woods Cross had never petitioned nor been granted a small refinery exemption for any year. However, in the year 2017, Woods Cross petitioned EPA for an exemption for the compliance year 2016. Woods Cross did not identify as having a disproportionate economic hardship, a requirement to be granted an exemption. DOE recommended that EPA grant Woods Cross a partial exemption, but EPA granted a full exemption.
- Wynnewood Refining Company, LLC (“Wynnewood”): Wynnewood had been granted a blanket exemption for the year 2011 and 2012. However, Wynnewood had not received an exemption since the year 2012. Wynnewood petitioned EPA for an exemption in 2017 for the compliance year 2016. DOE, noting that Wynnewood’s compliance would “not appear…to threaten the refinery’s economic viability,” recommended a partial exemption. EPA, nonetheless, granted Wynnewood a full exemption for the year 2016.
Initially, once EPA granted the exemptions for each refiner, a coalition comprised of various renewable fuel groups objected and challenged the exemptions. The 10th Circuit then vacated (reversed) EPA’s decision for the exemptions. Refiners then appealed the case to SCOTUS and shockingly, SCOTUS granted certiorari, choosing to hear the case. During oral arguments, the two parties centered their arguments around whether the regulations required refiners to apply for an exemption every year in order for it not to lapse. Don’t worry, the arguments were a bit of a snooze fest, you didn’t miss anything. SCOTUS determined that there was nothing in the statute to require a refiner to apply for an exemption every year in order not to lose the ability to do so. Essentially, a refiner can now apply for an exemption in any year, regardless of whether they have applied for an exemption in past years or previously been denied an exemption.
To put this decision in better context, there are two schools of thought on how SREs should be applied. One application is more of a “funnel” approach. This is what was seen in the 10th Circuit. Essentially, once a refiner has let their exemption lapse or been denied an exemption, the refiner would lose the ability to apply for the exemption. In this way, the refiner was “funneled” towards meeting their obligation. The other application is more of a “safety-valve” approach. This approach would allow refiners to apply for an SRE only in the years that they can effectively show a financial hardship, regardless of whether that refiner has let a previous exemption lapse or had one denied. In this way, this approach is more of a “safety-valve” because it stops undue financial hardships in years where the small refinery might not be able to meet their RIN obligation. This latest decision by SCOTUS solidifies the “safety-valve” approach because it allows small refineries to apply for SREs nonconsecutively.
From the outside looking in, this decision looks a lot like a sweeping win for refiners. It’s important to note, however, that this decision is a compromise, not a full-fledged refiner win. While SCOTUS did away with the “funnel” approach to compliance, they didn’t waive the requirement for refiners to show a hardship. In this way, SCOTUS “split the baby,” so to speak. On the one hand, refiners no longer have to be concerned about whether they can apply for exemptions based on the timeliness of their application or previous denials. On the other hand, they are still required to show the hardship, as an effort to ensure refiners are applying for exemption in years’ they truly need them.
What does this mean for the industry? It means EPA will still need to use its judgment in determining whether to grant SREs, which means the uncertainty surrounding SREs remains. This is a large part of why neither the renewable fuels industry nor the nonrenewable fuels industry is happy. SCOTUS’s compromise did more to create unpredictability than it did to lend stability. By being able to jump in and out of the need for RINs, renewable fuel producers and blenders alike do not gain the market certainty of renewable fuel and RINs. However, with the hardship requirement, refiner’s also do not gain the certain safety of an SRE. It’s a little bit like setting up an industry on quick-sand…not stable, not fun, and will definitely leave you spitting.
If you bet this went over across the industry about as well as a lead brick, you’d be correct. Within in a week of the published decision, bipartisan legislation called the Small Refinery Clarification Exemption Act of 2021 was introduced in the House. One of the parties on the original suit called on EPA to publish a memorandum of understanding when EPA publishes RVOs…whenever that’s going to happen. On the refinery side, a handful of SRE applications were withdrawn and a couple were added. So basically, no one knows what’s going on and what little they do know, they’re not happy about. The point here, is that this decision effectively impacts the landscape of the RFS. Regardless of your position in the RFS, this decision did not lend the industry the certainty it so desperately needs. Will the industry even out? Probably. It will take EPA time to be able to give effective guidance to navigate this new landscape.