Law and the Environment : Environmental Lawyer & Attorney : Foley Hoag Law Firm : Boston, Washington D.C.

The operators of the Regional Greenhouse Gas Initiative, or RGGI, announced today that all of the 12,565,387 CO₂ allowances offered for sale at the first RGGI auction on September 25 have been purchased at a relatively low price of $3.07 per allowance. This is only marginally above the auction reserve price of $1.86 per allowance, and below recent prices on the Chicago Climate Futures Exchange.

RGGI did not announce the names of the winning bidders, but did note that there were 59 participants in the auction, from the “energy, financial and environmental sectors.” In total, the bidders sought to purchase more than 51 million allowances, or approximately four times as many as were offered. 

The auction was administered by World Energy Solutions, Inc., and RGGI also retained an independent market monitor, Potomac Economics, to oversee the auction. Potomac Economics stated that most of the allowances were purchased by compliance entities or their affiliates.  Given that RGGI seems here to stay, at least in the absence of federal cap and trade legislation, it is good to know that fears that allowances would be bought up by someone seeking either to control the market or to put fossil fuel generators out of business seem to have been laid to rest, at least for now, though we won’t really know how well RGGI is working until we see who the winning bidders are and until RGGI gets a few more auctions under its belt without incident.

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As those of us who have practiced in the Superfund arena for some time know, in the early years of Superfund litigation, such litigation was, from the defendant’s perspective, brutish and short, if not nasty and mean. The DOJ attorney would, in essence, march into court, state “I am from the government; I win,” and the case would be over.

In recent years, that approach has not proven quite so uniformly successful. The key case in the defendants’ arsenal is United States v. Bestfoods. In Bestfoods, the Supreme Court looked to traditional common law principles regarding corporate law to assess the potential liability of a parent corporation under CERCLA. The Court concluded that a parent corporation could not be held liable for the acts of its subsidiary unless the traditional test for piercing the corporate veil could be met.

In a recent decision, the Seventh Circuit Court of Appeals also looked to common law principles in assessing liability under CERCLA. Once more, reference to the common law spared the defendant – at least temporarily – from the Superfund gallows. In United States v. Capital Tax Corporation, the defendant had purchased tax certificates from Cook County with respect to certain contaminated property. After it found a buyer for the property, Capital Tax then actually obtained tax deeds to the property. Capital Tax had no written agreement with the buyer and did not transfer the tax deeds to the buyer, because the buyer never made full payment of the purchase price. 

Eventually, EPA issued an administrative order to Capital Tax requiring it to clean up the property. When Capital Tax refused to do so, EPA performed the cleanup and sued Capital Tax, seeking recovery of response costs and penalties for failure to comply with the order. Capital Tax defended the case, arguing that, although it did hold legal title to the property, it did so only as security for the balance of the purchase price. In other words, Capital Tax asserted that it was entitled to the security interest defense under § 101 of CERCLA.

The Court found for Capital Tax, but took a slightly different approach. The Court concluded that Capital Tax should have an opportunity to establish that it is not the current owner of the property because, under the doctrine of equitable conversation, the true owner was the party to whom Capital Tax intended to sell the property. 

Ultimately, the facts of the case are complicated, obscure, and not necessarily transferable to other cases. What is transferable is the Court’s insistence that state common law rules about ownership are important in determining whether a party is an owner under CERCLA. As the Court stated,

The understanding that state law governs property and the expectations built around that understanding strongly suggest that the federal standard should be rooted in an adoption of state property law. … To invent out of whole cloth a distinctly federal law of property would be inappropriate, if not impossible.

The lesson from Capital Tax is thus a simple one, even if its application may be complicated in specific cases. CERCLA does not mean that the government always wins. It does not mean that common law is irrelevant. If a party’s status is the determining issue for Superfund liability, then the party should carefully consider what applicable state common law says about that status. The government may still win most of the time, but the defendants now have at least a few arrows in their quiver.

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On September 22, EPA issued a new Stormwater Multi-Sector General Permit (MSGP) to cover 4,100 facilities with discharges associated with an industrial activity. The permit replaces the MSGP that was issued in 2000 and expired in October 2005. The expired permit continued to be valid for facilities that were covered by the permit at the time it expired.

The new permit applies to states not authorized to implement EPA’s NPDES program, including Massachusetts and New Hampshire. It will be effective as of September 29, 2008.

Although EPA claims of regulatory reform sometimes ring hollow, the new MSGP truly does seem to be an improvement over the prior MSGP for industrial facilities. One significant improvement is that permit now separates technical requirements for effluent limitations from the requirement to prepare and implement stormwater pollution prevention plans (SWPPP). Importantly, EPA has clarified that a SWPPP is not an effluent limitation. Therefore, industrial facilities may amend SWPPP without EPA approval. More important, because the SWPPP is not an effluent limitation, noncompliance with the SWPPP will not subject a permittee to claims that he/she has violated an effluent limitation (though noncompliance with a SWPPP may be a violation of a record-keeping requirement).

EPA has also significantly streamlined its filing and compliance systems. First, notice of intent to be covered by the MSGP may be made electronically, through a new “eNOI” system. Second, EPA has created a “Water Locator” tool, which will enable facilities to obtained certain relevant information, such as applicable total maximum daily loads, or TMDLs, on-line. Facilities will also be able to provide required monitoring data on-line.

In short, while the new permit may not eliminate any substantive complaints that industrial facilities may have with EPA’s stormwater program, it should reduce transaction costs associated with compliance.

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Since the Court of Appeals for the District of Columbia vacated EPA’s Clean Air Interstate Rule in its entirety, EPA and Congress have been working on a variety of fixes. As we recently noted, Congressional Democrats recently put together a plan to enact CAIR’s Phase I SO2 and NOx limits. Enacting those limits would result in emissions reductions of approximately 45% of SO2 and 50% for NOx.

However, to enact the limits during the 110^th Congress, the bill would require 2/3 support in the House and unanimous consent in the Senate. The word is now out on Republican reaction to the planned fix, and the word is not good. Key House Republican Joe Barton rejected a request from Democrats that he support the quick CAIR fix. While Representative Barton stated that he was willing to make a thorough review of the Clean Air Act, including CAIR, a priority for the next Congress, he is not willing to expedite a CAIR fix in this Congress.

Without support from key Republicans such as Representative Barton, it is difficult to see how Congress can enact a CAIR fix in the 110^th Congress. Nonetheless, pressure is certainly going to continue to build to fix or replace CAIR, if not in this Congress, then in the next.

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There was a time when EPA was almost uniformly successful in defending its regulations in the courts. EPA would note the deference provided to agency decision-making under Chevron U.S.A. v. NRDC, remind the court of its expertise in interpreting some very complicated statutes, and the case would essentially be over. Not any more.

In recent years, as the Bush administration has embarked on some quite ambitious regulatory reform efforts, EPA’s record has slipped considerably. The most famous case at this point is Massachusetts v. EPA, in which the Supreme Court rejected EPA’s efforts to avoid regulation of greenhouse gases under the Clean Air Act. However, EPA has had a number of other significant failures in court. Of these, the continued rejection of EPA’s efforts to reform the New Source Review, or NSR, rules is perhaps most notable. In decisions in 2005 and 2006, the Court of Appeals for the District of Columbia threw out two critical pieces of EPA’s NSR reform effort.

Now, in the latest setback for EPA, the Court of Appeals for the 11th Circuit has vacated another piece of EPA’s NSR reform agenda. The rule at issue in the latest case would have precluded state and local regulatory authorities from imposing monitoring requirements beyond those required by EPA. While noting that its review was governed by Chevron, the Court concluded that the Clean Air Act “unambiguously precludes EPA’s interpretation.”

Given the change in administration that will occur next year, it is difficult to imagine EPA pursuing its NSR reform agenda for much longer. The more significant question is whether EPA’s efforts at NSR reform have done long-term damage to its ability to defend its regulatory choices in court.

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EPA’s enforcement efforts under the New Source Review, or NSR, program have had more twists and turns during the past ten years than it is possible to catalogue, at least in a blog post short enough to avoid crashing the server. In brief, EPA began under the Clinton administration an ambitious effort to bring NSR cases against numerous power plants. Those efforts have had substantial, though not perfect, success in court. Settlements with some targets have also yielded hundreds of million dollars in agreed-to upgrades in plant emission controls.

The Bush administration, of course, sought to amend the NSR regulations in ways that were inconsistent, at least going forward, with the pending enforcement actions. The Administration nonetheless continued to prosecute the cases that had already been brought, though at least for a time it decided that it would only bring new cases if they were consistent with its new NSR regulations. Still with me?

A settlement recently reached by EPA with St. Marys Cement, demonstrates that EPA’s NSR enforcement efforts still have some life. The settlement is the first by EPA with a company in the cement industry. All of the prior settlements were either with power plants or refineries. In the settlement, St. Marys agreed to pay $800,000 in civil penalties and to implement emission control projects. While the consent decree does not state the expected cost of the emission controls, these projects often cost in the millions or tens of millions of dollars.

There is no reason to think that the St. Marys settlement is a one-off by EPA. Other facilities in the cement industry should be assessing their potential NSR exposure, and any facility, whether power plant, refinery, cement kiln, or other major source, should assess the NSR rules in making decisions regarding facility maintenance or upgrades. 

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EPA has publicly taken the position that the current Clean Air Act is ill-suited to regulation of CO₂ as a pollutant.  In an advance notice of proposed rulemaking. EPA stated that regulation of greenhouse gases “could result in an unprecedented expansion of EPA authority that would have a profound effect on virtually every sector of the economy and touch every household in the land.”  (Of course, proponents of regulation of greenhouse gases under the CAA might say that that is precisely what is needed to address the problem of global climate change.)

Given EPA’s stated reluctance to regulate CO₂ and other greenhouse gases under the CAA, it came as something of a surprise this week when it became widely known that EPA recently approved an amendment to Delaware’s state implementation plan, or SIP, incorporating state regulations in which Delaware would in fact regulate emissions of CO₂ from stationary sources in that state. 

While EPA is apparently still taking the position that CO₂ is not a regulated pollutant under the CAA – and is apparently having second thoughts about its approval of the Delaware SIP amendment, environmental groups are taking a different position.  Patrice Simms, with the NRDC recently told the BNA that the Delaware SIP does make CO₂ a regulated pollutant under the CAA.  In the absence of a formal change of heart by EPA, this decision is certain to be cited broadly by those seeking immediate regulation of CO₂ by EPA. 

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Since the Supreme Court issued its decision in Massachusetts v. EPA, Congress, EPA, state regulators, environmentalists, and industry groups have been trying to determine what it would mean to regulate CO₂ under the Clean Air Act. While both presidential candidates are on record as supporting some kind of climate change legislation, the currently proposed legislation is extraordinarily complex and there are certainly no guarantees that legislation will in fact be enacted any time soon.

In the meantime, Massachusetts v. EPA does not seem to leave EPA much wiggle room, notwithstanding the agency’s current unwillingness to move forward on CO₂ regulation. In the absence of new legislation, it seems likely that, at some point, some court is going to order EPA to promulgate regulations governing emissions of CO₂ as a pollutant. 

So, what would be the scope of regulation of CO2 under the Clean Air Act? Based on a recent report by the U.S. Chamber of Commerce, the answer is – really, really, broad. The Chamber assumes that any facility emitting more than 250 tons of CO2 per year would be regulated as a stationary source under the Clean Air Act. The Chamber report estimates that more than 1,000,000 million facilities would be subject to such regulati9ons. 

Making these estimates is quite difficult; EPA’s own estimates were lower than those in the Chamber report. However, whether the estimate is several hundred thousand or more than one million, the picture is not pretty. The bottom line is that everyone has an interest in climate change legislation, because, in the absence of legislation, regulation will come at some point – and when it does, its impacts will be felt everywhere.

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In the days following the decision by the Court of Appeals for the District of Columbia to vacate EPA’s Clean Air Interstate Rule – CAIR – regulators, industry, and environmentalists have been attempting to answer one fairly basic – and quite critical – question. What now? Although a variety of parties had challenged various aspects of CAIR, it seems that no one was quite prepared for the decision by the Court of appeals that the entire rule had to be vacated, due to “several fatal flaws” in the rule. CAIR required 28 states and the District of Columbia to require additional reductions in NO_x and SO₂. Elimination of CAIR leaves a gaping hole in the regulatory landscape for these important criteria pollutants.

Recent development provide at least some idea what the post-CAIR landscape may look like. First, on September 2, 2008, EPA sent letters to states subject to CAIR asking them to revive their NO_x Budget Trading Programs (“NBPs”)which had been promulgated pursuant to EPA’s NO_x SIP Call. A number of states subject to CAIR had eliminated to scheduled to sunset their NBPs, because CAIR made them unnecessary. Repromulgation or maintenance of NBPs would at least provide a backstop for NO_x regulation in CAIR states.

The other venue for post-CAIR planning is Congress. The Bush administration has requested that Congress simply enact CAIR into legislation. Congressional Democrats have opposed this approach, fearing that enacting CAIR would make it more difficult to enact more stringent limitations down the road. Recently, Senator Tom Carper and Representative Rick Boucher apparently have reached agreement on CAIR legislation. Their approach would limit the legislation to SO₂ and NO_x. The proposed legislation would implement the first phase of CAIR for these pollutants, requiring a 45% reduction in SO₂ and a 50% reduction in NO_x.

However, in order to get the legislation enacted during the 110^th Congress, Carper and Boucher are looking to utilize expedited rules that would require the approval of 2/3 of the House and unanimous consent in the Senate. Time will tell whether unanimous agreement that something has to be done will translate into unanimous agreement in the Senate on a particular piece of legislation. Stay tuned.

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