Podcast - Small Refinery Exemption Litigation Update

Andy Kriha: Hello. Welcome to our podcast series on all things energy, climate, environment and natural resources. My name is Andy Kriha, I am an associate at Holland & Knight, and joined today by Susan Lafferty, a partner at Holland & Knight, and we are going to be talking today about the federal Renewable Fuel Standard. We recently did another episode that goes more in depth on a broader range of topics affecting the RFS and what is to come, and today we are going to focus specifically on small refinery exemptions and, in particular, some ongoing litigation about those exemptions. So quickly, what is a small refinery exemption? These are exemptions from general requirements of the RFS to produce a certain amount of renewable fuel, or introduce a certain amount of renewable fuel into commerce, if you are a fossil fuel refinery that is small, falls below a threshold volume production level and would suffer disproportionate economic harm from being forced to comply with the RFS. Under the Trump Administration, a record number of small refinery exemptions were given out. There was litigation, it went to the Supreme Court on an issue about whether or not small refineries could obtain exemptions in noncontiguous years, if they could skip a year where they don't get the exemption and then come back and reclaim it. That issue has since been resolved. They can, but the Biden Administration has found a new reason to deny small refinery exemptions, and that is that they have made a determination that it is nearly impossible for a small refinery to suffer disproportionate economic harm because RIN compliance costs can always be passed on to the consumer. And so we have seen this administration entirely deny all small refinery exemptions that have been from the beginning of the administration until now, and that actually does include some retroactive ones that had not been decided by the previous administration. So in April and June of 2022, EPA issued this new policy and actually ended up denying several small refinery exemptions dating as far back as 2016. Why does this topic matter if you are not a small refinery? Well, in general, granting exemptions, especially the number of exemptions that were granted in the past administration, results in fewer renewable fuels being introduced into the market and lowers overall demand for RINs, which can drive down RIN prices. Denying exemptions has the opposite effect, making compliance costs significantly higher, also introducing more renewable fuel into the market. But really, you should care about this litigation because no matter how your position, no matter what your viewpoint is, this adds significant uncertainty to the market for RINs and to how the program is going to function overall for all players because you never know in a particular year how many participants are going to be out there needing to purchase RINs. So there are a number of ongoing cases, we're going to group them today into three by circuit. There's a single case in the Fifth Circuit, one in the Eleventh Circuit and then many, many consolidated cases that are being argued together in the D.C. Circuit. And we are going to talk about some of the issues that these raise and, and what this litigation might mean for the market going forward. So with that, I have talked enough. Susan, can you get us started with the Fifth Circuit?

Susan Lafferty: Yes, absolutely. Thanks, Andy. So in the Fifth Circuit, the case was Calumet Shreveport Refining vs. EPA and this is a challenge against the April 22 denial of SRE petitions, small refinery exemption. We'll also refer to that as SRE petitions for the 2018 compliance year. And then there were also June 2022 SRE denials, and this covered 2016 through 2021 compliance shares. This case was actually decided in November of 2023, and the Fifth Circuit held that it, the Fifth Circuit, does have jurisdiction over these cases. EPA has been arguing in the most recent years that SRE cases were of national applicability, and therefore belonged in the D.C. Circuit Court of Appeals. This is contrary to how EPA had previously dealt with SREs, which were brought up in various circuits based on where the small refinery was located. So this is the first issue, which is what court has, has jurisdiction. And again, the Fifth Circuit said we've got jurisdiction because Calumet Shreveport is situated in our circuit. As Andy will get into shortly, that has not been a universal determination by other courts. So right there we've got a circuit split. The circuit in November also held that EPA's process was impermissibly retroactive. As noted, they looked at compliance shares as far back as 2016 and reversed those determinations where EPA had granted the SRE petitions. And as Andy said, that means the small refineries were told you do not have to retire RINs for your renewable volume obligation for this particular compliance year. EPA did not tell the small refineries that it had to go back and retire RINs. They sort of said, let's just call it all even and move forward. That's the subject of some other litigation. But nonetheless, EPA's process was retroactive and this court found that impermissible. The third finding was that this new methodology that was announced in April and June of 2022 for determining what disproportionate economic hardship means, was inappropriate as well. EPA in 2022 said it's purely a matter of what is the RFS compliance cost, and we're not going to look at anything else in determining whether or not a small refinery petition should be granted. The court disagreed and said in fact, EPA must consider other factors put forward by refineries, such as looking at their local economic conditions and considering other refinery-specific factors. Finally, EPA was also found to be incorrect in stating that all refineries, small or large, pass through their RFS compliance costs, which is RINs, the price to purchase RINs, to their customers. This court said that EPA had not proven that that was universally true in all cases and again, back to the third factor, EPA said you must look more broadly than just the RIN cost as well. So this case was requested to have a rehearing en banc, which would mean that the entire Fifth Circuit would hear the case and reconsider. That was denied. And now we are waiting to hear whether either EPA or the Renewable Fuel Interest decide to file for cert at the Supreme Court. And in fact, the Supreme Court recently extended that deadline until May 21, 2024, for them to file cert. So, Andy, I will let you take the Eleventh Circuit.

Andy Kriha: Sure. Thanks, Susan. The Eleventh Circuit. There is an ongoing case there called Hunt Refining vs. EPA, raises largely the same issues as were raised in the Fifth Circuit, and while challenging the same to April and June 2022 decisions by EPA. This case, however, did not reach the merits or what we would call the merits. So the court did not decide the retroactivity argument. They did not decide the disproportionate economic harm argument and in fact dismissed the case for lack of jurisdiction in January of 2024, saying that these are in fact an issue of national applicability, and thus can only be brought in the D.C. Circuit and is not appropriate for any of the other circuits to consider. This, of course, if this decision holds, would set up a circuit split between the Fifth and the Eleventh Circuit. There's already a little bit of a split anyway that we'll talk about in a little bit, but this would be a very clear split on this jurisdictional issue that would make it, you know, perhaps a more enticing case for the Supreme Court to take up, and waiting for this decision is part of why the Supreme Court has extended the deadline to appeal in the Fifth Circuit case. Here, Hunt Refining has filed for rehearing en banc. They would like the entire Eleventh Circuit to rehear the case. As of the time we are recording that is currently pending. So if the Eleventh Circuit were to take this up en banc, that would have the effect of delaying that circuit split, might make the case look a little less enticing, or at least a little less ready from the Supreme Court's view, and might lower those chances that the Supreme Court would, would take up the Fifth Circuit case if it's appealed. And having the effect of delaying perhaps a term or two until the Supreme Court could hear this argument. We'll move on to the D.C. Circuit. So the, the D.C. Circuit is where many of the refiners initially filed to challenge these same to April and June 2022 decisions. There have also been a number of other cases that have been transferred there, in particular from the Tenth Circuit, and all of these cases have been consolidated under the lead case, Sinclair Wyoming Refining vs. EPA. Oral argument was just heard in that case on April 16 of 2024. In that oral argument, the judges appeared to be skeptical of EPA's basis for the denials. They seemed to be questioning EPA pretty hard about this economic analysis that says all refineries should be treated the same, all refineries are capable of ratably passing on their RFS compliance costs. Obviously, anything that happens to an oral argument needs to be taken with a grain of salt. Judges very frequently use this opportunity to play devil's advocate and to, you know, test their own assumptions while ultimately deciding the opposite way of what you might have gleaned based on their line of questioning. But it does overall seem here like the refiners have at least a very strong argument that is, you know, perhaps somewhat in line with the Fifth Circuit's decision on the merits. Important to note here, kind of obvious, but in case it's not, the jurisdictional question is not before the D.C. Circuit, because it is the one place where everyone agrees this court is capable of hearing these cases. D.C. Circuit generally aims, as a matter of policy, to get decisions out about three months after arguments, so that would place a decision somewhere around mid-July. It can always take longer. Very complicated cases frequently do take a little bit longer, but look for that mid- to late summer time frame for a decision from the D.C. Circuit. At that point, we're going to discuss here in a minute, you know, what, what could perhaps happen next in terms of appeals to the Supreme Court, but certainly once the D.C. Circuit has decided, I think we'll have a much better idea of the relative merits and likelihood of the Supreme Court taking up a case not just on the jurisdictional issue, but on these, what we call the merits arguments as well. Before we get into more about the merits, I want to pass it back to you, Susan, if you would like to talk about what's next for this jurisdictional questions.

Susan Lafferty: Yes. So it appears pretty likely that the renewable interests that intervened in the Calumet Shreveport case, led by Growth Energy, will likely appeal the Fifth Circuit decision to the Supreme Court by May 21 deadline on at least a minimum the jurisdictional issue. This, of course, is subject to further action by the Eleventh Circuit. As Andy said, the D.C. Circuit is likely mid-July, but we could have a surprisingly quick decision there, possibly given they are certainly aware of all of the actions by the other circuit courts and, you know, and/or action by EPA on the remanded Fifth Circuit denials. So this all does mean there is a clear circuit split, not only with the pending Eleventh Circuit decision, but as Andy said, there were recent decisions by the Ninth and the Tenth Circuits. There are some other analogous, but not as directly on point decisions by a variety of circuits that also split on the jurisdictional issue. And it's when their circuit splits, circuits, you know, one circuit rules one way, one the other, that the Supreme Court often gets interested in taking a case, because that means that there is going to be unsettled law. And for something like the Renewable Fuel Standard, it does not operate well and, frankly, it does not operate at all if there are rules for one circuit that are different for another circuit. And this very well is sort of leading to a situation where somebody needs to say what the law of the land is. So the Supreme Court would likely make a decision on whether to hear the case for during the next term prior to the end of the current term, which is the end of June. But that's not necessarily what's going to happen. There still could be a file for cert, and the Supreme Court could decide to punt on a decision into early next term. Perhaps if they're waiting to see what the D.C. Circuit does and whether or not they might take the case on a broader basis. If they did that, we would still think that they would hear the case at some point next term. But if the Supreme Court takes the case now, then it would most likely again be on the more narrow jurisdictional issue. So if the Supreme Court did hold that all SRE cases need to be heard on the D.C. Circuit, that would be a pretty big win for EPA and the renewable interest. Just again, because if nothing else, it means that there would be one arbitrator making a decision, and that would give EPA a lot clearer direction going forward. If the Supreme Court held that individual circuits are the right place for each individual SRE case, that would mean the circuit split on the merits, assuming that there was a circuit split on the merits, that it would persist, and that you would either need the Supreme Court to ultimately resolve that split, or perhaps EPA would need to come up with a solution that allowed it to comply with every circuit's decision. But this could actually be impossible. So then you're back at hopefully having the Supreme Court ultimately resolve the issue. As I said, for EPA having different rules for different circuits really does not work. That, however, is not a guarantee that the Supreme Court takes up a case at all. The Supreme Court takes up only a very, very small percentage of the cases that are filed each year. And it has turned down cases multiple times that have come up in various ways. So it is possible that we just don't have a Supreme Court that picks this up either this year or next. We think that it's probably more likely than not, despite the fact that, again, on average, your likelihood of getting your case before the Supreme Court is pretty small. But again, this is to be determined. So, Andy, why don't you take up what happens next on the merits.

Andy Kriha: So, I guess I'd say a few more options for what could happen on the merits in the near future. As we've mentioned multiple times, EPA and the renewable energy interests have until late May to ask for the Supreme Court to take up the Fifth Circuit decision, which was on both the jurisdictional question and the merits. Unlike the jurisdictional question, we're pretty unlikely to have a circuit split by the time they have to make that decision. D.C. Circuit, as noted, unlikely to make any decision until mid-July, perhaps even a little bit later in the summer, but arguably, this is still a critically important issue, at least within the context of this program, it is a critically important issue. Whether or not the Supreme Court decides that it's a critically important issue for the nation as a whole, a little bit different measuring stick there. It's something that's going to continue to pop up as long as EPA continues to deny these SRE petitions, lawsuits are going to keep piling up. Eventually, we will get a decision from the D.C. Circuit. It may be in line with the Fifth Circuit, in which case the Supreme Court is probably pretty unlikely to take up the case. If the Supreme Court picks up the jurisdictional issue and believes that it's going to say everything needs to be in D.C., then it's especially not going to take up a merits case before D.C. has a chance to weigh in, because it's going to want to give the appellate court the first opportunity to weigh in on the merits, and it will not have done that yet if there's only the one circuit that it believes is allowed to hear it. So a few different things at play. Of course, whether or not EPA or the renewable interests appeal this Fifth Circuit case, they can wait for the D.C. decision. If the D.C. decision comes sometime over the summer, they can appeal that, and there is still a chance that it would be heard in the Supreme Court's next term. Ultimately, it may not matter whether they wait or not. If the Supreme Court decides in June that it's going to take the case and then hears it in September, or if the Supreme Court decides in October that it's going to hear the case and then actually hears it in April, most of the Supreme Court's decisions don't come out until June at the end of its term anyway, so we're probably looking a little over a year until the Supreme Court decision, regardless of at what point it's appealed and which case it's appealed and when it gets taken up. In the meantime, if the administration changes, this policy could change again. Will be very interesting to see. I don't think we can really predict just based on the knowledge we have now, how that would go. We would think a new Trump Administration would probably try to start granting these again. But if there is case law at the time that goes against that, then perhaps not. Perhaps they might be a little more restrained. It's definitely just going to be something that we have to watch as these cases are decided and then of course, watch the election as well. So with that, I'd like to thank you for joining us and this episode about small refinery exemptions. Thank you.