By Joshua T. Bledsoe and Max Friedman

As discussed in a previous post, the California Court of Appeal for the Fifth Appellate District (Court of Appeal) ruled on April 10, 2017 that the California Air Resources Board (ARB) had failed to properly follow a writ of peremptory mandate (the Writ) requiring ARB to remedy violations of the California Environmental Quality Act (CEQA) that occurred during adoption of the original Low Carbon Fuel Standard (LCFS). The Court of Appeal largely agreed with the petitioner, POET, LLC (POET), a South Dakota-based ethanol producer, holding that ARB had failed to comply with CEQA’s requirement that it analyze the degree to which nitrogen oxide (NOx) emissions from biodiesel fuels had been and would be impacted by the implementation of the LCFS. Indeed, the Court of Appeal found that ARB had acted in bad faith in selecting a definition of the “CEQA project” that failed to account for NOx emissions attributable to the original LCFS.

As a result, the Court of Appeal directed the Fresno County Superior Court (Superior Court) to deny ARB’s request for dismissal of the Writ and to set aside its 2015 approval of the CEQA analysis regarding NOx emissions from biodiesel until ARB had conducted a revised analysis. The Court of Appeal also froze the carbon intensity (CI) targets for diesel fuel at 2017 levels until ARB had completed its revised NOx assessment. The Superior Court implemented the Court of Appeal’s ruling on April 20, 2017, vacating its prior discharge of the Writ and modifying the reissued Writ as required by the higher court. However, on April 28, 2017 the Superior Court vacated its April 20th order as premature due to subsequent filings by ARB.

On April 25, 2017, ARB and intervenor-respondent the Natural Resources Defense Council (NRDC, and together, Respondents) filed a petition with the Court of Appeal requesting rehearing and modification of its prior ruling. While asserting that ARB already had commenced its work on the revised NOx analysis, Respondents requested that the Court of Appeal make modifications to its prior ruling to clarify alleged ambiguities. Respondents requested that the Court of Appeal clarify which specific provisions of the LCFS regulations the Court of Appeal was targeting to effectuate freezing the diesel CI mandates at 2017 levels. ARB interpreted the freeze to apply to Table 2 of Section 95484(c) of the LCFS regulations, which sets the CI targets applicable to diesel fuel and its substitutes, but wished to confirm its interpretation so as to avoid future litigation over the Court of Appeal’s intent.

Second, Respondents sought clarification that the Court of Appeal did not intend to require an agency amending any regulation to define the “CEQA project” as including the original regulation, potentially even when the original regulation had gone unchallenged or been upheld. ARB understood the Court of Appeal to mean that the project included the original LCFS only for those portions of the CEQA analysis addressing NOx impacts. ARB sought to confirm that the Court of Appeal did not intend to interpret the term “project” so broadly, either for all portions of this case or for future agency actions. ARB argued that such a broad reading could significantly increase the time and expense necessary for agencies to revise even unchallenged regulations, with ambiguity increasing the likelihood of future CEQA litigation on this issue.

Finally, Respondents attempted to push back against the Court of Appeal’s finding that ARB had not acted in good faith when conducting its revised CEQA process with respect to NOx emissions. ARB argued that it had not previously been obvious that the instructions in the Writ contemplated an interpretation of the “project” as including the original regulation, and that ARB had acted reasonably, transparently, and thoroughly in accordance with its understanding of the Writ, without receiving any objections to its approach until after the fact.

On May 5, 2017, the Court of Appeal granted Respondents’ petition for rehearing and directed POET and other Petitioners to respond to Respondents’ brief on the proposed modifications. Petitioners filed their response on May 16, 2017, arguing that the Court of Appeal should deny the modifications sought by Respondents. POET disputed ARB’s reading that the Court intended the “project” to encompass the original LCFS regulation only for purposes of the NOx emissions section, rather than for the entire LCFS regulatory regime. POET suggested that the Court of Appeal’s intent was, in fact, to assert that the project included both the original and revised LCFS regulations (as well as the 2015 Alternative Diesel Fuels (ADF) regulations) for all purposes. Petitioners suggested that ARB’s interpretation was contrary to established CEQA precedent, constituted a major revision of the ruling, and should be rejected.

Similarly, Petitioners disputed ARB’s claims that it had acted in good faith and called upon the Court of Appeal to reject Respondents’ request that the bad faith portion of the opinion be struck. Petitioners challenged ARB’s argument that its interpretation of “project” was reasonable due to the novel nature of the Court of Appeal’s application of the term to a regulatory scheme; POET suggested that there was nothing novel or ambiguous about the situation. Petitioners also contested ARB’s contention that it had provided early notice of its narrow definition of the CEQA project and that it had disclosed the quantity of earlier NOx emissions in its Draft Environmental Assessment. POET did not oppose Respondents’ request for clarification regarding identification of the particular regulations to freeze, but suggested that clarification was unnecessary.

On May 24, 2017, the Court of Appeal filed an order stating that no further briefing or oral argument would be required, and that the matter was deemed submitted. A week later, on May 30, 2017, the Court released its revised opinion. The Court of Appeal only made a few minor modifications to its original decision. In short, the revised opinion changes little about the Court of Appeal’s original opinion, although it does provide ARB and other LCFS stakeholders with a greater degree of certainty regarding the precise meaning of certain sections of the opinion.

The Court of Appeal adopted ARB’s suggestions for clarifying that the freeze applies only to the CI standards applicable to diesel fuel and its substitutes, as set out in Table 2 of Section 95484(c) of LCFS regulations. The Court of Appeal also partially clarified its intent regarding the scope of the “CEQA project.” While the Court of Appeal did not adopt ARB’s suggested changes to the opinion, it did nod toward the agency’s concern that a broad definition of the “project” could have implications for future litigation. The Court modified one sentence, in an apparent effort to confine its definition of the project to the context of this case, stating: “Therefore, we conclude that for purposes of CEQA the activities associated with the original LCFS regulations, the 2015 LCFS regulations, and the ADF regulations constitute a single project under the circumstances of this case.”[1] This change was not nearly as expansive as what ARB had requested, but it appears to be an effort to limit the Court of Appeal’s interpretation to the facts of the case. Additionally, the Court of Appeal declined to amend its language regarding ARB’s lack of good faith in assessing NOx impacts. While the Court was willing to clarify certain ambiguities in its original opinion, it was unwilling to reconsider substantive issues, such as whether ARB had acted in deliberate bad faith.

This revised opinion pauses judicial proceedings in this particular case regarding the original LCFS (POET I), at least until ARB has completed its revised NOx analysis and seeks discharge of the reissued Writ. However, the parallel case between POET and ARB regarding the readopted LCFS (POET II) is slated for oral argument in the Superior Court on July 26, 2017. Many of the same issues litigated in POET I will be before the Superior Court in POET II court, which is why the Superior Court previously delayed oral argument until after POET I had been resolved by the Court of Appeal. While it is likely that the Superior Court in POET II will borrow from the Court of Appeal’s recent POET I ruling (indeed, some of the issues in POET II may be precluded by res judicata), there remains a real possibility that the Superior Court in POET II could upend certain other portions of the readopted LCFS regulations. This added uncertainty will not be resolved for months—or even longer if the POET II ruling is appealed.

[1] Emphasis added to indicate new text.