Circuit Courts Continue to Clash Over Clean Air Act PSD Provisions

The Seventh Circuit Court of Appeals recently rejected industry arguments that a facility must increase its maximum potential hourly emissions in order to trigger Prevention of Significant Deterioration (“PSD”)[1] requirements under the Clean Air Act. Expressly rejecting the Fourth Circuit’s approach in Environmental Defense v. Duke Energy Corp.,[2] Judge Posner, writing for the panel in U.S. v. Cinergy Corp.[3], upheld EPA’s interpretation that an increase in annual emissions is sufficient to require full PSD permitting.[4] Though the Seventh Circuit’s decision in Cinergy is a significant victory for EPA, the pending Supreme Court appeal of Duke Energy, and contrary decisions by the Fourth Circuit and United States District Court for the Northern District of Alabama currently on appeal to the Eleventh Circuit[5], leave questions concerning the durability of the decision. Earlier this summer the Supreme Court granted certiorari in the Duke Energy, case[6] and the court is scheduled to hear oral argument on November 1, 2006.

Background on Prevention of Significant Deterioration (“PSD”)

Under the Clean Air Act, new or modified facilities that are major stationary sources[7] are subject to two distinct programs: the New Source Performance Standards (“NSPS”) and the NSR/PSD program.[8] The main requirements of the PSD program are: (1) the installation of Best Available Control Technology (“BACT”)[9]; and (2) the performance of an air impacts analysis to demonstrate that the air quality is not being significantly degraded and that the National Ambient Air Quality Standards are being met.

While PSD is always required for new major stationary sources, existing facilities were grandfathered, requiring PSD permitting and installation of BACT only when there is a “major modification” to the facility. The Clean Air Act defines the term “modification” for purposes of both the NSPS and PSD programs as “any physical change in, or change in the method of operation of, a stationary source which increases the amount of any air pollutant emitted by such source[.]”[10] For an existing major stationary source, major modifications are subject to PSD review. A “major modification” is defined as a physical change or a change in the method of operation of a major stationary source which would result in a contemporaneous significant net emissions increase in the emissions of any regulated pollutant. Certain exclusions apply, including an exclusion for routine repair and maintenance and increases in production.

Thus, under the NSPS and PSD programs, the first step in determining whether a “modification” has occurred, and under PSD whether a “major modification” has occurred, is a determination of whether there is a physical change or a change in the method of operation.[11] The second step in the NSPS and PSD analysis is determining whether the change results in an increase in emissions. The test under this second step has varied under EPA regulations interpreting the two programs. Under the NSPS program, for example, an increase in emissions is based on maximum hourly emissions, measured in kilograms per hour. In contrast, the test for increases in emissions under the PSD program has been based on annual emissions, measured in tons per year. The difference between these two methods of determining whether there is a significant increase in emissions can be significant, with the annual emissions test resulting in more facilities being required to install expensive BACT retrofits while achieving concomitant reductions in emissions.

The Issue: How to Measure Whether an Increase in Emissions Has Occurred?

At issue in both Duke Power and Cinergy is the applicability of EPA’s New Source Review Program to projects at a facility involving maintenance, repair and other changes in operations. During the 1990s, EPA filed a number of enforcement actions against coal-fired power plants for failing to obtain permits before making modifications to generating units. A major issue in those cases was how significant increases in emissions should be measured. In U.S. v. Ohio Edison,[12] the U.S. District Court for the Southern District of Ohio court upheld EPA’s interpretation that increases in emissions resulting from modifications should be measured by comparing actual annual emissions before and after the change, rejecting Ohio Edison’s arguments that projects that do not increase a facility’s maximum hourly emission rate do not trigger permitting under the PSD program. Similarly, in New York v. EPA,[13], the D.C. Circuit held that the Clean Air Act’s applicable regulations required emissions to be measured on an annual basis.

Creating a circuit split, the Fourth Circuit Court of Appeals in Duke Energy held that the new source review permitting requirements only apply when a modification results in an increase in the hourly rate of emissions.[14] The Seventh Circuit in Cinergy adopted the D.C. Circuit’s approach in Ohio Edison deferring to EPA’s interpretation of the regulations. Expressly rejecting the Fourth Circuit’s approach, Judge Posner explained that the Fourth Circuit “stepped out of bounds” and that only the United States Court of Appeal for the District of Columbia has jurisdiction to review the validity of Clean Air Act regulations.

Most recently, the United States Department of Justice filed an appeal to the Eleventh Circuit in a similar new source review case.[15] In United States v. Alabama Power Co., the government had brought an enforcement action against Alabama Power alleging that the company made modifications to its power plants that resulted in a major modification and increased emissions without complying with the PSD requirements. Consistent with the Fourth Circuit, the United States District Court for the Northern District of Alabama sided with Alabama Power and ruled that an emissions increase should be interpreted as an increase in the maximum potential hourly emissions rate.

Supreme Court Appeal

This summer, the Supreme Court agreed to hear the appeal of the Fourth Circuit’s decision in Duke Energy. Environmental groups, along with the District of Columbia and fourteen states, argued in seeking the Supreme Court’s review, that the Fourth Circuit acted outside its authority under the Clean Air Act because regulations can only be challenged in the D.C. Circuit, and that the Fourth Circuit’s decision was incorrect. The groups also noted that the Fourth Circuit’s decision clashed with the D.C Circuit’s 2005 decision in New York v. EPA. The Supreme Court certified two questions for hearing:

1. Whether the Fourth Circuit’s decision violated Section 307(b) of the Clean Air Act, which provides that national Clean Air Act regulations are subject to challenge “only” in the D.C. Circuit by petition for review filed within 60 days of their promulgation, and “shall not be subject to judicial review” in enforcement proceedings, 42 U.S.C. 7607(b); and

2. Whether the Clean Air Act’s definition of “modification,” which turns on whether there is an “increase” in emissions and which applies to both the NSPS and PSD programs, rendered unlawful EPA’s longstanding regulatory test defining PSD “increases” by reference to actual, annual emissions.

When the Supreme Court granted certiorari in the Duke Energy case, many commentators believed that the Supreme Court accepted the case primarily because of its jurisdictional question (i.e., whether any such challenge must be heard in the D.C. Circuit). With the current split on the substantive question among the Fourth, Seventh and D.C. Circuits, and with another appeal on the same substantive issue currently pending in the Eleventh Circuit, the Supreme Court may be more likely to also address the substantive issues.

If the Supreme Court overturns the Fourth Circuit’s decision in Duke Energy and EPA’s use of annual emissions is upheld, consistent with the Seventh Circuit decision, this could be very costly to industry. Lengthy and expensive PSD permitting and retrofitting to apply BACT technology would be required for the facilities subject to these enforcement actions, and could be required at other facilities on a more frequent basis. The quandary over whether emissions should be measured on an annual or hourly basis may be resolved for future modifications, however, due to pending regulations proposed by EPA. In October 2005, EPA proposed additional changes to its PSD permitting program that would apply the hourly emissions test nationwide. 70 Fed. Reg. 61,081 (2005).[16] These proposed regulations are still pending although the comment period has closed.