It’s Wise to Make Certain that Contracts Properly Allocate Future Environmental Compliance Costs

Last week, the 6th Circuit Court of Appeals ruled that AEP, which entered into a consent decree requiring it to install certain pollution controls at its Rockport 1 and 2 power plants, could not force the owner of those plants to pay to install the controls.  The case involved the interpretation of specific contractual language under New York law, but it still has lessons for power plant owners and operators everywhere.

AEP built Rockport 1 & 2.  It later entered into a sale-leaseback arrangement, running through 2022.  In 2007, EPA took enforcement action against several AEP facilities, not including Rockport.  Nonetheless, AEP entered into a consent decree in which it agreed to install pollution controls at Rockport by December 31, 2019.  In 2013, the government agreed to extend the time for installation of final controls at Rockport until December 31, 2028.

After entry of the modification to the decree, AEP took the position that the plant owner had the obligation to install the controls required by 2028, because the lease terminates in 2022.  While it actually persuaded the District Court, the Appeals Court was having none of it.

By reading the Facility Lease to allow AEP to settle litigation regarding alleged Clean Air Act violations at other plants by way of a consent decree affecting Rockport 2 and then encumber the owners’ interests in Rockport 2 via the 2013 modification, the district court gave AEP carte blanche authority to avoid the [contractual provisions making AEP liable for judgments entered against it.]

Why does this case matter?  I don’t know if it’s abject or object, but it’s certainly a lesson.  In the modern world of electric generation, with merchant capacity taking an ever larger role, and with power plants changing hands with dizzying frequency, the case is a useful reminder that the language of agreements matters, the parties on both sides of any transaction had better think carefully what the generation world might look going forward, and it would be wise to plan for all foreseeable contingencies.

Time to hire good lawyer!

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