Squire, Sanders & Dempsey L.L.P.'s Environmental Group

On the same day it issued its landmark decision authorizing EPA to regulate greenhouse gas emissions from new motor vehicles (Massachusetts v. Environmental Protection Agency), the US Supreme Court issued another important case further demonstrating the Court's expansive view of the federal Clean Air Act.

On April 2, 2007, the Court released its decision in Environmental Defense v. Duke Energy, ruling in favor of EPA and environmentalists and against power plants and utilities as to what constitutes a major modification to an air pollution control source.

Duke Energy Corporation, one of the largest electric power companies in the United States, had replaced or renovated facets of several coal-fired electric generating units at eight power plants in North Carolina and South Carolina. EPA brought an enforcement action, arguing that Duke violated Prevention of Significant Deterioration (PSD) regulations by not obtaining permits before doing the work and not installing Best Available Control Technology (BACT), as required for major modifications. The case was part of EPA's aggressive enforcement initiative seeking additional control technology and penalties from dozens of coal-fired power plants and utilities, arguing that a PSD permit and BACT are required for modification of an air pollution control source if there is a significant net increase in the annual discharge of the pollutant. The lower courts had held that Congress intended EPA to evaluate modifications based on their impact on the hourly rate of emissions. The Supreme Court disagreed, instead holding that PSD and BACT are triggered when a company initiates a physical change that leads to a significant increase in annual emissions even if the modernized plant does not increase its hourly emissions rate.

The case centered on EPA's divergent interpretation of the term modification under two air pollution control programs under the Clean Air Act: the New Source Performance Standards (NSPS) and PSD. Although Congress used the identical term in both the NSPS and PSD provisions of the Clean Air Act, EPA defined modification in the NSPS regulations as an increase in hourly emission rates, but defined it as an increase in annual emissions over the actual baseline emissions in the PSD regulations. Duke Energy responded to EPA's enforcement action by arguing in part that a PSD permit was not required because its renovation projects did not increase its plants' hourly emissions rates. Duke asserted that because Congress used the identical term modification in both sections of the Clean Air Act, EPA may not define it differently under the PSD regulations than it does under NSPS regulations (in terms of hourly emissions increases).

Both the trial court and the Fourth Circuit Court of Appeals agreed with Duke Energy and held that EPA's interpretation of modification under the PSD regulations must conform to its earlier interpretation of the same term under the NSPS regulations. As such, the Fourth Circuit concluded that a major modification requires a PSD permit only if it results in an increase in the hourly rate of air pollutants emitted (which more closely reflects the design capacity of the equipment). In its unanimous decision, the Supreme Court reversed the Fourth Circuit and sided with EPA, holding that the appellate court's attempt to conform the term modification under the PSD regulations to the NSPS counterpart was "too far a stretch" and effectively amounted to an invalidation of the PSD regulations. It further held that a given term used in the same statute may take on "different shades of meaning" based on its context in the regulations and that, therefore, the PSD regulations may define a major modification in terms of annual instead of hourly emissions increases. Accordingly, the Court vacated the appellate court's decision and remanded the case for further proceedings in the district court.

Although the Supreme Court overturned the lower courts' reliance on the use of an hourly emissions standard as the trigger for PSD permitting and BACT obligations as improperly invalidating the PSD regulations (judicial review of agency rulemaking is not permitted during enforcement proceedings absent a valid appeal of the regulations when issued), several arguments are expected to continue during the remand proceedings. For example, Duke argued that EPA has taken inconsistent positions in its interpretations of "routine maintenance, repair and replacement" and is now "retroactively targeting twenty years of accepted practice." The Supreme Court noted that this issue was not addressed by the lower court decisions, and, to the extent it is not procedurally foreclosed, Duke may raise it on remand. While Duke preserves a number of potential defenses that its power plant projects do not require a PSD permit, the adverse Supreme Court decision will increase EPA's leverage in settlement negotiations moving forward.

The Fourth Circuit's decision offered a glimmer of hope that projects aiming to return equipment to design capacity could escape the additional cost and burden of PSD and New Source Review (NSR). The Supreme Court's decision in Duke Energy extinguishes this hope and leaves in its place the annual emission evaluation approach to PSD/NSR applicability that has been used for decades. This continues to adversely affect companies and industry sectors with significant unused capacity by discouraging incremental investments in efficiency that cannot support the cost of BACT-level air pollution control equipment. EPA has proposed regulatory changes to address aspects of this problem, including a rule that would allow utilities to use an hourly emissions rate to determine PSD applicability in the future. In the wake of this Supreme Court decision, expect additional focus on regulatory fixes to the NSR/PSD permitting system.

If you have any questions regarding the Environmental Defense v. Duke Energy case or its implications, or if you need any additional information on federal or state air pollution control issues, please feel free to contact any of the Squire Sanders environmental lawyers listed in this Alert, or the one with whom you are most familiar.

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