Ct Finds Reheater Replacement Projects Triggered New Source Review

In United States v. La. Generating, LLC, 2012 U.S. Dist. LEXIS 134195 (M.D. La. 9/19/12), a federal district court ruled that reheater replacement projects for a coal-fired power plant did not qualify for the Routine Maintenance, Repair and Replacement (RMRR) exception to the New Source Review (NSR) program.

As a result, the defendant who acquired the coal plant pursuant to a 363 bankruptcy sale will now be liable for pre-acquisition NSR violations. This is because the court previously ruled that the defendant was the successor to the prior plant owner notwithstanding the “free and clear” language of the order of the bankruptcy court approving the sale as well as the confirmation order providing that the defendant was not a successor and “shall not have any liability for any claims against [Cajun Electric] as a result o fit s purchase of the Acquired Assets.” See December 2011  for our discussion on that ruling.

In this case, the Cajun Electric Power Cooperative (Cajun Electric) began constructing the “Big Cajun II” (BCII) coal-fired power plant in 1976 and began operating the plant in 1981. In 1994 and 1995, Cajun Electric upgraded the turbines of Units 1 and 2 (“the 1994/95 work”). Cajun Electric did not obtain a Preventing of Significant Deterioration (PSD) permit prior to starting work. In 1998 and 1999, Cajun Electric replaced portions of the primary boiler reheaters (“the 1998/99 work”) also without obtaining a PSD permit. The cost of each project was estimated at $4.5 million.

Defendant LaGen acquired BCII in April 2000 pursuant to the bankruptcy sale. In September 2001, LaGen submitted a revised Title V permit. While the application was still pending, EPA issued a notice of violation (“NOV”) regarding the 1998/99 work. In 2009, the federal government filed a lawsuit against LaGen seeking civil penalties and injunctive relief for NSR-PSD and Title V permit violations. Following the December 2011 decision, the parties then filed motions for summary judgment on whether the replacement of the primary reheaters constituted “major modifications” that triggered NSR-PSD.

The parties agreed that the so-called WEPCO factors set forth in Wisconsin Electric Power Co., v. Reilly, 893 F.2d 901 (7th Cir. 1990)  should be used to determine if the two primary reheater replacement projects constituted RMRR. The WEPCO factors are the nature, extent, purpose, frequency, and cost of the work, with no individual factor being dispositive. For the “frequency” factor, the parties agreed the court should take into consider the work conducted at the particular unit, the work conducted by others in the industry, and the work conducted at other individual units within the industry. In evaluating the “frequency” factor, the court said the relevant industrial sector was the coal-fired electric generating facilities but that it would give more weight to the frequency of similar work at particular units than to the overall number of similar projects across the industry.

The court said that just because other places may be replacing primary reheaters does not make it routine. However, if it were to turn out that similar units tended to replace their primary reheaters multiple times during a unit’s lifetime, this would suggest that such a project was routine.  The court also said that LaGen had the burden to establish the applicability of the exclusion.

On the “nature” factor, the defendant had argued that it followed both company protocol and general industry practice before doing the work, the work was routine. However, court said the degree of planning suggested that the work was anything but routine. The court also was persuaded that the work was not maintenance because Cajun Electric had treated the costs of the work as capital expenditures.

On the “extent” factor, the court said the issue was basically the size and scope of the project. LaGen pointed out that the work the work was done in 25 days per unit, a relatively short period of time within the industry. LaGen makes also noted that Cajun Electric directed bidders that the work was not to change the thermal performance of the reheater and that the new reheaters were to function in the same way. In addition to the extensive planning and preparation for the projects, the government pointed out that Cajun Electric’s own work order system referred to projects under $50,000 as “routine maintenance”. The Court noted that the work took 25 days per unit to complete, required a rail and pulley system to remove the old tubing, and the use of 175 boilermakers.  Everything about the project, the court concluded, was that it was extensive project and not a routine project.

Turning to the “purpose” factor, the court said the RMRR exception meant to apply to work that was done to preserve the status quo of a unit. The court noted that the purpose of the work was to reduce the number of forced outages that had been increasing over the years due to tube failures. The court said the work was to improve the condition of the units.  Since this type of work was beyond the purpose of the RMRR exception, the court found that the factor weighed against applying the exception.

For the “frequency” factor, LaGen pointed to projects that had replaced all or significant portions of reheaters at 574 units in the industry. The government argued this universe was too broad because it included projects costing at least $100,000 even though the cost for each of the Cajun Electric replacements was $4.5MM. The government argued the relevant projects should be those that occurred prior to 1998 and that cost at least $4.5MM. The court agreed that similar projects within the industry must be same size and scope, and that only pre-1998 projects were relevant. Even if it used the larger universe suggested by LaGen, the court said, there were no projects between 1972 and 1998 where facilities had performed multiple reheater replacements. Accordingly, the court concluded that the work was not a frequently performed procedure.

Turning to the cost factor, the court said $4.5MM was not only a lot of money but the most Cajun Electric had ever spent on the units. Borrowing from the definition of modification under the New Source Performance Standards, the defendant argued any project costing less than half of the replacement cost for an entire boiler should be considered routine. However, the court said such an interpretation would be an exception that swallowed the rule and did not fit with the narrow nature of the exception.