Refiners push court to crack down on RFS ‘misalignment’

Source: Ellen M. Gilmer, E&E News reporter • Posted: Tuesday, October 9, 2018

Federal judges heard hours of oral arguments last week in a complex debate over EPA’s implementation of its renewable fuel standard.

In a marathon session Friday before the U.S. Court of Appeals for the District of Columbia Circuit, EPA and various challengers sparred over the agency’s recent RFS blending requirements and its long-standing rule for who must comply.

Friday’s three-hour session delved into a dispute over EPA’s 2010 “point of obligation” rule, which designates who must meet the RFS program’s annual requirements.

The statute directs the agency to set annual obligations “applicable to refineries, blenders, and importers, as appropriate.” EPA cited the “as appropriate” phrase in finalizing its 2010 decision to exclude blenders — those who mix renewable fuels into petroleum.”

Refining companies have long argued that EPA’s failure to include blenders as so-called “obligated parties” undermines the program and is unfair to refineries.

Baker Botts LLP attorney Samara Kline, representing a coalition of refining companies, told the court the RFS requires EPA to review its determination of obligated parties every year.

She argued that the “misalignment” of the 2010 rule was evident earlier this year when refining firm Philadelphia Energy Solutions filed for bankruptcy protection after it was unable to meet its RFS obligations.

“When you’ve got the largest refiner on the East Coast going bankrupt as a result of this misalignment, it’s absurd for EPA to say that it can continue to apply a definition that it chose for administrative ease year after year after year,” Kline said.

Judge Gregory Katsas, a Trump appointee, pressed Kline to explain what was unreasonable about EPA simply referencing and reapplying its 2010 determination of obligated parties year by year.

Judge Nina Pillard, an Obama appointee, said she had trouble understanding how the system of credits known as renewable identification numbers would function if EPA each year changed its designation of who must comply.

“Wouldn’t that drive the RIN market into just total dysfunction?” she asked.

Kline responded that EPA must simply keep the obligation issue on the table each year and consider comments from affected parties. The D.C. Circuit sidestepped similar arguments in broader litigation last year (Greenwire, July 28, 2017).

Judicial review

Though apparently skeptical of some of the refiners’ claims, the D.C. Circuit panel also appeared dissatisfied with the notion that there is no way for a party to challenge EPA’s point-of-obligation approach.

Pillard said the statute “raises at least the suggestion that some determination of appropriateness is called for here.”

“Surely [refiners] are entitled to get that looked at by EPA,” said Senior Judge Stephen Williams, a Reagan appointee.

Justice Department attorney Patrick Jacobi noted that a yearly review of the point of obligation would be too big a burden for the agency, which already struggles to complete its task of setting annual blending requirements.

But he acknowledged that challengers could raise the concern in a petition for EPA to reopen the issue.

“If EPA became convinced based on what’s going on in the market that it needed to go ahead under its discretion and reconsider this in the annual, this provision allows for that,” Jacobi said. “What it does not do, it does not in any form require it.”

Jacobi added that the agency’s discretion is broad but not “unbounded.”

In an exchange with Katsas, he said he agreed that in limited circumstances — though not in this case — there could be some degree of judicial review for EPA’s determination of the point of obligation.

‘Cold comfort’

The refining companies opposed to EPA’s 2010 point of obligation rule didn’t challenge it the year it was finalized.

Their petition to EPA over the designation instead came six years later when the agency issued its RFS obligations for 2014 to 2016.

That was when EPA for the first time invoked waiver authority to set standards lower than the law required, based on a finding of inadequate renewable fuel supply.

The refiners say EPA’s waiver decision — which was later scrapped in separate D.C. Circuit litigation — shows that its decision to exclude blenders from compliance requirements was rendering the RFS ineffective.

“At that point, the RIN market was not working as intended,” Kline told the court. “Instead of being abundantly available, RINs were now in short supply.”

She argued that requiring blenders to comply with the obligations would help stabilize the market.

EPA says it’s too late for the refiners to challenge the 2010 decision, even under the Clean Air Act’s “after-arising” provision, which allows for later complaints in certain circumstances. EPA argued Friday that the refiners could have made all of their arguments in 2010.

Kline said the refiners’ complaints weren’t ripe until EPA’s waiver decision acknowledged problems in the market. Now they’re challenging the agency’s refusal to reconsider the point of obligation.

“The good news for you is that’s new grounds to support jurisdiction,” Katsas said. “The bad news for you is that you have a tough standard of review to show an abuse of discretion in not reopening a rulemaking.”

In any event, government lawyers told the court, EPA’s obligation approach was reasonable and well-supported.

“EPA determined that, based on the record before it, revision of the 2010 point of obligation rule was inappropriate, explaining that it ‘continues to believe that the point of obligation is appropriately placed on refiners and importers, consistent with the current regulation,'” the agency said in a recent brief.

EPA reaffirmed the approach just last year (Greenwire, Nov. 27, 2017).

Pillard noted that EPA can use and has used waivers to grant relief to refiners struggling to meet obligations. But Kline argued that such “back end” relief is not sufficient.

“The idea that they can just keep doing it wrong, fundamentally wrong, and will fix it on the back end is of cold comfort to refiners that are declaring bankruptcy because of massive RIN costs, hundreds of millions of dollars,” Kline said.

Justice Department attorney Meghan Greenfield said the refiners haven’t made the case that a change to the point of obligation to include blenders would “measurably” stabilize the RIN markets.

Battling over biomass, cellulosic fuels

Last week’s arguments also featured a showdown over the 2018 volumes for biomass-based diesel — made from soybean oil, used cooking grease and animal fats — which the National Biodiesel Board argues are below expected production levels and contrary to the law.

Justice Department lawyer Samara Spence, representing EPA, maintained that the agency’s approach was lawful and well-reasoned.

“EPA set the 2018 biomass-based volume in a manner that would continue to support growth for the [biomass-based diesel] industry by increasing the volume over the previous year while at the same time not setting it so high that it would crowd out opportunities for other types of advanced biofuel,” she told the court.

The American Petroleum Institute and the American Fuel and Petrochemical Manufacturers sided with EPA on the issue and added that the biodiesel group doesn’t even have standing to bring its claim because it never showed injury from EPA’s mandates.

But the two industry groups also had a complaint for EPA: Its 2017 requirements for cellulosic biofuel are too high.

Crowell & Moring LLP attorney Tom Lorenzen, representing the groups, told the court EPA has repeatedly overestimated volumes for cellulosic biofuel by relying on faulty methodology.

The debate over the volumes comes as the White House prepares an announcement set for tomorrow on potentially changing restrictions on higher-ethanol blends of fuel (see related story).