Sparks Continue to Fly Over Cooling Water Intake Structures as Fifth Circuit Approves Oil and Gas Phase III Rule and EPA Issues Contingent Valuation Survey

In the continuing saga of the Environmental Protection Agency’s (“EPA”) regulations governing cooling water intake structures (“CWIS”), the Fifth Circuit recently granted EPA’s request to voluntarily remand the portion of the “Phase III” rule governing existing non-utility facilities. The court also upheld the portion of the Phase III rule setting national categorical standards for CWIS at new offshore oil and gas facilities. The Fifth Circuit’s decision, ConocoPhillips Co. v. EPA,[1] is the latest twist in a series of CWIS rulemakings stretching back over fifteen years, including review by the U.S. Supreme Court last term in Entergy Corp. v. Riverkeeper, Inc.[2] The partial remand sets the stage for a new rule combining existing utility (Phase II) and non-utility (Phase III) facilities later this year. The ruling also comes just two days after EPA announced plans to conduct a survey of what the public would be willing to pay to protect aquatic organisms from CWIS, a move intended to support a new cost-benefit analysis of EPA’s upcoming proposal.[3] EPA is accepting comments on the proposed survey through September 20, 2010.

Background on EPA’s CWIS Regulations

Industrial facilities use cooling water to absorb heat in a variety of processes, from manufacturing to power generation. In the process of withdrawing the cooling water from nearby rivers and lakes, these facilities “impinge” and “entrain” fish and other aquatic creatures against the screens covering the intake structures or within the cooling mechanisms. Section 316(b) of the Clean Water Act specifies that standards governing the “location, design, construction, and capacity” of cooling water intake structures must “reflect the best technology available” for “minimizing [the] adverse environmental impact[s]” of CWIS. EPA first promulgated CWIS regulations in 1976; however, it withdrew a majority of the rules following a court challenge.[4] Under the rules that remained, each NPDES permitting authority was left to use its “best professional judgment” to determine the “best technology available” for CWIS at each facility, taking into account site-specific conditions.[5]

In 1995, EPA entered into a consent decree under which it agreed to divide the § 316(b) rulemaking into three phases. The Phase I rule, which EPA published in 2001, governs all new facilities above a certain intake volume threshold, with the exception of new offshore oil rigs (which were reserved for Phase III of the rulemaking).[6] The Phase II rule, which was finalized in 2004, set standards for CWIS at large, existing power plants;[7] while the Phase III rule - issued in 2006 and the subject of the Fifth Circuit’s ruling in ConocoPhillips - set standards for new offshore oil and gas rigs and all other existing facilities.[8]

The “Cost-Benefit Alternative” and the Supreme Court’s Entergy Decision

EPA’s Phase I rule concluded that “closed-cycle cooling technology”[9] was the “best technology available” for minimizing the adverse environmental impacts of cooling water intake by the sources subject to Phase I and set national standards based on that technology.[10] Unlike Phase I, Phase II’s national standards did not require closed-cycle cooling; rather, facilities could select and implement one of five alternatives for achieving compliance with the national standards.[11] Phase II also created two site-specific variances from the national standards, including the so-called “cost-benefit alternative.”[12] This alternative allowed local permitting agencies to make a site-specific determination of the best technology available if the facility could demonstrate that the costs of compliance with the national standards were significantly greater than the benefits of compliance.[13]

EPA’s Phase I and II rules were both challenged in court. The Phase I rule, with limited exceptions, was upheld by the Second Circuit Court of Appeals.[14] In 2007, however, the Second Circuit rejected EPA’s Phase II rule, holding that EPA lacked the statutory authority to consider a cost-benefit analysis when setting CWIS standards under § 316(b).[15] In response, EPA suspended the Phase II rule while the Second Circuit’s decision was appealed to the U.S. Supreme Court.[16] In Entergy Corp. v. Riverkeeper, Inc.[17] issued last term, the Supreme Court reversed the Second Circuit, holding that while EPA was not required to employ a cost-benefit analysis under § 316(b), nothing in the statutory language prohibited EPA from doing so.[18]

The Phase III Litigation and the Fifth Circuit’s ConocoPhillips Decision

Issued in 2006, EPA’s Phase III rule addressed two types of facilities that employ CWIS: (1) existing facilities; and (2) new offshore oil and gas rigs. Unlike the national standards and compliance alternatives established in Phase II, the existing facilities portion of EPA’s Phase III rule retained the status quo: it would rely on state and federal permit writers’ “best professional judgment” to determine the best technology available for CWIS at each specific location. For new offshore oil and gas rigs, however, the Phase III rule established national performance standards.[19] The rule differentiates between “fixed” and “non-fixed” rigs. Fixed rigs may choose from two compliance alternatives, Track I or II; while non-fixed rigs are limited to Track I only. Track I requires facilities to minimize entrainment by reducing through-screen velocity to 0.5 f/s or less. Track II permits the use of “alternative technologies” to reduce adverse environmental impacts to a “comparable level” to the Track I requirements. In addition, fixed facilities that do not use a “sea chest” must utilize technologies to prevent fish entrainment under either Track I or II.

Environmental and industry groups challenged the Phase III rule, and the cases were consolidated before the Fifth Circuit in ConocoPhillips v. EPA. Before the Fifth Circuit could hear oral argument, however, the case was stayed pending the Supreme Court’s review in Entergy Corp. v. Riverkeeper, Inc. Following the Entergy decision, EPA and the environmental petitioners sought voluntary remand of the existing facilities portion of the Phase III rule in order to combine it with a new Phase II proposal. EPA did not seek remand of the oil and gas portion of the Phase III rule in light of the Entergy decision.

In ConocoPhillips, the Fifth Circuit granted EPA’s request to remand the existing facilities portion of the Phase III rule, explaining that “it is imminently reasonable to address together the substantial similarities of fact between … the Phase II Rule and the instant Phase III Rule in light of Entergy Corp.”[20] The court also rejected ConocoPhillips’ arguments that the new offshore oil and gas facilities Phase III rule was arbitrary and capricious. In its original briefing, ConocoPhillips faulted EPA for failing to conduct a cost-benefit analysis, which it argued was mandated by §316(b). The Fifth Circuit noted, however, that the Entergy decision had “neutralized” these arguments.[21] Therefore, the court addressed ConocoPhillips’ two remaining objections: (1) that EPA had failed to properly consider facility location in setting the national standards, and (2) that EPA’s use of generalized, “qualitative” data to estimate the environmental impacts caused by CWIS at new oil and gas rigs was arbitrary and capricious.

The court rejected the first argument, concluding that although EPA “readily acknowledge[d]” that it did not attempt to estimate the likely benefits that would be achieved in specific locations, it had nonetheless relied on sufficient information to support the promulgation of national standards.[22] Regarding the second argument, the court held that the EPA was entitled to utilize qualitative data in the absence of any quantitative data, explaining that “when an agency is faced with such informational lacunae, the agency is well within its discretion to regulate on the basis of available information rather than to await the development of information in the future.”[23] On these grounds, the Fifth Circuit upheld the rule.

EPA’s Proposed Rulemaking for Existing Facilities

EPA has announced that it expects to issue a new proposed CWIS rule covering existing facilities later this year.[24] The new proposal will regulate the existing facilities that were originally addressed in the Phase II and Phase III rules – large power plants and manufacturing facilities. In support of the new rulemaking, EPA recently announced preparations to conduct a survey that seeks to quantify the amount that the public would be willing to pay to protect against the losses associated with CWIS.[25] Specifically, EPA plans to contact 2000 households in a variety of geographic locations to estimate whether and how much individuals would be willing to increase their cost of living to reduce impingement and entrainment losses of fish and other aquatic life and to improve commercial fish sustainability, long-term fish populations, and the condition of aquatic ecosystems.

EPA’s current survey builds on an earlier survey effort, which began during the Phase III rulemaking but was not completed, and seeks to collect data on both “use” and “non-use” values associated with the potential benefits attained by § 316(b) regulations.[26] EPA’s supporting statement summarizes: “the survey will provide estimates of total use plus non-use values, will allow estimates of value associated with specific choice attributes (following standard methods for choice experiments), and will also allow the flexibility to provide some insight into the relative importance of use versus non-use values in the 316(b) context.”[27] While EPA has identified “many studies in the environmental economics literature that quantify benefits or willingness to pay associated with various types of water quality and aquatic habitat changes”; EPA asserts that its current survey effort is “unique,” because the Agency has not identified any previous studies that have allowed for the “direct estimation of the social benefits of nationwide reductions in fish losses for all species (including forage, recreational, and commercial species) affected by the proposed 316(b) regulation.”[28] EPA is accepting comments on the survey until September 20, 2010.[29]

Conclusion

Although the EPA’s CWIS rulemaking was partially upheld in ConocoPhillips, the voluntary remand of Phase III for existing facilities, and the plan to produce a combined Phase II/Phase III rule in the near future, sets the stage for the another round of litigation. Throwing EPA’s recently announced survey into the mix undoubtedly will further stir the pot.

For more information regarding EPA’s CWIS rulemaking under § 316(b), contact Russell Prugh or any member of Marten Law’s Water Quality practice group.