On May 6, 2014, the D.C. Circuit dismissed several challenges brought by industry to the volumes the U.S.Environmental Protection Agency set for 2013 under the renewable fuel standard in Monroe Energy LLC v. EPA, No. 13- 1265 (D.C. Cir. May 6, 2014).
In this case, Monroe Energy, an independent refiner, and trade associations American Petroleum Institute and American Fuel & Petrochemical Manufacturers challenged the 2013 volumes. PBF Holding Company LLC intervened on behalf of the petitioners. Multiple parties intervened on behalf of the EPA. As discussed further below, the D.C. Circuit’s decision did not address the issues raised by the API and AFPM.
Background
In 2005, Congress established the renewable fuel standard, mandating the use of biofuels in the nation’s transportation fuel supply. Congress significantly expanded these obligations in 2007 when it passed the Energy Independence and Security Act. This legislation set increasing statutory annual volumes for renewable fuel, advanced biofuel, cellulosic biofuel and biomass-based diesel to try to reduce the nation’s reliance on foreign fuels and its greenhouse gas emissions.
To achieve these goals, the U.S. Energy Information Administration is required — by Oct. 31 every year — to provide the EPA with an estimate of the volumes of transportation fuel, biomass-based diesel and cellulosic biofuel that it predicts will be sold into commerce in the U.S. Using those estimates, the EPA is then charged with determining — by Nov. 30 — the renewable volume obligation for each of the foregoing types of renewable fuel for the following year. The EPA missed this deadline by over nine months when it issued the 2013 renewable volume obligation on Aug. 15, 2013, over three-quarters of the way through the 2013 compliance year.
Setting the annual renewable volume obligation has become more complicated over the years because there are limitations on the amount of renewable fuel that can be blended into the transportation fuel pool. This problem arises because fuels containing higher blends of renewable fuels are not necessarily compatible with existing infrastructure (e.g., pipelines, fuel tanks and vehicle engines).
When Congress passed this legislation, it set increasing annual statutory volumes for renewable fuels, anticipating that the demand for transportation fuel would continue to increase. However, this prediction proved inaccurate and the demand for transportation fuels has decreased since 2005. This trend has caused the statutorily required renewable fuel volumes to be out of alignment with the amount of renewable fuel that can be safely blended into the pool of petroleum-based transportation fuel. This problem is referred to as the “blendwall” — the point at which the statutory volumes in the renewable fuel standard are higher than can be consumed given concerns about vehicle, mechanical and infrastructure compatibility.
Congress did, however, anticipate that it might be necessary to reduce the annual renewable volume obligation from these statutory volumes; therefore, Congress granted the EPA various waiver authorities to reduce the obligation from the statutory annual volume, if necessary. The Monroe Energy case challenged, in part, the EPA’s decision not to not use its waiver authority when setting the 2013 renewable volume obligation, which Monroe Energy and PBF Holding argued is unachievable and imposes unjustified expenses on certain parties.
Problems with the 2013 Renewable Volume Obligation
Monroe Energy sought vacatur of the 2013 renewable volume obligation based upon three arguments:
- The EPA set the 2013 renewable volume obligation based on criteria other than the projected volumes of advanced biofuels available,
- The 2013 renewable volume obligation imposes devastating and legally unjustifiable costs on certain parties,
- The EPA missed the statutory deadline to issue the 2013 renewable volume obligation.
Separately, the API and AFPM argued that EPA failed to provide notice that the 2013 renewable volume obligation would be based on updated data from the EIA. When developing the 2013 renewable volume obligation, the EIA provided the EPA — before the Oct. 31 statutory deadline — with an estimate of the projected amount of renewable fuel to be sold into commerce.
However, between issuing the proposed rule and the final rule, the EPA obtained a new projection from the EIA, which was never subjected to public comment. EPA then used that new projection — and not the initial projection — to establish the final 2013 rewnewable volume obligation and, as a result, the 2013 obligation was higher than the EPA had proposed when it used the initial EIA projection. The API and AFPM also argued that the EPA granted an extension of the small-refinery exemption without providing notice in the proposed rule.
Oral Argument
At the oral argument held in April, Monroe Energy expressed concern that the 2013 renewable volume obligation would be unachievable because companies might opt to bank excess 2013 renewable identification numbers (i.e., credits used to establish compliance with the annual renewable volume obligation) to meet the 2014 obligation rather than sell them for 2013 compliance. Therefore, Monroe Energy argued that the EPA needed to consider the 2014 renewable volume obligation when determining whether the 2013 obligation would be achievable.
Counsel for the API and AFPM fielded numerous questions at oral argument regarding the applicability of the D.C. Circuit’s recent precedent in Utility Air Regulatory Group v. EPA, No. 12-1166 (D.C. Cir. Mar. 11, 2014).
In Utility Air Regulatory Group, the D.C. Circuit concluded that it lacked jurisdiction to hear arguments that were subject to an administrative reconsideration petition pending before the EPA. At the conclusion of his argument, counsel to the API and AFPM committed to update the D.C. Circuit regarding whether the EPA and trade associations could agree to hold their issues in abeyance pending reconsideration.
The EPA defended the 2013 renewable volume obligation by arguing that using 2012 carryover renewable identification numbers to meet the 2013 obligation is a valid compliance option and asserted that it has broad discretion when setting the annual obligation standards. The EPA also argued that concerns about the cost to comply with the 2013 renewable volume obligations were not valid considerations because companies have multiple compliance options: (1) spot purchase renewable identification numbers on the market, (2) purchase ethanol and blend renewable fuels or (3) enter into contracts with blenders.
API and AFPM Issues Severed and Held in Abeyance
Following oral argument, the API, AFPM and EPA filed a joint motion to sever the API’s and AFPM’s issues into a separate case and hold that case in abeyance pending reconsideration. Over the objections of three respondent-intervenors, the D.C. Circuit’s May 6 decision granted the motion to create a new case and hold it in abeyance. Thus, the groups’ issues regarding the EPA’s failure to provide adequate opportunity for notice and comment are still unsettled.
Monroe Energy v. EPA
After severing the API and AFPM issues, the D.C. Circuit swiftly dismissed the issues raised by Monroe Energy and Intervenor PBF Holding, giving great deference to the EPA. As to the first issue — whether the EPA impermissibly considered criteria other than the projected volumes of advanced biofuels available — the D.C. Circuit concluded the EPA has broad discretion to determine whether and under what circumstances to exercise its waiver authority and reduce the advanced and total renewable fuel volumes.
The D.C. Circuit also found substantial support in the record for the EPA’s rationale that the advanced biofuel volume could be met by other types of fuels, namely biomass-based diesel and imported sugarcane ethanol. Similarly, the D.C. Circuit was persuaded that the total renewable fuel volume was achievable given the number of 2012 carryover renewable identification numbers available and the fact that companies have several options to achieve compliance, such as increasing the production of biodiesel volumes. While the D.C. Circuit agreed the EPA could have done a better job explaining its analysis of 2012 and 2013 carryover renewable identification numbers, the circuit court concluded the agency’s rationale could reasonably be discerned.
Second, the D.C. Circuit declined to find that the 2013 standards are unlawful where there are sufficient renewable identification numbers to meet the renewable volume obligation, even if the cost to comply is higher in 2013 than in prior years. The D.C. Circuit reasoned that “high [renewable identification number] prices should, in theory, incentivize precisely the sorts of technology and infrastructure investments and fuel supply diversification that the [renewable fuel standards] program was intended to promote.” As to the independent refiners’ concerns about their disproportionate costs to comply with the renewable fuel standard, the D.C. Circuit dismissed this argument, noting “the decision to place compliance obligations on importers and refiners, rather than blenders was reaffirmed in 2010,” and “the time to challenge that decision has passed.”
Finally, relying heavily on its 2010 National Petrochemical and Refiners Association v. EPA decision, where the EPA missed the 2009 deadline to issue a biomass-based diesel rewnewable volume obligation, the D.C. Circuit dismissed Monroe Energy’s challenge that the rule was untimely. In particular, the D.C. Circuit underscored the finding in NPRA that Congress intended for the annual renewable volume obligation to be met “regardless of [the] EPA delay.”
The D.C. Circuit found that refiners “had no legally settled expectation that [the] EPA would exercise its waiver authority to reduce [the renewable volume obligation]” and that the rule was not retroactive because it was finalized before the end of the compliance year. Interestingly, the D.C. Circuit seemed to downplay the importance of the notice and comment process by implying that refiners could have made business decisions regarding 2013 compliance based on the EIA’s October 2012 projection and the February 2013 proposed rule, which stated the EPA was not proposing to reduce the advanced biofuel and total renewable fuel volumes for 2013.
Reconsidered 2013 Cellulosic Biofuel Standard
In addition to the issues raised by the API and AFPM, the cellulosic biofuel portion of the 2013 renewable volume obligation is also potentially unsettled. In January 2014, the EPA granted reconsideration of the cellulosic biofuel portion of the 2013 renewable volume obligation. Then, on April 22, 2014, in a direct final rule, the EPA substantially reduced the 2013 cellulosic biofuel volume from 6 million gallons to 810,185 gallons.
The EPA based this massive reduction in the 2013 cellulosic volume on limited actual production of cellulosic biofuel during 2013. As the D.C. Circuit held in API v. EPA, 706 F.3d 474 (D.C. Cir. 2013), a case challenging the 2012 cellulosic biofuel standard, the EPA must set a volume based on projected growth and not an aspirational volume intended to promote growth in the renewable fuel industry. In keeping with that judicial directive, the EPA issued this direct rule, revising its 2013 cellulosic biofuel projection to the amount of actual cellulosic production in 2013.
This direct final rule will be effective on July 1, 2014, unless the EPA receives adverse comments on the rule. The EPA will withdraw the direct final rule if adverse comments are filed and will then proceed with formal rulemaking.
GAO Recommends the EPA Develop a Plan to Issue its Annual Renewable Volume Obligation on Time
Although they did not gain much traction with the D.C. Circuit, several of the problems with the renewable fuel standard have been explored by the U.S. Government Accountability Office. In March 2014, the GAO documented findings regarding the refining industry in its report “Petroleum Refining: Industry’s Outlook Depends on Market Changes and Key Environmental Regulations.”
The GAO concluded that the renewable fuel standard has had three primary effects on refiners: “(1) compliance has recently increased costs for some refiners, (2) required blending of renewable fuels has contributed to declining domestic consumption of petroleum-based transportation fuels and (3) the EPA’s delays in issuing [the annual renewable volume obligation] may have contributed to investment uncertainty for some refiners.”
The GAO consulted with the EPA about the impact of the renewable fuel standard and was told “that refiners experience the same compliance costs [under the standard].” Despite these assurances, the GAO found that the effect of the renewable fuel standard on companies varies greatly. For example, ExxonMobil Corp. reported that the renewable fuel standard did not significantly impact its financial performance because it was able to blend most of its renewable fuels itself. In contrast, another company reported that its renewable fuel standard costs “exceeded the company’s entire operating budget, including labor and electricity, for a period in 2013.”
The report also explained the EPA’s failure to issue the annual renewable volume obligation on time impacts the available supply of renewable fuels, cost of compliance and companies’ ability to plan and budget for compliance. According to the GAO, the EPA has not undertaken a systematic review of its rulemaking process to determine why it repeatedly misses the statutory deadline for issuing the annual renewable volume obligation. Therefore, the GAO recommended the EPA assess its procedures and take measures to ensure the timely issuance of the renewable volume obligation in the future.
Given the D.C. Circuit’s overall tendency to defer to EPA decisions regarding the renewable fuel standard, industry’s best hope to address these problems may be to pursue legislative assistance. Without legislative direction, the EPA is not likely to voluntarily develop and execute a plan to start issuing the renewable volume obligation on time.