Generally, any physical change in or change in method of operation of an existing major stationary source that significantly increases emissions of any regulated New Source Review (NSR) air pollutant emitted will trigger NSR permitting review under the Clean Air Act as a major modification.  However, air pollution control regulations also generally contain exclusions from the definition of major modification for certain modifications.  For example, if a project constitutes routine maintenance, repair or replacement (RMRR), then it is not considered a major modification subject to NSR permitting review.  A determination of whether a project qualifies for the RMRR exclusion is heavily fact-specific and based on a detailed examination of the project utilizing the factors originally set forth in the Seventh Circuit Court of Appeal’s Wisconsin Electric Power Company v. Reilly (“WEPCo”), 893 F.2d 901 (7th Cir. 1990) decision; the seminal case on routine, maintenance, repair and replacement for utilities.  While WEPCo established five factors relevant to the RMRR exclusion – the project’s (1) nature, (2) extent, (3) purpose, (4) frequency, and (5) cost – courts burdened with application of those factors are often split on their application.  Most recently, the Western District of Pennsylvania and Middle District of North Carolina were faced with this issue.  While industry received a favorable ruling in Pennsylvania v. Allegheny Energy, it remains to be seen if the pending United States v. Duke Energy Corp. case will bolster or further split application of the RMRR exclusion.

Pennsylvania v. Allegheny Energy

On February 6, 2014, the Western District of Pennsylvania found that projects at three Allegheny Energy facilities met the routine maintenance, repair and replacement exclusion under the NSR program.  In Pennsylvania v. Allegheny Energy, the court held a bench trial on liability in 2010.  In its 2014 ruling, the court interpreted the Third Circuit’s holding in United States v. EME Homer City Generation to find that civil penalty claims associated with projects that were conducted more than five year before the case was initiated were barred by the statute of limitations.  On the issue of injunctive relief, the court relied on its earlier decision that injunctive relief is not similarly time-barred, and maintained that position in its final ruling – consistent with the Third Circuit’s later decision in EME Homer City Generation – via the law of the case doctrine.  The court ultimately found the government’s injunctive relief claim moot with respect to projects at the Armstrong facility because the plant shut down in 2012 and the challenged conduct could not reasonably be expected to recur.  As to the remaining projects, Allegheny Energy, through their expert’s application and analysis of the WEPCo factors, established that all the projects met the routine maintenance, repair and replacement exclusion to NSR permitting thereby avoiding injunctive relief as well.

Specifically, the expert evaluated each project and concluded that the nature, extent, purpose, frequency and cost of the projects were consistent with routine industry practices.  The manner in which Allegheny Energy performed the projects was consistent with typical industry component replacement practices.  Additionally, the length of each outage during which the projects were performed fell within the normal range of outage lengths at Allegheny Energy and across the industry.  And, the purpose of the projects was not to extend the life of the units, but rather to avoid future maintenance outages.  The cost of the projects ranged from $2.50 to $12 per kilowatt, which Allegheny Energy’s expert found to be significantly below the normal low-end cost of $100 per kilowatt for life extension projects in the utility industry.  Relying primarily on this analysis, the court found that Allegheny Energy met its burden of establishing that the projects were routine maintenance, repair and replacement and that the company was not liable under the NSR program for not obtaining permits prior to undertaking these projects.  The plaintiff states of Connecticut, Maryland and New York have appealed this decision to the Third Circuit Court of Appeals.

United States v. Duke Energy Corp.

On March 17, 2014, the Middle District of North Carolina ruled against the government’s motion for summary judgment in United States v. Duke Energy Corp.  In this fourteen year old case, the government is seeking civil penalties and injunctive relief in connection with Duke Energy conducting projects and restarting thirteen units without first obtaining preconstruction permits under NSR.  To establish liability under the NSR program, the government has to establish (1) physical or operational changes; (2) a significant net increase in emissions; and (3) that the significant net increase in emissions was caused by the physical or operational changes.  All thirteen units were not operating for various periods of time prior to Duke Energy restarting them, but all were shut down for at least three years prior to startup.  The Court found no justification for an alternate baseline emissions period and, therefore, used the most recent two years to set zero as the baseline emission rate for each unit.  The Court then concluded that Duke Energy’s restart of these units caused a significant net emissions increase. However, finding genuine issues of material fact, the court denied the government’s motion for summary judgment as to whether there were physical or operational changes and whether any such changes caused the significant net increase in emissions.  Instead, evaluation of whether the alleged physical changes meet the routine maintenance, repair and replacement exclusion and whether the alleged operational changes triggered NSR remain issues for trial.

Squire Sanders will continue to monitor all ongoing New Source Review litigation and will provide updates on this blog.