Hermes Consol., LLC v. Envtl. Prot. Agency

• Decision Date: 02 June 2015
• Docket Number: No. 14–1016.,14–1016.
• Parties: HERMES CONSOLIDATED, LLC, Doing Business as Wyoming Refining Company, Petitioner v. ENVIRONMENTAL PROTECTION AGENCY, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

787 F.3d 568

HERMES CONSOLIDATED, LLC, Doing Business as Wyoming Refining Company, Petitioner
v.
ENVIRONMENTAL PROTECTION AGENCY, Respondent.

No. 14–1016.

United States Court of Appeals, District of Columbia Circuit.

Argued Nov. 12, 2014.
Decided June 2, 2015.

Eric D. Miller argued the cause for petitioner. With him on the briefs were LeAnn Johnson Koch and William Pedersen.

Justin D. Heminger, Attorney, U.S. Department of Justice, argued the cause for respondent. With him on the brief was Sam Hirsch, Acting Assistant Attorney General.

Before: GARLAND, Chief Judge, and TATEL and SRINIVASAN, Circuit Judges.

Opinion

Opinion for the Court filed by Circuit Judge SRINIVASAN.

SRINIVASAN, Circuit Judge:

The Environmental Protection Agency administers a renewable fuels program under which oil refineries must satisfy annual obligations concerning production of renewable fuels. Petitioner Wyoming Refining Company operates an oil refinery located in Newcastle, Wyoming. WRC is subject to EPA's renewable fuels program, but obtained an exemption through 2012. WRC unsuccessfully petitioned EPA for an extension of its exemption through 2014. The company now seeks review of EPA's denial.

We reject WRC's various challenges other than those identifying two mathematical errors in EPA's independent analysis of WRC's financial data. EPA concedes those errors, and we are unable to conclude that EPA would have reached the same decision absent its mistakes. We therefore vacate EPA's decision and remand

787 F.3d 572

to allow the agency to reevaluate WRC's petition using the correct figures.

I.

A.

In 2005, Congress amended the Clean Air Act to encourage increased use of renewable fuels in the United States. As part of that statutory scheme, Congress prescribed target volumes of renewable fuels for use in each year through 2022. In 2015, for example, the statute calls for consumption of 20.5 billion gallons of renewable fuels. 42 U.S.C. § 7545(o )(2)(B)(i)(I). The statute vests EPA with authority to develop a renewable fuels program to secure satisfaction of the annual benchmarks. Id. § 7545(o )(2)(A)(i).

The statute calls for the Energy Information annually to estimate the total amount of transportation fuel expected to be sold in the United States in the upcoming year. Id. § 7545(o )(3)(A). EPA then divides the renewable-fuels benchmark set out in the statute by the overall fuel estimate provided by DOE, yielding a “volume percentage” requirement for the year. For example, if DOE projects the use of 100 billion gallons of fuel in a year for which the statute requires the use of 20 billion gallons of renewable fuels, the “volume percentage” for that year would be 20%. Obligated parties under the regulations—namely, refineries and importers of fuel—must demonstrate that they meet a pro-rata share of the overarching renewable fuels volume obligations based on that “volume percentage.” See 40 C.F.R. § 80.1406(a). Under a volume percentage of 20%, for example, an obligated party producing 100,000 gallons of fuel in a year would have a renewable fuels volume obligation of 20,000 gallons.

Obligated parties, however, are not necessarily required to produce and blend renewable fuels themselves. Instead, they demonstrate compliance through a system of Renewable Identification Numbers (RINs). Each gallon of renewable fuel produced for use in the United States generates its own RIN. Id. § 80.1426(a). RINs attach to the physical volume of the renewable fuel, but become “separated” from renewable fuel batches upon blending of the renewable fuel into conventional fuel. Id. §§ 80.1426(e), 80.1429(b). After blending, RINs may either be retained by the blending party or sold to other obligated parties. Id. §§ 80.1427(a)(6), 80.1451. As a result, parties who purchase an adequate number of RINs can comply with their renewable fuels obligations without producing or blending renewable fuels themselves. Each year, obligated parties must to submit to EPA a list of RINs in fulfillment of their renewable fuels obligations. A RIN is retired upon submission to EPA. See id. § 80.1427(a)(1).

The mechanics of the RIN system mean that obligated parties incapable of blending must rely disproportionately on the RIN market. Because small refineries generally have more limited blending capacity than larger refineries, they often need to acquire a large number of RINs from the market in order to meet their annual obligations. Congress, aware that small refineries would face greater difficulty complying with the renewable fuels requirements, created a three-tiered system of exemptions to afford small refineries a bridge to compliance.

First, the statute granted all small refineries (defined as refineries with crude oil throughput averaging 75,000 barrels or less per day) an exemption from the renewable fuels program through 2011. 42 U.S.C. § 7545(o ) (9)(A)(i), (o )(1)(K). That blanket exemption gave small refineries

787 F.3d 573

time to develop compliance strategies and increase blending capacity. Second, the statute directed DOE to conduct a study “to determine whether compliance ... would impose a disproportionate economic hardship on small refineries.” Id. § 7545(o )(9)(A)(ii)(I). If DOE determined that any small refinery “would be subject to a disproportionate economic hardship if required to comply with” the renewable fuels program, EPA was required to extend the exemption for that refinery “for a period of not less than 2 additional years.” Id. § 7545(o )(9)(A)(ii)(II). Third, the statute enables a small refinery to initiate an inquiry into disproportionate economic hardship at any time by “petition[ing] the [EPA] Administrator for an extension of the exemption ... for the reason of disproportionate economic hardship.” Id. § 7545(o )(9)(B)(i). When evaluating a petition for an extension, EPA must consult with DOE and consider the DOE study required by § 7545(o ) (9)(A)(ii)(I), as well as “other economic factors.” Id. § 7545(o ) (9)(B)(ii).

In 2011, DOE completed the 2011 Small Refinery Exemption Study (the 2011 Study) required by § 7545(o )(9)(A)(ii)(I). DOE concluded that a showing of disproportionate economic hardship “must encompass two broad components: a high cost of compliance relative to the industry average, and an effect sufficient to cause a significant impairment of the refinery operations.” J.A. 26. The 2011 Study also developed a scoring methodology to determine whether a small refinery satisfies those standards. That methodology assigns a score to twelve metrics, which are then used to produce two index scores: a disproportionate impacts index and a viability index. The disproportionate impacts index measures the structural impacts a small refinery would likely face in achieving compliance, while the viability index assesses how compliance would affect the refinery's ability to remain competitive and profitable. If a small refinery receives a score greater than 1 on both indices, it faces disproportionate economic hardship under DOE's standard.

Applying that methodology in 2011, DOE concluded that fourteen small refineries—including WRC—faced disproportionate economic hardship. DOE directed EPA to extend the exemption for two additional years (from 2010 to 2012) for those fourteen refineries pursuant to § 7545(o )(9)(A)(II).

Up through 2012, RINs sold at low prices reflecting the cost of corn ethanol (the most widely used renewable fuel) relative to that of conventional fuel. But beginning in 2013, the nature of the ethanol RIN market changed due to a so-called “ethanol blendwall” or “E10 blendwall.” Conventional engines can handle only a certain percentage (about 10%) of ethanol in fuel. In 2013, the statutory renewable fuels volume requirements exceeded the amount of ethanol that the transportation market could absorb. Because of the ethanol blendwall, RIN prices increased in 2013 and began to fluctuate widely.

B.

WRC is a small refinery that processes about 14,000 barrels of crude oil per day. Its output places it 117th in size out of the 132 refineries in the United States. In 2013, WRC's blending capacity enabled it to satisfy about one-third of its RIN requirements through in-house blending. The company thus primarily relies on the RIN market to achieve compliance. Before 2011, WRC qualified for the blanket small refinery exemption and was not required to comply with the renewable fuels program. WRC then qualified for a two year extension of its exemption pursuant

787 F.3d 574

to the 2011 DOE Study, deferring its compliance obligations to 2013.

In August 2013, WRC filed an economic hardship petition under 42 U.S.C. § 7545(o )(9)(B), requesting that EPA extend WRC's hardship exemption for another two years (2013 and 2014). WRC emphasized the financial stress caused by the skyrocketing price of RINs. Pursuant to the statutory directive requiring EPA to “consult” with DOE in evaluating hardship petitions, id. § 7545(o ) (9)(B)(ii), EPA submitted WRC's data to DOE and asked DOE to evaluate whether WRC should receive an extension. Applying the methodology established in the 2011 Study, DOE concluded that WRC scored higher than 1 on the disproportionate impacts index but less than 1...