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Western States Petroleum Association v. Environmental Quality Commission

Court of Appeals of Oregon

February 27, 2019

WESTERN STATES PETROLEUM ASSOCIATION, Petitioner,
v.
ENVIRONMENTAL QUALITY COMMISSION, Respondent, and OREGON FARM BUREAU FEDERATION, Intervenor-Petitioner, and OREGON ENVIRONMENTAL COUNCIL and Climate Solutions, Intervenors-Respondents. WESTERN STATES PETROLEUM ASSOCIATION and Oregon Farm Bureau Federation, Petitioners, and OREGON TRUCKING ASSOCIATIONS, INC., Intervenor-Petitioner,
v.
ENVIRONMENTAL QUALITY COMMISSION, Respondent, and OREGON ENVIRONMENTAL COUNCIL and Climate Solutions, Intervenors-Respondents.

          Argued and submitted April 7, 2017

         [296 Or.App. 299] Per A. Ramfjord argued the cause for petitioners and intervenors-petitioners. Also on the joint briefs were Thomas R. Wood, Rachel C. Lee, and Stoel Rives LLP; Timothy J. Bernasek and Dunn Carney Allen Higgins & Tongue LLP; and Gregory A. Chaimov and Davis Wright Tremaine LLP.

          Denise G. Fjordbeck, Assistant Attorney General, argued the cause for respondent. Also on the brief were Ellen F. Rosenblum, Attorney General, and Benjamin Gutman, Solicitor General.

          Karl G. Anuta and Law Offce of Karl G. Anuta, P.C.; and Amanda W. Goodin, Patti A. Goldman, and Earthjustice, Washington, fled the brief for intervenors-respondents.

          Before Armstrong, Presiding Judge, and DeHoog, Judge, and Shorr, Judge.

         Case Summary:

         Petitioners challenge the validity of administrative rules- OAR 340-253-0000 to 340-253-8080-adopted by respondent Environmental Quality Commission (EQC) that address low carbon fuel standards. First, petitioners claim that EQC failed to evaluate certain factors that the legislature required EQC to evaluate when the legislature gave EQC the authority to adopt rules for low carbon fuel standards. Second, petitioners claim that the adopted rules violate Article IX, section 3a, of the Oregon Constitution because the rules constitute a tax on motor vehicle fuel and the resulting revenue is not used for the construction and maintenance of public roads and roadside rest areas. Held: The challenged administrative rules are valid. First, EQC properly evaluated the requisite criteria when adopting and, with respect to one criterion, later readopt-ing and amending the challenged rules. Second, the rules adopted by EQC do not result in a tax on motor vehicle fuel and, as a result, are not subject to Article IX, section 3a.

         [296 Or.App. 300] SHORR, J.

         Petitioners challenge the validity of the administrative rules adopted by respondent Environmental Quality Commission (EQC) that address low carbon fuel standards (OAR 340-253-0000 to 340-253-8080).[1] See ORS 183.400(1) (providing jurisdiction in the Court of Appeals over petitions challenging the validity of administrative rules). They raise two arguments. First, they claim that EQC failed to evaluate certain factors that the Oregon legislature required EQC to evaluate when the legislature gave EQC the authority to adopt rules for low carbon fuel standards. Second, they claim that the adopted rules violate Article IX, section 3a, of the Oregon Constitution because the rules constitute a tax on motor vehicle fuel and the resulting tax revenue is not exclusively used for the construction and maintenance of public roads and roadside rest areas.[2] We conclude that (1) EQC did evaluate the appropriate criteria when adopting and, in one instance, later readopting and amending the challenged rules and (2) the rules adopted by EQC do not result in a tax on motor vehicle fuel and, as a result, are not subject to Article IX, section 3a. Hence, we reject petitioners' challenges and hold that the EQC rules are valid.

         THE LOW CARBON FUELS STANDARDS PROGRAM

         We begin with a brief background of the statute that authorized EQC to adopt low carbon fuel standards (LCFS) and then turn to a discussion of the resulting rules. In 2009, the Oregon legislature authorized EQC to "adopt [by rule] low carbon fuel standards for gasoline, diesel and fuels used as substitutes for gasoline or diesel." ORS 468A.266(1)(a).[3] [296 Or.App 301] The legislature's expressed intention was to reduce over time the greenhouse gas emissions caused by fuels in the Oregon transportation sector. ORS 468A.200(8). The legislature directed EQC to consider the low carbon fuel standards of other states before adopting Oregon's standards. ORS 468A.266(3). Significant to petitioners' arguments, the legislature also directed that, "[i]n adopting rules under this section, the [EQC] shall evaluate" the following:

"(a) Safety, feasibility, net reduction of greenhouse gas emissions and cost-effectiveness;
"(b) Potential adverse impacts to public health and the environment, including but not limited to air quality, water quality and the generation and disposal of waste in this state;
"(c) Flexible implementation approaches to minimize compliance costs; and
"(d) Technical and economic studies of comparable greenhouse gas emissions reduction measures implemented in other states and any other studies as determined by the commission."

         ORS 468A.266(5). The legislation had certain automatic sunset provisions, including one that repealed EQC's above-stated authority to adopt LCFS rules, which had a sunset date on December 31, 2015. Or Laws 2009, ch 754, § 8. However, before that date, the legislature repealed those sunset provisions. Or Laws 2015, ch 4, § 1.

         EQC adopted the LCFS rules in separate phases. In 2012, EQC adopted "Phase I" of the program. In early and late 2015, EQC adopted "Phase II" of the program. As we will discuss below, in 2017, after briefing and argument was concluded in this appeal, EQC readopted all of the Phase II rules with substantial amendments. We refer to all of the rules, together, as the "LCFS rules."

         [296 Or.App. 302] The Phase I rules required "regulated parties" and those that opted into the program to register, keep records, report the carbon intensity of the fuels that they produce or import, and calculate surpluses and shortfalls against certain baseline carbon intensity values. OAR 340-253-0000(4) (Dec 11, 2012).[4] EQC's intention with Phase I was to gather information about the fuels and carbon intensity of fuels produced and imported into Oregon. Id. The ultimate goal, however, was to create a program that would "reduce the average amount of lifecycle greenhouse gas emissions per unit of fuel energy used in Oregon by a minimum of 10 percent below 2010 levels over a 10-year period." OAR 340-253-0000(2) (Dec 11, 2012).

         The Phase II rules implemented the plan to reduce greenhouse gas emissions over a 10-year period. Ultimately, EQC adopted schedules that require the average carbon intensity of a regulated party's gasoline or diesel to meet a standard that gradually decreased 10 percent from the baseline in 2015 to the standard in 2025. OAR 340-253-8010; OAR 340-253-8020. The Phase II rules require that regulated parties demonstrate compliance with the program by calculating credits and deficits generated by the fuels they produce or import, and generally to balance those credits and deficits at the end of each compliance period. OAR 340-253-1030. Credits are created by producing or importing fuels that have carbon intensities below the annual standard, while deficits are created by producing or importing fuels that have carbon intensities above the annual standard. OAR 340-253-1000(5)(a) - (b). The rules establish an online tracking system that tracks compliance with the program and facilitates the trade of credits between regulated parties, credit generators that opt into the program, and credit brokers (later called aggregators) who assist in trades. OAR 340-253-0620 (Feb 1, 2015). The system facilitates credit trading between those parties with credits and those with deficits, along with the brokers who facilitate such trades, to allow for balancing and compliance at the [296 Or.App. 303] end of each compliance period. OAR 340-253-1050 (Feb 1, 2015). It also serves as a marketplace for the purchase and sale of credits. Id.

         In December 2015, EQC amended the Phase II rules. The amendments increased the baseline carbon intensity of gasoline and diesel fuels, such that importers of those fuels would need more credits if they only imported those fuels. It also increased the credit generation potential of some alternative fuels or fuel substitutes, such as corn ethanol, while decreasing the potential for others, such as soybean biodiesel. The amendments generally established new values, or new procedures for determining values, for other fuels, such as mixed fuels, electricity generators, and alternative fuels. OAR 340-253-0400(3) - (5) (Jan 1, 2016).

         As may be clear from the foregoing discussion, under the LCFS fuel program, fuel producers and importers are not required to sell only fuels that meet the annual fuel standards. Rather, if they produce or import fuels that have a carbon intensity above the annual standard, they generate a deficit that must be offset with a credit generated by a fuel with a carbon intensity below the annual standard. OAR 340-253-1030. Producers or importers may generate their own credits by importing or producing fuels with carbon intensities below the annual standard or by purchasing credits from other credit holders. OAR 340-253-1000 (5)(a); OAR 340-253-1005(1)(b). Producers and importers may carry over small deficits-five percent or less-at the end of a reporting period to the next compliance period without penalty. OAR 340-253-1030(4).

         The rules also incorporate a number of provisions to address cost and fuel supply concerns that may arise under the program. For instance, the rules provide that the Department of Environmental Quality (DEQ) "will issue an order declaring an emergency deferral" of the program's requirements if there is a shortage of a set magnitude of fuel or low carbon fuel necessary for regulated parties to comply with the rules. OAR 340-253-2000(1). In addition, the 2015 Phase II rules require DEQ to calculate monthly the 12-month rolling average price for gasoline and diesel blends. OAR 340-253-2200(2) (Feb 1, 2015). If that price [296 Or.App. 304] exceeds a preestablished threshold due to the costs of compliance with the program, EQC will direct DEQ to implement one or more of various cost-mitigation strategies if such strategies are necessary to mitigate the costs of compliance with the program. OAR 340-253-2200(3) (Feb 1, 2015).[5]Those strategies include suspending various aspects of the program, eliminating compliance with the program entirely for up to one year, or "[a]dopting any other price mitigation strategy that EQC determines to be necessary to effectively mitigate the cost of compliance." OAR 340-253-2200(6) (Feb 1, 2015).

         As we have noted and will discuss in more detail when we reach the merits of petitioners' arguments, after briefing and argument in this appeal occurred, EQC substantially amended all of the Phase II rules. On November 3, 2017, EQC readopted all of the Phase II rules and, in doing so, also amended each rule.

         EQC SUFFICIENTLY EVALUATED THE REQUIRED STATUTORY FACTORS "IN ADOPTING" THE PHASE II RULES

         Petitioners first contend that EQC erred when it promulgated the Phase II rules in 2015 because, they claim, EQC failed to evaluate all of the factors that the legislature required it to evaluate when adopting those rules. As noted, ORS 468A.266(5) directs:

"In adopting rules under this section, the [EQC] shall evaluate: "(a) Safety, feasibility, net reduction of greenhouse gas emissions and cost-effectiveness;
"(b) Potential adverse impacts to public health and the environment, including but not limited to air quality, water quality and the generation and disposal of waste in this state;
"(c) Flexible implementation approaches to minimize compliance costs; and
[296 Or.App. 305] "(d) Technical and economic studies of comparable greenhouse gas emissions reduction measures implemented in other states and any other studies as determined by the commission."

         Petitioners contend that EQC did not evaluate certain of those factors and that we must, as a result, invalidate the rules because EQC's failure means that the Phase II rules were adopted "without compliance with applicable rulemak-ing procedures." ORS 183.400(4)(c).

         In an administrative-rule challenge originally filed in this court, we "shall" declare the challenged rule invalid ...


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