Supreme Court to Address Lower Courts’ Jurisdiction to Review the Definition of “Modification” in EPA’s NSR and NSPS Regulations

By granting review of the Fourth Circuit’s decision in United States v. Duke Energy Inc.,¹ the Supreme Court will consider next fall whether the D.C. Circuit’s exclusive jurisdiction over direct review of regulations and standards issued by the Environmental Protection Agency (“EPA”) limits the authority of courts enforcing such requirements to interpret them. If the Court finds, in the circumstances of this case, that the Fourth Circuit’s interpretation of EPA’s New Source Review (“NSR”) regulations infringes upon the D.C. Circuit’s exclusive review jurisdiction, it is unlikely to address the merits of the Fourth Circuit’s interpretation. If, in contrast, it sustains the lower court’s interpretive authority, it may answer one of the central legal questions of the current EPA NSR enforcement initiative against coal-fired power plants: If the projects did not increase the maximum hourly emissions rate of any NSR regulated pollutant, can equipment repair and replacement projects at coal-fired power plants be considered “modifications” under the NSR regulations.

Duke Energy Litigation

This case stems from a NSR enforcement action that EPA brought against Duke Energy under the Clean Air Act (CAA or Act) in December 2000. In that action, EPA alleged that Duke Energy violated the CAA when it failed to obtain NSR permits before undertaking 29 projects to repair or replace existing power plant components. According to EPA, each of these projects constituted a “modification” that triggered the NSR permitting requirements because the project increased the plant’s annual emissions due to increases in daily hours of operation. The District Court in Durham, North Carolina, however, disagreed with EPA’s argument and ruled that the NSR permitting requirements did not apply since none of the projects increased a “unit’s maximum hourly rate of emissions,” as measured under the emissions increase test used in the New Source Performance Standards (“NSPS”) program. An emissions increase occurs under the NSPS test if the maximum hourly emissions after the project – measured in kilograms per hour – exceed by any amount such maximum hourly emissions prior to the project.

On appeal by EPA, the Fourth Circuit U.S. Court of Appeals affirmed the District Court’s ruling. The Fourth Circuit’s ruling was based on Congress’ decision in the 1977 CAA Amendments to incorporate into the NSR programs the term “modification” from the NSPS program, which requires that a “physical change” cause a maximum hourly emissions rate increase. In light of this amendment, the Fourth Circuit held that Congress intended the EPA to “interpret the term ‘modification’ in its [NSR] regulations to conform with its earlier NSPS regulations.” In the Fourth Circuit’s view, a “modification” triggering NSR permitting requirements occurs only when emissions after a repair or replacement project exceed the unit’s maximum hourly emissions rate.

The Jurisdictional Question and the D.C. Circuit’s Ruling

Section 307(b)(1) of the CAA provides that EPA’s nationally-applicable regulations and standards implementing the CAA may be reviewed only in the D.C. Circuit. Section 307(b)(2) provides that such requirements “shall not be subject to judicial review in civil or criminal proceedings for enforcement.” In order to reach the merits of the case, therefore, the Fourth Circuit had to find that its decision did not impinge the D.C. Circuit’s exclusive jurisdiction, as defined under § 307(b)(1) or violate § 307(b)(2). Acknowledging these provisions in the Duke Energy opinion, the Fourth Circuit reasoned that it was not directly reviewing the PSD regulations’ definition of “modification.” Instead, it was simply correcting EPA’s “interpretation” of its regulations in order to conform that interpretation with the statute and Congressional intent.

The Fourth Circuit announced its decision on June 15, 2005. Nine days later, in New York v. EPA, 413 F. 3d (D.C. Cir. 2005), the D.C. Circuit issued its decision on direct review of EPA’s 1980 and 2002 NSR regulations. Specifically, the Court rejected industry’s challenge of the NSR annual emissions test adopted under both sets of regulations. That challenge was based on EPA’s application of an annual test instead of the NSPS maximum hourly emissions test. In support of its holding, the D.C. Circuit ruled that the Act’s use of a cross-referencing definition created no inference of Congressional intent for the NSR program to adopt the NSPS regulatory test for an emissions increase, and noted, in support of this conclusion, that two different regulatory definitions for NSPS emissions increases were in place at the time when Congress adopted the NSR definition in 1977. Although potentially at odds with the prior Duke Energy holding, the D. C. Circuit stated that “[w]e express no opinion as to whether Congress intended to require that EPA use identical regulatory definitions of modification across the NSPS and NSR programs.” It took notice of the Fourth Circuit’s ruling, but found that the industry parties challenging the NSR regulations in the New York case had failed to preserve the contention that the NSPS and PSD regulations must be defined identically.

Petitions for Rehearing

Pointing to the D.C. Circuit’s holding, the EPA and various environmental intervenors asked the Fourth Circuit to rehear the Duke Energy case en banc. They alleged a conflict between the Duke Energy ruling, New York v. EPA and other cases. EPA’s rehearing petition also contended that “requiring [it] to interpret the [NSR] regulations to adopt the NSPS test for meaningful …. emission increases is inconsistent with the plain language of the regulations and thus is not an ‘interpretation’ at all, but rather invalidation.” The Fourth Circuit denied rehearing.

The Petition for a Writ of Certiorari

The Administration decided not to seek review in the Supreme Court of either Circuit’s decision. However, the environmental intervenors that had supported the government’s enforcement suit in the Duke Energy case petitioned the Supreme Court for a writ of certiorari to the Fourth Circuit. They sought review of two questions:

(1) Whether the Fourth Circuit violated the D.C. Circuit’s exclusive jurisdiction under § 307(b) of the CAA by reviewing nationally-applicable regulations in an enforcement proceeding;

(2) Whether the CAA requires EPA to interpret the statutory term “modification” consistently in its NSR and NSPS regulations.

Abandoning the position asserted in EPA’s rehearing petition to the Fourth Circuit, the Administration urged the Court to deny the environmental intervenors’ petition for Supreme Court review. It contended that there was no direct conflict between the Fourth and D.C. Circuit’s decisions, that the 1980 NSR regulations had been superseded by the 2002 NSR rule changes upheld by the D.C. Circuit in the New York decision, and that EPA was considering further changes in its NSR regulations in order to accommodate the Fourth Circuit’s decision. The Supreme Court nevertheless granted review on May 16, 2006. The case will be briefed over the summer and argued in late fall of 2006.

Implications

The Supreme Court’s grant of review signals that at least four Justices are concerned about the Fourth Circuit’s determination that it was merely interpreting the 1980 NSR regulations, not reviewing and invalidating them. Since the Court did not limit its review to the jurisdictional question, the parties will also have to address whether total annual emissions in tons, rather than maximum hourly emissions in kilograms per hour under the NSPS test, are the measure of “modification” for the purpose of triggering NSR permit requirements. If the Court holds that the Fourth Circuit effectively reviewed and invalidated the NSR regulations, it is likely to reverse for lack of subject matter jurisdiction the Fourth Circuit’s decision without reaching the merits, thus allowing EPA’s pending NSR enforcement cases to continue on the theory that increases in annual emissions of pollutants constitute a modification requiring a NSR permit. If, in contrast, the Fourth Circuit is upheld on the jurisdictional issue, the Court could reach the merits of the case and potentially resolve one of the central legal issues of the pending NSR enforcement cases. The resolution of that issue could also have far reaching implications beyond the pending enforcement cases regarding the regulations applicable to all major stationary sources under NSR program. Most importantly, a Court decision on the merits could confirm whether the NSR regulations (both past and present) require the use of an annual or maximum hourly emissions test for determining if plant projects trigger NSR permitting requirements.