Discussion Board: Initial Thoughts on Duke Energy

David B. Rivkin, Jr., is a partner in the Washington, D.C. office of Baker & Hostetler LLP. He participated in this case as an amicus, filing a brief on behalf of a group of law professors, supporting the jurisdictional aspects of the respondent’s position.

The Supreme Court’s decision today in Environmental Defense v. Duke Energy Corp., No. 05-848, decided both a great deal and very little in the battles over the legality and propriety of the Environmental Protection Agency’s (“EPA”) new source review (“NSR”) enforcement initiative. On one hand, the Supreme Court rejected the rationale adopted by the Fourth Circuit and at least one other district court and ruled in the government’s favor on a key legal issue—how to define an emission increase for purposes of the NSR program. On the other hand, the Supreme Court did not decide other key disputed issues regarding the NSR program, which have the potential to keep alive Duke Energy and the other lawsuits that are part of EPA’s NSR enforcement initiative. Moreover, the Court suggested that EPA has broad discretion to interpret key components of the NSR program, a key issue in considering the legality of the Bush Administration’s attempts and proposals to reform the NSR program. As a result, it remains to be seen whether Duke Energy will signal the end of the ongoing NSR saga or whether it will simply substitute one issue for another in the pending enforcement actions.

Enacted as part of the Clean Air Act Amendments of 1977, the NSR program was designed to manage economic growth in a way that balances environmental and economic imperatives. The program requires greenfield pollution sources to obtain preconstruction permits and install state of the art pollution control technology when they are constructed. The program also requires that existing sources obtain preconstruction permits, and possibly install this same control technology, when they are modified—that is, when the owner or operator makes a physical or operational change to the source that increases the source’s emissions. EPA’s NSR enforcement initiative consists of a series of lawsuits that the government filed in 1999 against most major electric utilities, claiming that these utilities unlawfully “modified” their power plants without obtaining NSR preconstruction permits. At the Supreme Court level, the Duke Energy case addressed one narrow legal issue: whether the Fourth Circuit was correct in holding that EPA’s regulations must be interpreted as requiring an increase in maximum hourly emissions, rather than maximum annual emissions, for a modification to occur.

The Supreme Court vacated the Fourth Circuit’s opinion and held that interpreting the regulations in effect at the time of the allegedly-unlawful activity to require that a physical change to a source increase the source’s maximum hourly emissions is not consistent with the regulations’ text, and that the regulations’ validity was not at issue in the case. Beyond that, the Supreme Court refused to “consider the significance” of Clean Air Act § 307, which the government and environmental group petitioners argued precluded the Fourth Circuit’s holding.

The Supreme Court’s decision has clarified greatly the legal standard that must be applied to the NSR enforcement initiative actions, and resolves a circuit split between the Fourth Circuit, which decided Duke Energy, and the Seventh Circuit, which decided the enforcement action filed against Cinergy Corporation (itself, ironically, now part of Duke Energy). However, it remains to be seen whether this newfound legal clarity will actually bring an end to the NSR enforcement initiative, or merely cause the government and the defendants to fight about a different set of legal issues.

One issue that the Supreme Court expressly declined to decide is whether the EPA has “taken inconsistent positions and is now retroactively targeting twenty years of accepted practice.” This language has left open the possibility that the NSR enforcement initiative’s legal battles could shift to the issue of “fair notice,” which has been briefed in numerous of the NSR enforcement actions. While the Supreme Court refused to defer to pronouncements by EPA officials that supported the Fourth Circuit’s interpretation of the NSR regulations, it is possible that the Supreme Court’s recognition that EPA has changed course in its interpretation of certain key Clean Air Act regulatory terms will bolster the defendants’ fair notice defense as to at least some of the allegedly unlawful modifications.

Another key issue the Supreme Court did not decide is what legal standard applies to the “routine maintenance, repair and replacement” exclusion from NSR. This issue is particularly crucial because the Duke Energy district court held that the routine maintenance exclusion must be assessed primarily by considering what activities are routine in the industry. This conclusion has been adopted by at least one other district court. Under this standard, the government and industry intervenors stipulated that all activities Duke Energy conducted were routine in the industry. While the Fourth Circuit did not resolve this issue because it decided the case on other grounds, it seems likely that this issue will be presented to the Fourth Circuit either now or later, and could end many NSR enforcement actions if the electric utility defendants were to prevail.

The routine maintenance and fair notice issues are not the only two issues in the NSR enforcement initiative that the Supreme Court did not resolve—they are the issues that could conceivably decide an enforcement action in the defendants’ favor before trial. The NSR enforcement initiative includes numerous other complex legal issues that have not been seriously litigated before, and which could materially affect the outcome of the initiative. For instance, the appropriate legal standard for causation and whether a failure to obtain an NSR preconstruction permit constitutes a continuing violation of the Clean Air Act have both been hotly contested in the current NSR enforcement actions, but have not yet been definitively addressed in most cases. Accordingly, it appears that while the Supreme Court’s decision in Duke Energy’s favor was certainly a victory for the government, it may not be a conclusive one.

Finally, the Supreme Court’s decision in Duke Energy suggested that it might be inclined to uphold the legality of the Bush Administration’s NSR reforms. EPA has proposed revising the NSR program’s interpretation of the term “modification” to conform to the Fourth Circuit’s decision in Duke Energy. While one rationale for this decision is obviously no longer in effect, the government also articulated various policy concerns that would similarly justify adopting a maximum hourly increase test for determining whether the NSR program is implicated.

Here, the Supreme Court’s opinion suggested that such a revision might be acceptable regardless of the outcome today in Duke Energy. In holding that the term “modification” need not be construed consistently throughout the Clean Air Act, the Court emphasized that Congress did not have “details of regulatory implementation in mind when it imposed PSD requirements on modified sources,” and that as a result, EPA had “customary agency discretion to resolve questions about a statutory definition by looking to the surroundings of the defined term.” Justice Thomas was more blunt, refusing to join this portion of the Court’s opinion because, in his view, “Congress’ explicit linkage” of the NSR program’s definition of modification to the New Source Performance Standards’ definition of modification “prevents the Environmental Protection Agency from adopting differing regulatory definitions of ‘modification’” for the NSR and NSPS programs. It follows that the Supreme Court is similarly likely to hold that EPA has the discretion to obey the general presumption that statutory terms defined consistently in the Clean Air Act should be given consistent effect.

Moreover, in 2003, EPA finalized the Equipment Replacement Provision, which created a safe harbor provision from the NSR program for like-kind part replacements at sources that did not increase the source’s hourly emissions and did not cost more than 20% of the source’s overall cost. The D.C. Circuit vacated this action, and the Supreme Court is currently deciding whether to review this decision. The D.C. Circuit’s decision was premised on the assumption that EPA did not have discretion to exclude a certain set of activities that would be excluded from the NSPS program from the NSR program. Interestingly, despite deciding Duke Energy, the Supreme Court took no action on this petition, which has been carried over for several conferences. This suggests that the Supreme Court is considering carefully whether to review the decision to ensure that it does not unduly crab EPA’s regulatory discretion under the Clean Air Act.