Ergon-W. Va., Inc. v. U.S. Envtl. Prot. Agency

• Decision Date: 20 July 2018
• Docket Number: No. 17-1839,17-1839
• Citation: 896 F.3d 600
• Parties: ERGON-WEST VIRGINIA, INCORPORATED, Petitioner, v. UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

896 F.3d 600

ERGON-WEST VIRGINIA, INCORPORATED, Petitioner,

v.UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, Respondent.

No. 17-1839

United States Court of Appeals, Fourth Circuit.

Argued: December 7, 2017

Decided: July 20, 2018

ARGUED: Jonathan Grant Hardin, PERKINS COIE LLP, Washington, D.C., for Petitioner. Patrick Reinhold Jacobi, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Respondent. ON BRIEF: LeAnn M. Johnson, PERKINS COIE LLP, Washington, D.C., for Petitioner. Jeffrey H. Wood, Acting Assistant Attorney General, Environmental and Natural Resources Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C.; Susan Stahle, UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, Washington, D.C., for Respondent.

Before NIEMEYER and AGEE, Circuit Judges, and Paula XINIS, United States District Judge for the District of Maryland, sitting by designation.

Petition for review granted, final agency action vacated, and remanded for further proceedings by published opinion. Judge Agee wrote the opinion, in which Judge Niemeyer and Judge Xinis joined.

AGEE, Circuit Judge:

Until 2011, Ergon-West Virginia, Inc. enjoyed an exemption as a small refinery from the Environmental Protection Agency’s renewable fuel standard program, which requires refineries and other facilities to allocate a certain percentage of their fuel production to renewable fuels. When Ergon filed for an extension of the small refinery exemption, the EPA denied its petition on the basis that Ergon’s participation in the program would not constitute a disproportionate economic hardship. Ergon petitions the Court for review of the EPA’s denial. Because we conclude that the EPA’s decision was arbitrary and capricious, we grant Ergon’s petition for review, vacate the EPA’s denial, and remand for further proceedings.

I.

We begin with the renewable fuels statute and its history and then turn to the proceedings in this case.

A.

With the Energy Policy Act of 2005, Congress added the renewable fuel standard program (the "RFS Program" or "Program") as Section 211(o) of the Clean Air Act. See 42 U.S.C. § 7545(o). The statute directs the EPA Administrator to promulgate regulations "to ensure that transportation fuel sold or introduced into commerce in the United States (except in noncontiguous States or territories), on an annual average basis, contains at least the applicable volume of renewable fuel, advanced biofuel, cellulosic biofuel, and biomass-based diesel"¹ required by the Program. Id. § 7545(o)(2)(A)(i). Renewable fuels, such as ethanol, are those that are "produced from renewable biomass and that [are] used to replace or reduce the quantity of fossil fuel present in a transportation fuel." Id. § 7545(o)(1)(J). Renewable biomass includes natural materials such as crops, trees, and animal byproducts. Id. § 7545(o)(1)(I). The regulations apply "to refineries, blenders, distributors, and importers." Id. § 7545(o)(2)(A)(iii)(I).

The applicable volumes of renewable fuel, advanced biofuel, cellulosic biofuel, and biomass-based diesel that transportation fuels must contain on an industry-wide basis are found in § 7545(o)(2)(B). For instance, the statute lists the applicable volume of renewable fuel for 2016 as 22.25 billion gallons. Id. § 7545(o)(2)(B)(i)(I). To determine the "applicable percentages" of renewable fuel, advanced biofuel, cellulosic biofuel, and biomass-based diesel that a facility must use, the EPA first estimates "the volumes of transportation fuel, biomass-based diesel, and cellulosic biofuel projected to be sold or introduced into commerce in the United States" the following year. Id. § 7545(o)(3)(A). The EPA then divides the applicable volume of the particular renewable fuel by the fuel estimate to arrive at the percentage every refinery must meet and publishes it in the Federal Register. Id. § 7545(o)(3)(B) ; 40 C.F.R. § 80.1405. For example, the percentage of renewable fuel for 2016 was 10.10%. 40 C.F.R. § 80.1405(a)(7)(iv). This percentage—or "renewable fuel obligation"—is "applicable to refineries, blenders, and importers, as appropriate,"² and is "expressed in terms of a volume percentage of transportation fuel sold or introduced into commerce in the United States." 42 U.S.C. § 7545(o)(3)(B)(ii). A refinery will multiply the percentage by the volume of nonrenewable fuel that it produces or imports to determine its "renewable volume obligation." 40 C.F.R. § 80.1407.

All renewable fuels are identified by a renewable identification number ("RIN"), which "is a unique number generated to represent a volume of renewable fuel." 40 C.F.R. § 80.1401. An obligated party must "separate" a sufficient number of RINs (i.e., blend the renewable fuel with nonrenewable fuel) to demonstrate compliance with the Program. See id. §§ 80.1427–80.1429; see also 42 U.S.C. § 7545(o)(5)(establishing a credit program for blending renewable fuels with transportation fuels). If the obligated party fails to separate the required number of RINs, it can purchase separated RINs from a party who has separated more RINs than it needs and thereby avoid violating the Program’s requirements and incurring penalties. See 40 C.F.R. §§ 80.1428, 80.1460(c)(1) ; see also 42 U.S.C. § 7545(o)(5)(B) (stating that "[a] person that generates credits ... may use the credits, or transfer all or a portion of the credits to another person, for the purpose of complying with [the Program]").

From 2005 until 2011, small refineries—those "for which the average aggregate daily crude oil throughput for a calendar year ... does not exceed 75,000 barrels," 42 U.S.C. § 7545(o)(1)(K) ; see also 40 C.F.R. § 80.1442 —were exempt from the Program, 42 U.S.C. § 7545(o)(9)(A)(i) ; see also 40 C.F.R. § 80.1441. The statute directed the Secretary of the Department of Energy to "conduct for the [EPA] Administrator a study to determine whether compliance with the [Program’s] requirements ... would impose a disproportionate economic hardship on small refineries." 42 U.S.C. § 7545(o)(9)(A)(ii)(I) (emphasis added). If the DOE determined that a given refinery would experience disproportionate economic hardship, then the EPA Administrator was required to extend the facility’s exemption for at least two years. Id. § 7545(o)(9)(A)(ii)(II). After this first mandatory extension period, the statute provides that a facility may petition the EPA for extension of the exemption "at any time" due to disproportionate economic hardship. Id. § 7545(o)(9)(B)(i). This petition "must specify the factors that demonstrate a disproportionate economic hardship and must provide a detailed discussion regarding the hardship the refinery would face in producing transportation fuel meeting the [Program’s] requirements." 40 C.F.R. § 80.1441(e)(2)(i). In evaluating the petition, the EPA—"in consultation with" the DOE—must "consider the findings of the [DOE’s] study ... and other economic factors." 42 U.S.C. § 7545(o)(9)(B)(ii).

B.

In 2009, the DOE presented the EPA with the Small Refineries Exemption Study (the "2009 Study"), as required by 42 U.S.C. § 7545(o)(9)(A)(ii)(I). The 2009 Study recognized that "[o]bligated parties, such as refineries, may fulfill their renewable fuel requirements through either blending renewable fuels into their products or purchasing credits from other parties who have exceeded their allocation of renewable fuel consumption." J.A. 15. The DOE determined that, "[a]s long as credits are available for purchase and the market is competitive, small refineries should not be subject to disproportionate economic hardship from their choice to purchase credits rather than to generate them." J.A. 15.³ The 2009 Study concluded that the general small refinery exemption should not be extended beyond 2010, based largely on its determination that "credits are available at a nominal value and compliance volumes have been in excess of the RFS requirements." J.A. 16.

Unsatisfied with this result, Congress directed the DOE to conduct a new, more in-depth analysis.⁴ The DOE released this new study in 2011 (the "2011 Study"). The 2011 Study defined disproportionate economic hardship as "increased cost of compliance to the point that the current or future viability of the refinery is impacted." J.A. 47. The DOE recognized that:

[s]mall refineries can suffer disproportionate economic hardship from compliance with the RFS program if blending renewable fuel into their transportation fuel or purchasing RINs increases their cost of products relative to competitors to the point that they are not viable, either due to loss of market share or lack of working capital to cover the costs of purchasing RINs.

J.A. 47.⁵ After conducting a survey of small refineries, the DOE created a scoring matrix composed of two indices—the "Disproportionate Impact Index" and the "Viability Index"—to be used to determine whether a small refinery suffers disproportionate economic hardship:

?

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J.A. 82, 85.

In Section 1(a) of the Disproportionate Impact Index, the DOE assesses the small refinery’s access to capital and credit, primarily through its credit rating. Section 1(b) considers a refinery’s business lines other than refining and marketing—"in particular upstream operations such as exploration and development that are less correlated with refining"—which may insulate the refinery from the volatility of refining margins. J.A. 83. Section 1(c) accounts for the refinery’s geographic location by evaluating how likely the local market will accept transportation fuels blended with renewable fuels. Although the category lists subcategories for E10 (a fuel mixture of 10% ethanol and 90% gasoline), E85 (a fuel mixture of 85% ethanol and 15% gasoline), and biodiesel, the latter two are "[r]eserved for later evaluation." J.A. 83. Section 1(d) evaluates a refinery’s percentage of diesel production in recognition of the fact that "refineries that disproportionately favor diesel production over gasoline inherently have a more difficult compliance pathway, as the percentage of...