Sinclair Wyoming Refining Co. v. United States Environmental Protection Agency

FILED
United States Court of Appeals
Tenth Circuit
August 15, 2017
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
SINCLAIR WYOMING REFINING
COMPANY, and SINCLAIR CASPER
REFINING COMPANY,
Petitioners,
v. No. 16-9532
UNITED STATES
ENVIRONMENTAL PROTECTION
AGENCY,
Respondent.
---------------------------------
STATE OF WYOMING,
Amicus Curiae.
PETITION FOR REVIEW OF A FINAL ORDER FROM
ENVIRONMENTAL PROTECTION AGENCY
(EPA No. EPA-1:CAA-08-2011-007)
Jeffrey R. Holmstead (Brittany M. Pemberton with him on the briefs) Bracewell
LLP, Washington, D.C., for Petitioners.
Paul Cirino, Environmental Defense Section, Environment and Natural Resources
Division, United States Department of Justice (John C. Cruden, Assistant
Attorney General, Jeffrey H. Wood, Acting Assistant Attorney General, and
Susan Stahle, Of Counsel, United States Environmental Protection Agency, with
him on the briefs) Washington, D.C., for Respondent.
Erik E. Peterson, Senior Assistant Attorney General, Wyoming Office of the
Attorney General, Cheyenne, Wyoming, on briefs for Amicus Curiae.
Before TYMKOVICH, Chief Judge, LUCERO, and MORITZ, Circuit Judges.
TYMKOVICH, Chief Judge.
In an amendment to the Clean Air Act (CAA), Congress directed the EPA
to operate a Renewable Fuel Standards Program (the RFS Program) to increase oil
refineries’ use of renewable fuels. But for small refineries that would suffer a
“disproportionate economic hardship” in complying with the RFS Program, the
statute required the EPA to grant exemptions on a case-by-case basis.
We conclude the EPA has exceeded its statutory authority under the CAA
in interpreting the hardship exemption to require a threat to a refinery’s survival
as an ongoing operation. That interpretation is outside the range of permissible
interpretations of the statute and therefore inconsistent with Congress’s statutory
mandate. Because we find that the EPA exceeded its statutory authority, we
vacate the EPA’s decisions and remand to the EPA for further proceedings.
I. Background
In the Energy Policy Act of 2005, Congress amended the CAA to encourage
the use of renewable fuels. The statute’s RFS program requires oil refineries to
either produce a sufficient proportion of renewable fuels as part of their output or
purchase credits generated by other refineries to meet their increased renewable-
fuel obligations. See 42 U.S.C. § 7545(o); 40 C.F.R. § 80.1429. But Congress
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also directed that small refineries may receive a statutory exemption if
participation in the program would cause them “disproportionate economic
hardship.” 42 U.S.C. § 7545(o)(9)(B).
A. The Renewable Fuel Standards Program
Through the RFS Program, Congress prescribed annual target volumes for
renewable fuel sales, which increase each year until reaching a maximum level in
2022. 1 Congress charged the EPA with implementing the RFS Program and
empowered it with authority to alter the statutory volumes of renewable fuel if the
EPA finds that the RFS Program is causing severe economic or environmental
harm or there is an inadequate supply of domestic renewable fuels. The EPA must
also consult with the Department of Energy (DOE) in exercising this power. See
42 U.S.C. § 7545(o)(7). The statute further requires “obligated parties,” including
“refineries, blenders, and importers,” to comply with the RFS Program. 42 U.S.C.
§ 7545(o)(3)(B)(ii).
Under the EPA’s accompanying regulations, an obligated party must satisfy
its Renewable Volume Obligation each year by holding sufficient credits, known
as Renewable Identification Numbers (RINs), at the end of each compliance year.
A RIN is created when a producer makes a gallon of renewable fuel, blends the
renewable fuel with petroleum-based fuel, and sells the resulting product
1
The RFS Program is codified as Clean Air Act § 211(o), 42 U.S.C.
§ 7545(o)(7).
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domestically. 40 C.F.R. § 80.1429. An obligated-party can accumulate RINs to
meet its RFS Program requirement by: (1) blending renewable fuels into
petroleum-based fuel and selling the product domestically; or (2) obtaining RINs
through another source, such as the RIN trading system Congress directed the EPA
to establish. See 42 U.S.C. § 7545(o)(5). Put simply, the program induces
refineries to produce renewable fuel products (e.g., ethanol), and if they cannot, to
purchase biofuel-generated credits from refineries that can.
B. Small Refinery Exemptions
Congress was aware the RFS Program might disproportionately impact small
refineries because of the inherent scale advantages of large refineries and therefore
created three classes of exemptions to protect these small refineries.
First, the statute exempted all small refineries from the RFS Program until
2011. 42 U.S.C. § 7545(o)(9).
Second, in the meantime, Congress directed DOE to conduct a study “to
determine whether compliance [with the RFS Program] . . . would impose a
disproportionate economic hardship on small refineries” after the program’s
implementation. 42 U.S.C. § 7545(o)(9)(A)(ii)(I). DOE conducted the study in
2011 and determined that a number of small refineries, including Sinclair’s two
Wyoming refineries, would suffer “disproportionate economic hardship” if they
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were required to comply with the RFS Program. 2 Accordingly, the EPA extended
the blanket exemption for two more years.
Third, after the exemption period expired, Congress provided a process for
small refineries to petition the EPA “at any time” for an extension of the initial
exemption “for reason of disproportionate economic hardship.” 42 U.S.C.
§ 7545(o)(9)(B)(i). In evaluating these petitions, the EPA must consult with DOE
and consider the findings of DOE’s study in addition to “other economic factors.”
42 U.S.C. § 7545(o)(9)(B)(ii).
This third exemption is at issue in this case.
C. Sinclair’s Petitions for Small Refinery Exemptions
Sinclair owns and operates two refineries in Wyoming: one located in
Sinclair, Wyoming, and another in Casper, Wyoming. Both fall within the RFS
2
DOE actually completed its first study in 2009, concluding that no small
refineries would suffer “disproportionate economic hardship” if they were
required to comply with the RFS Program. But Congress was unhappy with
DOE’s methodology and directed the Agency to conduct a new study, requiring it
to “seek and invite comment from small refineries on the RFS exemption hardship
question, assess RFS compliance impacts on small refinery utilization rates and
profitability, evaluate the financial health and ability of small refineries to meet
RFS requirements, study small refinery impacts and regional dynamics by PADD,
and reassess the accuracy of small refinery compliance costs through the purchase
of renewable fuel credits.” See S. Rep. No. 111-45, at 109 (2009), 2009 WL
1994747.
DOE completed its second study in 2011, concluding that “[i]f certain small
refineries must purchase RINs that are far more expensive than those that may be
generated through blending, this will lead to disproportionate economic hardship
for those effected entities.” J.A. Vol. 1 at 69 (alteration incorporated).
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Program’s definition of “small refinery” and were exempt from the RFS
requirements until 2011. Those exemptions were extended until 2013 after DOE
found Sinclair’s Wyoming refineries to be among the 13 of 59 small refineries that
would continue to face “disproportionate economic hardship” if required to
comply with the RFS Program.
Sinclair then petitioned the EPA to extend their small-refinery exemptions,
arguing that both refineries would continue to suffer “disproportionate economic
hardship” under the RFS Program. The EPA denied Sinclair’s petitions in two
separate decisions, finding that both refineries appeared to be profitable enough to
pay the cost of the RFS Program. Sinclair filed a timely petition for review with
this court. We grant Sinclair’s petition for review, vacate the EPA’s decisions for
both of Sinclair’s refineries, and remand for further proceedings consistent with
this opinion.
II. Analysis
We review Sinclair’s petitions under the Administrative Procedure Act
(APA). The APA requires courts to consider agency action in conformity with the
agency’s statutory grant of power, and agency action is unlawful if it is “in excess
of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5
U.S.C. § 706(2)(C). See generally id. § 706 (describing additional agency actions
that reviewing courts can hold unlawful and set aside, including arbitrary and
capricious rulings).
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We review questions of statutory interpretation de novo. EnergySolutions,
LLC v. Utah, 625 F.3d 1261, 1271 (10th Cir. 2010).
A. Judicial Review of Agency Action
When a court reviews an agency’s legal determination, it generally applies
the analysis set out by the Supreme Court in Chevron v. Natural Resources Defense
Council, 467 U.S. 837 (1984). Under Chevron, reviewing courts apply a two-step
analysis. Chevron step one asks “whether Congress has directly spoken to the
precise question at issue.” Id. at 842–43. If Congress’s intent is clear, then both
the court and the agency “must give effect to the unambiguously expressed intent
of Congress.” Id. at 843. Courts determine Congress’s intent by employing the
traditional tools of statutory interpretation, beginning—as always—with an
examination of the statute’s text. See New Mexico v. Dep’t of Interior, 854 F.3d
1207, 1223–24 (10th Cir. 2017). But, if Congress has “not directly addressed the
precise question at issue”—if “the statute is silent or ambiguous with respect to the
specific issue”—the court must determine at Chevron step two “whether the
agency’s answer is based on a permissible construction of the statute.” Chevron,
467 U.S. at 843–44.
In some circumstances, however, a court never reaches the Chevron analysis.
In such cases, we do not need to answer the step one or step two questions. As the
Supreme Court explained in United States v. Mead Corp., 533 U.S. 218 (2001), the
initial step of the Chevron inquiry is actually to determine whether Chevron should
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apply at all. See Cass R. Sunstein, Chevron Step Zero, 92 Va. L. Rev. 187, 247
(2006) (conceptualizing the inquiry of whether Chevron applies as “Chevron step
zero”); see also Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1157 (10th Cir. 2016)
(Gorsuch, J., concurring) (discussing the step zero inquiry and the confusion
created by Mead). 3
In Mead, the Court held that Chevron applies only where “it appears that
Congress delegated authority to the agency generally to make rules carrying the
force of law, and that the agency interpretation claiming deference was
promulgated in the exercise of that authority.” Mead, 533 U.S. at 226–27. This
context-driven determination requires us to examine the method by which the
agency exercised its delegated authority. Mead instructs: “It is fair to assume
generally that Congress contemplates administrative action with the effect of law
when it provides for a relatively formal administrative procedure tending to foster
the fairness and deliberation that should underlie a pronouncement of such force.”
Id. at 229–30. Mead thus created, in effect, a “safe harbor of Chevron deference”
3
We note that neither party discussed the Supreme Court’s decision in City
of Arlington v. Federal Communications Commission, 133 S. Ct. 1863 (2013), in
their supplemental briefs. We have not previously addressed the effect—if
any—City of Arlington might have on our application of the Mead inquiry. But
we do note that Justice Scalia, writing for the majority in City of Arlington,
reaffirmed that courts must determine whether Chevron or Mead controls at step
zero. See 133 S. Ct. at 1874 (“The dissent is correct that United States v. Mead
requires that, for Chevron deference to apply, the agency must have received
congressional authority to determine the particular matter at issue in the particular
manner adopted. No one disputes that.” (emphasis added)).
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for agency interpretations produced via formal agency action—formal rulemaking
or adjudication—and those produced via informal notice-and-comment rulemaking.
Charles H. Koch, Jr. & Richard Murphy, 3 Admin. L. & Prac. § 10:12 (Feb. 2017
update); see also Richard J. Pierce, Jr., Administrative Law Treatise, § 3.5 (2010)
(“After Mead, it is possible to know only that legislative rules and formal
adjudications are always entitled to Chevron deference, while less formal
pronouncements like interpretative rules and informal adjudications may or may not
be entitled to Chevron deference.”).
In situations where Chevron does not apply, Mead requires us to examine the
persuasiveness of agency action with no thumb on the scale of judicial deference.
As Mead explained, we follow the analysis set forth in Skidmore v. Swift & Co.,
323 U.S. 134 (1944). In that case, the Court explained that the weight courts
provide an administrative judgment “will depend upon the thoroughness evident in
[the agency’s] consideration, the validity of its reasoning, its consistency with
earlier and later pronouncements, and all those factors which give it power to
persuade, if lacking power to control.” Id. at 140.
Following Mead, the Court examined agency action that was less formal than
notice-and-comment rulemaking when it reviewed an opinion letter issued by the
Social Security Administration. See Barnhart v. Walton, 535 U.S. 212, 221–22
(2002). It found that such informal agency action “does not automatically deprive
that interpretation of the judicial deference otherwise its due,” but rather, whether
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courts provide Chevron deference “depends in significant part upon the interpretive
method used and the nature of the question at issue.” Id. The factors the Court
considered included the interstitial nature of the legal question, the related
expertise of the agency, the importance of the question to administration of the
statute, the complexity of that administration, and the careful consideration the
agency had given the question over a long period of time. Id. at 222.
The question we must answer, then, is whether to apply Chevron or Skidmore
deference to the EPA’s use of informal adjudications to resolve Sinclair’s petitions.
See WildEarth Guardians v. Nat’l Park Serv., 703 F.3d 1178, 1188 (10th Cir.
2013). Sinclair argues that we should review the EPA’s decisions using only
Skidmore deference, but maintains it would still prevail under a more deferential
Chevron review. Aplt. Supp. Br. at 1–2. The EPA, of course, argues the opposite.
As a preliminary matter, we acknowledge that the EPA’s decisions resolving
Sinclair’s hardship petitions were conducted via informal adjudication (the same
procedure employed by the U.S. Customs Service in Mead). The parties do not
seriously contest this conclusion. The decisions were adjudications because they
were specific to the parties at issue—in fact, they were specific even to the
individual refineries at issue (the EPA produced separate decisions for the Sinclair,
Wyoming and Casper, Wyoming refineries)—and were resolving petitions for
Sinclair’s exemptions from the RFS Program. The decisions were also informal
because they were resolved on the basis of Sinclair’s submissions and involved no
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oral argument, opportunity for cross-examination, or other “trial-like” procedures
generally required by the APA. See Pierce, supra, at Vol. 1 § 8.2 (describing the
trial-like procedures the APA requires for formal adjudications); see also J.A. Vol.
1 at 31 (the Casper, Wyoming refinery opinion describing Sinclair’s submission).
Under Mead, we conclude that Skidmore deference applies to the EPA’s
decision here. First of all, Congress specifically authorized the EPA to promulgate
regulations on aspects of the RFS Program, but not for the small refinery
exemptions. This means the agency did not have the benefit of notice-and-
comment about its interpretation of the term “disproportionate economic hardship.”
See, e.g., 42 U.S.C. § 7545(o)(2)(A)(i) (requiring the EPA to promulgate
regulations to “ensure that gasoline sold or introduced into commerce in the United
States . . . contains the applicable volume of renewable fuel”). Instead, the EPA
conducted its interpretation via informal adjudication. And the fact that the
adjudication was informal is also important—Sinclair’s involvement in the
decision-making was limited to submitting petitions and the EPA did not have the
benefit of hearing expert testimony on the topic. See Pierce, supra, at Vol. 1 § 8.2
(describing the trial-like procedures required for formal adjudications).
Additionally, the decisions were not made by the head of the EPA but instead
by a mid-level Agency official. See Aplt. Supp. Br. at 7–8; see also, e.g., Groff v.
United States, 493 F.3d 1343, 1352 (Fed. Cir. 2000) (one factor in the court’s
conclusion that it should provide Chevron deference to the agency action was that
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the adjudication at issue was “formal and culminate[d] in a formal written decision
by the head of the agency, not a nonbinding disposition by a low-level agency
official”).
Next, the decisions hold no precedential value for third parties. Indeed, the
decisions have no precedential value even for the refiner, since each petition must
be resolved on a case-by-case basis (again, the EPA produced two decisions, one
for each of Sinclair’s refineries). Nor do third parties have access to the decisions,
since the EPA does not publicly release its decisions because they contain
confidential business information. Aple. Supp. Br. at 8.
Finally, the EPA’s viability analysis is not a longstanding practice, but is,
instead, only a few years old. 4
Thus, Mead and Barnhart compel our conclusion that Congress did not
intend the EPA’s interpretation of “disproportionate economic hardship” to have
the “force of law.” We therefore apply Skidmore deference in reviewing the EPA’s
interpretation.
B. The “Disproportionate Economic Hardship” Exemption
In analyzing Congress’s grant of power to the EPA to administer the RFS
Program, we begin, as always, with the statutory text. “Unless otherwise defined,
4
Although the record does not indicate exactly how long the EPA’s
interpretation of “disproportionate economic hardship” has been in place, as a
matter of logic, the EPA’s interpretation must have been derived in 2011 at the
earliest (the year that DOE released its second study).
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statutory terms are generally interpreted in accordance with their ordinary
meaning.” BP Am. Prod. Co. v. Burton, 549 U.S. 84, 91 (2006); see also Engine
Mfrs. Ass’n v. S. Coast Air Quality Mgmt. Dist., 541 U.S. 246, 252 (2004)
(“Statutory construction must begin with the language employed by Congress and
the assumption that the ordinary meaning of that language accurately expresses the
legislative purpose.”).
1. The Statutory Requirement
As previously mentioned, Congress provided that small refineries could
petition the EPA to extend their initial exemption from the RFS Program “for
reason of disproportionate economic hardship.” 42 U.S.C. § 7545(o)(9)(B)(i). The
relevant statutory provision reads in full:
(B) Petitions based on disproportionate economic
hardship
(i) Extension of exemption
A small refinery may at any time petition the [EPA]
Administrator for an extension of the exemption
under subparagraph (A) for the reason of
disproportionate economic hardship.
(ii) Evaluation of petitions
In evaluating a petition under clause (i), the [EPA]
Administrator, in consultation with the Secretary of
Energy, shall consider the findings of the study under
subparagraph (A)(ii) and other economic factors.
42 U.S.C. § 7545(o)(9) (emphasis added).
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Although Congress did not define the term “disproportionate economic
hardship” in the statute, the provision makes clear that Congress provided the EPA
with a comprehensive directive in analyzing and evaluating RFS Program
exemptions. The statute prescribes the overall process: (1) when petitions can be
made: “at any time”; (2) the relevant agency actors: the EPA must make decisions
in “consultation with” DOE; (3) the relevant question: whether a refinery will
suffer “disproportionate economic hardship” if it is required to participate in the
RFS Program for a given year; and (4) the methodology the agency is to use: the
EPA must consider the findings of DOE’s 2011 study and “other economic
factors.” 42 U.S.C. § 7545(o)(9)(B).
With this statutory background, we turn to whether the EPA’s decisions
comport with Congress’s directive to grant exemptions when a small refinery
demonstrates that complying with the RFS Program would cause it to suffer a
“disproportionate economic hardship.”
2. The EPA’s Decisions
Prior to considering a refinery’s petition for a hardship exemption, the EPA
receives a recommendation on the petition from DOE. In its 2011 study, DOE
created a scoring matrix for determining its recommendations for granting
exemptions. The first part of the matrix assesses the “disproportionate structural
and economic” impacts of the RFS Program on the refinery, looking both at (1)
“disproportionate structural impact metrics” (a refinery’s percentage of diesel
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production, access to credit, local market acceptance of renewable fuels, etc.) and
(2) “disproportionate economic impact metrics” (the firm’s relative refining
margin, the degree to which the refiner can blend renewable fuels, whether RINs
are a net source of revenue, etc.). J.A. Vol. 1 at 99–102 (DOE’s 2011 Small
Refinery Exemption Study).
The second part of DOE’s matrix assigns scores for three “viability metrics”:
“(1) whether the cost of compliance ‘would reduce the profitability of the firm
enough to impair future efficiency improvements;’ (2) whether ‘individual special
events’ have had ‘a temporary negative impact on the ability of the refinery to
comply;’ and (3) whether compliance costs are ‘likely to lead to shutdown’ of the
refinery.” Aplt. Br. at 13–14 (quoting J.A. Vol. 1 at 103–04).
DOE’s interpretation of its methodology does not require that the cost of
compliance threaten a refinery’s long-term viability. Instead, DOE recommends a
50 percent waiver if the ranking meets a certain threshold on either side of the
matrix, although the DOE previously required the ranking meet certain thresholds
on both sides of the matrix. J.A. Vol. 1 at 17. DOE’s scoring change “is due to
language included in an explanatory statement accompanying the 2016
Consolidated Appropriations Act,” which instructed the DOE as follows: “‘If the
Secretary finds that either of these two components exists, the Secretary is directed
to recommend to the EPA Administrator a 50 percent waiver of RFS requirements
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for the petitioner.’” Id. (quoting Consolidated Appropriations Act, 2016, Pub. L.
No. 114-113 (2015)).
Here, DOE applied its matrix methodology and recommended the EPA
provide a 50 percent waiver of the RFS Program’s requirements for both of
Sinclair’s refineries. See J.A. Vol. I at 15–17 (Sinclair, Wyoming refinery
decision); J.A. Vol. I at 35–37 (Casper, Wyoming refinery decision).
The EPA rejected DOE’s recommendations and denied both petitions.
In denying Sinclair’s exemption for the Sinclair, Wyoming refinery, the EPA
explained its view that “disproportionate economic hardship” requires a threat to
the “longer term prospects” of a refinery:
EPA believes viability continues to be an important
economic factor for determining “disproportionate
economic hardship.” . . . . We consider whether [the
Sinclair, Wyoming refinery] will remain a competitive and
profitable refinery while satisfying its RFS obligations.
EPA notes that it considers profitability not merely in the
context of a single year’s financial statements, but also in
the context of assessing the longer term prospects for the
refinery. EPA also evaluates viability using metrics
considered by DOE in its viability index: (a) compliance
costs eliminate efficiency gains (impairment); (b) individual
special events; and (c) compliance costs likely to lead to
shut down. In reaching our conclusion, we consider all of
this information on viability, and additional relevant
information as available, to determine whether [the Sinclair,
Wyoming refinery] faces a “disproportionate economic
hardship” from compliance, and not merely an economic
impact.
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J.A. Vol. 1 at 18–19 (quoting DOE 2011 Small Refinery Study) (citations omitted)
(emphasis added in first sentence); see also id. at 38–39 (EPA’s identical analysis
in its denial of Sinclair’s petition for the Casper, Wyoming refinery).
In applying this long-term viability interpretation, the EPA rejected DOE’s
matrix scores for both Sinclair refineries. The EPA concluded that “viability”
meant only that program costs threatened the “long-term” survival of the refinery,
not a short-term comparison to other industry actors:
In the discussion that follows, EPA independently reviews
the information as we consider other economic factors in our
analysis, including, but not limited to, profitability, net
income, cash flow and cash balances, gross and net refining
margins, ability to pay for refinery improvement projects,
corporate structure, debt and other financial obligations,
RIN prices, and the cost of compliance through RIN
purchases. After considering all of this information, EPA
finds [the Sinclair, Wyoming refinery] will not experience
“disproportionate economic hardship” from compliance with
the RFS program.
As an initial matter, EPA recognizes its decision differs from
DOE’s recommendation. The CAA requires that EPA act on
a small refinery’s petition “in consultation with” DOE,
“consider[ing] the findings of” the DOE Small Refinery
Study and “other economic factors.” EPA gives weight to
DOE’s technical evaluation and scoring of the refinery,
recognizing that DOE has more experience in assessing,
e.g., the impact of a particular special event, and how to
balance short-term events with longer term planning and
concerns over viability. However, EPA has responsibility
for making the ultimate decision after considering DOE’s
evaluation and recommendation, and continues to believe
that the proper interpretation of the statutory
prerequisite—disproportionate economic hardship—involves
“examining the impact of compliance costs on a refinery’s
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ability to maintain profitability and competitiveness—i.e.
viability—in the long term.”
J.A. Vol. 1 at 17–18 (quoting CAA section 211(o)(9)(B)(ii) and, in last sentence,
Hermes Consol., LLC v. EPA, 787 F.3d 568, 575 (D.C. Cir. 2015)) (emphasis
added).
Thus, according to the EPA, to show “disproportionate economic hardship” a
small refinery must demonstrate an existential threat: it “faces RFS compliance
costs that would ‘significantly impact the operation of the firm, leading eventually
to an inability to increase efficiency to remain competitive, eventually resulting in
closure.’” 5 J.A. Vol. 1 at 19–20 (quoting DOE Small Refinery Study) (emphasis
added); see also id. at 39–40 (EPA’s identical analysis in its denial of Sinclair’s
petition for the Casper, Wyoming refinery).
5
The dissent describes this sentence as “regrettably inartful,” claiming that
the EPA did not mean what it said, but rather applied DOE’s viability metrics in a
“nuanced analysis.” Diss. at 1. But, as we have shown above, we do not read this
sentence in isolation. And, in any event, the EPA repeats this language in its
advocacy before us, using it to describe the test it applied in resolving Sinclair’s
petitions.
“Viability” is a term of art for purposes of EPA’s
assessment of petitions for small refinery
exemptions. . . . EPA has also described this factor as
requiring a small refinery to “show that it faces RFS
compliance costs that would ‘significantly impact the
operation of the firm, leading eventually to an inability
to increase efficiency to remain competitive, eventually
resulting in closure.’”
Aple. Br. at 40 n.11 (internal citations omitted) (emphasis added).
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As we discuss next, the EPA’s long-term threat of closure requirement is
inconsistent with the plain meaning of “disproportionate economic hardship.”
3. The Plain Meaning of “Disproportionate Economic Hardship”
Sinclair claims the EPA’s position is that “no matter how disproportionate
the economic impact of the RFS Program on other refineries, there can be no
‘disproportionate economic hardship’ unless compliance with the RFS Program is
so costly that it will eventually force a small refinery to shut down,” and argues
that this position is contrary to the plain language of the term “disproportionate
economic hardship.” Aplt. Br. at 34. Sinclair also maintains that the EPA’s
“viability” test not only fails the agency’s statutory duty to compare the refinery at
issue with its competitors, but also requires significantly more “hardship” to the
refinery than the statute instructs. 6
The statutory text at issue allows a range of linguistic possibilities in
defining “disproportionate economic hardship.” But as we discuss below, the
EPA’s interpretation falls outside the boundaries of permissible choice. It chose a
6
We reject the EPA’s argument that Sinclair “waived” its statutory
interpretation argument by failing to raise it during the administrative
proceedings. See Aple. Br. at 32–33. Sinclair fully explained its understanding
of the statutory term as informed by DOE’s exemption study and recommendation
that Sinclair was eligible for a 50 percent exemption. And, in any event, statutory
interpretation is the specialization of the courts, not the agencies. See Frontier
Airlines, Inc. v. Civil Aeronautics Bd., 621 F.2d 369, 371 (10th Cir. 1980) (“The
general rule requiring exhaustion of remedies before an administrative agency is
subject to an exception where the question is solely one of statutory
interpretation.”).
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definition of economic hardship plainly at odds with Congress’s statutory command
by reading a “viability” requirement into the statute and the “disproportionate”
requirement out of it.
We first evaluate Sinclair’s argument that the EPA improperly imported a
condition of future long-term viability into the statutory language. This question is
hardly in dispute, because the EPA admits as much. The EPA concluded its
decision for the Sinclair, Wyoming refinery with the following statement:
EPA does not doubt that Sinclair incurred costs, both
planned and unplanned, which affected profitability.
However, as discussed above, EPA believes that it is
necessary to show that RFS compliance will have an impact
on the refinery’s ongoing future viability to be eligible for
an exemption. After considering the full financial picture of
[the Sinclair, Wyoming refinery] for 2014 and prior years,
EPA does not find that compliance with RFS for 2014 would
threaten [the Sinclair refinery]’s viability. Given [the
Sinclair refinery]’s situation, we do not believe that an RFS
exemption for [the Sinclair refinery] is justified under the
statutory requirement of a disproportionate economic
hardship.
J.A. Vol. 1 at 20–21 (emphasis added); see also id. at 39–40 (similar language in
the Casper, Wyoming refinery opinion).
The EPA’s use of the word “necessary” proves Sinclair’s point. If long-term
“viability” was merely one element the EPA considered in its “disproportionate
economic hardship” analysis, that would be a different story. But by stating that
future viability (meaning whether the firm will go out of business) is necessary
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to—in effect, the sine qua non of—its decision, the EPA demonstrates it will not
grant an exemption unless there is a threat to a refinery’s long-term viability.
The EPA’s interpretation takes the statutory language too far. First, as a
matter of textual exegesis, a “‘hardship’” is something that “makes one’s life hard
or difficult—not just something that makes continued existence impossible.” Aplt.
Br. at 35; see Oxford English Dictionary (2017) (defining “hardship” as
“[s]omething which is hard to bear”); Black’s Law Dictionary (10th ed. 2014)
(defining “hardship” as “[p]rivation; suffering or adversity”); Webster’s Third New
Int’l Dictionary 1033 (1971) (defining “hardship” as “something that causes or
entails suffering or privation”).
“[V]iability,” on the other hand, is the “ability to continue or be continued;
the state of being financially sustainable.” Oxford English Dictionary (2017); see
also Webster’s Third New Int’l Dictionary 2548 (1971) (defining “viability” as “the
quality or state of being viable,” and defining “viable,” in turn, as “capable of
living”). As a matter of common sense, an experience that causes hardship is less
burdensome than an experience that threatens one’s very existence. Our law clerks,
for example, might say their first year of law school was a “hardship” they
suffered, but they could hardly claim that the experience of learning the law
threatened their very “viability” (we hope).
The EPA argues that “viability” and “hardship” are the same, since
“hardship” can be defined as “suffering” and “privation.” Aple. Br. at 38. But as
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we just explained, “suffering” and “privation” may be difficult to bear, but they do
not necessarily rise to the level of threatening one’s very existence. And the EPA’s
interpretation of “viability” is akin to a death knell, not simple privation. In any
event, DOE’s matrix analysis supplied three “viability metrics” that collectively
determine hardship: (1) reduced profitability; (2) temporary negative events; and
(3) risk of closure. See J.A. Vol. 1 at 103. The EPA’s interpretation ignores two-
thirds of this analysis and selects only risk of closure as the appropriate measure of
hardship. This is not a reasonable interpretation of the statutory term. In short, the
EPA’s equation of “hardship” and “viability” improperly transforms Congress’s
statutory text into something far beyond what Congress plausibly intended.
The statute also commands the EPA to consider the disproportionate impact
of the RFS Program, which inherently requires a comparative evaluation. The EPA
must compare the effect of the RFS Program compliance costs on a given refinery
with the economic state of other small refineries. The EPA’s viability test involves
no such comparison, but instead looks at each refinery in isolation and asks
whether the cost of long-term compliance with the RFS Program would force the
refinery to shut down. By making long-term viability a necessary factor in its
analysis, the EPA impermissibly reads the word “disproportionate” out of the
statute. See Clark v. Rameker, 134 S. Ct. 2242, 2248 (2014) (“a statute should be
construed so that effect is given to all its provisions, so that no part will be
inoperative or superfluous”). The EPA tries to sidestep the comparative nature of
-22-
the “disproportionate economic hardship” by pointing out that the statute requires
the EPA to consider DOE’s study and “other economic factors.” Because viability
is one of the factors considered by DOE, the EPA argues it is also an appropriate
consideration for the EPA. See Reply Br. at 11. But as we explained above, the
statutory requirements for what sources the EPA must consider in evaluating the
petitions are distinct from the overall purpose of the inquiry. In effect, the EPA
takes the holistic evaluation required by Congress and morphs it into a single
question: a threat of closure inquiry.
The EPA’s narrow viability evaluation is also not supported by contextual
clues in the statutory scheme. Congress, in fact, directed the EPA to apply a
closure test for another part of the CAA involving primary nonferrous smelter
orders. 42 U.S.C. § 7419(d)(2) (requirement to use continuous emission reduction
technology can be waived “upon a showing by the owner or operator of the smelter
that such requirement would be so costly as to necessitate permanent or prolonged
temporary cessation of operations of the smelter.” (emphasis added)). Although
this CAA provision is not part of the RFS Program, it makes the basic point that
Congress knows how to supply a closure test when it intends to do so. See Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 170–73
(2012) (discussing the presumption of consistent usage).
The EPA places significant weight on two recent circuit court decisions
addressing § 7545(o)(9)(B)(ii), which it claims support its interpretation of the
-23-
statute: Hermes Consolidated, LLC v. EPA, 787 F.3d 568 (D.C. Cir. 2015) and Lion
Oil Company v. EPA, 792 F.3d 978 (8th Cir. 2015). In Hermes, a refinery
challenged the EPA’s denial of its extension for an economic hardship exemption
from the RFS Program (a denial supported by DOE’s matrix scheme). The court
rejected the refinery’s challenge under Chevron step one, concluding that the
EPA’s reliance on a viability index did not contradict the plain language of
§ 7545(o)(9)(B) because so long as “EPA consults with DOE and considers the
2011 Study and ‘other economic factors,’ EPA retains substantial discretion to
decide how to evaluate hardship petitions.” Hermes, 787 F.3d at 574–75 (internal
citation omitted). The D.C. Circuit also rejected the refinery’s Chevron step two
argument, concluding that the EPA’s method of evaluating “‘disproportionate
economic hardship’ is ‘based on a permissible construction of the statute.’” Id. at
575 (quoting Chevron, 467 U.S. at 843). In other words, the court found it
reasonable for the EPA to incorporate the methodology from the 2011 DOE study,
and the viability matrix in particular, because the statute requires the EPA to
consider the findings of the study and “other economic factors” in evaluating
hardship petitions. Thus, the court concluded the EPA’s choice was within its
discretion under Chevron step two. See id.
In Lion Oil, the Eighth Circuit also rejected the refinery’s Chevron step one
argument. The court stated that since the statute does not define “disproportionate
economic hardship,” and Congress delegated authority to the agency to implement
-24-
an ambiguous statute, the court was “‘required to accept the agency’s statutory
interpretation, so long as it is reasonable.’” 792 F.3d at 984 (quoting Fast v.
Applebee’s Int’l, Inc., 638 F.3d 872, 876 (8th Cir. 2011). The Eighth Circuit
concluded that the EPA’s choice to measure “hardship” by examining the refinery’s
viability in the long run was within the agency’s discretion, and was thus
reasonable. Id.
But these cases are distinguishable. As an initial matter, neither the D.C.
Circuit nor the Eighth Circuit considered whether Mead should control its
interpretation of the statute; instead, both courts assumed that Chevron applied.
Regardless, as we explained above, Mead instructs us that Skidmore deference is
the appropriate standard of review to apply to an informal adjudication that does
not carry “the force of law.”
The petitioner in Hermes argued that mere “[c]onsideration of a viability
index” was “inconsistent with [the EPA’s] statutory mandate.” 787 F.3d at 574. In
other words, the EPA could not consider a refinery’s viability at all, even if
viability was considered along with a host of other economic factors. The D.C.
Circuit properly rejected that argument. The statutory scheme does not prohibit the
EPA from considering viability as a factor. But as we explained above, when the
EPA makes long-term viability the necessary, if not the sole, factor—refusing to
grant an exemption unless there is a threat to a refinery’s long-term viability—it
renders an interpretation outside the bounds of permissible statutory choice.
-25-
As for Lion Oil, the Eighth Circuit’s decision does not make clear whether
the petitioner argued it was impermissible for the EPA to consider viability as a
factor in its analysis (as in Hermes) or as the sole factor in its analysis (as in this
case). See 792 F.3d at 984. Either way, we are unpersuaded. If the former, our
analysis of Hermes applies. If the latter, Lion Oil improperly interpreted Hermes as
rejecting the EPA’s use of viability as the sole factor in its “disproportionate
economic hardship” analysis before relying entirely on the D.C. Circuit’s
reasoning. See id. Consequently, we are unpersuaded by the court’s analysis in
Lion Oil.
Mead instructs us to defer to agency interpretations of a statute only to the
extent those decisions have the “power to persuade.” 533 U.S. at 220. Since our
textual and contextual analyses demonstrate that the EPA’s interpretation of
§ 7545(o)(9)(B) is contrary to the meaning and purpose of the statute, the EPA has
failed to persuade us here.
III. Conclusion
By reading a necessary “viability” requirement into its statutory directive to
evaluate a refinery’s petition for exemption from the RFS program based on
“disproportionate economic hardship,” the EPA exceeded its statutory authority.
We therefore GRANT Sinclair’s petition for review, VACATE the EPA’s decisions
for Sinclair’s two Wyoming refineries, and REMAND for further proceedings
consistent with this opinion.
-26-
Sinclair’s June 24, 2016 motion to seal the docketing statement and agency
decision documents and its September 9, 2016 motion to seal all the briefs and the
joint deferred appendix are GRANTED.
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16-9532, Sinclair Wyoming Refining Co. v. United States Environmental Protection
Agency
LUCERO, J., dissenting.
My majority colleagues predicate their opinion on the premise that the
Environmental Protection Agency (“EPA”) has impermissibly adopted a test under which
a refinery can demonstrate disproportionate economic hardship only upon a showing of
an existential threat to ongoing operations. Whether that presumed test would pass
muster may present an interesting question, but it is quite academic to the real issue
before us. Assuredly, the EPA decisions include a regrettably inartful sentence—a partial
quote from the 2011 Small Refinery Exemption Study issued by the Department of
Energy (the “Department”). However, when construed as a whole, those decisions
demonstrate that EPA applies a more nuanced analysis. Rather than adopting a one-
factor test looking solely to whether a shutdown is likely, it seems clear to me that EPA is
applying the three-pronged “viability metrics” developed by the Department. Under
those standards, a refinery can establish economic hardship under four different
circumstances, only one of which requires a threat of shutdown. Because the majority
proceeds on a misconstruction of the EPA analysis, I must respectfully dissent.
I
In its decisions in this case, EPA discussed the Department’s study at length.1 It
quotes the Department’s determination that “[d]isproportionate economic hardship must
encompass two broad components: [1] a high cost of compliance relative to the industry
1
There are two EPA decisions at issue, one denying an exemption to the Sinclair
Wyoming Refinery and one denying an exemption to the Sinclair Casper Refinery. This
dissent quotes from the former decision, but the latter is identical in all material respects.
average, and [2] an effect sufficient to cause a significant impairment of the refinery
operations.” EPA explained that it asked the Department “to evaluate all of the
information EPA receives from each petitioner” because the Department “has expertise in
evaluating economic conditions at U.S. refineries, which it used in developing an
assessment process for identifying when ‘disproportionate economic hardship’ exists in
the context of the [Renewable Fuel Standard (“RFS”)] program.”
In resolving the two components of cost and sufficiency of the effect, the
Department considers numerous factors which are grouped into two categories—
structural and viability. In assessing “disproportionate structural impacts,” the
Department scores a refinery on eight metrics: percentage of diesel production, access to
capital/credit, availability of other cash flows, local market, state regulation, relative
refining margin, blending capability, and niche market. Under the “viability” category,
the Department considers three metrics: whether compliance costs “would reduce the
profitability of the firm enough to impair future efficiency improvements”; “[r]efinery
specific events (such as a shutdown due to an accident, and subsequent loss of revenue)
in the recent past that have a temporary negative impact on the ability of the refinery to
comply”; and whether compliance costs are “likely to lead to shut down.” Each metric is
scored either 0, 5, or 10. Subtotal scores for the structural and viability categories are
then averaged and divided by 2. The Department’s study determined that an exemption
would be warranted only if a refinery had an overall score of 1 or higher in both
categories. For the viability category, a refinery can qualify with a score of 10 on any
2
single metric, or with an intermediate score of 5 on both the efficiency and specific event
metrics.
After providing background information on Sinclair Wyoming Refinery’s
operations, the EPA decision reproduces the Department’s scoring matrix for the facility.
That metric calculated a score of 1.6 on the structural impact category, and 0 for the
viability category. Then, EPA evaluated “viability using the metrics considered by [the
Department] in its viability index: (a) compliance costs eliminate efficiency gains
(impairment); (b) individual special events; and (c) compliance costs likely to lead to shut
down.” Considering the Department’s score of zero on all three viability factors, EPA
concluded that Sinclair Wyoming Refinery “remains fully able to comply with its 2014
RFS obligations without causing a significant impairment of the refinery’s operations,”
and thus compliance would not threaten its “viability.” EPA specifically considered
Sinclair’s argument that a fire at the refinery caused a large one-time loss—an argument
clearly directed toward the specific event metric. And it discussed the RFS program’s
impact on efficiency gains as relevant to the first metric.
The majority opinion does not consider this lengthy discussion. If it had, it would
be abundantly clear that EPA considers all three of the Department’s viability factors.
Importantly, a refinery can qualify for an exemption under the Department’s matrix
without showing that compliance costs would lead to a shutdown. Rather than
considering EPA’s nuanced approach, the majority opinion focuses on the statement that
a refinery must show that compliance costs would “significantly impact the operation of
the firm, leading eventually to an inability to increase efficiency to remain competitive,
3
eventually resulting in closure.” (Majority Op. 18.) Read in context, that statement does
not support the assertion that EPA applies a single-factor test under which a refinery must
show a shutdown is likely.2
The statement at issue is a direct quote from the Department’s Small Refinery
Exemption Study. In describing its three viability metrics, the Department explained that
the term “viability refers to the ability of the refiners to remain competitive and
profitable,” which “requires sufficient profits to make investments in the refinery.” That
statement quoted by EPA explains that “under some circumstances, a small refinery may
face compliance costs that would significantly impact the operation of the firm, leading
eventually to an inability to increase efficiency to remain competitive, eventually
resulting in closure.” Read together with the Department’s explanation of the metrics,
the quoted passage shows that eventual closure is not required. Refineries may receive
points under the efficiency metric because “significant constraints on efficiency
improvements would eventually leave many small refineries at risk.” And the individual
special events metric is specifically aimed to provide relief to refineries that have
2
As the majority notes, EPA’s brief repeats this statement in a footnote. (Majority
Op. 18 n.5.) But as with the decisions at issue, the statement must be read in context.
EPA’s brief strenuously rejects the reading of its decisions urged by Sinclair and adopted
by the majority. After quoting Sinclair’s argument that a refinery must demonstrate that
RFS compliance “will eventually force a small refinery to shut down,” EPA states: “This
is not an accurate characterization of EPA’s interpretation because it gives the incorrect
impression that the Agency will grant the exemption only if it concludes that the refinery
will have to close if it has to comply with its RFS requirements.” (Resp’t Br. 40.)
Instead, consistent with its decisions, EPA explains that “[t]he viability factor addresses
three types of metrics that could impact long-term competitiveness, none of which
necessarily would cause a closure of the facility in the near term.” (Id. at 38-39.)
4
suffered incidents causing “a temporary negative impact on the ability of the refinery to
comply with the RFS.”
In discussing “viability” in the challenged decisions, EPA is referring to all three
metrics—not just the possibility of refinery closure. The majority opinion’s reliance on
the ordinary usage definition of “viability,” and its claim that EPA ignored the first two
of the Department’s viability metrics, (Majority Op. 21, 22), cannot be squared with the
text of the challenged decisions. Those decisions unequivocally state that EPA
“evaluates viability using the metrics considered by [the Department] in its viability
index: (a) compliance costs eliminate efficiency gains (impairment); (b) individual
special events; and (c) compliance costs likely to lead to shut down.” Therefore, the
appropriate question in reviewing the decisions at issue is whether that multi-factor
analysis is consistent with the statute.
II
Regardless of the standard of review applied, EPA’s adoption of the Department’s
three-part viability test should be upheld. See Edelman v. Lynchburg Coll., 535 U.S.
106, 114 n.8 (2002) (“[T]here is no need to resolve deference issues when there is no
need for deference.”). Congress specifically directed EPA to consider the findings of the
Department’s Small Refinery Exemption Study. 42 U.S.C. § 7545(o)(9)(B)(ii).
Consistent with the Congressional directive, that study created the viability standard
actually being applied by EPA.
Consideration of a refinery’s overall health makes sense in light of the statute’s
use of the term “hardship.” § 7545(o)(9)(B)(i). As the EPA decision notes, a refinery
5
must show it “faces a ‘disproportionate economic hardship’ from compliance, and not
merely an economic impact.” A refinery that spends $5 million per year to meet its RFS
obligations and suffers net annual operating losses of $1 million per year would
experience more of a “hardship” than a refinery that spends $10 million per year on RFS
compliance but nevertheless operates at a profit.
In an “Explanatory Statement” contained in the 2016 Consolidated Appropriations
Act, Congress directed the Department to recommend a 50% waiver for refineries that
score above 1 on the Department’s matrix for either the viability or structural impact
categories. See Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, 129 Stat.
2242 (2015). Because that statement did not amend the statute, it should have little
bearing on our analysis of the statutory text. See Bruesewitz v. Wyeth LLC, 562 U.S.
223, 242 (2011) (“Post-enactment legislative history (a contradiction in terms) is not a
legitimate tool of statutory interpretation.”). As EPA explained, despite the
appropriations rider, the agency “remains constrained by the plain governing statutory
language that limits exemption extensions to small refineries that experience a
‘disproportionate economic hardship.’” Moreover, as noted by EPA, “a refinery could
satisfy the nonviability metrics as a result of primarily refining diesel and not having
other lines of business, regardless of how profitable the refinery was or what the impact
of compliance with the RFS would be on the refinery.” I agree that “it would [not] be
appropriate to grant even a 50% waiver for ‘disproportionate economic hardship’ in these
circumstances without some further consideration of whether compliance with the RFS
would actually cause such a hardship.”
6
Finally, reliance on the Department’s study necessarily incorporates a
disproportionality element. That study applied the Department’s metrics to a broad
cross-section of small refineries and found thirteen qualified for an exemption. Under
that matrix, Sinclair’s refineries do not qualify for an exemption for compliance year
2014. Even if the Department was required to depart from the study’s findings due to an
appropriations act requirement, EPA followed the statute when it relied on the
Department’s study in making these evaluations. The agency was mandated to consider
both the study and the Department’s recommendation. § 7545(o)(9)(B)(ii).
Two other circuits have approved EPA’s approach. See Lion Oil Co. v. EPA, 792
F.3d 978 (8th Cir. 2015); Hermes Consol., LLC v. EPA, 787 F.3d 568 (D.C. Cir. 2015).
Hoping to avoid a circuit split, my majority colleagues unconvincingly attempt to
distinguish these cases. They characterize both as having decided, unlike this case,
whether EPA can consider viability as a factor, rather than the only factor. (Majority Op.
25-26.) As explained above, the majority’s framing misstates what EPA did in the
present case. The majority opinion also dismisses the cases claiming that those courts did
not consider the appropriate degree of deference. But both decisions speak favorably of
using viability as a factor. See Lion Oil, 792 F.3d at 984 (“Of course, some refineries
will face higher costs than others, but whether those costs impose disproportionate
hardship on a given refinery presents a different question” and EPA reasonably
concluded “that the best way to measure ‘hardship’ entail[s] examining the impact of
compliance costs on a refinery’s ability to maintain profitability and competitiveness—
i.e., viability—in the long term.” (quotation omitted)); Hermes, 787 F.3d at 575 (same).
7
I would uphold, as well, EPA’s consideration of viability as described in the
Department’s Small Refinery Exemption Study.
8