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

United States Court of Appeals, Tenth Circuit

August 15, 2017



          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.


         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 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 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 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 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).

         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 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" 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 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 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 ...

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