Lawyer: EPA Faces Decision on Waivers

HOUSTON (DTN) -- A recent biofuels industry victory in a federal appeals court could spell the end of the small-refinery exemptions program in its current form, the lead attorney for the ethanol industry in the case said on Tuesday.

Matthew Morrison, an attorney with Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C., represented the Renewable Fuels Association, National Corn Growers Association, American Coalition for Ethanol and National Farmers Union and Farmers Union Enterprises, in the U.S. Court of Appeals for the 10th Circuit in Denver.

On Jan. 24, the court ruled EPA didn't have the authority to issue small-refinery exemption extensions to three companies that were not originally granted waivers in 2017 and 2018.

The court also found EPA "abused its discretion" by not explaining its conclusion that a small refinery could suffer disproportionate economic hardship while also maintaining refiners passed on RFS compliance costs to consumers at the pump.

"The first thing, (the) important thing, is that it's game over," Morrison told an industry audience at the National Ethanol Conference in Houston.

"On these three exemptions, there's going to be no real do-over. It's a factual stipulation that, in fact, their exemptions had lapsed. So this is not something EPA could gussy up on remand and bring back to life."

The court's ruling, Morrison said, applies to at least small refineries -- those producing 75,000 barrels or less per day -- operating in six states in the 10th Circuit.

"Keep in mind we're in the 10th Circuit," he said. "The 10th Circuit is about six states, so it doesn't affect all small-refinery exemptions. But I would say to you this is a pretty good hit at the agency in terms of looking at the legal basis and having a further court of appeals say EPA acted inappropriately and acted in excess of its authority."

Morrison said the big question is whether EPA is going to ask for a review of the decision.

"The intelligence that we have is (EPA is) probably not going to seek a re-hearing," he said. "They're pragmatic. They know that the 10th Circuit grants less than 10% of requests for en banc (before the whole circuit) panels."

In addition, Morrison said a Supreme Court review is "highly unlikely." That's because usually the Supreme Court only takes cases where an appeals court has a split opinion. The recent ruling in the 10th Circuit was unanimous.

"This decision today, it covers six states: Colorado, Utah, Wyoming, Kansas, Oklahoma and New Mexico," he said.

"And if you look at those states, those states comprise roughly a third of the small-refining capacity in the United States. Small refineries produce about 2 million barrels per day, and those states amount to about 650 million gallons. That's a big chunk of the small-refinery capacity today."

Morrison said it would be difficult for EPA to "try and just cordon this off."

In addition, he said it would be "virtually impossible" for EPA to reconcile its position that compliance costs from the Renewable Fuel Standard are passed on to consumers, with the ruling that small refineries have economic hardship.

THE COURT'S DECISION

Morrison said he believes the court decision should be applied nationally because it would "avoid an uneven playing field" when it comes to the exemption program.

"We think it would avoid a ton of national confusion and complexity," Morrison said.

"Think about being a national refinery. You'd have to keep one set of books for those 10th Circuit facilities, and EPA would have to set almost two sets of standards: one that embraced the exemptions and one that ignored them."

The 10th Circuit made its decision on three issues. First, the three small refineries that were subjects of the case could not receive exemption extensions because they never received waivers originally.

"When Congress says EPA may extend a small-refinery exemption, it means there has to be one in existence currently to extend," Morrison said.

Secondly, if a small refinery has a disproportionate economic hardship from trying to comply with the RFS, a company has to show the hardship was not a result of any other factors such as tough economic times in the industry.

Third, Morrison said the EPA hasn't reconciled how RFS compliance costs for small refiners are largely recouped by passing costs on to consumers, with the approval of waivers.

"When you take these three things together, does that mean it's the end of the small-refinery exemption program?" Morrison asked. "Maybe in the 10th Circuit, maybe nationally. EPA is right now deliberating over that very issue. Do we take this decision, which right now is legally or technically limited to those states in the 10th Circuit, and apply it nationally?"

TEMPORARY EXTENSIONS

Congress allowed EPA to extend some small-refinery exemptions temporarily.

From 2007 through 2010, 59 small refineries received waivers "just by signing up," Morrison said. The U.S. Department of Energy then examined the 59 waivers and determined that 24 of them could be extended for another two years.

In 2011 and 2012, the number of exemptions was whittled down to eight, then down to seven in 2015.

"So, as Congress planned it, this temporary program was tapering until the current administration came into power," he said.

"The next year it blew up. The lid blew off. Nineteen small-refinery exemptions came out, not seven, and the year after that, 35. And following that, 31."

CHAOS IN THE RFS

Morrison said the small-refinery program has created "chaos" in the RFS program for the past few years.

"This is the opportunity for the agency to calm the waters," he said. "This is the opportunity to take it on a national level and put an end to a program that Congress had always intended would be temporary and phased out."

He said if EPA doesn't make a change, the industry has other legal options, including other cases it has filed. That includes in the U.S. Court of Appeals for the District of Columbia Circuit, which he said could be asked to review the three pillars.

"Our hope is not to litigate these," Morrison said. "Our hope is to again calm the waters and hope that the agency sees the light of day on this. To do the right thing and to phase out the program that Congress always intended would be short lived."

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @toddneeleyDTN

(AG/CZ)

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