Not Dead (Yet?): After HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association, The Renewable Fuels Standard’s Small-Refinery Exemption Survives, But It May Be On Life Support

Vinson & Elkins LLP

In its June 25, 2021 decision in HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association, the Supreme Court rejected the central holding of a January 2020 decision by the U.S. Court of Appeals for the Tenth Circuit that would have rendered almost all small refineries categorically ineligible for an exemption under the federal Renewable Fuels Standard program (RFS). The RFS requires obligated parties consisting of non-exempt domestic refineries and importers of transportation fuels to blend specific volumes of ethanol and other renewable fuels into gasoline and diesel transportation fuels or otherwise obtain renewable identification numbers (RINs) on an annual basis. Although a victory for small refineries, the Court’s narrow decision in HollyFrontier leaves ample room for EPA to limit the number of exemptions granted to small refineries going forward. The Biden administration’s focus on climate change and promoting renewable energy sources suggests that it may exercise its authority to limit exemptions and require small refineries to adhere to the RFS’s requirements.

HollyFrontier interpreted 42 U.S.C. § 7545(o)(9). That provision exempted small refineries (those that on average produce fewer than 75,000 barrels per day during a calendar year1) from the RFS through the end of 2010.2 Congress further provided that EPA “shall extend the exemption” for at least two years for any small refinery that “would be subject to a disproportionate economic hardship if required to comply” with the RFS.3 HollyFrontier focused on § 7545(o)(9)(B)(i), which provides that “[a] small refinery may at any time petition the Administrator for an extension of the exemption under subparagraph (A) for the reason of disproportionate economic hardship.”4

Very few small refineries have continually maintained an exemption from the RFS under 42 U.S.C. § 7545(o)(9). The central question in HollyFrontier was whether a small refinery remains eligible for a “disproportionate economic hardship” exemption under § 7545(o)(9)(B)(i) if its exemption from the RFS has lapsed for a period of time. Rejecting EPA’s prior position that small refineries remain eligible “at any time” for § 7545(o)(9)(B)(i) exemptions despite such lapses, the Tenth Circuit held that a § 7545(o)(9)(B)(i) exemption is available only to the few small refineries that have continually maintained exemptions from the RFS.5

By a 6-3 vote featuring an interesting lineup — with Justice Breyer joining Chief Justice Roberts and Justices Thomas, Alito, Gorsuch, and Kavanaugh in the majority, while Justice Barrett wrote a dissent joined by Justices Sotomayor and Kagan — the Supreme Court reversed the Tenth Circuit. The Supreme Court held that § 7545(o)(9)(B)(i) “does not contain the continuity requirement the court of appeals supposed.”6 Instead, a “small refinery can apply for (if not always receive) a hardship extension [under § 7545(o)(9)(B)(i)] ‘at any time,’” even if it has lacked an exemption (and thus been required to comply with the RFS) for a period of time.7

The Supreme Court’s decision in HollyFrontier is important but narrow. The decision means that an administration so inclined has the authority under § 7545(o)(9)(B)(i) to grant hardship exemptions to small refineries, even if they have managed to comply with the RFS in certain years. Under the Biden administration’s leadership, however, it appears unlikely that EPA will tend to look favorably on applications for § 7545(o)(9)(B)(i) exemptions. Indeed, after the change in administrations, the federal government reversed its position and filed a merits brief in HollyFrontier that supported the Tenth Circuit’s holding that a small refinery that has experienced a lapse in exemption is ineligible for a hardship exemption under § 7545(o)(9)(B)(i).

Even after HollyFrontier, EPA has considerable flexibility to limit the number of exemptions granted under § 7545(o)(9)(B)(i). Indeed, EPA under the Biden administration can sap much of the practical effect of the Supreme Court’s decision by denying applications for hardship exemptions on other grounds. That may even be the ultimate outcome in HollyFrontier itself. In that case, the Tenth Circuit vacated EPA’s grant of exemptions for two additional reasons that were not challenged in the Supreme Court. First, the Tenth Circuit concluded that EPA erred by considering “hardships not caused by RFS compliance” in granting the exemptions.8 Under the Tenth Circuit’s decision, only disproportionate economic hardships caused by compliance with the RFS can serve as the basis for a § 7545(o)(9)(B)(i) exemption.9 Hardships attributable to other factors, such as “overall economic conditions,” cannot justify an exemption.10 Second, the Tenth Circuit held that EPA acted arbitrarily and capriciously by concluding that RFS compliance would cause disproportionate economic hardship for the exemption applicants without addressing prior EPA findings that non-vertically integrated refineries can pass on the costs of purchasing credits (i.e., RINs) to ensure compliance with the RFS.11

On remand from the Tenth Circuit, EPA in HollyFrontier may rely on either (or both) of the two remaining grounds supporting in the Tenth Circuit’s decision as a basis for denying the exemption applications in that case. The Tenth Circuit’s decision also provides a roadmap for how EPA might justify denying exemption applications in other cases. EPA might deny an application because the applicant has not shown that its alleged disproportionate economic hardship is caused by the RFS program, rather than by other factors. And for non-vertically integrated refineries, EPA might conclude that the RFS does not impose economic hardship because the refineries can pass the cost of purchasing RINs on to their customers.

To satisfy the requirements of the Administrative Procedure Act, EPA would have to provide a reasoned explanation for any denial of an exemption application, and the disappointed applicant could then challenge the denial in court. Such challenges may be strongest in cases where the disappointed applicant has previously been granted exemptions by EPA, has since experienced no significant changes relevant to the exemption inquiry, and can show that it reasonably relied on the expectation that EPA would continue granting it exemptions in the future.12 But the potential arguments available to each disappointed applicant will likely depend on the particular facts of its individual case. For now, what appears clear is that the small-refinery exemption is likely to remain a fertile ground for potential litigation in the coming years.

The outcome of EPA’s decision on these exemptions may be even more significant for the industry than this ruling because of the potential implications for the RINs market. EPA’s website reveals that the total small refinery waivers issued in 2017 and 2018 encompassed 30 million gallons and account for roughly 3.2 billion RINs.13 A rejection of the determinations at issue in Holly Frontier would mean that these exempt small refiners’ volumes during the years in question in that case would be subject to the renewable volume obligations. What that outcome may mean for other exemptions granted to other refiners remains to be seen as it is not clear how many of any such exemptions have been challenged and are also at risk of being affected by any such determination. For now, these questions just add to the uncertainty surrounding the RINs market.

1 42 U.S.C. § 7545(o)(1)(K).

2 Id. § 7545(o)(9)(A)(i).

3 Id. § 7545(o)(9)(A)(ii)(II).

4 Id. § 7545(o)(9)(B)(i).

5 Renewable Fuels Ass’n v. EPA, 948 F.3d 1206, 1243-51 (10th Cir. 2020).

6 Slip op. at 12.

7 Id.

8 Renewable Fuels Ass’n, 948 F.3d at 1254.

9 Id. at 1253-54.

10 Id. at 1253.

11 Id. at 1255-57.

12 See Perez v. Mortgage Bankers Ass’n, 575 U.S. 92, 106 (2015) (“[T]he [Administrative Procedure Act] requires an agency to provide more substantial justification [for a policy change] … when its prior policy has engendered serious reliance interests that must be taken into account.” (quoting FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009))).

13 https://www.epa.gov/fuels-registration-reporting-and-compliance-help/rfs-small-refinery-exemptions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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