Likely RFS Legal Arguments to Focus on Missed Deadlines, Waiver Authority

Source: By Rachel Gantz, OPIS • Posted: Saturday, December 12, 2015

It’s been a week and a half since EPA released its final 2014-2016 Renewable Fuel Standard (RFS2) targets, with stakeholders still digesting the rule. It’s expected that multiple lawsuits will soon be filed on the issue, and according to sources, the bulk of the legal arguments will likely focus on three major

issues: missed statutory deadlines, targets above the E10 blend wall and EPA’s interpretation of its waiver authority.

EPA issued its long-awaited final 2014-2016 RFS targets on Nov. 30. Once the rule is published in the Federal Register, parties have 60 days to file litigation. While no groups have officially filed any lawsuits yet, both the American Fuel & Petrochemical Manufacturers (AFPM) and the Biotechnology Industry Organization recently indicated to OPIS they soon planned to do so.

“We expect biofuel proponents to argue that the rule reduces volumes too much, and for refiners to argue that the rule doesn’t go far enough,” ClearView Energy Partners explained in a recent note to clients. “We think stakeholders can challenge all three years’ worth of requirements, in addition to EPA’s lateness and methodologies,” it added.

Oil Interests: Lateness of Targets; Beyond Blend Wall Concerns

According to Scott Irwin, in any RFS lawsuit, oil interests will likely focus on EPA not meeting its statutory deadlines and the expense of going above the E10 blend wall, the point at which 10% ethanol blends are maxed. “The oil industry has to try, but I think the chances of them winning are limited,” he noted.

EPA is statutorily required to finalize each year’s RFS targets by Nov. 30 of the previous year, and in order to get the requirement “back on track,” the agency this year rolled out three years’ worth of targets.

Oil interests “might challenge the rule because EPA missed statutory deadlines,”
Tim Cheung, vice president and research analyst at ClearView Energy Partners, told OPIS on Wednesday. “They might also challenge biodiesel targets because those are due 14 months prior to the start of compliance years,” he noted.

It’s worth noting that AFPM and the American Petroleum Institute have sued EPA over previously missed annual RFS target deadlines, ultimately leading the agency to issue three years’ worth of numbers this year.

As for EPA moving beyond the E10 blend wall, EPA addressed the issue in its final RFS rule.

“We believe that the RFS program can and will drive renewable fuel use and, indeed, we have considered the ability of the market to respond to the standards we set when we assessed the amount of renewable fuel that can be supplied,” the agency explained in the final RFS rule. “In our view, while Congress recognized that supply challenges may exist as evidenced by the waiver provisions, it did not intend growth in the renewable fuels market to be stopped by those challenges, including those associated with the ‘E10 blend wall.’ The fact that Congress chose to mandate increasing and substantial amounts of renewable fuel clearly signals that it intended the RFS program to create incentives to increase renewable fuel supplies and overcome constraints in the market. The standards we are finalizing will provide those incentives,” the agency added.

Biofuel Groups: Inadequate Domestic Supply Waiver

For biofuel interests, “there is one [lawsuit] target: EPA’s interpretation of the ‘inadequate domestic supply’ waiver authority,” Irwin explained. “I think the case will swing on how much weight a judge places on traditional deference courts have given to the discretion of regulators versus the intent of Congress as demonstrated in the history of the RFS legislation,” he said.

Left unchanged from its RFS proposal in May, EPA used its waiver authority, including consideration of fueling infrastructure and other constraints, as a way to reduce RFS targets below the statutory requirement in its final rule.

“Despite significant increases in renewable fuel use in the United States, real world constraints, such as the slower than expected development of the cellulosic biofuel industry and constraints in the marketplace needed to supply certain biofuels to consumers, have made the timeline laid out by Congress impossible to achieve,” EPA explained in the final RFS rule. “These challenges remain, even as we recognize the success of the RFS program over the past decade in boosting renewable fuel use, and the recent signs of progress towards development of increasing volumes of advanced, low greenhouse gas-emitting fuels, including cellulosic biofuels,” it noted.

In comments on the RFS proposal, biofuel groups hammered EPA for using the waiver to reduce the targets, noting there was sufficient supply, including abundant carryover Renewable Identification Numbers (RINs).

Anticipating those same concerns, EPA included further justification in the final rule. “Some commenters referred to EPA’s 2010 RFS2 rule … where we stated that ‘… it is ultimately the availability of qualifying renewable fuel, as determined in part by the number of RINs in the marketplace, that will determine the extent to which EPA should issue a waiver of RFS requirements on the basis of inadequate domestic supply,’ as indicating that EPA had previously determined that carryover RINs must be counted as part of ‘supply.’ We disagree,” EPA explained in a footnote on the final rule.

“The quoted language makes no explicit reference to carryover RINs, and the context indicates that the point of the passage was to explain that it is in the interest of biofuel producers to generate RINs for all qualifying biofuel to avoid or minimize the possibility that EPA would grant waivers…. In any case, this sentence is entirely consistent with the approach we are taking today to interpret ‘supply’ to refer to the volume of biofuels that is available and which can be expected to satisfy all of the definitional requirements to be renewable fuel (including ultimate use as transportation fuel, heating oil or jet fuel),” EPA noted.

“To the extent that the interpretation of the general waiver authority we are asserting in this final rule appears inconsistent with our statement in 2010, or is inconsistent with any other past statement made at a time when we were not actually exercising the authority, we intend for the interpretation we are clearly setting forth today to be a clarification/modification of such prior statements,” EPA added.

As ClearView noted in its recent note to clients, “f the parties were to agree to a fast-paced briefing schedule (a call hard to make at this juncture), the earliest we would expect the D.C. Circuit to issue a decision would be this time next year.”