Back to the Future: EPA Renews New Source Review Enforcement

Clinton-era enforcement of the Clean Air Act (“CAA”) returned last month, as the Justice Department filed a complaint against Westar Energy, Inc. for allegedly failing to install the best available control technology (“BACT”) at one or more of its coal-fired power plants. The complaint, brought under the New Source Review (“NSR”) provisions of the CAA, revives a line of NSR enforcement cases that date to an initiative the Clinton administration began in 1999.

Clinton-era enforcement of the Clean Air Act (“CAA”) returned last month, as the Justice Department filed a complaint against Westar Energy, Inc. for allegedly failing to install the best available control technology (“BACT”) at one or more of its coal-fired power plants. The complaint, brought under the New Source Review (“NSR”) provisions of the CAA,[1] revives a line of NSR enforcement cases that date to an initiative the Clinton administration began in 1999.

Clean Air Act New Source Review

The CAA sets forth requirements for the prevention of significant deterioration (“PSD”) of air quality in areas that already meet EPA’s national ambient air quality standards (“NAAQS”).[2] Section 165(a) of the Act, among other things, prohibits the construction and operation of a “major emitting facility” in an attainment area without a PSD Permit. The CAA defines “construction” to include “modification.” Modification generally means any physical change in, or change in the method of operation of, a stationary source that increases pollution emissions or results in new pollutants not previously emitted.[3] In order to obtain a PSD permit, section 165(a) requires, in part, that the facility use best available control technology (“BACT”) for each pollutant that the facility emits.[4] Facilities that fail to obtain these permits are subject to injunctive relief and significant civil penalties.[5]

The PSD regulations clarify the statute by limiting the PSD permit requirement to major modifications.[6] The rules define a “major modification” as a change that would result in a significant net increase in emissions,[7] and set “significance” thresholds for each of the regulated NSR pollutants.[8] The rules also identify physical changes or changes in the method of operation that will not be considered “modifications” for purposes of PSD permitting, including “routine maintenance, repair and replacement” (“RMRR”).[9] Many of the NSR enforcement disputes with utilities to date have had to do with whether a modification is exempt from permitting requirements because it was a “routine” repair or replacement. Without such an exception, major sources, such as power plants, that are modified in ways that could significantly increase their actual or potential emissions must demonstrate that they also implemented the best available pollution control technology, or be subject to potential regulatory enforcement or litigation.

In the complaint brought by the Obama Administration against Westar, DOJ alleges that on several occasions between 1994 and the present, Westar modified and operated three generating units at the Jeffrey Energy Center, a coal-fired electric plant in St. Marys, Kansas, without first obtaining permits authorizing the construction and without installing and employing BACT. DOJ asserts that by replacing front re-heaters, final superheaters, and economizers in several separate units within the Energy Center, Westar conducted “major modifications” and then continued operations without a PSD permit or applying BACT for sulfur dioxide, nitrogen oxide, and various particulate matter. Finally, DOJ also alleges that Westar failed to complete an application for a Title V operating permit for the Jeffrey Energy Center that identified all applicable requirements, that certified compliance with these requirements, and that contained a compliance plan for all areas for which the Center was not in compliance. As for relief, DOJ requested that the court enjoin Westar from operating the Jeffrey Energy Center unless and until it was in compliance with the CAA and other applicable regulations, order Westar to install BACT for each pollutant, apply for PSD and Title V program permits, conduct audits to determine if additional major modifications took place, mitigate the environmental harm caused by it’s CAA violations, and assess civil penalties.

Earlier NSR Litigation and Rulemaking under the Clinton and Bush Administrations

The Clinton Administration brought a significant number of NSR lawsuits in the late 1990s.[10] The government’s success in these suits has been mixed, at best. Although two federal district courts have ruled against the electric utility industry, two federal courts have ruled in their favor, including the TVA’s win in the 11th Circuit Court of Appeals[11] and Duke Energy’s success (later vacated by the Supreme Court) in 2006 in the Fourth Circuit.

Shifting politics have also played a role in the pursuit of the NSR litigation. During the Bush administration, EPA – even while continuing to litigate the cases filed under the Clinton Administration – simultaneously sought to overhaul the NSR program through rulemaking. As part of these efforts, in December 2002, EPA proposed a rule attempting to clarify the “routine maintenance, repair and replacement” exception by specifying activity categories that would be considered RMRR without regard to other considerations.[12] This rule was finalized in October 2003, significantly reshaping the contours of the RMRR rule by declaring a set of equipment replacement activities that would be viewed as per se RMRR, in contrast to the previous case-by-case approach taken by EPA. It would not have been a defense to the pending CAA enforcement actions based on failure to meet RMRR, but it provided the possibility of clarifying the uncertainty surrounding the RMRR exception going forward.

However, fifteen states and several localities and environmental groups filed multiple lawsuits in the D.C. Circuit, challenging the RMRR rule on the basis that if went beyond EPA’s authority under the CAA. The suits were consolidated under State of New York v. EPA.[13] On December 24, 2003, the court granted the petitioners’ motion to stay the rule pending the court’s full review, finding that the petitioners had demonstrated the irreparable harm and likelihood of success on the merits. By suspending the new rule, the court effectively re-instated the previous case-by-case approach to determining whether changes to a facility fell within the RMRR exception.

Bush also proposed in 2001 the “Clear Skies” legislation that many viewed as an alternative to the NSR enforcement-by-litigation campaign. When this bill failed to pass Congress, EPA turned to rule-making and issued the Clean Air Interstate Rule (“CAIR”) in an attempt to limit power plant pollution east of the Mississippi. CAIR would have limited power plant emissions of sulfur dioxide (SO2) and nitrogen oxide (NOx), as precursors to fine particulates and ozone, in 28 states and the District of Columbia. The rule was a response to years of complaints from “downwind” states that they could not improve their air quality without reductions in out-of-state upwind sources. However, The D.C. Circuit found that this rule ran afoul of limits on EPA’s ability to regulate emissions from power plants that result from the structure of the federal Clean Air Act, and invalidated this rule.[14]

Case Studies

Two of the cases initiated by the Clinton administration – Environmental Defense Fund v. Duke Energy Corp. and United States v. Cinergy Corp. stand out for their significance (Duke) and longevity (Cinergy), and may provide roadmaps for the handling of Westar and other similar cases.

Environmental Defense Fund v. Duke Energy Corp.[15]

At the request of EPA, DOJ initiated an action against Duke Energy Corporation in December 2000, alleging that it made modifications to and operated eight coal-fired electrical generating plants in North Carolina and South Caroline in violation of the PSD provisions of the CAA. Unlike some of the utilities that settled with EPA, Duke and several other companies denied any wrongdoing, arguing that EPA had used an incorrect test to determine compliance with the NSR program, and that the power plants had simply conducted routine maintenance, repair, and replacement. The U.S. District Court for the Middle District of North Carolina agreed, granting Duke’s motion for summary judgment. The Fourth Circuit Court of Appeals also agreed, finding that Duke did not violate the CAA when it upgraded its power plants in the 1980s and 1990s.[16]

Nine years after the initiation of the litigation, the Supreme Court granted certiorari in the fall of 2006 on two issues: 1) whether the Fourth Circuit encroached on the D.C. Circuit’s exclusive jurisdiction under the CAA by reviewing nationally applicable regulations in an enforcement proceeding; and 2) whether the CAA required EPA to interpret the statutory term “modification” consistently in its NSR and New Source Performance Standards. Duke did not dispute that annual emissions of nitrogen oxides, sulfur dioxide and other pollutants had gone up after the modifications were made, but instead argued that the increases only occurred because they were allowed to run their coal-fired units longer without interruption. EPA countered that its use of the annual emissions test, as opposed to hourly emissions, was the proper vehicle to determine compliance with the NSR requirements.

Holding that the Fourth Circuit engaged in a “form of judicial review” that the CAA reserves to the exclusive jurisdiction of the D.C. Circuit, the Supreme Court remanded the case to the Fourth Circuit to reconsider its jurisdiction. The Supreme Court also addressed the test for emissions increases under the PSD regulations, rejecting the Fourth Circuit’s conclusions that the PSD regulations had to conform to their NSPS counterparts, and declared that the ambiguity in the PSD regulations allowed EPA to interpret them as it saw fit.[17] While the Supreme Court rejected Duke’s hourly emissions test argument, it did not address whether projects like Duke Energy’s are excluded from NSR under the “routine maintenance, repair and replacement” exclusion. Further, on remand, it left open the possibility for Duke or other companies to argue that EPA’s construction of PSD “modifications” reflected a retroactive change of position that was inconsistent with the agency’s prior accepted practice.

United States v. Cinergy Corp.

DOJ and a collection of state and environmental groups first sued Cinergy and several other power companies in 1999, filing the case in the United States District Court for the Southern District of Indiana. Cinergy and DOJ nearly settled the case right before the end of the Clinton administration, but after President Bush took office, Cinergy declined settlement, based on President Bush’s statement that he would direct EPA to revise the underlying air pollution regulations. Subsequently, the court held that, in determining whether a modification would produce a significant net emission increase, and so trigger PSD, post-project emissions had to be determined by a pre-project projection, rather than a post-project measurement. The court also held that the company had to calculate an increase in the amount of any pollutant emitted by a source based on a yearly, not hourly emissions rate. Finally, the court held that if a physical change resulted in a plant increasing its operating hours, the projected actual emissions had to be measured using projected actual operating hours and projected actual production rates, not the pre-project operating hours. [18]

After another round through the District Court, a three-judge panel for the Seventh Circuit Court of Appeals ruled against Cinergy. That court held that because both the base emissions rate from which a significant increase was calculated and the amount of the increase were in terms of tons per year, not per hour, the natural reading of the PSD requirements was that any physical change or change in operating methods that increased annual emissions was covered. The Seventh Circuit sent case back to U.S. District Court in Indianapolis in August 2006.

The Supreme Court declined to hear the case in April 2007. In May 2008, a federal jury in Indianapolis had dismissed 10 counts brought against Cinergy, but on December 19, 2008, a federal district judge granted a motion for retrial due to party misconduct, finding that Cinergy acted improperly during the jury trial in the case by failing to disclose a consulting agreement between Cinergy and a key witness.

Conclusion

Despite nearly a decade of litigation and many efforts at rulemaking, there remains little clear guidance as to what projects at existing facilities that may trigger NSR. Regardless, the recent complaint against Westar is a signal to utilities to prepare for an uptick in NSR enforcement and potential litigation over past, and potentially future, modifications.

For more information, please contact any member of the Air Quality practice group.