Oil And Ethanol Fight At The Supreme Court Over The Word “Extension”

A protracted legal and political fight that has pitted two pillars of the Republican base against each other reached its apex last week as the Supreme Court heard arguments in HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Association. At issue is the authority of the U.S. Environmental Protection Agency (EPA) to provide relief to refiners under the Renewable Fuel Standard (RFS), which mandates blending requirements in the domestic fuel supply for biofuels, primarily corn-ethanol. Refiners argue that EPA’s waiver authority is broad, while the farm lobby counters that the authority is limited. The outcome of the case rests on how the nine justices interpret the meaning of the word “extension”. Their decision has the potential to enormously impact the value of ethanol in the United States, directly driving corn prices and economies in the U.S. heartland.

The regulation at issue, known as the RFS, was established by Congress with the Energy Independence and Security Act of 2007. Formulated during a time of falling U.S. oil production, the RFS created a biofuels blending requirement for the nation’s fuel supply. The strategy was seen both as an economic benefit to Middle-America and a way to fortify domestic energy security. Under the RFS, the EPA sets annual “Renewable Volume Obligations” for a variety of biofuels that refiners must blend into finished fuels. To track compliance and enable burden sharing, the RFS established a market-based system that allows obligated parties to trade compliance credits (RINs). These RINs have a fluctuating value depending on supply and demand of biofuels in the market, and the D6 RIN which relates to corn-ethanol has been an important economic driver for growers in the midwest. The program underpins an ethanol industry that generated more than $46 billion in revenues in 2018 alone.

The cost of the RINs is borne by refiners (and eventually the consumer), who must purchase sufficient RINs to”retire” with the EPA to satisfy their mandate. To aid small refiners from the added compliance costs, the RFS includes a waiver process designed to exempt qualifying refiners from the obligations of the RFS. Through a petition to the EPA, qualifying refiners can be granted temporary exemptions from blending mandates if the EPA, in consultation with the Department of Energy, finds that RFS compliance would lead to “disproportionate economic hardship” for the petitioner.

The difficulty for corn growers is that this exemption program was expanded considerably during the Trump administration. The number of waivers granted to refiners skyrocketed from under 10 to over 30 in the first two years of the administration. Large refiners were given waivers, and the EPA failed to increase mandates on other refiners to compensate for the missing gallons, effectively reducing demand for biofuels by billions of gallons overnight. Prices for ethanol and the D6 RIN collapsed. Many ethanol plants closed as a result. Incensed, Chuck Grassley (R-IA) noted that the EPA “screwed us” and the lobbyists for farmers and ethanol producers unloaded criticism on administration officials. A lawsuit followed, claiming the EPA overstepped its bounds in issuing the waivers.

That lawsuit was decided by lower courts on the interpretation of the statutory language. The RFS rules state that small refiners (under 75,000 bbl/day) did not need to comply with the RFS until 2011, and allowed a temporary exemption valid for an additional two years for refiners meeting the disproportionate economic hardship threshold. The next paragraph in the statute further allows that a “small refinery may at any time petition for an extension of the exemption.” The 10th Circuit focused on the word “extension” and ruled that exemptions are only valid if they are extensions of exemptions previously and continuously granted from the start of the RFS. Most exemptions under the Trump Administration didn’t qualify. The decision was a major win for the ethanol industry, and the value of the corn-ethanol D6 RIN has increased over 400% since the decision was handed down.

Three small refiners in Wyoming, who have not had continuous exemptions, challenged that ruling, paving the way for last week’s oral arguments at the Supreme Court. As expected, the justices focused on the word “extension”, working to determine if the law’s intent was to increase compliance over time as exemptions lapsed and weren’t renewed, or to allow for regulatory relief due to hardship through an “extension”, at any time, of the original exemption program in the law. The justices questions did not provide much guidance on which way the court is heading, but a win for the ‘hardship’ interpretation pushed by the refiners would work to undercut the RFS, opening it to further political meddling (beyond the EPA’s authority to set annual blending mandates) every four years, and likely leading to further efforts by midwestern politicians to shore up the RFS program. Either way, both corn and oil will be watching this summer for the final opinion on the matter from the highest court in the land.