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

In a crisply written opinion by Judge Posner, the 7^th Circuit Court of Appeals just reversed a district court judgment against Cinergy in the NSR case involving Cinergy’s power plant in Wabash, Indiana, and directed that judgment enter for Cinergy. It is not obvious that the case will have wide applicability, but it is certainly worth noting.

The first key issue in Cinergy was whether proposed new projects would be subject to NSR review if they were expected to result in an increase in annual emissions or only if they would result in an increase in the hourly emissions rate. In an earlier ruling, the 7^th Circuit decided that annual emissions, rather than the hourly rate, was the appropriate test provided for in the statute and regulations.

However, when the case came to trial, a twist occurred. The jury only found violations with respect to four projects. All of those projects occurred between 1989 and 1992 – and during that time, Indiana’s SIP stated that the applicable test was whether a project would result in an hourly emissions rate increase. Even more complicated, EPA had approved the SIP, even though it also told Indiana that the SIP had to be changed. Indiana had apparently changed its rules prior to 1989, but failed to submit a SIP modification until 1994. The Court ruled that EPA must be held to the SIP that it approved and that was in effect at the time of the projects.

The Clean Air Act does not authorize the imposition of sanctions for conduct that complies with a State Implementation Plan that EPA has approved. The EPA approved Indiana’s plan with exceptions that did not include [the improper test.]

Calling EPA’s approval of the SIP a “blunder,” the Court said that EPA must live with it.

It’s not obvious that this decision will have much relevance outside cases in Indiana involving projects implemented during the time Indiana’s SIP contained the wrong test. However, it is a lesson that the details do matter – in particular, the details of the relevant SIP.

The second aspect of the case is also a lesson in the nitty-gritty of litigation – and may have broader applicability. With respect to NOx emissions [it is not clear why the NOx allegations were not controlled by the prior part of the decision], EPA relied on two experts to testify that the projects would result in increases in annual emissions. However, both experts relied on a formula used for baseload power plants. Unfortunately for EPA, the Wabash facility is a cycling plant, not a baseload plant. The model used by EPA's experts assumes that an increase in capacity would result in a proportionate increase in output. However, that assumption is not valid for a cycling plant. The Court thus ruled that the experts’ opinions should not have been admitted; without them, EPA had no evidence of increased emissions and judgment had to enter for Cinergy.

This aspect of the case provides a cautionary lesson for the government (though I wouldn’t start dancing in the street if I were defending one of these cases). I think that there has been a sense that, if the government wins the legal battle on the issue of annual emissions v. hourly emissions rate and wins the routine maintenance argument, then the defendants are sunk. This case is a reminder that the facts still matter and that the government has to prove its case based on evidence regarding the specific projects being challenged.

What a notion.

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EPA announced yesterday that it had reached a settlement with Duke Energy to address allegations of New Source Review violations at Duke’s Gallagher coal-fired generating plant in New Albany, Indiana. A jury had already found Duke liable for certain NSR violations at the plant. The settlement obviates the need for a remedy trial, which had been scheduled for early 2010.

The settlement requires Duke Energy to repower Units 1 and 3 at Gallagher with natural gas or shut them down and to install emission controls at Units 2 and 4. Duke will also pay a $1.75 million penalty and spend $6.25 million on various mitigation projects. 

The settlement is not that surprising, particularly given the prior liability findings. It nonetheless serves as a useful reminder that EPA continues to focus on coal plants and that it is going to use all the tools at its disposal to reduce coal plant emissions. Although the press release does not mention global warming, these settlements are another way for EPA to attack the climate change problem under existing authority, even in advance of rules regulating GHGs under the PSD program.

BTW, if it seems as though I am inundating you with posts today, the blog will be on vacation until January 4, so I wanted to get some last posts done. Happy holidays to all.

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Harking back to legislative efforts of a few years ago, Representative John McHugh (R-NY) yesterday introduced legislation that would require significant reductions in emissions of SO₂ and NO_x, and mercury from power plants. The highlights of the bill include the following:

• No later than two years from enactment, EPA must promulgate regulations requiring that powerplants:
  • reduce SO₂ emissions by 75% over the Phase II levels contained in the current CAA acid rain program
  • reduce NO_x emissions by 75% over 1997 levels
• Even aside from the above-described reductions, on the later of 5 years from enactment or 30 years from initial operation, powerplants must meet applicable new source performance standards, or NSPS
• Mercury emissions from coal-fired powerplants will be restricted to 0.6 pounds per trillion Btu. These limits will go into effect:
  • As of the date of operation, for facilities beginning operations after December 31, 2010
  • As of January 1, 2013, for facilities existing as of December 31, 2010

There is no provision for a cap-and-trade program with respect to mercury. The bill would impose a penalty of $10,000 per ounce on facilities that exceed the mercury limit.

Representative McHugh has said that he hopes to attach the legislation to the climate change bill. I haven’t seen any discussion yet regarding the bill’s prospects, but the fact that it was introduced by a Republican, albeit one from New York, suggests that something like this is at least possible. 

To me, the requirement that existing facilities attain NSPS may be the most interesting part of the bill. While the regulated community is diverse, I think that, given sufficient time to meet NSPS, at least some fraction of owners of existing facilities would be willing to do so, if – and it’s a big if – Congress would in return make changes to the NSR/PSD rules so that facility owners would not have to engage in a difficult, expensive, and uncertain NSR review for every conceivable facility modification. Freedom from NSR review in return for compliance with NSPS by a reasonable date certain? That would be an interesting trade-off.

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The results of EPA’s annual auction of sulfur dioxide (SO₂) allowances under the acid rain program provide empirical support for a proposition that the regulated community repeatedly advances – certainty is critical to the success of complex regulatory regimes. Prices for 2009 allowances fell from last year’s average of $380/ton to $70/ton, or more than 80%. Prices in the 7 year advance auction fell even more dramatically, from $136/ton in 2008 to $6.65/ton, or more than 95%.

The short explanation for the crash in prices? Uncertainty over the fate of EPA’s Clean Air Interstate Rule. Although there may be a number of other factors in play, the consensus seems to be that CAIR is the primary culprit. Having a rule issued, challenged, struck down, vacated, and then temporarily reinstated does not provide much of a basis for rational investment planning by corporations that might need allowances.

The number and identity of the bidders are also interesting. Two bidders purchased more than 98% of the spot auction allowances. One bidder – JP Morgan Ventures Energy Corporation – purchased essentially 100% of the 7 year allowances. (Though you will all be comforted to know that “Bates College Environmental Econ” was able to purchase 2 allowances in both the spot and 7 year auctions.) Of course, most of the allowances are allocated to existing emitters; fewer than 3% of allowances are auctioned. Nonetheless, this seems like remarkably little interest.

Is there a lesson here for a CO₂ cap and trade program? Don’t let the perfect be the enemy of the good might be one candidate. Another would simply be not to tinker too much. The importance of cost certainty in corporate planning may be obvious, but that does not mean that it doesn’t bear repeating in times such as these.

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