Kern Oil & Refining Co. v. Usepa

• Court: Court of Appeals for the Ninth Circuit
• Decided: August 16, 2022
• Docket: 21-71246
• Status: Unpublished

Opinion

FILED NOT FOR PUBLICATION AUG 16 2022 UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS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

2 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.

3 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

4 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

5 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

6 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

7 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.

8 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. 9