SREs back in the Fray as Appeals Court Faults EPA Denials


   
   CRANBURY, N.J. (DTN) -- Small Refinery Exemptions under the Clean Air Act's 
Renewable Fuel Standard are back in the news following an appeals court 
decision on Nov. 22 striking down the U.S. Environmental Protection Agency's 
decisions in April and June 2022 rejecting 100 requests from oil refineries 
seeking the exemption.

   Six small refineries challenged the EPA's denials, with the U.S. Court of 
Appeals for the Fifth Circuit ruling in their favor. The refineries included 
Calumet Shreveport Refining, L.L.C., Placid Refining Company, L.L.C., Ergon 
Refining, Inc., Wynnewood Refining Company, L.L.C., The San Antonio Refinery, 
L.L.C., and Ergon-West Virginia, Inc.

   "The EPA denied petitioners' years-old petitions using a novel CAA 
interpretation and economic theory that the agency published in December 2021. 
We conclude that the denial was (1) impermissibly retroactive; (2) contrary to 
law; and (3) counter to record evidence. We grant the petitions for review, 
vacate the challenged adjudications, deny a change of venue, and remand."

   In its ruling, the court notes three exemptions Congress granted small 
refineries, which are defined as having a crude throughput of no more than 
75,000 bpd, because adhering to the RFS "might impose disproportionate economic 
hardship" on them. Congress did not define disproportionate economic hardship, 
while EPA in issuing the SRE denials said the economic harm can only be caused 
by the cost of compliance credits known as Renewable Identification Numbers, 
which can be secured by blending an approved renewable fuel with 
petroleum-based fuel or purchasing the RIN in the market.

   The first was a blanket exemption for all small refineries from complying 
with the RFS until 2011.

   The second exemption is initiated by the U.S. Energy Secretary. If after a 
statutorily mandated study conducted by the Department of Energy the Energy 
Secretary finds that meeting RFS obligations subject the small refinery to a 
"disproportionate economic hardship," then EPA as administrator of the RFS 
shall exempt the refinery from RFS obligations for "a period of not less than 2 
additional years."

   The third exemption allows a small refinery to petition for an exemption 
"for the reason of disproportionate economic hardship." The court ruling said 
in evaluating the exemption the EPA, in consultation with the Secretary of 
Energy, "shall consider findings of the study...and other economic factors."

   The court also notes EPA "shall act on any petition...not later than 90 days 
after the date of receipt."

   In its ruling, the court said the case filed by the six small refineries 
"involves the last of the three small refinery exceptions enumerated in the 
CAA."

   On April 7, 2022, EPA rejected 36 petitions for SREs for the 2018 compliance 
year "using its revised interpretation of the subparagraph (B) exemption 
provision and RIN-passthrough economic theory."

   The court notes 31 of the 36 petitions were granted by EPA in 2019.

   "These August 2019 grants were subsequently ensnared in proceedings 
litigated in the D.C. Circuit unrelated to the dispute at hand. What is 
relevant, however, is that EPA moved for voluntary remand without vacatur to 
consider those petitions with regard to the Tenth Circuit's "alternate 
holdings" in Renewable Fuels Ass'n v. EPA ("RFA")," said the court.

   On Dec. 8, 2021, the D.C. court granted EPA's motion which included a 
proposal to change the approach to SRE eligibility to require that a 
petitioning small refinery to have received the initial exemption through 2010 
in order to qualify for an SRE.

   "EPA once again applied its new interpretation and approach in June 2022 
when it denied sixty-nine exemption petitions for the 2016 through 2021 RFS 
compliance years," said the Fifth Circuit Court. "EPA's new interpretation and 
approach -- which it applied in the Denial Actions -- displaced the 
adjudicative methodology the agency had relied on for over a decade."

   Under the new interpretation, "a small refinery's disproportionate economic 
hardship must be caused solely by RFS compliance costs. Second is a new 
economic theory. Called "RIN passthrough," EPA now theorizes that (A) the "cost 
of RINs is the same for all obligated parties, whether the RINs are acquired by 
blending renewable fuel or by buying them on the market" and (B) the "costs of 
RFS compliance (i.e., RINs) are passed through in the prices of refined 
products."

   In their complaint, the petitioners disagreed with EPA's RIN theory in that 
the price of a RIN "at any given point in time is identical for all refineries 
nationwide." And that "market prices for fuel and RIN costs correspond, which 
means all refineries could offset 100% of their RIN costs by raising the price 
of their fuel products, thereby passing RIN costs along to their customers."

   The court said, "that all refineries can completely pass on their RIN costs 
-- is so implausible as applied to the petitioners that it cannot be ascribed 
to a difference in view or agency expertise."

   The ruling pointed to Calumet's exemption petition, which included 
"micro-market" pricing data for its local market compared to Pasadena, Texas, 
which is considered an economically efficient market. The RIN passthrough 
theory applied to the Pasadena market, but not Calumet's micro-market, where 
prices were lower, "which means that fuel is discounted by more than the 
corresponding RIN market price."

   "EPA's macro-level analysis about fuel markets only supports a conclusion 
that passthrough can occur in fuel markets generally -- it does not rule out 
the existence of inefficient fuel markets. And those are the markets in which 
petitioners operate."

   The court also highlighted the disadvantage of a small refinery in 
purchasing RINs.

   "Ratable purchasing is an underlying premise of EPA's second finding -- a 
refinery must be able to purchase RINs at the same time they sell fuel in order 
for the market price to correspond with the price of RINs. That's not an option 
available to petitioners," said the court.

   In using the San Antonio Refinery as an example, the court said "Given the 
amount of fuel it produces, it would need to buy 75,000 RINs per day. But a 
trade size of 75,000 RINs is "essentially unheard of" in the RIN market -- most 
RINs are sold in "a clip of '1 million' at a time." Indeed, as TSAR explained 
to the EPA, it can't even find a RIN broker willing to transact at such low RIN 
quantities."

    

    

   Brian L. Milne, 1.732.768.0260, brian.milne@dtn.com, www.dtn.com.




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