After over a decade of litigation, EPA’s original NSR enforcement attack on Cinergy for various projects completed in the late 1980’s and early 1990’s is finally over. On October 12, 2010, the U.S. Court of Appeals for the Seventh Circuit threw out EPA’s only victory in that original action – a jury verdict finding Cinergy in violation of the Clean Air Act’s preconstruction permit requirements for several pulverizer projects performed at its Wabash plant in Indiana. While the decision represents a significant win for Cinergy and other utilities facing similar claims, it could have a ripple effect for other Clean Air Act programs, including EPA’s new greenhouse gas regulations.
The decision addresses two issues: (1) whether the trial court erred in allowing the jury to consider EPA’s expert testimony projecting significant emissions increases as a result of the projects; and (2) which version of the state regulations applied to the projects at issue, the version on the State’s books at the time of the projects, which had not yet been approved by EPA, or the previous version that was EPA-approved.
With respect to EPA’s expert testimony on emissions, the Court ruled that it should not have been admitted into evidence, which is significant because EPA relies on the same experts and methodology in virtually all of the electric utility NSR enforcement actions. Calculating emissions correctly is critical in determining whether a New Source Review permit is required for a project, because the permitting regulations only apply to projects that result in a significant net emissions increase. According to the methodology created by EPA’s experts for the electric utility enforcement initiative, a plant that replaces a worn-out component, such as an economizer or reheater, will run more hours after the replacement than it did prior to the replacement because it will no longer experience outages associated with that component. That is, EPA and its experts argue that the replacement enables the plant to increase the hours of unit availability and increased hours of availability translate directly into increased hours of operation and increased emissions that require a New Source Review permit.
The Seventh Circuit, however, recognizes that there is not necessarily a one-to-one relationship between increases in a plant’s availability to operate and increases in a plant’s actual hours of operation. Specifically, the court ruled that an increase in the total annual availability of a “cycling” plant – one that ramps up and down each day to meet the daily peaks in electricity demand – might not translate into any additional hours of operation. Because the units at issue were cycling units, the court ruled that the testimony from two EPA experts, Richard Rosen and Robert Koppe, should have been excluded by the trial court.
While the court’s rejection of EPA’s expert testimony on emissions increases is certainly significant for companies facing similar allegations, it is the court’s other holding that could potentially have broader implications. That holding also dealt with the method for calculating emissions, but instead of ruling that EPA’s evidence was improper, the court held that EPA used the wrong legal theory entirely. As required by current EPA regulations, EPA relied on an “actual emissions” test that measures increases in total tons per year to allege that the projects at issue resulted in emissions increases. As its name suggests, the “actual emissions” test compares “actual emissions” in annual tons in the past to expected “actual emissions,” again expressed in annual tons, in the future. Cinergy, on the other hand, claimed that the prevailing law at the time the projects were completed provided for a “potential emissions” calculation, under which a permit would only be required if the projects in question caused an increase in a unit’s maximum hourly emission rate – at test that was rejected by the U.S. Supreme Court in the Duke Energy NSR case under different circumstances.
To determine the correct legal test, the Seventh Circuit reviewed the history of the air quality regulations in Indiana, noting that the “potential emissions” test was adopted in 1980 and approved by EPA, but was replaced by the state in 1981 with the “actual emissions” test. Fortunately for Cinergy, however, only the 1980 regulations had been approved by EPA when the projects at issue were undertaken. Although Indiana revised its regulations in 1981 to incorporate the “actual emissions” test, those regulations were not formally approved by EPA until 1994. Therefore, even though EPA argued that case law in 1979 required an actual test, and even though the Indiana regulations began requiring an actual test in 1981, the court concluded that EPA could not enforce the actual emissions test in this case because the “potential test” was the only test EPA had officially approved at the time. With the application of Indiana’s 1980 regulations and the exclusion of EPA’s expert testimony on emissions increases, the court concluded that EPA had no evidence that the projects at issue resulted in emissions increases, reversed the lower court decision, and entered judgment for Cinergy. It remains to be seen whether EPA will seek review of the decision by the U.S. Supreme Court.
The court’s decision reaffirms that for states that have authority from EPA to develop their own rules to implement the federal Clean Air Act requirements, EPA may not enforce the federal regulations against sources in those states or even state regulations consistent with the federal regulations if those regulations have not been formally approved by EPA. EPA’s review and approval of state air quality regulations is notoriously slow, often taking years after the rules have been submitted for review. The lag in approval creates uncertainty over which rules will actually be enforced – the unapproved rules on the books or the previous EPA-approved rules. The decision thus has implications for all changes in federal air quality rules that must be implemented by the states and confirms that new state rules implementing new federal rules are not federally enforceable until they are formally approved.
Some experts have speculated that the decision could impact EPA’s current effort to regulate greenhouse gases under the Clean Air Act. The impact will likely vary from state to state and will depend, for example, on the type of regulatory authority EPA has granted the state under the Clean Air Act and the provisions of the current state laws and air quality regulations. It may also have implications for states that are actively attempting to limit the impact of EPA’s greenhouse gas regulations by adopting EPA’s Tailoring Rule, which is designed to help ensure that the new regulations only apply to the largest sources of greenhouse gases. The Seventh Circuit decision highlights the need for quick EPA approval of those regulations to ensure that efforts to limit the scope of EPA’s greenhouse gas rules are effective.