The U.S. Court of Appeals for the Third Circuit recently rejected EPA’s application of its “Reactivation Policy” to a St. Croix, USVI refinery, finding that a Clean Air Act (CAA) Prevention of Significant Deterioration (PSD) Permit was not required to restart operations although it had been idle since 2012. In a July 25, 2023 opinion, Port Hamilton Refining and Transportation LLP v. EPA, the Court vacated EPA’s permitting decision, concluding that the agency had exceeded its statutory authority and is barred by “unambiguous” language of the CAA from classifying the Refinery as “new” for purposes of PSD permitting.

Background

The Refinery was constructed in the late 1960s under an agreement with the USVI government and USVI port authority. The Refinery was operated by the same owner until it ceased operations in 2012 due to financial concerns. After failing to find a purchaser, the owner filed for bankruptcy. In 2016, Limetree Bay Terminals purchased the Refinery from the bankruptcy estate.

Limetree requested guidance from EPA regarding whether a PSD permit would be required to restart operations. In 2018, EPA, applying the Reactivation Policy, concluded that a PSD permit would not be required as the Refinery had been “idled” and not shut down. The Refinery was allowed to resume operations under a plantwide applicability permit issued by EPA in 2018.[1] After millions of dollars in spending, Limetree brought the Refinery back online in February 2021 and promptly faced a series of air and water malfunction and noncompliance events. These events included flaring incidents resulting in oil and water discharging on nearby homes and excess emissions of hydrogen sulfide over multiple days, resulting in a closure of nearby schools. Eventually, EPA issued a Section 303 emergency order for Limetree to immediately cease all operations. This was followed by Limetree filing for bankruptcy in July 2021.

Port Hamilton purchased the Refinery from the Limetree bankruptcy estate in December 2021 and requested direction from EPA regarding the permitting status of the Refinery. In a reversal of its 2018 conclusion, EPA concluded in a November 2022 Final Determination Letter that a PSD permit was required. Per EPA’s Reactivation Policy, EPA concluded that “the Refinery was permanently shut down in 2012 and that restarting the Refinery qualifies as construction of a new major stationary source under the federal PSD permitting regulations.”[2] Port Hamilton then petitioned the Third Circuit Court of Appeals for review.

The Reactivation Policy

PSD permits are required for new major sources and major modifications of existing sources in areas that meet the national ambient air quality standards (attainment areas). PSD permits often result in a facility being required to install state-of-the-art and expensive pollution controls. Specifically, the CAA provides that “[n]o major emitting facility in which construction is commenced after August 7, 1977, may be constructed” in an attainment area without a PSD permit.”[3] The statute defines “construction” to include major modifications to a major emitting facility.[4] The PSD regulations provide that “no new major stationary source or major modification … shall begin actual construction” without a PSD permit.[5]

The “Reactivation Policy” is EPA’s framework for determining when a facility has been permanently shut down or whether the facility has been temporarily idled for purposes of new source PSD permitting. The earliest version of the Reactivation Policy first appeared a 1979 EPA Memorandum and then has appeared in several PSD applicability determinations over the following twenty plus years.[6] As originally set forth by EPA, the Reactivation Policy was a simple concept- if a source could demonstrate, to the satisfaction of the Administrator, that its two year (or longer) shutdown was not intended to be permanent, PSD review would not apply to its reactivation.[7] While the PSD applicability determinations were fact specific, it was not until EPA’s 1999 Administrative decision, In the Matter of Monroe Electric, where a framework was developed to determine whether a source was shut down or idled. Monroe identifies six factors for EPA to use in evaluating the source’s intent:[8]

1. The amount of time the facility has been out of operation.

2. The reason for the shutdown.

3. Statements by the owner or operator regarding intent.

4. Cost and time required to reactivate the facility.

5. Status of permits.

6. Ongoing maintenance and inspections conducted during the shutdown.

The Final Determination for the Refinery goes a step beyond Monroe to document its comprehensive explanation and legal bases for the Reactivation Policy. An attachment to the Final Determination states that it is provided to serve as a “reaffirmation” of the Reactivation Policy.[9] The Final Determination also engages in a lengthy discussion of the application of the Reactivation Policy to the Refinery, concluding, in laborious detail, that the Refinery had been completely shut down since 2012 and thus would be subject to new source PSD permitting.[10]

The Court’s Decision

The Third Circuit Court of Appeals reviewed the Final Determination per 42 U.S.C. §7607(b)(1). This on-the-record review concluded that the Reactivation Policy does not apply to the Refinery based on the unambiguous language of the CAA. As a result, the Court determined that EPA exceeded its authority by requiring Port Hamilton to obtain a PSD Permit:

The Clean Air Act unambiguously limits the PSD’s program’s application to newly constructed or modified facilities. The Refinery is not new and has not undergone a “modification” as the Act defines that term. The EPA therefore exceeded its authority by requiring Port Hamilton to obtain a PSD permit for the Refinery.

The Court explained that the only facilities subject to PSD permitting are those major emitting facilities “constructed” (or modified) in an attainment area after August 7, 1977. As the Refinery was constructed prior to August 7, 1977, and EPA did not present any evidence of a “major modification,” EPA had no authority to apply PSD review.

Further, the Court rejected conducting a Chevron analysis.[11] The Court rejected EPA’s claims that the term “construction” is ambiguous and that it could include construction at a shutdown facility to prepare for a restart. The Court did not mince words in finding that the statute is not ambiguous and that it is clear that “the type of construction that requires a PSD permit is construction that commenced after 1977 that brings a major emitting facility into existence.”

Takeaways from the Third Court Decision

• The Court’s opinion may have effects beyond the Third Circuit, significantly narrowing EPA’s PSD permit review requirements where idled facilities are brought back into operation. Although the Court’s opinion could be read to only apply to shuttered facilities, constructed before 1977, we read it as much broader, fundamentally calling into question the continued applicability of the Reactivation Policy. As stated by the Court, the CAA definition of construction includes “modification” but does not include “restart after a shutdown” or language to that effect . . . the CAA limits the PSD program’s reach to only two circumstances: construction and modification.
• EPA had also focused on the Refinery’s “environmental justice” impacts. The Refinery, located in a predominantly low-income and minority community, certainly has had a history of compliance issues.[12]EPA’s §303 Emergency Order shutting down the Refinery was hailed by EPA as an environmental justice victory.[13] Although the Final Determination contains a discussion of the environmental justice impacts of the Refinery, environmental justice concerns did not find their way into the Court’s evaluation or opinion, continuing to support doubts raised about the resilience of Environmental Justice goals when faced with the limits of statutory and regulatory authority.
• The Court gave short shrift to EPA’s Chevron deference analysis, rejecting such analysis in a one sentence footnote, adding more fuel to the fire that Chevron deference is on its way out. If the Refinery’s history, including a 10-year cessation of operations, could not compel the Court to defer to EPA, one could wonder what fact scenario could compel such action.
• And a postscript – As noted in previous postings on this Blog, the true impact of EPA’s Environmental Justice initiatives is likely to be felt by increased EPA scrutiny of facilities (particularly new construction) in perceived over-burdened communities.[14]As a result, Port Hamilton is not going to take this victory and ride into the sunset. The Refinery will remain in EPA’s crosshairs long into the future, with scrutiny of every step or misstep. EPA, in fact, has an entire page on its website devoted solely to the Refinery air, wastewater and waste disposal obligations.So, the conclusion of the Refinery’s story is still to be written.

Footnotes

[1] The permit was the subject of dueling petitions (one by the Refinery; the other by an environmental group) before EPA’s Environmental Appeals Board (EAB). Neither petition was resolved before the Trump administration transitioned to the Biden administration. On March 25, 2021, EPA Administrator Michael Regan notified the Governor of the USVI that the Refinery’s Plantwide Applicability Limit (“PAL”) Permit was withdrawn and, because timely petitions with the EAB had been filed, the PAL Permit did not go into effect.

[2] The Final Determination contained two lengthy attachments supporting its application of the Reactivation Policy to the Refinery. Attachment 1 - Application of Reactivation Policy Permanent Shutdown Factors to Refinery and Attachment 2 - Affirmation of EPA's Long-Standing Reactivation Policy..

[3] 42 USC § 7475

[4] 42 USC § 7479(c)(2).

[5] 40 C.F.R. 52.21(a)(2)(iii).

[6] Case law regarding the Reactivation Policy is limited. A District Court in California noted that the six factors in the Reactivation Policy was a “reasonable interpretation of the Clean Air Act.” Communities for a Better Environment v. Cenco Refining Co, 179 F.Supp. 2d 1128 (C.D.2001). A North Carolina District Court indicated in a footnote that the Reactivation Policy may be used in a later evaluation regarding whether a shutdown was temporary or permanent. U.S. v. Duke Energy, 981 F. Supp. 2d 435 (M.D. NC 2013).

[7] A compilation of these PSD Applicability memorandum can be accessed on EPA’s New Source Review webpage at Reactivation of a Shutdown Source | US EPA.

[8] In the Matter of Monroe Electric Generating Plant Entergy Louisiana, Inc., Proposed Operating Permit, Petition No. 6-99-2 (June 11, 1999).

[9] This attachment entitled "Affirmation of EPA's Long-Standing Reactivation Policy" takes a deep dive into case law, guidance letters and memoranda and formal adjudications to present the EPA’s current Reactivation Policy in writing. The attachment also rebuts Trump Administration criticism of the Reactivation Policy, noting that no effort was made to document such criticism and thus it is not final or binding.,

[10] Attachment 1 - Application of Reactivation Policy Permanent Shutdown Factors to Refinery provides a 22-page pain-staking analysis of each of the six factors to reach the ultimate conclusion that, “the six factors point convincingly in favor of a finding that the Refinery was permanently shut down in 2012” and indicates this conclusion is based on a “compelling” analysis.”

[11] Under the two-part Chevron analysis, if the Court finds that a statute is ambiguous regarding the issue before the court, the court defers to an agency’s reasonable interpretation of the statute.

[12] The Third Circuit acknowledged these compliance issues, which are documented extensively in EPA’s Final Determination. See also EPA orders troubled St. Croix Refinery to obtain new permit - The Washington Post

[13] EPA Uses Emergency Powers to Protect St. Croix Communities and Orders Limetree Bay Refinery to Pause Operations | US EPA; Regan Touts St. Croix Refinery Shutdown as Environmental Justice (bloomberglaw.com)

[14] See Biden Administration Seeks to Put Environmental Justice Into Action with an Earth Day Executive (kilpatricktownsend.com); Abraham Lincoln and Environmental Justice Department of Justice Highlights Civil War Era False (kilpatricktownsend.com); EPA s Environmental Justice Continues to Expand its Reach with the Issuance of Draft Action Plan (kilpatricktownsend.com); CERCLA EPA Sharpens CERCLA Enforcement Tools to Focus on Environmental Justice Communities (kilpatricktownsend.com); Addressing Environmental Justice through EPA s Enforcement Tools (kilpatricktownsend.com)