Justices Hint at Limits on Oil Refineries in Feud on Ethanol (1)

Supreme Court justices signaled skepticism of assertions from small oil refineries that they should be allowed to extend lapsed waivers from mandates they use biofuels.

Hearing arguments by phone Tuesday, the justices vigorously questioned contentions by two refining companies that Congress intended to create a long-term safety valve for gasoline and diesel makers otherwise required to blend plant-based fuels into their products.

At issue is a 16-year-old law that mandated renewable fuels but also empowered the Environmental Protection Agency to waive small refineries from annual blending quotas if they face an “economic hardship” in complying. The 10th Circuit Court of Appeals last year ruled that those valuable waivers -- each potentially worth hundreds of millions of dollars annually -- should be reserved only for refineries that have continuously secured extensions of their initial exemptions.

If affirmed, that 10th Circuit interpretation would mean just a few refineries nationwide would qualify for waivers.

The case will likely turn on how the justices interpret just a few words in the Renewable Fuel Standard law -- specifically its provision allowing a small refinery to petition the EPA “at any time” for an “extension” of an initial, automatic exemption. And on Tuesday, justices questioned assertions by HollyFrontier Corp. and CVR Energy Inc.’s Wynnewood Refining Co. that an “extension” of a previously granted exemption doesn’t require a continuous string of them.

“It just seems a little bit odd to think of an extension for something that has already terminated,” Justice Clarence Thomas said.

Justice Elena Kagan speculated how a landlord might respond if a former tenant were to seek an extension of a lease five years after moving out of an apartment.

“I think the landlord would scratch her head and think that’s a very strange context in which to be using the word ‘extension,’” acknowledged Peter Keisler, an attorney with Sidley Austin LLP representing refiners.

Still, Keisler argued, Congress used the “at any time” phrase because it wanted waivers to be available when necessary, and he added, lawmakers didn’t explicitly say the exemptions needed to be “consecutive.”

“Driving those small refineries out of the market would undermine the statute’s energy independence goals, and that’s one of the reasons Congress authorized them to petition at any time,” he told the court. “It seems implausible to think that Congress meant that merely being able to comply for one year in the early years of the program would mean a small refinery would never warrant hardship relief ever again.”

Chief Justice John Roberts questioned the congressional contortions.

“Is this what you might expect if Congress were going to provide a free-standing exemption -- that they would do it in this sort of roundabout way?” he asked.

A core question is whether Congress intended the exemptions as a safety valve available at any time, or, as the Biden administration and biofuel producers argued, a temporary program meant to funnel refiners into compliance with the blending requirements over time.

Justices Stephen Breyer and Samuel Alito questioned whether the government’s interpretation would create, in Breyer’s words, “a kind of chaos” in the market where the cost of biofuel compliance credits already fluctuate dramatically.

“Why would Congress want that small refinery to be forced out of business?” Alito asked.

The federal government’s lawyer, Christopher G. Michel, rejected the premise of the question, saying small refineries have managed to comply previously and, in any case, “the purpose of the program was to drive change.”

Justice Brett Kavanaugh pressed Michel on whether the law’s provision that refiners may ask for an extension “at any time” undercuts the government’s argument that exemptions must be continuous.

“I think ‘at any time’ means exactly what it says,” Michel said. “Which is that a small refinery can ask for an extension of the exemption at any time, but that doesn’t define what an extension of the exemption is.”

Biofuel makers argue the exemptions have undercut demand, running counter to Congress’ goal of bolstering renewable fuel production.

“That has had a devastating effect on the renewable fuel sector,” said Matthew Morrison, a Pillsbury Winthrop Shaw Pittman LLP lawyer representing the Renewable Fuels Association.

Height Capital Markets analysts Benjamin Salisbury and Josh Price said that some conservative justices who might be expected to side with the government in favor of an ordinary interpretation of “extension” seemed dubious of that approach Tuesday. It was notable, they said, that Kavanaugh repeatedly implied that government and biofuel advocates’ interpretation would mean assuming Congress was indifferent to small refiners going out of business because of the costs of compliance.

While the Trump administration waived dozens of small refineries, the EPA under President Joe Biden is expected to sharply limit exemptions, even if the Supreme Court ultimately rules that many facilities remain eligible for them. Still, a Supreme Court ruling affirming the 10th Circuit’s interpretation that waivers are much more limited could reverberate for years, ruling out expansive relief for refiners and binding future administrations’ flexibility on the issue.

A ruling also could roil the market in Renewable Identification Numbers, or RINs, the e credits refiners us to prove they have fulfilled annual blending quotas. Fewer waived refineries would lead to greater demand for those RINs, which have already climbed in the wake of the 10th Circuit ruling last year.

RINs tracking ethanol blending have soared 823%, up from just 15.5 cents apiece on Jan. 24, 2020 to $1.43 on Tuesday. In the same time, RINs tracking biodiesel blending climbed from 41 cents to $1.51 each, a 268% increase.

The case is HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association, 20-472.

(Updates with analyst in 21st paragraph. An earlier version corrected the day of arguments in second paragraph.)

To contact the reporters on this story:
Jennifer A. Dlouhy in Washington at jdlouhy1@bloomberg.net;
Ellen M. Gilmer in Arlington at egilmer@bloomberg.net

To contact the editors responsible for this story:
Jon Morgan at jmorgan97@bloomberg.net

Jennifer A. Dlouhy, Elizabeth Wasserman

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