Third Circuit Dismisses NSR Action Against Coal Plant, Affirms Limits of Clean Air Act Liability

by Cozen O'Connor
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On August 21, 2013, the U.S. Court of Appeals for the 3rd Circuit roundly dismissed an enforcement action brought under the federal Clean Air Act (CAA or the Act) by the U.S. Environmental Protection Agency (EPA) and several state environmental agencies against the former and current owners of the Homer City Generating Station (Homer City), a coal-fired power plant located in Indiana County, Pa. The enforcement action alleged, among other things, that modifications were made to the plant in violation of the CAA’s prevention of significant deterioration (PSD) pre-construction permitting program and subsequently operated in violation of the operating permit requirements of Title V of the Act.

The plant’s regulators not only sought to impose maximum civil penalties against the current owners for the previous five years of operation, but also requested injunctive relief that would require the former owners to seek a retroactive pre-construction permit for the alleged improper modifications and install pollution controls. In dismissing the action, the court in U.S. v. EME Homer City Generation, L.P., No. 11-4406 (Aug. 21, 2013), provides some degree of comfort to subsequent owners, operators and investors with respect to present liability under the CAA for the potentially questionable actions (or omissions) of previous owners and operators.

Background

Homer City was built in the 1960’s and placed into commercial operation well before the enactment of the 1977 and 1990 CAA amendments that created the PSD and Title V permitting programs. As a result, Homer City and other pre-existing sources were grandfathered under the PSD program until modified in a way that would increase their regulated emissions. However, from 1991 to 1996, changes were allegedly made to the power plant’s boilers that increased emissions of sulfur dioxide and particulate matter. Because the former owners believed that these changes were “routine maintenance” exempted from the PSD permitting process, they did not apply for pre-construction permits and were never required to consider whether more stringent emission standards must be imposed through the application of “best available control technology” or BACT. In 1999, the former owners of Homer City sold the plant to its current owners who then entered a sale-leaseback arrangement two years later. When Homer City received its first Title V operating permit in 2004 (for which it had applied in 1995), the permit therefore did not contain BACT requirements.

Retroactive Enforcement Action

The changes made at Homer City in the 1990’s formed the basis of the enforcement action later filed by EPA over a decade later in 2011 (although Homer City was aware of the alleged CAA violations as early as 2008). According to EPA, the former owners of Homer City had violated the CAA by modifying the plant without seeking PSD pre-construction permits or installing BACT-based pollution controls and by submitting an incomplete Title V operating permit application. EPA also alleged that the current owners of Homer City violated the CAA by operating the plant without having a valid PSD pre-construction permit for the previous modifications and an accordingly flawed Title V operating permit. The enforcement action sought civil penalties from the current owners of $37,500 per day for the previous five years of operation and requested injunctive relief against both the former and current owners, to include a requirement that the former and/or current owners retroactively seek a PSD pre-construction permit for the modifications made a decade earlier and install pollution control equipment that would allow the plant to meet BACT-based emissions controls.

Dismissal by the District Court

On defendants’ motion to dismiss for failure to state a claim, the U.S. District Court for the Western District of Pennsylvania granted the motion and dismissed the claims in their entirety in October 2011. The district court held that the PSD pre-construction permit program imposes only a one-time requirement at the time of construction/modification and that the failure to obtain a pre-construction permit does not constitute an ongoing violation. Because the PSD program imposes no ongoing condition of operation, the court dismissed the claim for civil penalties against the current owners of Homer City. Because the current owners were not the party that made the changes in the 1990’s, they were not liable for the failure to obtain the PSD pre-construction permit and so injunctive relief was held to be likewise unavailable. With respect to the former owners, injunctive relief was unavailable because they did not pose a risk of future violation of the PSD program.

With respect to the alleged Title V violations, the district court held that because the PSD program did not create any ongoing condition of operation, the current owners could not be held liable for the past violation. The court also held that Title V does not allow a collateral attack on a facially valid permit. As for the former owners, the court held that because they ceased to own or operate the facility in 1999, well before the Title V operating permit was issued in 2004, they could not be held to have violated the law.

The 3rd Circuit Opinion PSD-Related Claims

Affirming the district court’s dismissal in its entirety, the 3rd Circuit emphasized that the PSD pre-construction permitting program does not prohibit operating a facility without BACT or a PSD permit. Citing the unanimous view of the other circuit courts to have addressed this issue, and despite numerous EPA arguments to the contrary, the court held that its conclusion was compelled by a plain reading of Section 175(a) of the CAA, which only requires a PSD permit before a major emitting facility may be constructed or modified.

In response to concerns that limiting violations of the CAA’s pre-construction permit requirements to the period of construction or modification would result in a “laughably inadequate” compliance incentive, the court noted that EPA has a considerable arsenal of other enforcement tools at its disposal, including injunctive relief and criminal penalties. To further ensure that potentially major modifications do not go undetected in the future, the 3rd Circuit also suggested that it saw no reason that the EPA or the states could not require “advance reporting” from sources prior to making changes to existing facilities.

The 3rd Circuit similarly addressed an alternative EPA argument that the Pennsylvania state implementation plan (SIP) separately imposed the obligation to obtain a PSD permit as an operating condition. Because the SIP did not contain language expressly requiring an owner or operator to obtain a PSD permit as a condition of operation, the court refrained from reading such a requirement into the law. In doing so, the court aligned itself with decisions from the 8th and 11th Circuit Courts. These opinions, however, are in contrast to one from the 6th Circuit, teeing up the issue for potential resolution by the U.S. Supreme Court.

Affirming the district court’s rejection of injunctive relief against the former owners of Homer City on slightly narrowed grounds, the 3rd Circuit held only that the CAA (as opposed to mandatory injunctions, in general) does not allow an injunction against a former owner for a past violation, even where that violation causes an ongoing harm. Among the remedies available to a plaintiff in the federal district courts, only civil penalties may be imposed for past violations. In any case, the court held that because the former owners were no longer in control of the plant, the specific relief sought by EPA could not be compelled and that any attempt to require the former owners to purchase and retire emissions credits would be an end-run around the five-year statute of limitations on civil penalties.

Title V-related Claims

While the district court dismissed the claims regarding Homer City’s Title V operating permit on the merits, the 3rd Circuit affirmed on the basis that the district court lacked jurisdiction even to hear the claim. Citing decisions from the 7th, 8th and 9th Circuits, the court observed that Title V subjects permitting to administrative review procedures appealable exclusively to the courts of appeals. 42 U.S.C. § 7607(b)(2). Collateral appeal of a permit in the context of enforcement actions before the district courts is not allowed. Because EPA’s Title V-related allegations concerned permitting deficiencies (as opposed to operating without or in violation of a valid permit), those claims were not properly before the district court. In sum, operating under a facially valid yet inadequate permit cannot be the subject of an enforcement action before the district court.

Going Forward

While the 3rd Circuit’s decision in this matter is likely to be appealed, the court’s opinion establishes the precedent within the circuit for the foreseeable future. Current owners and operators must continue to observe the requirements of the CAA, but with respect to actions to enforce PSD permitting requirements for past modifications this opinion not only limits liability for civil penalties to the duration of construction/modification, but also confirms that the general five-year statute of limitations on civil penalties will be applied.

This decision should also provide some level of comfort to companies considering the targeted acquisition of existing facilities. Although risk allocating language in any asset purchase agreement still must be carefully parsed to ensure that certain liabilities are not inadvertently transferred, a buyer cannot be held liable for the failure of the seller to obtain PSD pre-construction permits or for continued operation of the facility under a facially valid though arguably inadequate operating permit. The decision effectively protects the “reasonable investment expectations” of new owners and operators.

As for the future development of the PSD permitting program, it remains to be seen whether EPA and the states will adopt the tacit suggestions of the 3rd Circuit. Specifically, EPA and the states might consider implementing some sort of advance reporting requirement before modifications may be made to an existing facility, even where such modifications are believed to qualify as routine maintenance. While such a requirement would assist regulatory agencies in identifying major modifications that may otherwise go unpermitted, the increased burden on both facilities and regulators must be carefully considered. In addition, the 3rd Circuit’s opinion in EME Homer City, when read in conjunction with its recent decision in Kristie Bell v. Cheswick Generating Station, GenOn Power Midwest L.P., No. 12-4216 (Aug. 20, 2013), suggests that the regulatory “floor” set by the CAA may allow a state to affirmatively require PSD permitting compliance as an ongoing condition of operation. In any event, it will be important for companies to monitor regulatory developments and remain engaged at both the state and federal levels.

 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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