D.C. Circuit Vacates EPA New Source Review Equipment Replacement Rule

On March 17, the United States Court of Appeals for the D.C. Circuit vacated the Equipment Replacement Provision (ERP) of the Environmental Protection Agency’s (EPA) New Source Review (NSR) regulations in New York v. EPA, D.C. Cir., No. 03-1380. EPA intended the ERP to provide a bright-line exclusion from the NSR program for capital projects that do not exceed 20 percent of the replacement cost of the entire process unit at a facility. Under the ERP, projects involving the replacement of identical or functionally equivalent components could be implemented without triggering NSR, regardless of whether the project resulted in an emissions increase. The unanimous three-judge panel held that the ERP exclusion was contrary to the plain language of section 111(a)(4) of the Clean Air Act (CAA) that defines the term “modification.”

The NSR program requires modified sources to install modern pollution control equipment and comply with rigorous requirements for ensuring the protection of air quality. Section 111(a)(4) defines “modification” in relevant part as “any physical change . . . which increases the amount of any air pollutant emitted by such source.” Since the start of the NSR program, routine maintenance, repair, and replacement (RMRR) activities have been excluded from the definition of “modification” by regulation. EPA has applied the RMRR exclusion on a case-by-case basis, based upon the nature, extent, purpose, frequency, and cost of the particular project. In adopting the ERP exclusion, EPA sought to adopt a bright-line test that would expand the scope of the long-standing RMRR exclusion to include the replacement of major components that do not exceed the 20 percent cost threshold.

The D.C. Circuit held, however, that the statutory phrase “any physical change” is not ambiguous and, as a result, EPA must give full effect to the plain meaning of the statute. The Court noted that the clarity of Congress’s intent is reflected by its use of the word “any,” which requires the phrase “any physical change” to be construed broadly “to cover all types of physical changes.” Although the phrase “physical change” may be susceptible to multiple meanings, the Court pointed out that the word “any” makes clear that all activities falling within the ordinary meanings of that phrase are subject to NSR when the activity results in an emissions increase. As a result, the Court held that EPA does not have the authority to exclude equipment replacements from the broad definition of “modification” in the statute.

The Court further noted that Congress’s goal in passing the 1977 amendments to the CAA was balancing economic and environmental interests and that it was not “far-fetched” for Congress to have intended NSR to apply to any type of physical changes that increase emissions. Finally, the D.C. Circuit concluded that EPA’s interpretation of the CAA would have required Congress to use “superfluous words” while allowing the agency to disregard the expansive term – “any” – that Congress did use.

Potential Implications

The Court’s ruling could provide legal grounds for narrowing the scope of the current RMRR exclusion. The D.C. Circuit portrays the RMRR exclusion as only allowing minor and trivial emissions increases to escape NSR coverage under the agency’s de minimis authority. To bolster its position, the Court cites to the “historical fact” that EPA interpreted the statutory phrase “any physical change” to mean “virtually all changes, even trivial ones,” and generally interpreted the current RMRR exclusion “as being limited to de minimis circumstances.” Although the Court did not express an opinion on the limits of the de minimis exception, such a point of reference may make it more difficult to justify the exemption of significant capital projects in the future under the existing RMRR exclusion. In addition, this decision could have legal ramifications in pending or future NSR enforcement actions regarding the scope of the RMRR exclusion.

The D.C. Circuit previously stayed the ERP on December 24, 2003, and therefore, the Court’s decision will have no additional immediate effect on the NSR program. The full impact of the decision, however, remains uncertain – particularly with regard to upcoming equipment replacement activities being undertaken or planned by industry sources. Prior to issuing the ERP, EPA excluded projects on a case-by-case basis through the RMRR exclusion and, with the Court’s invalidation of the ERP rule, the agency has no choice now but to rely on the RMRR provision for excluding routine projects.

Furthermore, the only statutory limit on the scope of the “any physical change” language for purposes of the NSR program is that the activity must result in an emissions increase. Since the statute does not define how an emissions increase is to be measured, EPA retains the discretion to define this term through regulation. To this end, EPA adopted flexible rules for measuring emissions increases in a December 31, 2002 rule, which the D.C. Circuit upheld last year. In addition, the agency issued a proposed rule on October 20, 2005 that would define an emissions increase for electric generating units as an increase in the maximum hourly emissions rate. Both emissions tests, if upheld on appeal, could provide alternative ways to exclude many of the same equipment replacement activities from NSR that would have been excluded under the now overturned ERP.

Finally, it is possible that EPA may appeal the D.C. Circuit’s decision. Although the three-judge panel was unanimous, the prospects for reversal will depend on the strength of the Court’s legal interpretation. The agency may seek rehearing of the case by the full D.C. Circuit Court of Appeals and may also file a petition for certiorari with the United States Supreme Court. EPA has not yet indicated which, if any, of these courses of action it may take.