Appeals court vacates EPA equipment replacement rule

Appeals court vacates EPA equipment replacement rule

Washington (Platts)--20Mar2006

In a decision hailed by states but disappointing to the electric utility
industry and the Bush administration, a federal court Friday vacated the
Environmental Protection Agency's rule that would have allowed utilities to
avoid Clean Air Act requirements when upgrading coal-fired power plants.

The 3-0 ruling would trigger New Source Review requirements for even routine
maintenance measures if emissions increase, industry groups said Friday. Also,
the case does not affect ongoing litigation between EPA and utilities, such as
the Duke Power case, over possible NSR violations made during plant
modifications from the late 1970s to late 1990s, they said. Those cases must
be litigated separately.

The decision by the US Court of Appeals for the District of Columbia Circuit
zoomed in on the plain language of the law and concluded that Congress clearly
meant that a physical change to a power plant that results in emissions
increases is a modification subject to new-source review requirements.

EPA's rule, which had been stayed by the court since 2003, would have allowed
utilities to dodge NSR requirements when replacing equipment at power plants
with similar components that "do not exceed 20% of the replacement value of
the process unit and does not change its basic design parameters."

The court ruled in State of New York v. Environmental Protection Agency that
the EPA's equipment replacement provision violates the intent of Congress when
it formulated the Clean Air Act. "First, Congress' use of the word 'any' in
defining a 'modification' means that all types of 'physical changes' are
covered," the court said in its decision. "Although the phrase 'physical
change' is susceptible to multiple meanings, the word 'any' makes clear that
activities within each of the common meanings of the phrase are subject to NSR
when the activity results in an emission increase.

"As Congress limited the broad meaning of 'any physical change,' directing
that only changes that increase emissions will trigger NSR, no other
limitation (other than to avoid absurd results) can be implied," the court
said. "The definition of 'modification,' therefore, does not include only
physical changes that are costly or major. Second, Congress defined
'modification' in terms of emission increases, but the ERP would allow
equipment replacements resulting in non-de minimis emission increases to avoid
NSR. Therefore, because it violates [CAA], we vacate the ERP."

The agency, which had two other NSR rule changes vacated by the court last
year, had argued that its ERP was a "policy choice" and pointed to the Clean
Air Act's "'model market-based programs,' as support of its view that economic
and environmental interests can be effectively balanced while limiting the
application of NSR to existing sources," the court said.

"Although EPA might prefer market-based methods of controlling pollution,
Congress has chosen a different course with NSR," the judges wrote.

Despite protests from environmental groups and states that claimed they were
in harm's way from out-of-state coal-fired emissions, the ERP would remain
unchanged, EPA said last summer. Under the ERP, which was finalized in October
2003, equipment replacements that meet certain criteria can automatically
proceed under routine maintenance, repair and replacement, excluding it from
major NSR requirements.

In November 2003, state and local government groups challenged the rule in the
D.C. Circuit court to prevent the rule from taking effect. In December 2003,
the court granted those requests and issued an order to stay the effective
date of the ERP.

EPA issued a 29-word statement in response to its loss and declined to say
whether the agency would seek an appeal. "We are disappointed that the court
did not find in favor of the United States. We are reviewing and analyzing the
opinion and cannot comment further at this time."

Ruling disappointing

Scott Segal, director of the Electric Reliability Coordinating Council, called
the court decision disappointing. "To place the decision in context, we
believe it is a step backwards for the protection of air quality in the United
States. The decision does not deal with pending enforcement actions and
explicitly recognizes the legality of the 'routine maintenance' exclusion.
This case, which deals with a 2003 rule, does not purport to interpret the
1980 NSR rules that are the basis of the enforcement actions [but] it appears
that the NSR enforcement actions filed back in the late 1990s are on no firmer
legal ground today than they were before [the case] was decided."

"Unfortunately, there's an absurdity to the decision," Edison Electric
Institute spokesman Dan Riedinger told Platts Friday. "[Electricity
generators] would be prohibited from doing things that are relatively minor.
We have an obligation to maintain the reliability of our facilities because we
have an obligation to provide power."

That doesn't mean the electricity generating industry will "skimp" on
maintenance, but the ruling could "raise the stakes" for electric reliability,
he said.

New York Attorney General Eliot Spitzer, who led the lawsuit backed by 14
states and a dozen advocacy groups, said the decision was "a major victory"
for public health and will "encourage industry to build new and cleaner
facilities, instead of prolonging the life of old dirty plants."

"While today's decision was unequivocal, there are continuing threats to
enforcement of the Clean Air Act, which the administration and EPA have
repeatedly sought to undermine," Spitzer said. "Our hope is that today's clear
and forceful reaffirmation of the act's vitality will cause the administration
to reconsider its course."

State and local clean air regulators also applauded the court's decision.
State and Territorial Air Pollution Program Administrators/Association of
Local Air Pollution Control Officials told EPA in 2003 that under the rule, a
utility could spend up to $250 million within five years modifying a 1,000-MW
power plant and not come under NSR requirements regardless of their impact on
air quality.

The ruling is "a tremendous victory for clean air and preserves an important
regulatory tool for state and local air quality officials," said Bill Becker,
executive director of the two groups.

Environmental groups were letting out a sigh of relief. "Today, the needs of
asthmatic children and the elderly trumped the Bush administration's attempt
to repeal the Clean Air Act," said John Stanton, vice president of the
National Environmental Trust. "States have made it clear that limits on their
authority to cut air pollution from old power plants are illegal and our
nation's second highest court agrees."

It's too early to say whether the industry will appeal the case to the US
Supreme Court, Riedinger said. That is the next avenue of appeal after the
lower appeals court.

--Steve Hooks, steve_hooks@platts.com and
--Cathy Cash, cathy_cash@platts.com

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