UPDATE 2-U.S. appeals court rejects challenge to 2013 renewable fuel standard

Tue May 6, 2014 4:05pm EDT

(Adds companies' comments, biofuel trade group reaction, background on additional challenges)

By Ayesha Rascoe and Cezary Podkul

WASHINGTON May 6 (Reuters) - A U.S. appeals court on Tuesday threw out an oil industry challenge to the Obama administration's 2013 biofuel mandate, ruling that the government has "wide latitude" to decide whether to modify renewable fuel use targets, and by how much.

The U.S. Court of Appeals for the District of Columbia Circuit rejected arguments from refiners that the Environmental Protection Agency had not thoroughly considered how renewable fuel credits are used to satisfy federal targets.

The ruling could have broad implications for the biofuel mandate, as various groups weigh challenges to EPA's management of the program. The EPA's final 2014 quotas are due out in June.

The Renewable Fuel Standard requires increasing amounts of biofuels such as ethanol to be blended into U.S. gasoline and diesel supplies through 2022.

U.S. refiners need to accumulate credits, or Renewable Identification Numbers (RINs), to prove they have blended their share of renewable fuels into gasoline and diesel. If they do not blend, they need to buy RINs.

The oil industry unsuccessfully urged the EPA to lower the federal mandate to use 16.55 billion gallons of biofuels in 2013, saying it would unduly burden refiners.

In its challenge, PBF Energy said the EPA should not consider the use of left over ethanol credits from 2012 when setting targets for 2013.

"This contention is meritless," the court said, adding that "EPA was entitled to conclude, as it did, that it had wide latitude to consider a range of factors as appropriate."

PBF said it is evaluating its legal options. "We are disappointed in the court's ruling and do not agree that EPA properly exercised its discretion," a PBF spokesman said in an email.

Monroe Energy, a subsidiary of Delta Air Lines which operates the 185,000 barrels-per-day (bpd) Trainer refinery in Pennsylvania, argued the EPA's decision not to cut 2013 biofuel targets did not take into account that companies might need to carry over some ethanol credits for use in 2014, when it finalized the 2013 targets.

The company said a spike in RIN prices last year could cost Monroe more than $100 million. The ethanol blending credits topped out at around $1.45 each in July 2013 and remain elevated, with trades spotted at 43.00 cents each on Tuesday.

But the court ruled that expensive fuel credits were not enough to warrant vacating the target and that there was "no ground to conclude the 2013 standards are unlawful simply because RINs are costlier than in prior years."

The court added that higher RIN prices should provide an incentive to invest in more fueling infrastructure and in diversification of the fuel supply.

In a statement reacting to the court decision, Monroe Energy disagreed strongly with this reasoning: "These prices will not increase the volume of renewable fuel consumed in the U.S., and are in essence nothing but a tax on refiners," the company said in an email.

BETTER LATE THAN NEVER

Biofuel supporters have been locked in a pitched lobbying battle against the oil industry to keep the mandate intact. On Tuesday, they had reason to celebrate at least one victory in a larger battle over the biofuel content of fuel supplies.

"Today's decision is a victory for American consumers," said a coalition of biofuel trade groups including the Renewable Fuels Association, Growth Energy and the Biotechnology Industry Organization.

The court also rejected claims from the refineries that the 2013 rule should be thrown out because it was issued more than eight months after the legislative deadline of November 30. The court noted that companies could estimate their obligations based on fuel consumption estimates from the Energy Information Administration.

The decision seems to indicate that the delay, while inconvenient, does not prohibit refiners from complying with the rules, some legal experts said.

"The unanimous nature of the decision, that the EPA can miss the statutory deadline by more than eight months, is very significant not just for the 2013 standards but also the 2014 standards," said David McCullough, a lawyer at Sutherland Asbill & Brennan LLP who specializes in energy issues.

It means that, even if the EPA is late finalizing the rules, the court held that refiners and other obligated parties "still had notice under the statute establishing the mandates" to plan ahead for their compliance, and therefore the court views it as not unreasonable for the EPA to adjust them, said McCullough, whose firm is not involved in the case.

Last month, the American Petroleum Institute and American Fuel and Petrochemical Manufacturers asked the court to hold out on ruling on their challenges to the 2013 rule, pending EPA's review of the matters. (Additional reporting by Lawrence Hurley; Editing by Diane Craft and Grant McCool)

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