Tough Summer for EPA and Administrative Law Professors

The dog days of August  have been particularly cruel to EPA and law professors who are teaching administrative law this semester. In August alone, there separate federal appeals court vacated high profile Clean Air Act initiatives of EPA. The decisions were stunning for their lack of deference to EPA’s interpretations of its Clean Air Act authority. As a result of these decisions, administrative law professors are going to have to revise their course materials to incorporate these rulings.

Judicial challenges to administrative actions are guided by the principles articulated by the United States Supreme Court in Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837  (1984). In Chevron, the Supreme Court set forth a two-step analysis for reviewing administrative decisions. Step 1 is whether Congress has directly spoken  to the precise question at issue. If the intent of Congress is clear, the court  as well as the agency must give effect to the unambiguously expressed intent of Congress. Step 2 applies when the statute is silent or ambiguous with respect to the specific issue. Under such a situation, the court is not to impose its own construction of the statute but afford considerable weight to the interpretation of the statutory scheme by the agency that has been entrusted to administer the law. The court may not substitute its own construction of a statutory provision and should defer to a reasonable interpretation made by an agency unless the interpretation or regulation is arbitrary, capricious, or manifestly contrary to the statute.  The court explained that when a challenge centers on the wisdom of the agency’s policy rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. The court said that under our form of Constitutional government, federal judges  have a duty to respect legitimate policy choices made by the other branches of the government. The court said it was not the responsibility or role of he courts to assess the wisdom of policy choices or resolve the struggle between competing views of the public interest.

The issue in Summit Petroleum Corp. v. EPA, 2012 U.S. App. LEXIS 16345 (6th Cir. 8/7/2012) was if EPA could treat geographically distant gas production wells as one emission source so that the entire production system would be considered a “major source” that was subject to the Title V permit program.  A “major” source under Title V is “any stationary facility or source of air pollutants which directly emits, or has the potential to emit, one hundred tons per year of any pollutant,”

In this case, the plaintiff owned natural gas sweetening  plant that processed “sour” gas produced from approximately 100 production wells in a 43-square mile area. The distance from the wells to the sweetening plant varied from 500 feet to 8 miles. Summit Petroleum owned all of the production wells and the subsurface pipelines that connect each of the wells to the sweetening plant. However,Summit did not own the property between the individual well sites or the property between the wells and the plant. None of the well sites shared a common boundary with each other nor did any of the well sites share a common boundary with Summit’s production plant. Flares were installed at various points on the pipelines to relieve pressure on the gas collection equipment. The closest flare was located approximately one half-mile from the plant while the remaining flares were each over one mile away.

The sweetening plant, gas production wells, and flares emit sulfur dioxides (SO2) and nitrous oxides (NOx). Because the sweetener plant emitted or had the potential to emit less than 100 tons per year of these pollutants, it would not be regulated as a “major source” Title V of the Clean Air Act (CAA). However, when if SO2 emissions of the flares and wells were combined with those of the sweetening plant, the total SO2 emissions would exceed the 100 tons threshold. EPA’s Title V regulations provide that multiple pollutant-emitting activities can be aggregated together and considered a single stationary source only if they: (1) are under common control; (2) “are located on one or more contiguous or adjacent properties”; and (3) belong to the same major industrial grouping (40 CFR 71.2).

In 2005,Summit and the Michigan Department of Environmental Quality (MDEQ), submitted a request to the EPA to determine ifSummit’s facilities met the definition of a Title V major source.Summit argued that aggregation was improper its wells were located at great distances from its production facility on entirely different tracts and leases so that they should not be considered contiguous or adjacent to one another. Summit also noted that EPA specifically considered aggregation of multiple facilities in the oil and gas industry under the Hazardous Air Pollutant (HAP) regulations and determined that aggregation was improper.

EPA determined that the natural gas sweetening plant and the production wells constituted a single stationary source and was a major source that required a Title V permit. The agency said that the wells and production plant were commonly owned, part of the same industrial grouping but were not located on contiguous surface sites. Accordingly, EPA said it had to evaluate the adjacency of the sour gas wells to the sweetening plant to determine whether Summit’s facilities constituted a single stationary source for purpose of the Title V program. Although the agency acknowledged that its so-called “Wehrum Memorandum” stated that “proximity is the most informative factor in making a source determination involving oil and gas activities”, EPA concluded the wells and sweetening plant based on a “common sense notion of a source and the functional interrelationship of the facilities.”

Summit appealed, arguing that the “adjacency” can be established through functional relatedness was unreasonable and contrary to the plain meaning of the term “adjacent.” In a 2-1 decision, the 6th circuit agreed, vacating EPA’s ruling and remanding the matter to determine if the sweetening plant and gas wells were sufficiently physically proximate to be considered “adjacent” within the ordinary, i.e., physical and geographical, meaning of that requirement.

EPA argue it was entitled to Chevron deference since had an established history of used functional relatedness to supplement the traditional definition of “adjacent”. However, the court held that the term “adjacent” was unambiguous and it was not required to defer to EPA’s interpretation. The court said just because an agency had adopted a long-term erroneous interpretation did not mean the agency was entitled to deferential treatment. Instead, the court said that it would take this first opportunity to review a history of “entrenched executive error” to vacate EPA’s agency’s unreasonable interpretation of its Title V permitting plan. Ouch!

Even if the term was ambiguous, the court said it would still find the EPA’s interpretation of “contiguous or adjacent properties” was inconsistent with the regulatory history of its Title V permitting plan and the agency’s own guidance memorandums. The court noted that the  Wehrum Memorandum had rejected the notion that geographically distant oil and natural gas activities could be considered “contiguous” or “adjacent. Moreover, even when the Obama Administration withdrew the Wehrum Memorandum and replaced it with the so-called the McCarthy Memorandum, the court said EPA conceded that proximity may well be the  determining factor.

State of Texas v. United States EPA, 2012 U.S. App. LEXIS 16898 (5th Cir. 8/13/2012) involved EPA’s disapproval of a revision to the Texas State Implementation Plan (SIP). EPA has been engaged in a highly public dispute with Texas over its administration of the CAA and has threatened to rescind the state’s CAA delegation. It appears that the court may have viewed the challenged action in this case as more a reflection of this political battle rather than a reasoned policy dispute.

In the 1990s,Texas implemented a Flexible Permit Program (FPP) for new source review (NSR) for minor sources. Under the FPP, a facility could obtain a permit that would allow modifications to facilities without additional regulatory review as long as the emissions increase would not exceed an aggregate limit specified in the permit. The FPP was intended to incentivize grandfathered facilities to install pollution controls in exchange in exchange for obtaining approval of modifications or operational changes to emissions sources. All told, approximately 140 FPP permits were issued.

Texas submitted included its FPP in revisions to its SIP in 1998 as a form of Minor New Source Review (NSR). In 2007, EPA began sending letters to FPP facilities indicating that the permit may not comply with applicable federal requirements. EPA also began objecting to Title V permits issued to facilities with FPP permits.

In 2009,  EPA proposed to disapprove the revision because it was not expressly limited to Minor NSR. EPA was concerned that the program could be used by major sources to avoid undergoing NSR.  EPA wanted an express negative statement prohibiting major sources from avoiding Major NSR. In 2010,  EPA finalized its objection to the SIP revision. By the time the dispute reached the court, 42 facilities had begun the process of “de-flexing” or withdrawing their FPP permits.

The court said that EPA’s quibbling with the language of the program was inconsistent with the notion of cooperative federalism envisioned in the CAA. The court said that while EPA was responsible for providing the basic requirements of state implementation plans, the states had broad authority to determine the methods and particular control strategies they will use to achieve the statutory requirements. The court said EPA did not have authority to condition approval of a SIP based simply on its preference of a particular control measure.

The court also found that EPA had failed to put forth evidence demonstrating how the program would cause interference with applicable air quality standards. In the absence of any expression of technical expertise, the court said it did not defer to EPA’s interpretation. The court held that the CAA furnished the standards that EPA was to apply in disapproving SIP revisions and those standards did not require drafting in negative terms. Therefore, the court held that this first reason for rejecting the Texas Program was arbitrary and capricious, and in excess of its statutory authority.

EPA also claimed that the FPP contain inadequate monitoring, record keeping and recording (MRR) provisions but instead conferred too much discretion on the TCEQ Director. EPA alleged it had a policy disfavoring such director discretion, the court rejected this ground as well. The court said that EPA did not cite its policy against director discretion when it disapproved the FPP so the court did not have to consider that policy. However, the court observed that the agency had approved such provisions in other state SIPs. The court said that while EPA could certainly change its policies, it could reject the very concept of director discretion in one case months after approving extensive director discretion in another, and then hold out its rejection here as an example of reasoned decision-making. This suggested to the court that EPA had invented this policy for the sole purpose of disapproving Texas’s proposal. Ouch again!  As a result, the court vacated EPA’s disapproval and remanded the SIP revision to EPA for reconsideration.

In Eme Homer City v. EPA, 2012 U.S. App. LEXIS 17535 (D.C. Cir. 8/21/2012), the Court of Appeals for the District of Columbia struck down the Cross-State Air Pollution Rule (Transport Rule) which is also known as the “good neighbor” provision.  Under section 110 of the CAA, SIPs must contain provisions that prevent emissions of pollutants that will “contribute significantly to non-attainment or interference with maintenance of air quality standards.”

The court held that EPA exceeded its authority when it promulgated the Transport Rule because upwind States were required to reduce emissions by more than their own significant contributions   to a downwind State’s non-attainment and did not take into account from other upwind States, The court said the Transport Rule was flawed because the emissions reductions for each upwind State was not tied to how much the upwind State contributed to downwind States’ air pollution problems but instead on the cost to reduce emissions if the upwind State’s plants applied all controls available at or below a given cost per ton of pollution. In addition, the court said EPA violated the CAA when it failed to require reductions on a proportional basis that took into account contributions of other upwind States to the downwind States’ non-attainment problems. The court said that EPA may not require upwind States to do more than necessary for the downwind States to achieve the NAAQS.

The court also held that EPA acted improperly when it simultaneously issued Federal Implementation Plans (FIPs) to implement emission reductions obligations on sources in the upwind States instead of providing states an initial opportunity to implement the obligations themselves through their own SIPs. The court said EPA cannot impose a FIPs until the agency finds that the SIP fails to contain a “required submission” or EPA disapproves a SIP because of a deficiency. However, the court said, EPA could deem that a SIP lacked a required submission or was deemed deficient for failing to implement the good neighbor obligation at the same time that EPA adopted the good neighbor provision. The court said that the placement of the good neighbor requirement in the SIP section of the CAA strongly suggested that Congress intended states to implement those obligations.

The court said that the good neighbor provision was not a free-standing tool for EPA to seek to achieve air quality levels in downwind States that are well below the NAAQS. Therefore, if modeling shows that a given slate of upwind reductions would yield more downwind air quality benefits than necessary for downwind areas to attain the NAAQS, EPA must attempt to ratchet back the upwind States’ obligations to the level of reductions necessary and sufficient to produce attainment in the downwind States

Moreover, the court noted, section 126 of the CAA explicitly authorized EPA to take direct action including “emission limitations and compliance schedules,” against specific sources that generate interstate pollution. The fact that Congress explicitly authorized EPA to use direct federal regulation to address interstate pollution suggests it did not contemplate direct Federal regulation in the section 110 of the CAA.

The summer was not a complete loss for EPA as EPA was able to win another battle with Texas in Luminant Generation Co. LLC v. United States EPA, 2012 U.S. App. LEXIS 15722 (5th Cir. 7/12/2012). Here, EPA partially approved a portion of SIP revision submitted by Texas that created an affirmative defense against civil penalties for excess emissions during unplanned startup, shutdown, and maintenance/malfunction (“SSM”) events. EPA explained that it had long recognized that sources may, despite good practices, be unable to meet emission limitations during periods of start-up and shutdown and that sources   may suffer a malfunction despite good operating practices due to events beyond the control of the owner or operator. A source has the burden of proving that the excess emissions were due to circumstances beyond the control of the operator or the owner.

However, the agency disapproved the portion of the SIP revision providing an affirmative defense against civil penalties for planned SSM events EPA said that sources should be able to comply with applicable emission limits for planned events. The EPA said that the affirmative defense for planned SSM events was not “narrowly tailored” because planned maintenance activities are predictable, and excess emissions can be avoided by scheduling maintenance during shutdown periods. Further, EPA contended that the provision was potentially broadly applicable because it contained a “defect” that could be interpreted as not requiring a source to establish all elements of the affirmative defense.

The court started its analysis by noting that the CAA was silent if a state may include in its SIP the availability of an affirmative defense against such penalties. Consequently, the court said that EPA may not interfere with a state’s broad authority to determine the methods and particular control strategies to use to achieve the statutory requirements including its decision to include the availability of an affirmative defense for certain unplanned SSM events under narrowly defined circumstances so long as the SIP revision is consistent with the CAA requirements.

The found that EPA’s reasoning for its partial approval of the SIP revision was consistent with its past policy guidance as well as was the result of a formal and deliberative decision-making process. Therefore, the court held that the agency’s action was entitled to Chevron deference.

The court then found EPA’s approval of the affirmative defense for unplanned SSMs was a permissible construction of the statute. The court also found that the text of the SIP supported EPA’s view that a source owner or operator may not be required to establish all elements of the affirmative defense. The court found EPA’s reasoning met minimal standards of rationality and therefore ruled the agency had not acted was not arbitrary, capricious, or contrary to law, when it disapproved the portion of the SIP revision containing an affirmative defense for planned SSM activity.

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