LINCOLN, Neb. (DTN) -- The future of the small-refinery exemptions program likely will come down to the meaning of the word "extension" in the Renewable Fuel Standard. During oral arguments Tuesday, justices on the U.S. Supreme Court quizzed attorneys for the federal government, biofuels groups and refiners on how they interpret the word.
Refining company HollyFrontier brought the question before the court this spring in an appeal of a ruling by the U.S. Court of Appeals for the 10th Circuit in Denver in January 2020.
That court found EPA acted improperly when it granted exemptions to three small refiners, including HollyFrontier, because they had not received exemptions in previous years.
An eventual ruling by the Supreme Court is likely to determine how EPA grants similar exemptions going forward.
During oral arguments, HollyFrontier attorney Peter D. Keisler was questioned by Justice Elena Kagan about the limits of the word extension in the RFS.
"In thinking about the ordinary meaning of this word extension," Kagan said, "I guess I'm wondering if you would comment on this hypothetical. Suppose that I rented an apartment five years ago and I rented it for a year, and then I decided to give it up. And five years later, I'm now really tired of where I'm living now, and I want to move back, and I call the landlord and say, I'd like an extension of my lease. What would the landlord say? I think the landlord would scratch her head and think that's a very strange context in which to be using the word extension."
Kagan went on to pose a hypothetical in which a small refinery had an initial exemption that ended in 2011. EPA defines a small refinery as producing 75,000 barrels per day or less.
Since then, she said, the refinery has been able to meet its RFS obligations "and continues to do so for decades. And then, 20 or 30 years later, it runs into problems and files for a hardship petition. And you're saying that, in this context, it's an ordinary use of the word extension to say that, after that 30-year lapse, the small refinery gets its extension?"
Keisler responded, "We would your honor, and while that's an extreme example, we think it is still more in keeping with the statutory purposes and text to permit the small refinery in your honor's example to petition at any time."
EPA DEFENDS APPEALS COURT
U.S. Department of Justice Solicitor General Christopher G. Michel argued the 10th Circuit's reading of the case was correct in that if a small refinery received an exemption previously, it was allowed to obtain an extension.
"EPA cannot grant something that does not exist," Michel said.
"That is the ordinary, common-sense meaning of the statutory text. It gives the word extension the same meaning in adjacent interconnected clauses, and it reflects the statute's objective to boost production of clean, renewable fuel, while providing transition time for small refineries to comply. In common parlance, it would be awkward at best to seek an extension of something that has lapsed, especially if it were described as temporary."
Michel said the "vast majority" of small refineries, including the petitioners in the case, successfully complied with the RFS in many prior years.
"The statute creates flexibility to facilitate ongoing compliance, and other tools exist to address other challenges," he said.
Some justices raised the concern markets drive decisions for small refineries, including whether they can comply with the RFS or shut down operations.
"Tell me why the scheme, then, that you're proposing is one that Congress would think is sensible if a small refiner is able to comply for a number of years but then is unable to comply because of the fluctuation of the price," Justice Samuel A. Alito said, "but wouldn't be able to comply again after that year. Why would Congress want that small refinery to be forced out of business?"
Michel responded, "So, Justice Alito, I do want to make clear that we don't think they'll be forced out of business, and I think that's an important point because that would really raise the stakes beyond where they actually are. I also think it's important to know that EPA's long-standing position is that a refinery can recover the cost of compliance through this program. At the end of the day, this is a statute that's aimed at transforming the fuel supply, and ultimately, it is necessary to bring all the small refineries into compliance."
When asked by Justice Sonia Sotomayor why small refineries wouldn't be forced to close, Michel said the vast majority of small refineries have complied with the RFS, including the petitioners in this case.
"That includes years in which they have sought hardship relief under this provision and had it denied," Michel said. "EPA denied about 18 petitions between 2013 and 2015, and as far as we know, only one small refinery went out of business."
Matthew W. Morrison, attorney for ethanol and agriculture groups, told the court the statute requires the "ordinary meaning" of the word extension.
"Extension may have other possible meanings in different contexts, but it's ordinary meaning to lengthen or prolong is the only plausible meaning in the context of this statutory provision," Morrison said, "and petitioners have offered no compelling reason to depart from that ordinary meaning."
Small refineries, he said, have had 15 years to comply with and adjust to the demands of the RFS. That includes a five-year blanket exemption that ended in 2011.
"I would say that the RFS compliance costs, as the government points out, turned out to be recoverable anyway," Morrison said, "which would adjust for the fluctuations if it did become more expensive in a given year, those compliance costs would still be recoverable in the cost of the products sold."
Keisler said although the renewable fuels industry has argued small refiners have had years to comply with the RFS, there is no similar law that provides such a transition.
"My friends say that these provisions establish only a limited transitional period," he said, "but they've identified no other statute with a transition period remotely like what they propose here. There is no defined end date. There's no defined number of years. It instead ends on different customized dates for each small refinery, depending on when that refinery first happens to be able to comply, even if it can do so only for one year."
Keisler told the court if the renewable fuels industry won the case, it wouldn't "add a drop" to RFS volumes.
"We have submitted evidence with our briefs that indicate that small-refinery exemptions have caused a substantial drop in the price of ethanol roughly $2.3 billion in losses due to reduced revenues during the recent period about 162 million gallons," Morrison said in response to a question from Justice Brett Kavanaugh.
EPA said in an analysis of the RFS in recent years that small refineries generally are able to recover the costs of complying the law by passing on those costs to consumers at the pump.
In his rebuttal, Keisler disputed the finding.
"In the applications we submitted to the EPA, we said that our margins in many cases were zero or negative once the costs of this program were taken into account," Kesler said.
"And this cost is the single largest operating cost we have. But we don't want the court to decide as a factual matter whether we can pass through these costs or not; we're just asking the EPA to look at that evidence as part of our submission."
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