On Nov. 14, 2023, the Colorado Apartment Association (“CAA”) and Apartment Association of Metro Denver (“AAMD”), which represent thousands of apartment owners, filed a lawsuit against the Colorado Air Quality Control Commission (“AQCC”) in Denver District Court. The lawsuit challenges the state’s mandate to reduce energy use in large buildings under the “Building Benchmarking and Performance Standard” regulations, otherwise known as “Regulation 28” or “Reg 28,” that went into effect on Oct. 15, 2023.

As our team has previously explained, Regulation 28 imposes new energy performance standards on large buildings by requiring “covered building” owners to reduce greenhouse gas emissions by 7% by 2026 and by 20% by 2030 as compared to the benchmark levels. Reg 28 defines a “covered building” as any commercial or residential building over 50,000 square feet, which is estimated to be approximately 8,000 buildings throughout Colorado. To meet such standards, building owners must make material building modifications, such as:

• electrifying natural gas equipment;
• installing high-efficiency appliances;
• converting to LED lighting; and
• improving heating and cooling efficiency by adding insulation, thickening walls, and replacing doors and windows.

Owners are authorized under Reg 28 to apply for a waiver, extension or exemption, in certain circumstances. Reg 28 received harsh criticism from building owners, management companies and developers across the state who cited the practical challenges and significant costs of implementing the required energy reductions, interference with the operation and management of projects and the short deadline to meet Reg 28’s initial 7% reduction requirement. Industry experts have estimated the total cost of compliance to be north of $3.1 billion, or an average cost of $387,000 per each of the estimated 8,000 covered buildings.

The lawsuit brought by CAA and AAMD challenges the AQCC’s rulemaking process on procedural and fairness grounds. Specifically, CAA and AAMD allege that:

1. the incomplete, last-minute and materially modified drafts released during the rulemaking process failed to give CAA, AAMD other interested parties and the public an opportunity to participate in, and proper notice of, the rulemaking and proposed Reg 28 as required under the Colorado Administrative Procedure Act (the “APA”). Reg 28 is grounded in House Bill 21-1286, which was signed into law on June 24, 2021. Even so, it took the AQCC until Jan. 20, 2023, to provide the public and covered building owners with a draft of Regulation 28 to review and consider—a draft that was filled with “to be determined” criteria, making it impossible to know what energy reductions would be required. Throughout the rest of the rulemaking process, AQCC released multiple revised drafts, each with drastic changes to the standards and requirements under Reg 28 and the last such draft being made available to the public only days before the final rulemaking hearing;
2. the economic impact, cost-benefit and regulatory analyses performed by the AQCC during the rulemaking process failed to comply with the state’s procedural requirements under the APA and the Colorado Air Pollution Prevention Control Act (the “APPCA”), which require that the AQCC demonstrate that the standards being enacted are feasible, in the public interest and will meet the statutory emission reduction goals;
3. the final regulatory analysis was not submitted by the deadline required under the APA;
4. Reg 28 is impermissibly vague and does not give building owners reasonable notice of which building standards apply to particular buildings and the process and requirements for complying with such standards, in violation of principles of fair notice and due process and other requirements under the APA, APPCA and U.S. and Colorado constitutions; and
5. Reg 28 unlawfully impairs contracts in violation of the U.S. and Colorado constitutions by forcing building owners to remove equipment and infrastructure with remaining useful life and retrofit existing buildings that are subject to existing gas, electricity, financing, maintenance, repair and appliance supplier contracts; impairing building owners’ investments in and reliance on such buildings and contracts; arbitrarily and unreasonably applying to only a narrow subset of Colorado buildings; impacting building owners’ ability to meet existing financing and lease obligations; and creating drastic pass-down effects on renters.

CAA and AAMD requested that, considering these legal flaws and violations, the court declare that Reg 28 is invalid, unlawful and unenforceable. As of the date of this alert, the AQCC hasn’t filed an answer or response to the plaintiffs’ complaint.