United States: Between Scylla & Charybdis: EPA and Second Circuit Raise New Challenges for Electricity-Generating Facilities under Clean Water Act §316(b)

After almost three decades of amicable detente, battle has broken out this month on two fronts over the substance and scope of regulations critical to electricity-generating facilities. On February 16, 2004, the United States Environmental Protection Agency (the "EPA" or the "Agency") issued its nearly 500-page pre-publication version of the final regulations implementing §316(b) of the Clean Water Act for existing electricity-generating stations (the "Existing Facility Rule" or the "Rule"). Not quite two weeks earlier, on February 3, 2004, the Second Circuit Court of Appeals issued a decision (the "New Facility Decision"), largely rejecting the challenges of industry and environmental groups alike, by affirming most of EPA’s December 18, 2001 final regulations implementing §316(b) for new electricity-generating stations (the "New Facility Rule"). Both Rules are intended to address perceived impacts to aquatic resources associated with cooling-water withdrawals from the nation’s water bodies.

EPA issued these Rules in response to a court order to implement the single-sentence mandate of §316(b) requiring that "the location, design, construction and capacity of cooling water intake structures reflect the best technology available to minimize adverse environmental impacts." Rather than issue a single regulation, EPA surprisingly trifurcated its efforts, proposing separate and distinct regulations for new and existing power-generation facilities, while reserving a third and independent future rulemaking to address manufacturing facilities.

Compliance with the Existing Facility Rule will be no simple matter, and may threaten the already overtaxed American electric power generating system. EPA, in fact, concedes that compliance will be costly, difficult or impossible, depending on the specific location and configuration of each facility. If implemented as proposed, therefore, the Existing Facility Rule will change how power facilities throughout the nation operate, at substantial cost to industry and consumers of electric power, among other adverse impacts.

At stake is basic power-plant infrastructure – the standard configuration of intake structure for power stations, which borrow water from nearby lakes, rivers and oceans for cooling purposes. It is unclear what environmental benefits, if any, may accrue from the enormous costs and potential disruptions that compliance with the Existing Facility Rule will require. Even EPA will not, and cannot, predict whether its Rule will improve the aquatic resources that EPA purports to protect.

This article provides an overview of the Existing Facility Rule and, using a recent final power plant permitting decision as an example, illustrates the exorbitant costs that the proposed new Rule would impose. The article also assesses the Second Circuit Decision upholding the New Facility Rule, including troubling implications of the court’s ruling that, unwittingly or otherwise, may amplify the significant adverse economic and social consequences of the Existing Facility Rule.

The Rule, which EPA will implement in National or State Pollutant Discharge Elimination System ("N/SPDES") permits governing discharges from industrial and other facilities through point sources to U.S. waters, ironically does not address discharges at all. Instead, the Rule addresses the withdrawal of water for cooling purposes through intake structures and the perceived impacts of those structures on aquatic resources. EPA tentatively has determined that "environmental impacts may be associated" with intake structures of existing electricity-generating stations, because withdrawal by such facilities "has the potential to affect" phytoplankton, zooplankton, fish and shellfish. (Emphasis supplied). Of particular potential concern, EPA posits, are entrainment (drawing through the cooling system) of fish eggs and larvae, and impingement (drawing against screening mechanisms) of juvenile and adult fish.

EPA acknowledges that it remains unclear whether entrainment and impingement alter fish populations, given fish reproductive strategies and high natural mortalities unrelated to power-plant activities, among other factors. As EPA summarized its position in the Rule: "EPA shares the concerns expressed by expert fishery scientists that historical over fishing has increased the sensitivity to aquatic ecosystems to subsequent disturbance, making them more vulnerable to other stressors, including cooling water intake structures." (Emphasis supplied). In other words, in the Rule, EPA requires the power industry, and therefore American electric consumers, to compensate for the cumulative effects of both historical commercial fishing and the impacts of cooling water intake structures (if any), without knowing whether the substantial costs the power industry is being asked to take on will produce any discernible environmental benefits.

To meet this surprisingly speculative environmental goal, EPA imposes a technology-forcing scheme which compels certain power plants to meet performance standards for water reduction achieved mostly through technology retrofits or operational limitations. The Rule has broad application. In particular, the Rule applies to point-source dischargers engaged in electricity generation that draw in at least 50 million gallons per day from U.S. waters, at least 25% of which is used for cooling purposes, provided the facility in question was constructed prior to January 17, 2002 or, if constructed afterward, is undergoing certain major modifications. EPA has calculated that at least 550 mostly base-load electricity-generating stations will be subject to the Rule, but acknowledges more may be affected. Thus, most of the nation’s large-capacity power plants, the very facilities that ensure reliable electric power, are at risk.

Not all power plants with once-through cooling, however, are subject to the Rule. Rather, in one of many contested provisions, EPA has exempted from the Rule’s requirements those facilities with operating capacities of less than 15% (so-called "peaking" facilities), irrespective of when their operations occur. As industry comments noted, the Rule necessarily encourages "base load" facilities that can "peak" to do so, reducing their output and decreasing the reliability of the electric system accordingly. Increased production at peaking facilities also may increase electricity prices, since such facilities typically operate when prices support their limited use. Further, since nothing in the Rule prevents peaking facilities from operating during the high spawning periods that EPA believes are the periods of greatest entrainment and impingement, the peaking exemption is difficult to reconcile with EPA’s stated environmental goals.

To satisfy §316(b), the Rule implements a complicated five-track system grounded in the concept of performance standards requiring reductions of cooling water use. Most facilities, except those of very low flow or on water bodies EPA has concluded are not at risk, must reduce entrainment by 60 to 90% and impingement by 80 to 95% from hypothetical baseline operating conditions (i.e., without flow controls and minimal screening) using some mix of technology and operational limitations, such as plant outages during spawning periods. While EPA states in the Rule that closed-cycle cooling is not required, the performance-standard ranges for entrainment have been more candidly characterized by EPA in the New Facility Rule as the equivalent of those achievable with closed-cycle cooling. Not surprisingly, therefore, absent the availability of a limited range of closed-cycle alternatives untried and, in some circumstances, unavailable, meeting the performance standards through technology upgrades is likely to be prohibitively costly for many power plants.

EPA sought to preserve some flexibility in the Rule by continuing to allow alternative measures, including restoration or environmentally beneficial programs, to be used in lieu of technology upgrades or operational limitations. Unfortunately, as discussed below, the Second Circuit has rejected such measures in the New Facility Rule as irreconcilable with Congress’ statutory mandate. As a result, it is far from clear that this important option for existing facilities will remain available.

Not all facilities invariably must meet the performance standards. Rather, EPA recognizes that meeting the Rule may in some circumstances be too costly, in which case qualified relief is afforded. In particular, the Rule allows facilities to perform a highly detailed environmental and economic demonstration, establishing that the costs of technology that the plant would be required to install to meet the Rule are significantly greater than either EPA-estimated costs for the relevant protective technology or the environmental benefits to be achieved.

This safe harbor provision is an important one, the likely last stop for facilities that otherwise might be forced to shut down to avoid exorbitant technology costs not likely to cause any demonstrable environmental benefit. However, the safe harbor provision is not a full exemption. Rather, the facility must come as close as reasonably practicable, accounting for costs, to the applicable performance standards. While EPA’s approach is not clear, it is likely that operational limits, such as outages, and restoration measures, if available, will be used to approximate the Rule’s performance standards, likely at substantial costs.

EPA’s first permitting determination under the new §316(b) framework, issued just before the Rule was released, underscores the costliness of the Rule, and calls into question how secure the safe harbor provision actually is. In its recent final NPDES permit for Brayton Point Station on Mount Hope Bay in Massachusetts, EPA concluded that estimated capital costs of up to $202 million for closed-cycle cooling were appropriate, and declined to apply the safe harbor concept to exempt Brayton Point from installing closed-cycle cooling. While Brayton Point also involved thermal considerations not within the scope of §316(b), the permit decision – currently under appeal – nonetheless represents a cautionary tale for future application of the Rule and its safe harbor provision.

Assuming the Rule survives expected industry and environmental group challenges, compliance timeframes are tight, particularly given the significant demonstration studies that a facility must undertake to meet the new §316(b) standard. Generally, the Rule applies during the next permitting cycle. For facilities that already have submitted permit renewal applications (and are operating under administratively continued N/SPDES permits), the latest possible date for compliance is three-and-a-half years after publication of the Rule (expected in March 2004) or late 2007. For facilities with newly issued permits, compliance must be demonstrated with the next permit-renewal application, filed no later than four-and-a-half years from the date of their newly issued permit, likely in late 2008.

EPA issued its New Facility Rule on December 18, 2001. That Rule established a two-track system requiring water reductions commensurate with closed-cycle cooling or, upon appropriate demonstration, alternative technologies or operational limitations which achieve reductions commensurate with closed-cycle cooling. Various environmental groups and industry appealed. In general, the environmental groups sought more stringent requirements, including a national mandate for closed-cycle cooling and the elimination of EPA’s built-in flexibility in the Rule. Industry challenged certain of EPA’s conclusions as unsupported by record evidence, and sought increased flexibility in the form of compliance options.

In its February 3, 2004 decision, the Second Circuit Court of Appeals largely affirmed the New Facility Rule, specifically deferring to EPA’s considerable discretion in such rulemaking efforts. The court declined, however, to allow restoration measures – an option EPA had proposed to maximize flexible application of the Rule. Instead, the court concluded that restoration measures were "plainly inconsistent with the statute’s text and Congress’s intent" in enacting §316(b), and that EPA had exceeded its authority by allowing compliance with §316(b) based upon restoration measures.

While EPA has preserved and defended restoration measures in the Existing Facility Rule, the court’s broad pronouncements will certainly create an opportunity for challenge and a difficult defense. Absent future clarification from the court or reversal on appeal, restoration measures may be at risk in the Existing Facility Rule.

The Decision also included several pronouncements that, while dicta, nonetheless present a sobering picture of the judiciary’s inclination to presume environmental benefits where none have been demonstrated, and to discourage flexible regulatory frameworks. Thus, for instance, the court inexplicably surpassed EPA’s tentative conclusions regarding whether cooling water intake structures in fact cause adverse environmental impacts, issuing its own definitive conclusion to that effect. Further, the court proclaimed that §316(b) "appears to contemplate a single level of performance applicable to all facilities," seeming to limit EPA’s flexibility with respect to the New Facility Rule and, absent expected future clarification, the flexibility that is at the heart of the Existing Facility Rule.

Most problematic and wide-ranging was the court’s surmise, in still more dicta, that §316(b) may apply to existing facilities, a position that industry is expected to challenge with respect to the Existing Facility Rule. In short, the Decision may not augur well for industry, which has yet to challenge EPA’s extension of the Rule to existing facilities, or for EPA’s well-intentioned effort to insert flexibility into the Existing Facility Rule.

In summary, while EPA has issued a final Existing Facility Rule that reflects some moderating influence, the Rule remains a costly and potentially damaging initiative for the nation’s power suppliers and electricity consumers alike. As ever, the devil is in the details of state regulators’ and EPA’s application of the complex and sometimes baffling regulation. As troublingly, early indications, as in the Brayton Point decision, are that any apparent flexibility or safe harbor in §316(b) may be illusory. Much remains to be seen, including likely future decisions out of the Second Circuit. We will continue to address the application of §316(b), including the expected legal challenges to the Existing Facility Rule, in the months ahead.

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