Court Rules on Routine Maintenance, Repair & Replacement Power Plant Projects Violate New Source Review

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On August 7th,2003, a federal judge in Ohio issued an important court decision interpreting a key exemption from the new source review provisions of the Clean Air Act. In the first of the federal lawsuits against the coal-fired power generation industry to reach conclusion, the judge held that multiple projects did not constitute routine maintenance, repair or replacement. As a result, the court held that the plant's owner violated the Prevention of Significant Deterioration program (PSD), giving rise to penalties and the need to undergo retroactive PSD.

New source review is the keystone of the Clean Air Act. This program requires that new major sources and modified existing major sources assess emission impacts and install state-of-the-art emission control technology. Sources in areas where the national ambient air quality standards have historically been met must undergo the Prevention of Significant Deterioration (PSD) program, while sources in areas where the national ambient air quality standards have not historically been met must undergo nonattainment new source review. The basic concept of requiring that sources employ best available control technology when building a new source or fundamentally rebuilding an existing source is agreed by many to make sense. Uncertainty about when it applies, however, has resulted in new source review forming a significant disincentive to making many changes that could ultimately result in greater energy efficiency or even lower emissions.

Determining whether new source review is triggered by changes to an existing major source can be a technically and legally demanding process. Whether a modification has occurred that triggers new source review hinges on the difference between the emissions before the change and the anticipated emissions after the change. If post-change emissions exceed pre-change emissions by more than one of the predetermined "significant emissions rates," then the change is considered a major modification and new source review is required.

Historically, post-change emissions were calculated based upon the source's total potential to emit, as opposed to what its owners reasonably believed the source would emit. This required a project owner to assume that the source would operate 24 hours per day, 365 days per year unless the source's permit included a requirement for limiting operation. However,approximately ten years ago the federal rules changed to allow electric utility steam generating units (and only these units) to calculate post-change emissions based on projected actual emissions, exclusive of increases that could have been accommodated prior to the change. Rule changes that took effect in March 2003 extended greater latitude in the calculation of pre- and post-change emissions to sources other than electric utility steam generation units as well. Regardless of how pre- and post-change emissions are calculated, several court cases have held that the evaluation of whether a major modification has occurred must take place before construction of the modification commences.

Sources that otherwise would trigger new source review by implementing a particular change can still avoid that program under certain circumstances. The Environmental Protection Agency (EPA) early on realized that it was not fair for a source to have to be concerned about triggering new source review if that source was simply engaged in routine maintenance, repair or replacement. New source review was supposed to require reevaluation of a source's controls in the event of a major modification, not routine maintenance. However, there has always been confusion about how exactly a source owner is supposed to differentiate between routine maintenance and non-routine maintenance. EPA has sometimes equated routine maintenance to changing the oil, batteries or tires on a car. Non-routine maintenance was equated to replacing the engine. In other words, routine maintenance is maintenance needed to allow the vehicle to attain its expected life while non-routine maintenance extended the vehicle life. Applying this analogyis tougher than it sounds. Routine versus non-routine cannot be distinguished solely on frequency or cost. This author rarely changes his automobile tires in large part because of his abhorrence of the cost. There have been times when the cost of new tires appeared to exceed the value of the car for which they were considered. However, although the author might consider tire changes unusual and expensive, EPA would consider this routine. Clearly, determining what is routine is often going to be a very subjective decision.

Coal-Fired Utility Enforcement Initiative & the Ohio Edison Decision

In 1999, the Justice Department filed a series of enforcement actions against 13 utilities that owned a total of 51 power plants alleging that the defendants had made major modifications at coal-fired facilities that triggered new source review (see Wood, Insider #289). One case involved the Tennessee Valley Authority (TVA). Because the TVA is a governmental agency, EPA filed an administrative order requiring TVA to implement new source review. This order was recently held unconstitutional by the Eleventh Circuit Court of Appeals (see Wood, Insider #324). By contrast, the private utilities faced judicial enforcement. A number of the utilities challenged EPA's allegations that the plant renovations at issue had triggered new source review. Instead, the utilities countered, the renovations were exempt from new source review as routine maintenance, repair and replacement. Several of the utilities ultimately settled their enforcement actions, but some, including Ohio Edison (a wholly owned subsidiary of FirstEnergy Corporation) and Southern Indiana Gas & Electric Company (SIGECO), fought back. These defendants argued forcefully that EPA had changed its interpretation of what constitutes routine maintenance and were now unfairly seeking penalties and retrofit controls when the projects were considered routine at the time implemented.

Ohio Edison and SIGECO were neck and neck in moving towards resolution of their cases. However, SIGECO ultimately settled with EPA after receiving a preliminary ruling in February 2003 suggesting that the court was not sympathetic to its arguments. Ohio Edison took its case through to trial. The result was the opinion, released on August 7th, 2003, concluding that Ohio Edison had violated new source review by undertaking multiple projects without going through the new source review process. U.S. v. Ohio Edison, Civil Action No. C2-99-1181 (Southern District of Ohio).

At issue in Ohio Edison's case were 11 construction projects involving 34 parts replacements at its Sammis coal-fired plant in Stratton, Ohio. These projects took place between 1984 and 1998 and ranged in cost from $1 million to $27 million for a total cost of $136.4 million (by way of comparison, Ohio Edison was credited by the court with having spent over $450 million on emission control devices alone at the plant since 1970).

In evaluating whether the Sammis plant projects constituted routine repairs, the court focused on a four factor analysis. First, the court considered the nature and the extent of the activities. Here, the fact that the projects were performed by outside contractors (not the plant's maintenance staff), many of the costs were capitalized and that the projects took many weeks to complete was deemed important. This was in contrast to work performed by the plant maintenance staff, whose work was typically accomplished during much shorter shutdowns and whose costs were considered operating expenses. Second, the court considered the purpose of the activities, i.e., was the project intended as merely maintenance or was it intended to achieve life extension. In relation to this criterion, the court clearly was concerned that several of the projects were described in internal documents as life extension projects and projects intended to improve reliability. Third, the court evaluated the frequency with which such activities have been performed at a particular plant. Ohio Edison argued, without success, that the frequency of making such a change should not be considered where other sources within the industry engaged in similar repairs. The court rejected the notion that industry norms should be considered-a rather surprising and arguably illogical conclusion. Finally, the court evaluated the cost of the activities and was clearly swayed by the dollars expended. However, in considering the amount of money spent, the court appeared to pay little, if any, attention to how small these expenditures were in comparison to the overall value of the plant.

The Ohio Edison court ultimately concluded that the 11 projects were not of the type that could be considered routine. The opinion is scathing in its criticism of EPA and the agency's inconsistent and difficult to follow guidance. Penalties and injunctive relief will be determined in a separate phase of the trial scheduled to commence in March 2004. Analysts predict that the ruling could result in Ohio Edison having to expend $400 to $500 million on control equipment with approximately $30 million per year in ongoing operating expenses.

There are serious questions about the logic underlying the conclusions in the Ohio Edison opinion. Much ado was made over the cost of the work performed on the Sammis plant. Those expenditures, though, were never put into perspective as to the total amount routinely spent on such plants and the total investment made in such a plant over time. Similarly, the court placed much emphasis on the fact that the changes made the plant operate more efficiently and with less down time. New source review was intended to apply when a source made such a fundamental modification that it was essentially equivalent to building a new source. Decreasing plant downtime and increasing fuel efficiency at an existing source is not something that should be penalized by threatening to require investments far outstripping the benefits gained. These types of efficiency modifications should be allowed and even encouraged. Contrary to this logic, however, the court relied on the idea that increased availability and, therefore, increased production should be primary considerations in concluding whether a repair is routine. This logic does not appear consistent with the underlying goals of new source review.

40 What This Means For Other Sources

Most states either have rules containing a maintenance and repair exemption similar to the federal rules or the states directly implement the federal rules. For example, Oregon's rules contain a routine maintenance, repair and replacement exemption that is substantially similar to that in dispute in the Ohio Edison case. The one difference is that the Oregon rules exempt routine maintenance, repair and replacement "of components," as opposed to the federal exemption which simply exempts "routine maintenance, repair and replacement." See Oregon Administrative Rules 340-200-0020(66). Whether this Oregon variation, which was added to the rules in 2001, has any substantive difference from the federal rules has not been determined. In contrast to Oregon, most states have adopted the federal exemption for routine maintenance, repair and replacement verbatim. Therefore, much of the court's assessment could be carried over in determining whether other projects are exempt from the definition of a "major modification."

The breadth of impact of the Ohio Edison case will likely be limited. Other defendants in the 1999 EPA enforcement actions clearly are concerned about the precedent as will any other sources concerned about past activities. EPA is currently drafting rules intended to change the way in which the routine maintenance, repair and replacement exemption is implemented (see Wood, Insider #310). These rule changes will bedirectly relevant only to changes made after the rules take effect. If the rules are changed, however, the Justice Department's appetite to pursue substantial enforcement actions based upon the out-of-date rules likely will decrease significantly.

Other rule changes already in place will also impact the relevance of the Ohio Edison decision. On December 31st, 2002, EPA made substantial revisions to the way in which new source review applicability determinations are made for existing sources (see Wood, Insider #300 and #309). Several of these changes will lessen the need for sources to rely upon the routine maintenance, repair and replacement exemption. For example, plantwide applicability limits ("PALs") potentially offer a more flexible means of making necessary efficiency improvements without being penalized through the new source review process. Oregon sources have had these plantwide limits (referred to as plant site emission limits or "PSELs") in place for years and the result has been that the routine maintenance, repair and replacement exemption is seldom used or even considered. So long as the PSELs do not need to bereset to an amount equal to or greater than the netting basis plus the significant emission rate, Oregon sources have not needed to be concerned about triggering new source review. This approach has resulted in much greater regulatory certainty and allowed many companies to switch to cleaner and more energy efficient equipment more rapidly than in other states.

Other News on New Source Review Reform

In an ironic twist, just as the Ohio Edison decision was getting set for release, EPA expressed some doubts in aspects of the new source review rule revisions it issued in December 2002. On July 30th, 2003, EPA reopened for reconsideration portions of the revised new source review rules issued on December 31st, 2002 (68 Fed.Reg. 44620 (July 30, 2003)). Although refusing to stay the new rules, EPA did state that it would accept public comment on six elements of the December 2002 rules and issue a "final" decision by October 28th, 2003. The six areas under reconsideration are EPA's Environmental Impact Analysis related to the rules, computation of PAL, the ability of PALs to supplant existing "synthetic minor" limits, recordkeeping, treatment of replacement units and the applicability of the Clean Unit exemption when an area changes attainment status.

The deadline for responding to this unusual after-the-fact comment period is August 29th, 2003. Although the leading association of air pollution permitting agencies has requested that EPA extend that comment period by an additional thirty days, EPA has, so far, indicated an unwillingness to do so.

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Thomas R. Wood
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