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4th Cir.: Agency analysis of small-refinery exemption is flawed

Despite past efforts to improve its approach, the Department of Energy’s recommended analysis of economic hardship on small fuel refineries attempting to comply with federal renewable fuel standards is facially flawed. In considering a petition for a small-refinery exemption, the EPA’s uncritical reliance on that methodology was arbitrary and capricious.


Until 2011, Ergon-West Virginia Inc., as a small refinery, enjoyed an exemption from the Environmental Protection Agency’s renewable fuel standard program. Pursuant to the Clean Air Act, the program requires refineries to allocate a certain percentage of their fuel production to renewable fuels.

From 2005 to 2011, small refineries as defined by statute were exempt from the program. The Department of Energy was to conduct for the EPA a study to determine whether compliance with the program’s requirements would impose a disproportionate economic hardship. If the Department determined that a refinery would experience such hardship, then the EPA was required to extend the facility’s exemption for at least two years. After obtaining this first mandatory extension, a refinery can petition the EPA for a statutory extension “at any time” due to disproportionate economic hardship.

In 2011, the Department released a study on the program’s economic hardship on refineries. The study created a scoring matrix to be used to determine whether a small refinery suffers disproportionate economic hardship. In evaluating small-refinery exemption petitions, the EPA considers the findings of the Department’s 2011 study in addition to “a variety of economic factors.”

In 2016, Ergon petitioned for a small-refinery exemption for compliance years 2014-2016. The EPA denied the petition, at least in part due to Ergon’s scores under the approach articulated in the Department’s 2011 study.  Ergon then sought this court’s review of the agency’s final action.

Arbitrary and capricious

The EPA relied on the Department’s facially-deficient recommendation and failed to properly address Ergon’s petition with regard to renewable fuel costs. Accordingly, its decision to deny Ergon’s petition must by vacated as arbitrary and capricious.

The Department accords points depending on the acceptance of renewable fuel in the refinery’s local market. There are three subcategories within this factor: E10, E85, and biodiesel renewables. In analyzing Ergon’s petition, the Department did not score the latter two subcategories at all and has apparently never scored those subcategories in any refinery’s petition. Instead, the Department gave Ergon’s petition a score of 0 for the local market’s acceptance of E10, completely disregarding the fact that approximately two-thirds of Ergon’s transportation fuel production is diesel, which must be mixed with biodiesel. The Department treated similarly the refinery’s capacity for blending renewable fuels with nonrenewable fuels: Although the relevant section has subcategories for ethanol, biodiesel, and advanced biofuel blending, the Department scored only the first, ignoring Ergon’s biodiesel blending and giving Ergon a score of 0 for this category. Had Ergon achieved a score of 10 in either section, it would likely have earned a small refinery exemption.

The Department’s approach to this issue is plainly arbitrary, treating unfairly those facilities where diesel makes up a substantial percentage of their transportation fuel production. Despite the widespread acceptance of E10 gasoline, a local market may not readily accept diesel blended with biodiesel, placing refineries with higher-than-average production of diesel, like Ergon, at a measurable disadvantage. Similarly, while a facility may have a high capacity to blend ethanol with its nonrenewable fuel, it may not have the same capacity to blend biodiesel, so failing to score this factor again harms those facilities with higher-than-average production of diesel. These errors are readily apparent on the face of the Department’s report. Because the Department’s recommendation was flawed on its face, the EPA’s unexplained reliance on the report was “a clear error of judgment.”

Similarly, the EPA’s analysis of the effect of renewable fuel costs on Ergon’s refining facility was also arbitrary and capricious. The agency ignored specific evidence suggesting that those prices had a negative effect, relying instead on its own study of the refining industry as a whole. Thus, it failed to squarely address Ergon’s petition with regard to renewable fuel costs. This failure alone warrants granting Ergon’s petition.

Petition granted; agency action vacated; remanded.

Ergon-W. Va. Inc. v. U.S. Envtl. Prot. Agency, Case No. 17-1839, July 20, 2018. 4th Cir. (Agee), from EPA. Jonathan Grant Hardin for Petitioner; Patrick Reinhold Jacobi for Respondent. VLW No. 018-2-151, 28 pp.