On May 1, 2015, the U.S. Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) held that the Environmental Protection Agency (“EPA”) acted arbitrarily and capriciously when it modified its National Emissions Standards and New Source Performance Standards (“NSPS”) to allow backup generators to operate without emission controls for up to 100 hours per year in emergency demand-response programs.  As a result of the ruling, the D.C. Circuit reversed the 100-hour exemption and remanded the rules back to EPA for further action.

In 2010, EPA promulgated two separate rules that allowed for backup generators to operate for 15 hours per year without emission controls as part of demand-response programs.  EPA received petitions for reconsideration of the 15 hour rule, and on January 13, 2013, after reconsideration, the EPA issued the final rules that expanded the 15-hour exemption to the present 100-hour exemption.  EPA argued that the increased hourly exemption would help prevent grid failures and maintain reliability.

In response to the rules, Delaware regulators and several merchant generators (“Petitioners”) challenged the rules and argued that EPA: (1) violated section 112 of the Clean Air Act (“CAA”) when it modified the definition of the National Emissions Standards for backup generators; (2) violated section 111 of the CAA when it modified the definition of backup generators under the NSPS; and (3) unlawfully modified emissions controls for non-emergency generators in low-density areas (which was dismissed for a lack of standing).  The Petitioners argued that by increasing the hourly exemption, backup generators would distort capacity markets, displace traditional generators thereby affecting reliability, and increase pollution.  The Petitioners further argued that it raised these concerns during the notice and comments period, yet the EPA failed to properly respond to their comments.

In responding to the challenge, the D.C. Circuit held that EPA acted arbitrarily and capriciously when it failed to properly address the Petitioners’ comments.  The D.C. Circuit noted that while EPA responded to Petitioners’ comments by stating that ‘“[t]he issues related [to] management of energy markets and competition between various forms of electric generation are far afield from EPA’s responsibilities,”’ the response “seem[ed] to have missed the forest for the trees.”  The D.C. Circuit’s reasoning for this was because the Petitioners’ comments focused on the effect the exemption would have on the “reliability and efficiency of the capacity and energy markets, not the specific clean energy alternatives that could supply the grid instead of backup generators,” as was the subject of EPA’s response.  Furthermore, the D.C. Circuit stated that while EPA is not required to respond to every comment submitted, the EPA must at least respond to sufficiently so that parties can identify why and how an agency acted as it did.  Yet, the D.C. Circuit stated that the EPA “refused to engage with commenters’ dynamic market arguments.”

In further ruling on the case, the D.C. Circuit stated that while EPA argued that the backup generator exemption was expanded for the purpose of maintaining grid reliability, reliability is not the “province of EPA.”  And, when a commenter suggested that EPA consult with FERC, the D.C. Circuit noted that EPA responded that the rules’ purpose was to address backup generator emissions, not determine which resources are used for grid reliability.  In response, the D.C. Circuit stated that “EPA cannot have it both ways” by simultaneously relying on reliability concerns and then dismiss comments about reliability as beyond its judgment.  As a result, the D.C. Circuit encouraged EPA to seek input from FERC on remand.

A copy of the opinion is available here.