What's It All About?

Courts create confusion with differing decisions on EPA actions

Regulated facilities can expect change with a capital C in 2009 in the areas of global warming, hazardous air pollutants, new source review, and enforcement. These changes will come from the Obama administration, rules promulgated in the final days of the Bush administration, and judicial opinions rejecting or modifying past U.S. Environmental Protection Agency actions.

Global Warming
In its 2007 decision in Massachusetts v. EPA, the U.S. Supreme Court ruled that EPA has the authority to regulate greenhouse gases under the Clean Air Act, giving traction to efforts to control global warming.

Last July, EPA issued an Advance Notice of Proposed Rulemaking (ANPR) that suggested a wide variety of possible options but set no clear direction for the path forward. In the meantime, public interest groups continued to block all new source review (NSR) permits for major sources of greenhouse gases until permitting authorities set limits on those emissions.

Last November, EPA's Environmental Appeals Board (EAB) issued an opinion on the Deseret Power Electric Cooperative ruling that EPA Region 8 provided inadequate reasons for exempting a coal-fired unit at a power plant from carbon dioxide limitations. The board remanded the permit decision to the region. That decision is broadly interpreted as putting at least a temporary block on pending or recently completed NSR permit decisions where greenhouse gas challenges have been mounted.

Neither the ANPR nor the Deseret decision specifically requires EPA to adopt regulations or impose permit limitations on greenhouse gas emissions. In fact, both actions identified significant obstacles to regulating those emissions under the current regulatory and permitting framework. Both decisions encouraged Congress to address this issue as soon as possible.

On Dec. 18, 2008, EPA Administrator Stephen Johnson issued an interpretive memorandum that carbon dioxide was not subject to regulation under prevention of significant deterioration (PSD). "EPA interprets the definition of 'regulated NSR pollutant' in 40 C.F.R. 52.21(b)(50) to exclude pollutants for which EPA regulations only require monitoring or reporting but to include each pollutant subject to either a provision in the Clean Air Act or regulation promulgated by EPA under the Clean Air Act that requires actual control of emissions of that pollutant." Presumably, in new PSD decisions, EPA will use this interpretation, and public interest groups again will appeal those decisions.

Hazardous Air Pollutants
EPA has had limited success defending its approach to hazardous air pollutant (HAP) regulation. The first of the agency's court losses came in the March 2007 case, Sierra Club v. EPA, vacating the maximum available control technology, or MACT, standards for brick and ceramic kilns. The D.C. Circuit also handed EPA a loss in the MACT standards for industrial boilers and process heaters (Boiler MACT) and the commercial industrial solid waste incineration MACT standards under Section 129. The court also vacated and remanded portions of the MACT standards regulating plywood and composite wood products.

In March 2005, EPA chose to regulate mercury emissions from coal-fired electric generating units under the New Source Performance Standards (NSPS) provisions of Section 111, rather than under its Section 112 air toxics source category list. In doing so, the agency concluded that regulation under Section112 was no longer "appropriate" or "necessary."

The agency issued NSPS emission standards under a voluntary "cap-and-trade" program called the Clean Air Mercury Rule (CAMR). In February 2008, the D.C. Circuit Court ruled that EPA had illegally substituted a mercury pollution trading scheme for the protections required by the HAP requirements (State of New Jersey v. EPA). The court's frustration was evident in the language accusing EPA of "deploying the logic of the Queen of Hearts, substituting EPA's desires for the plain text of section 112(c)(9)." The CAMR rule had relied upon significant reductions in mercury emissions to be achieved under the Clean Air Interstate Rule. In July 2008, the D.C. Circuit invalidated that rule in State of North Carolina v. EPA.

These HAP rule invalidations are of more than academic interest to the affected industries. Under the act, selected source categories must have installed appropriate HAP control technology by specified dates. If EPA had not adopted appropriate regulatory standards by the deadline, Section 112(j) of the act (the MACT Hammer) requires affected existing facilities to conduct a case-by-case analysis of the appropriate level of control and submit it to their permitting authorities for approval. Section 112(g) requires the same case-by-case MACT action for new or modified sources where no regulatory standard exists. EPA has taken the position that where courts have invalidated a standard, facilities must submit permit applications under the case-by-case requirements of Section 122 (j) or (g).

Originally, Illinois was the only state that requested existing facilities to submit the Part 1 applications, requesting a case-by-case determination for units subject to the invalidated Boiler MACT. Illinois made it clear that it did not intend to act on those applications but wanted to have the applications on file to prevent citizen suits against the facilities or challenges to the adequacy of the state program. Since then, several states have requested existing facilities to submit Part 1 applications for units subject to an invalidated MACT standard. Few if any states are actually processing the applications and making case-by-case determinations of the appropriate control technology for existing units. New or modified units subject to an invalidated MACT standard cannot be constructed until the permitting authority has issued a formal Section 112(g) case-by-case MACT for that unit, a decision affirmed by the U.S. District Court for the Southern District of North Carolina in Southern Alliance for Clean Energy v. Duke Energy.

Perhaps the most potentially disruptive decision to MACT standards was a December 2008 Christmas present to EPA from the D.C. Court of Appeals in Sierra Club v. EPA, regarding startup, shutdown, and malfunction (SSM) requirements. EPA regulations had embraced, "the general principle that compliance with a MACT standard is not mandatory during periods of [SSM]." The court reviewed Section 302(k) of the act, which defines "emission standard" as "a requirement established by the state or the administrator which limits the quantity, rate, or concentration of emissions of air pollutants on a continuous basis," and concluded that exempting SSM from MACT compliance was inappropriate. One noteworthy aspect of the case is that the Section 302 "continuous compliance" language is not MACT specific. It affects virtually all of EPA’s air regulations including new source performance standards, NSR, and other programs. If this decision gains widespread applicability, virtually all permit limitations could require some form of continuous compliance requirements for SSM conditions.

Prompted by a series of public interest lawsuits and subsequent court orders, EPA has been proposing a host of new HAP regulations at the close of the Bush administration. These include both the area source rules and the residual risk rules.

Section 112(k) of the act requires EPA to adopt HAP standards applicable to area sources -- those with the potential to emit less than 10 tons per year of a single HAP and less than 25 tons per year of a combination of HAPs. These regulations apply regardless of the source category or source status. The requirements may be included in a Title V permit if the facility is a major source for any reason. EPA identified 33 chemicals and 70 source categories for regulation under this section. By June of 2007, EPA had completed 28 categories. Public interest lawsuits and subsequent court orders mandated that EPA complete all source categories by June 2009. EPA had an additional 11 categories to be promulgated by Dec. 15, 2008, and the remaining 10 categories had to be promulgated by June 15, 2009. This prolific regulatory activity will have a significant impact on a wide range of industrial facilities in 2009 as they determine which portions of their operations will be subject to the regulations and how they might comply.

The integration of these new regulations with existing MACT standards has not always been easy. For example, in 1995 EPA adopted the Aerospace MACT, 40 CFR Part 63, Subpart GG, which covered certain stripping and coating operations at aerospace manufacturing facilities. These requirements do not apply to "parts or assemblies that are not critical to the vehicle’s structural integrity or flight performance." In 2008, EPA adopted the Paint Stripping and Miscellaneous Surface Coating Area National Emissions Standards for Hazardous Air Pollutants (Part 63, Subpart HHHHHH). This regulation would apply at aerospace manufacturing facilities to the remaining parts, those that are not critical to structural integrity or flight performance. Regulatory standards and reporting are not consistent between the two rules. The two sections of EPA headquarters responsible for the respective rules do not always agree on the scope of each regulation. This has created confusion in the industry. Facilities subject to an existing MACT standard should carefully examine the new area source standards for potential overlap or conflict with their existing regulatory coverage.

The act also requires EPA to periodically review existing MACT standards to see if they adequately protect public health, the "residual risk" rules. The agency divided the required regulatory actions into three groups. The eight Group I standards were due at the end of 2008. The 22 Group II standards are due by summer of 2009. The 16 Group III standards are due to be proposed by March 2009. This significant regulatory activity will require affected facilities to monitor and perhaps modify their permit or compliance obligations. It also will raise the specter of potential regulatory conflicts.

New Source Review
New source review applies to the combined programs for PSD, which covers areas attaining that particular air quality standard, and non-attainment new source review (NA-NSR), which covers areas not attaining the standard. It has been the most contentious, and most litigious, component of the act. NSR is the primary battleground for the fight over modernization in our aging industrial infrastructure. Each year, the respective combatants bring NSR disputes to the executive, legislative, and judicial branches of government. The coming year will see increased intensity in this debate due to the change of administration and the likely change in direction from the positions advocated by the Bush administration over the last eight years.

Much of the NSR debate has focused on very large emissions sources, such as coal-fired power plants and petroleum refineries. These very large sources make up only a small percentage of the NSR decisions, yet they form the primary driver for programmatic decisions. Critical regulatory and judicial decisions from the past year will significantly influence implementation of the NSR program in 2009.

The genesis of the new source review program came in the Clean Air Act Amendments of 1977. One would think that after 30 years certain fundamental interpretations of that program would be settled. Those would include:

(1) What constitutes routine maintenance that is exempt from NSR,

(2) Whether significant emissions increases should be measured on an annual or hourly basis,

(3) Whether construction without an appropriate NSR permit was a one-time or ongoing violation, and

(4) Whether fugitive emissions should be included in calculating NSR applicability. Today, these issues are the subject of continued debate and litigation. Unfortunately, the conflicting court opinions and the conflicting EPA policies leave environmental professionals with no clear guidance for their day-to-day NSR decisions.

Routine Maintenance, Repair, and Replacement (RMRR). Not all changes at a facility require NSR permitting. EPA's regulations have historically exempted activities that are described as RMRR, and the agency's interpretations had kept this exemption very small. In 2003, EPA promulgated regulations that significantly increased the scope of RMRR. In a March 16, 2006 decision, the court of appeals focused on the statutory language of "any modification" and vacated the EPA rule as overly expansive. The court acknowledged that de minimis increases in emissions may be excused based on the agency’s inherent authority to overlook "trifling" matters involving "miniscule" emissions increases but not on any other basis. Since that time, litigators and the courts have focused on the question of whether RMRR must be "routine" in the industry or routine at that unit.

In July 2008, in United States v. Alabama Power Company the court held that potential applicability of the RMRR exception to a particular project is based on activities that are considered routine in the industry of which the source is a part rather than on activities that are routine at the specific emission unit at which the project occurred, stating, "the analysis shall be with reference to the industry as a whole, not just the particular unit at issue." This is consistent with the decision in United States v. East Kentucky Power Co-op, Inc., but in conflict with two other decisions: U.S. v. Cinergy Corp., and United States v. Ohio Edison, which held that "routine" must be determined by reference to the individual emission unit. This split in judicial authority most likely will need to be resolved by the Supreme Court or by additional amendments to the act. For the coming year, a facility attempting to do RMRR activities should carefully investigate whether these activities are routine in their industry as well as for that particular unit.

Averaging periods. What averaging period should be used to determine if a facility modification causes a significant emissions increase, thereby invoking NSR? The less stringent standard would require a facility to increase its hourly emissions rate before NSR applies. The more stringent standard would invoke NSR whenever the annual emission rate increases. For example, a facility could make improvements that would allow it to operate at 80 percent annual capacity compared to its prior maximum capacity of 70 percent but would not increase the capacity to emit during any one hour. Under the annual test, this would require an NSR permit, under the hourly test it would not. EPA historically invoked the annual averaging period.

However, a contentious 2005 EPA policy memo restricted enforcement activities against power plants unless a modification would increase the hourly emissions rate. The agency appears to have returned to the posture that an increase in annual emissions will invoke NSR. When the question was presented to several courts, as seems all too common, the courts disagreed. On April 2, 2007, in Environmental Defense v. Duke Energy Corp. the Supreme Court unanimously held that EPA is free to adopt the annual standard.

Once the Supreme Court decides an issue, one would think it was settled. Not so. Shortly thereafter, in a June 7, 2007 Supplemental Notice of Proposed Rulemaking, EPA re-emphasized its desire to switch to the hourly emissions rate standard, at least for electric generating units. The rule was anticipated to become final at the end of 2008, a so-called midnight rule. Several Congressional leaders had discussed methods to overturn the midnight rules, such as this one. On Dec. 10, 2008, the agency announced that it would not pursue hourly test revision, "at this time." It now appears that all units will be bound by the annual emissions test.

Fugitive emissions. EPA historically did not include fugitive emissions, except for certain specified industrial categories, in determining whether a new source or major modification would have a significant emissions increase and therefore be subject to NSR. In 2002, EPA’s NSR rule revisions specifically codified inclusion of fugitive emissions in determining whether a physical or operational change results in a major modification for listed and non-listed sources. In December 2008, the agency adopted regulations that would restore the original concept -- fugitive emissions would only be included for the specifically listed categories. This regulation likely will be part of the package of midnight rules Congress will consider for revocation.

Fine particulates. EPA also has adopted new NSR regulations that will change the landscape this year. In May 2008, the agency issued final rules governing the implementation of the NSR program for particulate matter less then 2.5 micrometers in diameter, also is known as fine particulates.

Under the final rules, a major source of fine particulates would be a source that exceeds the major source thresholds -- 250 tons per year of direct fine particulate emissions (100 tons per year for certain industrial categories) in attainment areas and 100 tons per year in nonattainment areas. In addition, a source exceeding these major source thresholds for any pollutant determined to be a fine particulate precursor in a given area is also major. Precursors are regulated as follows:

• sulfur dioxide – regulated in all areas;

• nitrogen oxides – regulated unless a state demonstrates that nitrogen oxides are not a significant precursor;

• volatile organic compounds (VOCs) and ammonia are not regulated unless a state demonstrates they are a significant precursor.

A major source that is modified to increase potential emissions by a "significant" amount is also subject to NSR requirements. This significant emission rate for fine particulate precursors remains unchanged at 40 tons/yr for sulfur dioxide, nitrogen oxides, and VOCs. The significant emissions rate for ammonia would be defined by each state if ammonia is determined to be a precursor. The significant emission rate for direct fine particulate emissions was set at 10 tons per year (compared to 15 tons per year for particulate matter of 10 microns or less, or PM10, under the current NSR program).

With regard to condensable particulate matter (typically the "back half" catch of a particulate matter test), EPA deferred including condensables in major source determinations and in NSR permit emission limits until the end of a transition period (which will end no later than Jan. 1, 2011). States are free, however, to set more stringent standards. The federal agency will interpret PM emissions limitations in existing permits or permits issued during the transition period as not requiring quantification of condensable fine particulates for compliance purposes unless such a requirement was clearly specified in the permit conditions or the applicable implementation plan.

In fine particulate nonattainment areas, the requirements are effective on July 15, 2008. In attainment areas where states have adopted their own PSD rules (most of the country), the new requirements will not be effective until the states revise their PSD rules (required by May 16, 2010). In the interim, "state implementation plan-approved" states are to continue to use PM10 NSR requirements as a surrogate for fine particulates. In states where the PSD program is being implemented under EPA rules, the effective date is July 15, 2008. Sources subject to the July 15, 2008, effective date that have submitted a complete application by that date remain subject to the PM10 surrogate program.

A related rule, proposed on Sept. 21, 2007, would complete the fine particulate preconstruction review program framework by establishing increments, significant impact levels, and significant monitoring concentrations for NSR. Together, these rules will establish the framework for implementing preconstruction permit review for fine particulates.

Materials and processes. And finally, two federal appellate court opinions affected permitting agencies' abilities to alter the type of source a facility wants to build as part of the NSR permitting process. In Sierra Club v. EPA, the court’s 2007 opinion tacitly endorsed the agency’s authority to require a coal-fired power plant to use lower-sulfur coal, unless the plant was built next to a high-sulfur coal mine. In another case later in 2007, Sierra Club v. EPA, a different federal appellate court invalidated the Brick MACT standard, in part because EPA failed to evaluate the impact of using cleaner raw materials (clay) in setting the standards. Taken together, these opinions provide significant support for a permitting agency to consider extensive changes to the raw materials and manufacturing processes that a facility describes in its permit application, so long as it would decrease emissions.

The new administration likely will place a higher priority on filing new enforcement matters. In addition, a number of court cases have expanded the exposure companies may have during the enforcement process.

One of the most significant cases involves failure to secure an NSR permit. The courts have split on the issue of when a permitting violation stops. The question is fairly simple. Assume a facility previously constructed a source but did not secure a needed NSR permit. Is that a one-time violation that ceases as soon as construction was complete, or does the continued day-to-day operation of that source constitute a continuing NSR violation? If it is the former, citizen suits and EPA enforcement actions can only be brought against the facility for a limited period of time after the construction has been completed. If it is the latter, then those suits can be brought at any time so long as the source continues to operate without having the required permits.

Two enforcement cases brought by the National Parks Conservation Association against two separate Tennessee Valley Authority (TVA) facilities for failure to get appropriate permits produced opposite judicial results. In National Parks v. TVA, regarding a Tennessee TVA facility, the U.S. District Court, held that the failure to obtain a PSD permit is a discrete violation that accrues only as of the date construction commences. Because this particular project was constructed 13 years before suit was filed, the court found that the claim was filed too late. On appeal, in March 2007, the 6th Circuit reversed the District Court, holding that both the failure to apply best available control technology and the failure to obtain a PSD permit are discrete violations that manifest themselves anew each day. Therefore, failure to have a required NSR permit was an ongoing violation.

National Parks also brought an NSR enforcement case against an Alabama TVA facility for similar violations, this time the decision was in the 11th Circuit Court of Appeals. The court evaluated the state regulations and concluded that any NSR violation was a one-time event. This split in the federal appellate court decisions then headed to the Supreme Court.

A funny thing happened in the Supreme Court. TVA agreed that it should not have won the Eleventh Circuit case (holding the NSR event was a one-time violation). The Justice Department, which represented TVA because it is a federal government entity, admitted that the Eleventh Circuit decision their client had won was incorrectly decided. The United States argued that the Alabama state regulations did require facilities to have ongoing compliance with NSR requirements and therefore each day of operation was an ongoing violation. The United States also argued that federal regulations and the act require that NSR violations are an ongoing violation. Therefore, they argued, there was no split in the Circuit Courts of Appeal and the Supreme Court need not hear the case. The Supreme Court in June 2008 declined to hear the case. This leaves the issue in limbo. Since the Supreme Court did not overturn the Eleventh Circuit opinion, it is still valid law. So is the conflicting Sixth Circuit opinion. Future cases may help demonstrate which way the pendulum is swinging.

Another NSR enforcement case in Indiana has raised some ominous potential consequences, including the specter that NSR enforcement cases may mandate activities to correct harm from past non-compliance. This case also may have an adverse impact on a facility's ability to file insurance claims for NSR enforcement activities.

Traditionally, NSR enforcement cases have required only that the defendant install the latest, greatest pollution control technology and pay civil penalties. In an October 2008 decision in the U.S. District Court for the Southern District of Indiana, U.S. v. Cinergy, Judge Larry J. McKinney was asked to address past health and environmental effects caused by the violations. The court concluded that its authority is not limited to providing prospective relief only. The exact nature of the remedial relief was not discussed because the United States had not specifically identified what it was seeking and Cinergy had not had the opportunity to object to those specific requests. Nonetheless, the very broad language from the court would seem to allow a normal PSD enforcement case to include all types of financial damages and natural resource damages, similar to a products' liability or toxic tort case.

One interesting aspect of the case was the court's reliance on arguments Cinergy had made to its insurer while seeking coverage for the litigation. In an apparent attempt to make sure this case was covered under the policy, Cinergy had filed insurance coverage notices stating that government claims for "any other appropriate relief" was not limited to an injunction requiring compliance and prevention of future harm but also "includes environmental projects that mitigate past harm." Such claims are common in insurance coverage disputes. A facility faced with an NSR enforcement action would be well advised to review their insurance claim notification very carefully.

A final issue concerns Title V permitting and a compliance schedule. Initially, the U.S. Second Circuit Court of Appeals ruled, in New York Public Interest Research Group v. Johnson, that once a notice of violation has been issued, the permitting agency cannot grant a Title V permit unless that permit contains a compliance schedule for the alleged violations. Subsequently, the 7th Circuit Court of Appeals, in Citizens Against Ruining the Environment v. EPA, ruled that a compliance schedule was not mandatory where a notice of violation had been issued but no enforcement action had yet been commenced. And finally, the 11th Circuit Court of Appeals in Sierra Club v. Johnson, ruled that a compliance schedule is not necessary even when an enforcement action has begun, as long as the violation has not been determined by a final adjudication. Again, this represents one of the conflicts among the circuits that will ultimately have to be decided by the Supreme Court.

This year promises to be filled with significant changes that will affect the majority of facilities subject to EPA’s air regulations. Environmental professionals will need to be especially attentive to policy changes that would affect either continuing facility operations or any planned modifications. Timing will be important. It may be beneficial to make modifications now before the new administration has implemented many of the planned changes.

About the Author

Bill S. Forcade, who has written regulatory forecast articles for Environmental Protection since 2002, is a partner in Jenner & Block’s Chicago office. He is a member of the firm’s Environmental, Energy and Natural Resources Law, Climate and Clean Technology Law, Trade Secrets and Unfair Competition, Defense & Aerospace, and Association practices. His primary focus is in the area of air pollution and enforcement. In the last five years alone, he has represented clients in more than 20 rulemaking proceedings at both the federal and state level, prepared or reviewed more than 50 Title V operating permit applications, Title IV Acid Rain permit applications, and Title I New Source Review Construction Permit applications, provided ongoing regulatory and permit compliance counseling to both large and small companies and represented clients in more than 30 noncompliance negotiations and formal enforcement proceedings brought pursuant to the Clean Air Act, in both federal and state forums, at administrative and judicial levels. In 2008, Forcade was selected by the Leading Lawyers Network as one of the Top Ten Environmental Lawyers in Illinois and is named in the 2009 edition of Best Lawyers in America for environmental law. He received his law degree from The John Marshall Law School in 1976 and his bachelor's degree in biology and chemistry from the University of Illinois at Chicago in 1971.