Kern Oil & Refining Co. v. Usepa

FILED
NOT FOR PUBLICATION
AUG 16 2022
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FOR THE NINTH CIRCUIT
KERN OIL & REFINING CO., No. 21-71246
Petitioner, No.
Environmental Protection Agency
v.
U.S. ENVIRONMENTAL PROTECTION MEMORANDUM*
AGENCY,
Respondent.
On Petition for Review of an Order of the
U.S. Environmental Protection Agency
Argued and Submitted August 8, 2022
Anchorage, Alaska
Before: S.R. THOMAS, McKEOWN, and CLIFTON, Circuit Judges.
Kern Oil & Refining Co. (“Kern Oil”) petitions for review of a final order of
the U.S. Environmental Protection Agency (“EPA”), which granted Kern Oil an
exemption from the requirements of the Clean Air Act’s Renewable Fuel Standard
(“RFS”) program for the 2017 compliance year. The EPA had the authority to
*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
grant Kern Oil an exemption from the RFS program under 42 U.S.C.
§ 7545(o)(9)(B). See also 40 C.F.R. § 80.1441(e)(2). We have jurisdiction over
this timely petition for review under 42 U.S.C. § 7607(b)(1). “Because the [Clean
Air Act] does not specify a standard of review, we apply the general standard of
review for agency actions set forth in the [Administrative Procedure Act (“APA”)],
5 U.S.C. §§ 701–06.” Sierra Club v. U.S. EPA, 671 F.3d 955, 961 (9th Cir. 2012)
(cleaned up). Under the APA, this Court upholds agency action unless it is
“arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with
law.” 5 U.S.C. § 706(2)(A).
We grant in part and deny in part the petition for review, and remand to the
EPA for further proceedings consistent with this disposition. Because the parties
are familiar with the factual and procedural history of this case, we need not
recount it here.
I
Section 7545(o)(9)(B)’s allowance for an “exemption” from the RFS
program does not require the EPA to fully refund the costs that a refinery incurs
when it chooses to comply with its obligations under the RFS program before it
receives the “exemption.” See 42 U.S.C. § 7545(o)(9)(B)(i). Kern Oil claims that
the EPA must (1) swap out all of the expired tradeable credits that Kern Oil had
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used to show RFS compliance—called Renewable Identification Numbers
(“RINs”)—for unexpired, most-recent-vintage-year RINs, and (2) issue Kern Oil
enough new RINs to offset the amount by which its unexpired RINs depreciated
between the time when they were acquired and when the EPA later refunded them.
We “first . . . employ[] traditional tools of statutory interpretation” to determine
whether Congress expressed “an intention on th[is] precise question.” United
States v. W.R. Grace & Co., 429 F.3d 1224, 1237 (9th Cir. 2005) (quoting Chevron
U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 843 n.9 (1984)).
II
The RFS statute is ambiguous as to the remedy that the EPA must extend to
a small refinery that petitions for and receives an “exemption” after it has already
fulfilled its annual obligations under the RFS program. Neither the statute nor its
implementing regulations define an “exemption.” See 42 U.S.C. § 7545(o)(1); 40
C.F.R. § 80.1401. And conventional definitions of “exemption” as “[f]reedom
from a duty, liability, or other requirement,” Exemption, Black’s Law Dictionary
(11th ed. 2019), take us only so far, as they do not address what—if
any—affirmative steps a party must take to actualize an “exemption” when the
recipient initially acts as if it were not exempt.
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The surrounding language does not make Congress’s intent regarding this
“precise question” any clearer. Section 7545(o)(9)(B)(i) speaks specifically to “an
extension of the exemption under subparagraph (A),” but all “exemption[s]” under
§ 7545(o)(9)(A) were granted prospectively, and thus were self-actualizing, see 42
U.S.C. § 7545(o)(9)(A)(i), (ii); recipient small refineries reaped the benefits of
their subparagraph (A) “exemptions” by never complying with the RFS program at
all, and without the need for any separate action from the EPA. Moreover, while
the fact that small refineries may receive a subparagraph (B) exemption only for
the reason of “disproportionate economic impact” suggests that the EPA is
obligated to provide a post-compliance exemption recipient a remedy that offsets
some compliance costs, see id. § 7545(o)(9)(B)(i), that language does not speak
clearly to the nature or the extent of the remedy that the EPA must provide.
Finally, that subparagraph (B) allows a small refinery to petition the EPA for an
exemption “at any time,” see id., does not answer the question of what exact
remedy the EPA must provide a refinery that receives an exemption after it has
already complied so much as it raises that question in the first place.
III
The level of deference that we afford an agency’s interpretation of an
ambiguous statute depends on the manner and context in which it provides the
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interpretation. See Sierra Club, 671 F.3d at 961–63. Under the standard set forth
in Skidmore v. Swift & Co., 323 U.S. 134 (1944), the agency’s “interpretation is
‘entitled not to deference but to a lesser ‘respect’ based on the persuasiveness of
the agency decision.’” Nat. Res. Def. Council, Inc. v. Nat’l Marine Fisheries Serv.,
421 F.3d 872, 877 (9th Cir. 2005) (quoting Wilderness Soc’y v. U.S. Fish &
Wildlife Serv., 353 F.3d 1051, 1067 (9th Cir. 2003)).
Because the RFS statute is ambiguous as to the post-compliance “remedy”
that the EPA must provide, we next consider whether the EPA’s default remedy
reflects a persuasive reading of the RFS statute. See Price v. Stevedoring Servs. of
Am., Inc., 697 F.3d 820, 832 (9th Cir. 2012) (identifying consistency with other
pronouncements, validity of reasoning, and thoroughness of consideration as
factors contributing to the persuasiveness of an agency’s interpretation).
The EPA’s default post-compliance remedy—refunding all of the unexpired
RINs that the exemption recipient previously used to show RFS compliance—is
persuasive. As the agency tasked by Congress with creating and administering the
RIN system, the EPA has convincingly explained how the sorts of large-scale and
unpredictable infusions of “swapped” RINs that would occur under Kern Oil’s
proposed alternative remedy would further disrupt the already-volatile RIN market
on which the RFS program depends. See 42 U.S.C. § 7545(o)(2), (5). By
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mechanically refunding unexpired RINs that are linked to actual units of renewable
fuel production, the EPA can minimize those disruptions while still affording post-
compliance exemption recipients some form of economic relief.
The EPA’s reasons for not adopting the constituent elements of Kern Oil’s
preferred remedy are also persuasive. First, as to the swapping of expired RINs,
post-compliance exemption petitioners are on notice that certain types of RINs will
have expired, by operation of law, if they seek an exemption after the RFS
program’s annual compliance deadline has passed. See 42 U.S.C. § 7545(o)(5)(C);
40 C.F.R. §§ 80.1427(a)(6)(i), 80.1428(c). Moreover, the statute and regulations
afford petitioners various avenues to avoid the irredeemable costs arising from
expired RINs. See, e.g., 42 U.S.C. § 7545(o)(5)(D); 40 C.F.R. § 80.1427(b)
(allowing refineries to “carry forward” a compliance deficit and thus not use any
RINs in years for which they seek exemptions); 40 C.F.R. §§ 80.1427(a)(6)(i),
80.1428(c) (indicating a refinery can avoid the expiring RINs problem by using
only newer RINs to show compliance). Second, regarding compensation for the
depreciation in value of unexpired RINs, the record suggests that refineries incur
these depreciation costs regardless of whether the exemption is granted pre- or
post-compliance; thus, refineries are no worse off under the default remedy. The
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EPA has also explained persuasively that it would be prohibitively difficult to
calculate these depreciation costs on a case-by-case basis.
Finally, the EPA’s decision to issue a unique form of relief to one set of
post-compliance exemption recipients does not undermine the persuasiveness of
the default remedy that it has extended in all other cases. See Producers of
Renewables United for Integrity Truth & Transparency v. EPA, No. 19-9532, 2022
WL 538185, at *2–3 (10th Cir. Feb. 23 2022) (unpublished order) (summarizing
the circumstances of this decision). Unlike here, failure to depart from the EPA’s
default remedy as to the petitions at issue in Producers of Renewables would have
resulted in the refineries’ receiving no economic benefit from their exemptions at
all, since the EPA’s initial erroneous decision and subsequent protracted litigation
meant that all of the refineries’ RINs would have been expired (and worthless) by
the time they could be “returned.” See id. Additionally, the EPA in that case
considered the impact that “swapping” RINs would have on the credit market, but
determined that the number of RINs involved in that specific action would be too
small to have any meaningful adverse effect. See id. at *5–7.
IV
Because the EPA’s default remedy reflects a persuasive reading of the RFS
statute, the only remaining question is whether the EPA erred by declining to
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depart from that default remedy under the particular circumstances of this case.
Here, the EPA waited 238 days to act on Kern Oil’s small refinery exemption
(“SRE”) petition—148 days longer than the 90-day statutory deadline. See 42
U.S.C. § 7545(o)(9)(B)(iii). The parties agree that the RINs that the EPA
eventually returned to Kern Oil would have been worth more had they been
returned within 90 days. Kern Oil argues that the EPA erred by failing to
compensate it for that further loss in value.
The EPA does not meaningfully dispute that the 90-day requirement in
§ 7545(o)(9)(B)(iii) imposes a mandatory deadline by which the agency must issue
its default post-compliance remedy. Its main defense for its untimely action—that,
under the RFS statute, it is not obligated to provide any affirmative remedy at all to
post-compliance SRE recipients–—is entirely beside the point. Now that the EPA
has opted to mechanically apply a default remedy, it must either extend that
remedy or provide a reasoned explanation for withholding it. See FCC v. Fox
Television Stations, Inc., 556 U.S. 502, 515–16 (2009). And while the volatile
nature of RIN prices might well mean that not every late-issued default remedy
will leave an SRE recipient worse off, the record indicates that Kern Oil was not so
lucky: By the EPA’s own estimates, Kern Oil’s RINs lost value as a result of the
agency’s delay.
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The EPA has the authority under the RFS statute to remedy this injury via a
tailored RIN replacement order, authority that the agency has exercised before
when its own legal errors have deprived SRE recipients of a benefit that they
otherwise would have received under the EPA’s default remedy. See Producers of
Renewables, 2022 WL 538185, at *2–3; see also 42 U.S.C. § 7545(o)(5), (9)(B).
Therefore, we grant Kern Oil’s petition in part and remand to the EPA with
instructions to issue a remedy order that compensates Kern Oil for the loss in value
that its unexpired RINs1 experienced between the time when the EPA should
have acted on Kern Oil’s SRE petition in October 2018 and when it ultimately
granted the petition in March 2019. We do not prejudge the outcome of this
examination and remand the issue without prejudice to either party. In light of the
EPA’s prior delays in this matter, we instruct the EPA to issue its new decision
within 90 days of the filing of this disposition.
PETITION GRANTED in part, DENIED in part, REMANDED. Each
party shall bear its own costs.
1
Consistent with our prior discussion, the EPA on remand need not tailor its
remedy to compensate Kern Oil for any loss in value associated with the expired
2016 RINs.
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