EnviroNotes

August 2008

U.S. EPA Sweetens Incentives for New Owners to Self-Disclose Violations
Industry Position on Routine Maintenance, Repair and Replacement Adopted in NSR Enforcement Case
Indiana Supreme Court Addresses Statute of Limitations for Certain Environmental Causes of Action
IDEM Seeks Comments on Revisions to Annual Compliance Certification Non-Rule Policy Document
U.S. Army Corps of Engineers Guidance Restores Flexibility to Section 404 Wetland Permitting Process
U.S. EPA Seeks Comments on Regulation of Greenhouse Gases

U.S. EPA Sweetens Incentives for New Owners to Self-Disclose Violations

By Andy Bowman, Chair, Environmental Law Department, Bingham McHale LLP

On August 1, 2008, U.S. EPA published notice of its “Interim Approach” to applying the U.S. EPA’s April 11, 2000 policy on “Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations,” more commonly known as the “Audit Policy.” See 73 Federal Register 44991 (August 1, 2008). The Interim Approach describes how U.S. EPA will apply the 2000 Audit Policy to new owners of regulated facilities who discover environmental violations that commenced prior to acquisition. U.S. EPA is providing new owners additional incentives to self-disclose, correct and prevent recurrence of violations, including penalty reductions beyond those allowed under the 2000 Audit Policy as well as additional flexibility.

The Interim Approach became effective August 1, 2008. U.S. EPA is concurrently seeking comments on the Interim Approach until October 31, 2008. U.S. EPA will decide whether to finalize, alter or discontinue the Interim Approach based on comments submitted and its experience implementing the tailored incentives for new owners.

U.S. EPA reported that over 50% of the self-disclosures under the 2000 Audit Policy involved reporting violations. U.S. EPA would like to increase the use of policy to address more serious violations, such as the prior owner’s failure to install required air pollution controls. U.S. EPA believes that owners of newly acquired facilities are well-situated and motivated to audit environmental compliance and correct violations in order to achieve a “clean start.” By providing new owners with additional incentives to audit, self-disclose and correct violations at newly acquired facilities, U.S. EPA hopes to facilitate prompt corrections of violations that yield significant improvements to the environment.

Generally, the Interim Approach applies only to new owners who prior to closing the transaction: (1) were not responsible for environmental compliance and did not control operations at the facility; and (2) did not cause the violations. In addition, the violations must have originated with the prior owner. Finally, neither the buyer nor seller may have had the largest ownership share of the other entity and they must not have had a common corporate parent. The new owner must certify it meets all of these criteria.

A new owner meeting these criteria will remain eligible for the enhanced new owner incentives provided by the Interim Approach for nine months after the transaction closing date. During this nine month period, the new owner may elect to make self-disclosures of violations under two alternatives: (1) entry into an audit agreement with U.S. EPA specifying the facility to be audited, the scope of the audit, the deadline for completing the audit and the deadline for disclosing the violations; or (2) disclosure of violations individually as discovered. The key difference between the two approaches is the required time period for making disclosures. If the new owner does not enter into an audit agreement with U.S. EPA, the disclosure of individual violations as they are discovered must be made within 21 days of discovery or within 45 days of closing the transaction, whichever is longer. The audit agreement, in contrast, offers a significant advantage by allowing a longer time period for making disclosures. Entry into an audit agreement within nine months of the closing date provides an opportunity to conduct the audit and make the disclosure outside the initial nine month period. The audit agreement also would “stop the clock” as to disclosure of violations involving monitoring, sampling or auditing required by a permit or other legal requirement if the new owner enters into the audit agreement prior to the required monitoring, sampling or auditing.

The cornerstone of the Interim Approach is the additional penalty reduction made available to new owners. Under the 2000 Audit Policy, 100% of the gravity portion of the penalty may be waived if nine conditions are met. If the first of the nine conditions, discovery of violations via an environmental audit or compliance management system, is the only condition not met, a 75% reduction of the gravity component of the penalty is available. However, the 2000 Audit Policy did not reduce the economic benefit portion of the penalty, which can be significant. The Interim Approach affords new owners additional penalty relief:

• No economic benefit penalty will be assessed for the period prior to the closing date.
• Penalties for economic benefit associated with avoided operation and maintenance costs will be assessed against the new owner from the date of acquisition.
• Economic benefit penalties associated with delayed capital expenditures or with unfair competitive advantage will not be imposed on the new owner if the violations are corrected within 60 days of discovery or other time period agreed upon by U.S. EPA.

The 2000 Audit Policy sets out nine conditions which must be met in order to obtain a 100% reduction of the gravity penalty and the other benefits of the Policy. The Interim Approach modifies five of these conditions to provide flexibility for new owners.

• Violations must be discovered through either an environmental audit or compliance management system. A new owner’s pre-closing due diligence must meet all the criteria for an environmental audit established in the 2000 Audit Policy, except it need not be part of a “periodic” review.
• Violations must be discovered voluntarily. Under the 2000 Audit Policy, discovery via monitoring, sampling or auditing required by a permit or other legal requirement is not considered voluntary with the exception of Clean Air Act violations disclosed by a new owner prior to the new owner’s first annual compliance certification under a Title V operating permit. The Interim Approach allows new owners to meet this condition by disclosing the violations or entering into an audit agreement prior to the first instance of required monitoring, sampling or auditing.
• The 2000 Audit Policy requires disclosure of violations within 21 days of discovery. The Interim Approach allows new owners to disclose violations discovered prior to closing the transaction within 45 days of the closing date. Post-closing discoveries must be disclosed within 21 days of discovery or 45 days from the closing date, whichever time period is longer.
• The 2000 Audit Policy provides that certain violations are not eligible for incentives if they resulted in actual harm or imminent and substantial endangerment or violated the terms of a consent agreement or order. For new owners, such violations which began prior to acquisition are eligible for incentives unless they resulted in a fatality, community evacuation or other seriously injurious or catastrophic event.
• As is the case under the 2000 Audit Policy, a new owner must cooperate with U.S. EPA’s requests for information showing that it satisfies the nine conditions under the Policy. The Interim Approach adds that the U.S. EPA may request that a new owner also furnish information supporting its certification that it qualifies as a “new owner.”

Under the 2000 Audit Policy, violations must be corrected within 60 days of discovery. The Interim Approach clarifies that a new owner has 60 days from the closing date to correct violations discovered prior to closing.

The Interim Approach addresses some of the disincentives which may have previously limited utilization of the 2000 Audit Policy. The Interim Approach is available for settlement of civil penalties for violations of federal environmental laws; however, it does not apply to violations of Indiana environmental laws. The IDEM has its own Self-Disclosure and Environmental Audit Policy which was amended July 13, 2007, but does not include the incentives now provided to new owners by U.S. EPA.

Industry Position on Routine Maintenance, Repair and Replacement Adopted in NSR Enforcement Case

By Larry Kane, Partner, Environmental Law Department, Bingham McHale LLP

In a decision announced July 24, 2008, the U.S. District Court for the Northern District of Alabama adopted an interpretation of the routine maintenance, repair and replacement (“RMRR”) exception to the Prevention of Significant Deterioration (“PSD”) rules’ applicability to source modifications that is favorable to industry. In United States v. Alabama Power Company, _____ F. Supp. 2d ____, 2008 U.S. Lexis 58866, the Court held that potential applicability of the RMRR exception to a particular project is based on activities that are considered routine in the industry of which the source is a part, rather than on activities that are routine at the specific emission unit at which the project occurred. The Court further qualified the determination on applicability of the RMRR exception by stating that “RMRR will not be analyzed solely by reference to the industry, but judged under the multi-factor WEPCO test, and the analysis shall be ‘with reference to the industry as a whole, not just the particular unit at issue.’”

The decision was issued in response to a summary judgment motion filed by the utility in a New Source Review (“NSR”) enforcement case brought by the EPA for several projects at the utility’s power plants conducted between 1985 and 1993 that EPA alleged to not be routine but rather major modifications requiring PSD permits. Background for the decision involves a regulatory exception to EPA’s rules interpreting, for purposes of PSD and New Source Performance Standards applicability, the Clean Air Act’s definition of modification. Specifically, the case focuses on the EPA’s PSD regulations as originally promulgated in 1980. The definition of major modification at 40 CFR § 52.21(b)(2) provides an exception in paragraph (iii)(a) for activities that are “routine maintenance, repair and replacement.”

The Alabama Power Company decision adds to a continuing interpretative dichotomy in the federal courts concerning the proper test for applying the RMRR exception. The Alabama Power Company decision aligns with the decision in United States v. East Kentucky Power Co-op, Inc., 498 F. Supp. 2d 976 (E.D. Ky. 2007) and is contrary to other decisions such as U.S. v. Cinergy Corp., 495 F. Supp. 2d 909 (S.D. Ind. 2007) and United States v. Ohio Edison, 276 F. Supp. 2d 829 (S.D. Ohio 2003), both of which held that “routine” must be determined by reference to the individual emission unit and not the industrial category as a whole. The Alabama Power Company decision provides a good summary of the RMRR issue.

Indiana Supreme Court Addresses Statute of Limitations for Certain Environmental Causes of Action

By Katherine L. Shelby, Partner, Environmental Law Department, Bingham McHale LLP

The Indiana Supreme Court recently decided the case of Pflanz v. Merrill Foster, No. 36S01-0710-CV-425 (June 19, 2008) addressing the issue of when the statutes of limitations begin to run for environmental causes of action under the Indiana Underground Storage Tank (UST) Act and under common law theories. There are different statutes of limitations applicable to these theories of liability: the statute of limitations applicable to a claim under the UST Act is 10 years; however, the statute of limitations applicable to a common law claim is 6 years.

The Pflanzes filed a Complaint against prior owners and operators of a service station to recover clean up costs incurred by the Pflanzes from leaking underground storage tanks. Their Complaint asserted both UST Act claims and common law claims of waste and negligence.

In Pflanz, the Supreme Court found that when the statute of limitations for environmental damage begins to run depends upon the cause of action involved:

• A cause of action under the UST Act is one for contribution. Because the Pflanzes’ clean up obligation did not begin to run until they were ordered by IDEM to clean up the property, the Supreme Court held that the statute of limitations for their UST Act claim did not begin to run until they had been ordered to clean up the property.
• The statute of limitations for the common law claims of waste and negligence begins to run when the plaintiff, in the exercise of ordinary diligence, knew or should have known of the injury. Therefore, a plaintiff has 6 years from when it knew or should have known of the contamination to bring a common law claim.

The Pflanz case did not address the issue of when the statute of limitations for a claim under the UST Act begins to run when the plaintiff voluntarily cleans up the property without an order from IDEM.

Also, the Pflanz case did not address the issue of when the statute of limitations for an Indiana Environmental Liability Act ("ELA") claim begins to run. The ELA does not have a specific statute of limitations contained in the ELA. The United States District Court for the Southern District of Indiana has applied the common law statute of limitation for damage to real property (which is 6 years) to an ELA claim. In a case involving claims under the ELA, Cooper Industries, LLC v. City of South Bend, the Supreme Court accepted transfer and heard oral arguments in January 2008, but has not yet handed down a decision. Cooper Industries, LLC v. City of South Bend may resolve the question of when the statute of limitations for an ELA claim begins to run.

IDEM Seeks Comments on Revisions to Annual Compliance Certification Non-Rule Policy Document

By Jennifer Thompson, Partner, Environmental Law Department, Bingham McHale LLP

The Indiana Department of Environmental Management (“IDEM”) has proposed revisions to its non-rule policy document (“NPD”) AIR-007-NPD-R2, Guidelines for Submittal and Review of Annual Compliance Certifications under the Federally Enforceable State Operating Permit (FESOP) and Part 70 Permit Programs. The proposed revisions include a revised sample Annual Compliance Certification (“ACC”) form which allows sources with Title V operating permits or FESOPs to certify compliance with the terms and conditions of permits through a more streamlined process, requiring a listing of only those specific conditions for which compliance was intermittent during the reporting period, while still certifying compliance with the remainder of permit conditions.

Use of a short form ACC will relieve sources from the burden of listing every condition of their permit in a different format and will allow the IDEM and others to more readily identify any noncompliance the source is reporting. Other U.S. EPA Region V states already utilize ACC short forms.

Comments on the proposed revisions to the NPD must be submitted to the IDEM by September 8, 2008. Comments may be submitted via U.S. mail or emailed as set forth below:

Judy Lombardo
IDEM – Office of Air Quality
100 North Senate Avenue
MC 61-53, IGC-N 1003
Indianapolis, IN 46204
jlombard@idem.IN.gov

The IDEM plans to present the revised NPD to the Air Pollution Control Board (“APCB”) during its October 1, 2008 meeting. Pursuant to IC § 13-14-1-11.5, the revised NPD cannot become effective until at least thirty (30) days after presentation to the APCB.

The proposed NPD can be accessed here.

U.S. Army Corps of Engineers Guidance Restores Flexibility to Section 404 Wetland Permitting Process

By E. Ryan Murray, Attorney, Environmental Law Department, Bingham McHale LLP

On June 26, 2008 the United States Army Corps of Engineers (“Corps”) issued Regulatory Guidance Letter No. 08-02 (“RGL 08-02”) regarding approved and preliminary jurisdictional determinations (“JDs”). JDs are used by the Corps to implement permitting programs under Section 404 of the Clean Water Act (“CWA”) and Sections 9 and 10 of the Rivers and Harbors Act of 1899 (“RHA”). RGL 08-02 defines both approved and preliminary JDs and provides guidance to landowners, permit applicants, and other affected parties regarding when an approved JD is required and when a preliminary JD may be used.

Following the United States Supreme Court’s ruling in United States v. Rapanos, the Corps and the United States Environmental Protection Agency (“EPA”) issued guidance establishing a process for determining whether wetlands and other water bodies are subject to permitting under the CWA and RHA. In conjunction with the Rapanos guidance, the Corps issued RGL 07-01 requiring all CWA Section 404 permit applicants to obtain an “approved JD” for each water body impacted by a proposed project, thereby eliminating the past practice of allowing the use of non-binding preliminary JDs to expedite the permitting process. The elimination of preliminary JDs caused significant increases in expenditures of time and resources in situations where applicants did not contest or waived jurisdiction. Because RGL 07-01 reduced the Corps’ flexibility in addressing jurisdictional issues and substantially increased the length of time to process a permit application, the Corps revised its guidance in RGL 08-02 to restore flexibility to the permit process by allowing the use of preliminary JDs and clarifying the process for obtaining an approved JD. RGL 08-02 took effect on June 26, 2008 and supersedes any inconsistent guidance regarding JDs contained in RGL 07-01.

RGL 08-02 defines a “approved JD” as “an official Corps determination that jurisdictional ‘waters of the United States,’ or ‘navigable waters of the United States,’ or both, are either present or absent at a particular site.” The Corps will provide an approved JD where: (1) an approved JD or official jurisdictional determination is requested; (2) jurisdiction is contested; or (3) the Corps determines jurisdiction does not exist.

RGL 08-02 defines a “preliminary JD” as a “nonbinding written indication that there may be waters of the United States, including wetlands, on a parcel or indications of the approximate location(s) of waters of the United States or wetlands on a parcel.” Preliminary JDs are non-binding, advisory, and non-appealable decisions stating that there may be jurisdictional waters on a property. A preliminary JD does not make a finding that jurisdictional waters or wetlands are absent. Land owners, developers, and other affected parties who desire to waive jurisdiction questions may seek a preliminary JD in order to expedite the permitting process. Permit decisions based on a preliminary JD assume that all waters and wetlands on the site are jurisdictional waters.

Under RGL 08-02, approved and preliminary JDs must be completed by the Corps within 60 days of receipt of a request. Parties receiving preliminary JDs may later choose to request an approved JD.

You can obtain a copy of RGL 08-02t here.

U.S. EPA Seeks Comments on Regulation of Greenhouse Gases

By Matt Gernand, Attorney, Environmental Law Department, Bingham McHale LLP

On July 11, 2008, the U.S. EPA released an Advanced Notice of Proposed Rulemaking (“ANPR”) on the regulation of greenhouse gases. The ANPR was issued in response to the U.S. Supreme Court’s decision in Massachusetts v. EPA, 549 U.S. 497 (2007), in which the court held that carbon dioxide and other greenhouse gases (“GHGs”) were pollutants as the term is defined in the Clean Air Act (“CAA”). The Massachusetts decision required the U.S. EPA to make a determination as to whether GHGs from mobile sources endanger human health or the environment.

The ANPR does not make this determination, but rather solicits comments on how the U.S. EPA should regulate GHGs. The ANPR, which is over 500 pages long, outlines the various provisions of the CAA that could be used to regulate GHGs and presents the challenges of regulating GHGs under each of the identified CAA provisions. Particularly, the ANPR discusses the ramifications of establishing a national ambient air quality standard (“NAAQS”) for greenhouse gases. Because GHGs are generally uniformly distributed across the earth, the U.S. EPA would likely be faced with designating the entire country as either attainment or nonattainment for the GHG NAAQS; thus, leading to a very unconventional, and likely futile, state implementation plan process. The ANPR also discusses the possibility of using the new source performance standard (“NSPS”) provisions of the CAA and the establishment of a cap-and-trade program for GHGs. However, the recent vacaturs of the Clean Air Mercury Rule and the Clean Air Interstate Rule call such a cap-and-trade approach into question. Finally, the ANPR discusses the impact the regulations would have on the PSD/NSR programs. If GHGs become regulated pollutants, than any source that emits greater than 250 tons of a GHG would be subject to the NSR/PSD programs. Such a threshold would require an extraordinary amount of commercial buildings to undergo preconstruction review.

As can be seen, the ANPR calls into question the present CAA’s ability to effectively regulate GHGs. In fact, in the preamble to the ANPR, the U.S. EPA Administrator, Stephen Johnson, stated that the CAA is an “outdated law…that…is ill-suited for the task of regulating global greenhouse gases.” However, given the Supreme Court’s mandate in Massachusetts, the U.S. EPA is eventually going to have to make an endangerment determination. If it finds that GHGs do endanger human health or the environment, Congress may need to enact radical changes to the CAA.

The public has until November 28, 2008 to comment on the ANPR which can be found here.

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