US Supreme Court hears arguments in Duke Energy NSR litigation

Washington (Platts)--1Nov2006

The US Supreme Court held oral arguments Wednesday in a landmark case
that could radically alter the New Source Review program, a provision of the

Clean Air Act that requires power generators and others to install new
pollution controls when undertaking certain modifications.

The case pits Environmental Defense and other environmental advocacy
groups against Duke Energy, a Charlotte, North Carolina-based electric
utility. The groups said Duke violated NSR when it modified eight coal-fired
power plants in the Carolinas between 1988 and 2000 without installing new
pollution controls. The Environmental Protection Agency, which brought the
original enforcement action against the utility during the Clinton
administration, is siding with Environmental Defense in the case.

Duke, however, argued that its modifications were not subject to NSR
because they did not create the type of emissions increases that Congress
envisioned when it created the NSR program in 1977. Specifically, Duke said
Congress did not intend for NSR to cover modifications that do not increase
the "hourly rate" of a plant's emissions. Duke said its modifications did not
do that, even though the modified plants could operate for longer periods
without shutting down for maintenance, a change Environmental Defense said
would increase their emissions on an annual basis.

Much of the hour-long oral argument session Wednesday focused on whether
EPA altered the types of modifications that would trigger NSR without making
these changes clear to Duke and other generators. Sean Donahue, a
Washington-based attorney who represented Environmental Defense in the case,
said Duke was well aware that it was violating NSR when it carried out
"massive renovations" its plants, but went ahead with the upgrades anyway.

"Duke knew very well what EPA's interpretation was" of the NSR program,"
Donahue told the justices.

But that argument didn't seem to sit well with Justice Antonin Scalia,
who noted that EPA in a 1981 memorandum said modifications would not trigger
NSR if they did not increase emissions on an hourly basis. "What I'm concerned
about is that companies can get whipsawed" because EPA changed the type of
modifications that trigger NSR, Scalia said.

Chief Justice John Roberts seemed to agree, saying Donahue was "audacious"
for suggesting that the ground rules of the NSR program were always "perfectly
clear" to Duke.

Donahue, speaking to reporters after the oral arguments, defended his
remark. "I'm audacious sometimes," he joked, before reiterating his claim that
Duke knew "exactly what it was doing" when it modified its plants.

Carter Phillips, Duke's Washington-based attorney, bristled at that
argument. Phillips said EPA made a 180-degree turn on the NSR regulations
during the Clinton administration, when it brought NSR enforcement actions
against Duke and other large electricity generators. Phillips called this a
"pure gotcha" campaign, and said that if EPA had clarified the NSR program
during a rulemaking back in 1980, he "wouldn't have had to litigate this case
25 years later."

After the oral arguments, Phillips said he was optimistic Duke would
prevail, but he cautioned against reading too much into the justices'
questions. "I don't think there's any way you can predict" the outcome,
Phillips said. Donahue, similarly, said he was optimistic that Environmental
Defense would prevail.

A ruling in the case is not expected until mid-2007.

--Brian Hansen, brian_hansen@platts.com

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