Wabash Cannonball: 7th Circuit Opinion Limits Long-standing EPA Method for Calculating Emission Increases

October 19, 2010

In an Oct. 12, 2010, decision, the 7th Circuit Court of Appeals ruled inadmissible EPA testimony calculating emissions increases as a result of equipment replacement projects, and reversed a jury verdict against Cinergy for alleged New Source Review (NSR) violations at its Wabash, Ind., power plant. U.S. v. Cinergy Corporation, ___F3rd. ___, 2010 LEXIS 20994 (7th Cir. 2010). This decision undermines EPA’s long-standing approach to NSR enforcement against non-baseload power plants, and may provide a basis to challenge EPA’s overall methodology for predicting emissions increases at other types of facilities.

The case grew out of an NSR enforcement action brought by EPA against a number of Cinergy facilities in 1999. (Cinergy was acquired by Duke Energy in 2006.) EPA alleged that Cinergy and its predecessor companies performed numerous equipment replacement projects at their facilities resulting in increased emissions, and that these projects were therefore modifications which required pre-construction permits. Cinergy originally argued that emissions increases for NSR purposes could only be evaluated based on an increase in the hourly rate, as opposed to an increase in the annual volume as argued by EPA. The district court ruled for EPA on this issue – a decision affirmed by the 7th Circuit in U.S. v. Cinergy Corp., 458 F3d 705 (7th Cir. 2006).

The parties then proceeded to trial on one facility in which a jury was asked to evaluate 14 specific projects at Cinergy’s Wabash plant. The jury returned a verdict that only four of the projects were NSR modifications which increased emissions in sulfur dioxide and nitrogen oxides. Based on that finding, the district court ordered Cinergy to shut down the Wabash plant.

In a relatively brief opinion, the court ruled for Cinergy on the two grounds raised. The court’s ruling with respect to the nitrogen oxide emissions, holding that the testimony of EPA’s experts should have been struck because they used the wrong methodology to calculate potential emissions increases, breaks surprising new ground.

The court found that the experts were not entitled to assume that increases in annual electric generating capacity at a non-baseload power plant achieved by projects replacing aging components would be proportionate to an increase in actual output. The court held that the cycling plant’s actual output would continue to be constrained by the economics of the system in which it operated and EPA’s experts could not evaluate potential increases in operations without taking those economics into account. Without this testimony, EPA had no case and the court ordered the verdict reversed with instructions to enter a verdict for Cinergy.

For non-baseload plants in NSR enforcement the implications are tremendous. EPA has used the method stricken by the court from the beginning of its enhanced NSR enforcement project, and this approach informed the evaluation of potential liability by EPA and environmental practitioners. Indeed, this decision calls into question EPA’s process for evaluating the “potential to emit” for many new and modified facilities, and appears to allow facility operators to argue that their potential to emit can be constrained by economics, not just physical constraints or enforceable permit limits.

Just as significant was the court’s ruling on that the Indiana State Implementation Plan (SIP) in effect at the time of the projects governed Cinergy’s sulfur dioxide emission increases. The court noted that the projects took place between 1989 and 1992, when Indiana’s approved SIP specifically required potential NSR emissions to be evaluated based on increases in the hourly rate of operation, rather than in the annual tons of emissions.

The court held that even though the D.C. Circuit Court of Appeals had by then ruled that NSR emissions increases should be evaluated solely on an annual tons basis, and EPA had revised its regulations accordingly, Indiana’s then current SIP controlled. The court found that Cinergy was entitled to rely on the SIP in effect at the time of its projects and that the increases in sulfur dioxide emissions associated with the projects, evaluated in light of that SIP, did not implicate NSR.

The court’s finding that a SIP can shield a permittee from responsibility to comply with EPA regulations has potentially significant implications for EPA’s implementation of future programs, particularly its GHG Tailoring Rule. The court’s ruling on Indiana’s 1992 era SIP will have limited impact, although it should encourage companies involved in enforcement actions to review the SIP applicable at the time of the violation. More significantly, the finding that a SIP represents the applicable law for emission sources despite regulations adopted by EPA or interpretations by courts, will resonate through the introduction of any new EPA programs or regulations.

While some states allow for EPA regulations to modify their SIPs automatically, other states go through SIP revision procedures, resulting in a significant time lag between EPA’s action and the modification and approval of individual SIPs. EPA generally takes the position that its Clean Air Act regulations are enforceable against permittees during that lag, but the court here rules otherwise. This may force EPA to take more aggressive action to ensure states promptly modify their SIPs to reflect EPA regulations.

The decision is more than surprising. In recent years, many appellate courts, including the 7th Circuit, have routinely held for the government in NSR cases. The court took an unusually aggressive approach with EPA’s arguments, broke remarkable new ground, and took the additional step of having judgment entered for Cinergy. Similarly, EPA must begin to question its NSR strategy. It prosecuted this case for 11 years, obtained a relatively limited jury verdict, and now has had that verdict reversed by the appellate court.

While some of the issues here were fact specific, the case still represents an enormous use of resources which eventually resulted in no identifiable gain and a negative appellate ruling. The 7th’s Circuit’s decision may force EPA to reevaluate its ongoing approach to NSR cases in light of its limited resources and shifting priorities. In the meantime, EPA is likely to appeal but may have a hard time obtaining either en banc review or certiorari.