SCOTUS Sides With Refiners on RFS

This article was originally published at 9:40 a.m. CDT on Friday, June 25. It was last updated with additional information at 11:28 a.m. CDT on Friday, June 25.

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LINCOLN, Neb. (DTN) -- Friday's ruling by the Supreme Court siding with petroleum refiners over the biofuels industry could drive down demand for corn, soybeans and other biofuels crops as the Environmental Protection Agency responds to the court's ruling.

In a 6-3 decision, the Supreme Court overturned a unanimous ruling by the 10th Circuit Court of Appeals. The Supreme Court ruled that small refiners such as HollyFrontier and others can receive extensions of their exemptions to the Renewable Fuels Standard even if their earlier exemptions had lapsed.

The court's ruling had an immediate impact on the corn and soybean markets Friday. Corn had started trading lower earlier in the morning because of rain, but the prices for corn and soybean oil began moving even lower shortly after the court decision was released, said DTN Lead Analyst Todd Hultman.

"Corn prices dropped even lower shortly after 9 a.m. CDT, along with a sharp drop in soybean oil prices after Friday's Supreme Court ruling was announced. At midmorning, December corn was down 15 cents and December soybean oil was down 3.15 cents. Friday's ruling was seen by traders as a weakening of the renewable fuels mandate, but it is not yet clear just how much blending would be reduced by the ruling."

Hultman added that it's possible Friday's ruling may end up with little actual effect on the production of ethanol or biodiesel, but it adds to uncertainty in the market that the White House and the new EPA may be amenable to weakening policy for renewable fuels. Also, traders continue to wait for EPA to rule on the renewable volume obligations (Renewable Fuel Standard) for 2021 and 2022, Hultman said.

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. The 10th Circuit had ruled EPA acted improperly when it granted exemptions to three small refiners, including HollyFrontier, because they had not received exemptions in previous years. The High Court, in overturning the lower court, ruled EPA was allowed to grant refiners new exemptions to the RFS.

BIOFUEL INDUSTRY REACTION

In a joint statement on Friday, the coalition of groups that originally sued EPA in 2018, including the Renewable Fuels Association, the National Corn Growers Association, National Farmers Union, and the American Coalition for Ethanol, said they remain optimistic the Biden administration would change course on small-refinery exemptions.

"Nearly a year and a half ago, the 10th Circuit handed down a unanimous decision that was ultimately adopted by the very agency we took to court in the first place," the group said.

"While we are extremely disappointed in this unfortunate decision from the Supreme Court, we will not stop fighting for America's farmers and renewable fuel producers. Further, we are optimistic that other elements of the 10th Circuit decision, which were not reviewed by the Supreme Court, will compel the Biden administration and EPA's new leadership to take a far more judicious and responsible approach to the refinery exemption program than their predecessors did."

The Trump administration granted 88 small-refinery exemptions between 2016 and 2020.

As of Friday, 70 additional exemption petitions remain pending with EPA for compliance years 2011 to 2020. Without knowing specifically how many gallons are involved, staff at the Renewable Fuels Association estimated it would likely fall somewhere in the range of about 3.1 billion to 3.3. billion gallons of biofuels that could be affected if EPA were to grant all those petitions.

Iowa Renewable Fuels Association Executive Director Monte Shaw said his group was "extremely disappointed" in the court's ruling.

"I am not a lawyer, but it sure seems like the 10th Circuit court got it right when they determined that a refinery can't extend something it no longer has," he said. "However, it is important to remember this case only applied to one of the three major findings from the 10th Circuit court. Today's decision allows refiners to apply to extend RFS exemptions that have lapsed."

American Fuel and Petrochemical Manufacturers President and CEO Chet Thompson said in a statement the court's ruling will bring relief to refiners.

"RFS compliance costs hit all-time highs this month, nearing 25 cents per gallon," Thompson said. "The program is hurting consumers and jeopardizing the viability of refineries across the country, as well as the jobs and communities they support. Further delay from the administration in setting achievable annual volume standards, issuing small-refinery waivers, and responding to numerous petitions for relief will make a bad situation even worse."

Growth Energy CEO Emily Skor said in a statement the court's decision does not change a ruling made by the U.S. Court of Appeals for the 10th Circuit.

"In the past, the biofuel industry has looked to the courts to halt abuse," she said. "Today, new leaders at the Environmental Protection Agency have shown a willingness to defend the RFS, most recently by reversing three improperly granted exemptions."

JUSTICES' OPINIONS

During oral arguments, attorneys for all sides grappled over the meaning of "extension" when it came to SREs.

"The plain meaning of 'extension' does not require unbroken continuity," the court said in its opinion.

"Dictionary definitions contemplate the possibility of resumption after an interruption. Federal rules permit litigants to seek (and courts to grant) an 'extension' of time even after a lapse. And recent federal statutes provide an 'extension' of benefits that previously expired months or even years earlier. A different statutory context might make for a different outcome, for example, where Congress uses modifying language requiring an extension to be 'consecutive' or 'successive.' But the statutory context here confirms the best reading of subparagraph does not require unbroken continuity."

Justices joining the majority opinion were Brett Kavanaugh, Clarence Thomas, Neal Gorsuch, Samuel Alito, John Roberts and Stephen Breyer. Joining the dissent were Justices Amy Coney Barrett, Sonia Sotomayor and Elena Kagan.

In writing the majority opinion, Gorsuch said the law leaves wide open the interpretation of "extension."

"Think of the forgetful student who asks for an 'extension' for a term paper after the deadline has passed," Gorsuch writes. "The tenant who does the same after overstaying his lease, or parties who negotiate an 'extension' of a contract after its expiration.

"Perhaps for reasons like these, the respondents and court of appeals are unable to point to a single dictionary definition of the term 'extension' requiring unbroken continuity. We mention all this not because we pick sides. Neither the statute's text, structure, nor history afford us sufficient guidance to be able to choose with confidence between the parties' competing narratives and metaphors."

In writing the dissenting opinion, Barrett said that although the majority opinion points out the lack of a definition of the term "extension" in the Renewable Fuel Standard, the majority offered its definition.

"By dismissing the need for a continuing connection between the first period and the second," Barrett wrote, "the court forgoes the 'far more natural' reading of 'extend.' The upshot? A refinery could ask to 'extend' an exemption it had in 2010 in the year 2040, with no need to connect the two periods.

"It defies ordinary usage to deem the second exemption 'an extension' of the first, as opposed to a new, standalone exemption. HollyFrontier recognizes as much, seeking to deflect this example as 'extreme' and 'highly unlikely.' Unlikely or not, it follows logically from HollyFrontier's reading of 'extension' which shows just how far this interpretation strays from the term's ordinary meaning."

Read the Supreme Court opinion here: https://www.supremecourt.gov/….

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

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