Environmental Law ReSource : Environmental Lawyer & Attorney : Reed Smith Law Firm : Climate Change, Sustainability

1. Offshore Wind Power Generation (Robert Vilter, New York)

The Obama Administration is pursuing the development of 10 gigawatts of offshore wind-generating capacity by 2020, and 54 gigawatts by 2030. This would produce enough energy to power 2.8 million and 15.2 million homes, respectively. However, because of complicated and overlapping federal and state regulations, it takes anywhere from seven to 10 years to receive approvals and to fully permit an offshore wind project – more than double the amount of time it takes to permit an offshore oil or natural gas platform. The U.S. Department of the Interior has announced a “Smart from the Start” wind energy initiative to facilitate siting, leasing and construction of new projects in an effort to shorten this time line. Keep in mind that offshore wind farms, such as Cape Wind, also face local hurdles to development, oftentimes in the form of opposition by well-funded citizen groups.

2. Renewable Energy Incentive Programs (Arnold Grant, Chicago)

The cash grant program enacted under Section 1603 of American Recovery and Reinvestment Act in order to help renewable energy developers has expired except for projects that (i) began construction before January 1, 2012, and (ii) are placed in service before a specified date. The date varies depending on the type of project. The major remaining federal tax benefits are the energy tax credit under IRC Section 48, the production tax credit under IRC Section 45, and accelerated tax depreciation under IRC Section 168. Various structures are available to help renewable energy developers monetize these incentives.

3. Hydraulic Fracturing Regulation (Larry Demase, Pittsburgh)

Hydraulic fracturing or “fracking” is a practice of stimulating and maximizing production of natural gas in shale formations that has been in use in the United States for more than 50 years, but which has recently gained public attention. It involves pumping, under high pressure, a mixture of very large quantities of water and very small quantities of chemicals and proppants to create fissures in the shale and to hold fissures open so that gas will flow in greater quantities to the well bore. The controversy over its use concerns the amount of water being withdrawn from ground and surface resources, alleged contamination of drinking water from the fracking fluid and the disposal and treatment of waste water. In 2011 the U.S. Environmental Protection Agency (EPA) announced it will study the impacts of hydraulic fracturing on drinking water resources. The results of EPA’s study are intended to provide decision makers with some answers to fundamental questions about the effect of fracking on drinking water. The results will also no doubt be the impetus for regulatory and policy changes that could have a significant impact on the shale gas industry. A panel of experts will analyze the effect of fracking using reported cases of alleged groundwater contamination, laboratory studies, toxicological assessments of chemicals used in hydraulic fracturing, their degradation and/or reaction products, and naturally occurring substances that may be released or mobilized as a result of fracking.

There will be two reports resulting from EPA’s study with the first to be completed in 2012. An additional report based on long term study projects is to be issued in 2014. In the meantime, look for states to address these issues in various ways.

4. Aggregation (Larry Demase, Pittsburgh)

As we’ve discussed in previous posts, aggregation is the process of determining whether emissions from multiple operations should be aggregated into a single source for air permitting purposes. A significant issue related to oil and gas operations is whether emissions from individual operations, such as wells, processing plants and compressor stations, should be combined so that they become major sources for permitting purposes, subject to Title V requirements and New Source Review.

In 2011, a number of public interest groups challenged air permits issued by the Pennsylvania Department of Environmental Protection (DEP) on the grounds that DEP should have included multiple sources of emissions in those permits so that they would be considered “major” permits. The Clean Air Council, Group Against Smog and Pollution, and Citizens for Pennsylvania’s Future have asserted before the Pennsylvania Environmental Hearing Board and the United States District Court for the Middle District of Pennsylvania, that DEP failed to properly apply the three-part test for deciding whether sources should be “aggregated” together for permitting purposes. One case asserts that the permittee should be penalized for failing to submit an “aggregated” permit application. Decisions in these cases could result in precedents that will impact development of the shale gas industry in Pennsylvania.

Initial decisions in all three cases are expected in 2012, but final results could be extended if the losing parties seek appeals.

5. Greenhouse Gas Litigation (Jennifer Smokelin, Pittsburgh)

Regarding greenhouse gas (GHG) litigation, there are two main areas to watch in 2012: (i) the United States Supreme Court (and the Ninth Circuit) in the aftermath of American Electric Power v. Connecticut (AEP), and (ii) four consolidated cases in the D.C. Circuit challenging the endangerment finding slated for argument at the end of February.

Before the Supreme Court ruled in Massachusetts v. EPA, certain states sued the nation’s five largest coal-fired electric power corporations in the Southern District of New York under federal and state common law, charging AEP and other defendants with contributing to the public nuisance of global warming and seeking an injunction to cap and reduce their carbon dioxide emissions. The AEP Court voted unanimously that federal common law had been “displaced” by the Clean Air Act (and the Obama Administration’s efforts to regulate emissions), and thus states cannot use federal common law to restrict greenhouse gas emissions. The AEP ruling leaves open the question of (i) whether states can sue under state law, and (ii) whether climate change victims can seek damages through the courts. The issues are likely to be litigated in 2012 in a case, Kivalina v. Exxon Mobil.

Following the decision in Massachusetts v. EPA, but before AEP was decided in the U.S. Supreme Court: (i) EPA published two endangerment findings under the Clean Air Act, triggering a mandatory duty for EPA to adopt regulations to control emissions from power plants, industries, motor vehicles, and other sources; (ii) EPA issued tailpipe emission standards for new cars and trucks under the Clean Air Act; and (iii) EPA issued Best Available Control Technology (BACT) guidance for new sources and New Source Performance Standards (NSPS) for existing sources of GHG emissions under the Clean Air Act. Four cases are consolidated in the D.C. Circuit that challenge EPA’s Endangerment Findings. The cases are Coalition for Responsible Regulation Inc., et al. v. EPA, case numbers 09-1322, 10-1092 and 10-1073; and American Chemistry Council v. EPA, case number 10-1167, in the U.S. Court of Appeals for the District of Columbia Circuit. Argument will take place February 28 and 29, 2012. This is a very complex series of cases that will affect not only utilities but many other industries as well, since the fundamental underpinning to all GHG regulation under the Clean Air Act is essentially up for review.

6. California’s Cap-and-Trade Program (Todd Maiden, San Francisco)

In October 2011, the California Air Resources Board approved final regulations implementing a “cap-and-trade” program under the state’s climate law (more commonly referred to by its legislative bill number, “AB 32”). These regulations became effective January 1, 2012, and many consider California a possible test case for similar programs in other parts of the country. Regulated entities under the first phase of this program include utilities and large industrial facilities (i.e., emitters of greater than 25,000 metric tons of CO2 equivalent per year). The regulations trigger two 2012 auctions for buying and selling rights to emit, and requires entities to comply with a series of progressively stringent emission caps beginning January 2013.

7. California's Green Chemistry Initiative (Todd Maiden, San Francisco)

In October 2011, California’s Department of Toxic Substances Control (DTSC ) released revised “informal” draft regulations of its Green Chemistry initiative titled the “Safer Consumer Products Regulation.” DTSC’s new informal draft makes substantial changes, specifically in the areas of timeframes, the prioritization of chemicals and products, alternative assessment compliance, and exemptions. The informal draft also significantly broadens the chemicals that will initially be regulated to include an estimated 3,000 Chemicals of Concern without limits on which product categories may initially be considered. These draft regulations are highly controversial, yet DTSC is projecting that it will likely finalize these regulations – or something close to them – in spring 2012.

In a related development, California’s Office of Environmental Health Hazard Assessment recently finalized separate regulations that regulate the hazard traits in chemicals of concern. While finalized, these regulations remain controversial within the regulated community, and we anticipate administrative or litigation challenges to these regulations as well.

8. New Mercury Standards for Coal and Oil-Burning Power Plants (Douglas Everette, Washington, D.C.)

The final version of EPA's Mercury and Air Toxics Standards, or MATS rule, was signed December 21, 2011. For the first time in history, power plants will have to reduce all of their air toxic emissions, not just mercury, arsenic and lead – but a wide range of toxic chemicals. For coal-fired generators, the MATS rule sets emissions limits for mercury, particulate matter (a surrogate for toxic metals), and hydrogen chloride (a surrogate for acid gases). For oil-fired units, limits are set for particulate matter, hydrogen chloride and hydrogen fluoride. Also revised are new source performance standards for power plants to address emissions of particulate matter, sulfur dioxide and nitrogen oxides. According to EPA, approximately 1,400 existing coal and oil-fired units are affected. Existing sources are required to comply within three years of the effective date of the MATS rule, with case-by-case extensions up to five years beyond the effective date for documented electric reliability issues. These extensions are not offered to new or reconstructed sources. Vigorous debate centers on the practical implementation of the MATS rule deadlines and whether the electric grid will have enough capacity to avoid outages stemming from coal power plant retirements.

9. Fallout from Burlington Northern and Santa Fe Railway Co. v. U.S. (Robert Frank, Philadelphia)

In Burlington Northern and Santa Fe Railway Co. v. United States (BNSF), 556 U.S. 599 (2009), the U.S Supreme Court decided two key issues for parties facing Superfund liability: the standard for establishing “arranger” liability and the standard for establishing divisibility of liability. Since then, more than 100 courts have cited the decision. On arranger liability, including two at the federal appellate level, the cases illustrate that courts are following the Supreme Court’s directive to conduct a fact-intensive inquiry into a defendant’s purported “intent” to dispose of a hazardous substance. It’s fair to say that courts have been more reluctant to establish liability under an arranger theory than in the era preceding BNSF and look for that trend to continue in 2012.

For example, last year, the Ninth Circuit issued its first “arranger” liability decision under CERCLA since being reversed by the Supreme Court in the 2009 Burlington Northern decision.

In Team Enterprises, LLC v. Western Investment Real Estate Trust, 647 F.3d 901 (9th Cir. 2011), plaintiff argued that the requisite "intent to dispose" element necessary to trigger CERCLA arranger liability could be inferred from the fact that the dry cleaning machine was designed in a way that made disposal inevitable. Plaintiff also argued that the fact that the manufacturer exercised control over the disposal process provided a sufficient basis to infer the requisite intent necessary to trigger CERCLA arranger liability. The Ninth Circuit held that a manufacturer of equipment used to recycle wastewater from dry cleaning machines, as a matter of law, had neither the intent nor the control necessary to be held liable as an arranger. The court held that, to sustain an arranger claim against a “company selling a product that uses and/or generates a hazardous substance as part of its operation,” the plaintiff must prove “that the company entered into the relevant transaction with the specific purpose of disposing of a hazardous substance.” The holding underscores the high bar plaintiffs must meet in order to establish CERCLA arranger liability following the BNSF decision.

Regarding divisibility, there have been fewer cases applying the Supreme Court’s divisibility holding in BNSF. Generally, the courts looking at whether a “reasonable basis” for apportionment exists have reviewed the evidence that defendants have submitted to determine whether they have met their burden of proof. These cases have been very fact-intensive and, so far, it is difficult to identify a trend.

10. Final Rules for Conflict Minerals (David Wagner, Pittsburgh)

Section 1502 of the Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to issue disclosure and reporting regulations regarding manufacturers’ use of conflict minerals from the Democratic Republic of Congo (DRC) and adjoining countries. The SEC was required to issue its conflicts minerals rules last year but missed the deadline. Look for the final rules – and plenty of implementation concerns – sometime in 2012. The legislation for conflict minerals is part of a broader multilateral effort to require manufacturers and other users of certain minerals to closely track and publicly disclose where their raw materials originate. It is designed to suppress end-use demand for minerals produced in certain high-risk areas where minerals operations and revenues have been linked to violent and repressive rebel groups.

The law focuses on forcing supply chain transparency for users of certain minerals (which are used primarily in electronic components, engine components, aerospace equipment, jewelry and other industries). It does not directly impose restrictions on mining or metals companies, or create any sort of embargo on the DRC.

Significant substantive changes were also made to the SCPA Regulations, including:

• While slightly expanding the list of “temporary” hazard traits in effect until the Office of Environmental Health Hazard Assessment (OEHHA) publishes its final list, the categories of products that can be designated as Priority Products have been significantly restricted. Specifically, for the first five years following implementation of the SCPA Regulations (through January 1, 2016), Priority Products can consist only of three categories deemed to pose the greatest threat to human health and the environment: (a) Children’s products; (b) Personal care products; and (c) Household cleaning products. Moreover, nanomaterials have been removed from the scope of the revised regulations completely.
• Certain important regulatory exclusions have been expanded, clarified and the criteria for their application made more objective. For example, the exclusion of chemicals and products regulated by other regulatory programs (the “non-duplication” provision) has been expanded to include international trade agreements, no longer includes the burden of proof by clear and convincing evidence, and is now applied in a more objective manner. Similarly, the exclusion applicable to products containing chemicals that exhibit a hazard trait, but for which there is no exposure pathway posing a threat to public health or the environment, no longer carries a negative presumption (i.e. is no longer presumed not to apply).
• The Chemicals Under Consideration and Products Under Consideration lists have been deleted, eliminating intermediate steps in the prioritization process between initial data assessment and final determination of the chemicals and products to be regulated. Additionally, deadlines have been specified for publishing the initial lists of those chemicals and products to be regulated, i.e., the lists of Chemicals of Concern and Priority Products. The initial list of Chemicals of Concern must be published no later than one year following enactment of the SCPA Regulations (December 31, 2011), and the initial Priority Products list one year later (December 31, 2012).
• Changes to the regulations governing treatment of confidential information, including trade secrets, include removal of the prohibition against the misuse of confidential information by DTSC employees (based on assertion that this provision was duplicative of existing law and DTSC practice), and deletion of a process allowing for DTSC’s independent review of trade secret claims separate from the provisions in Health and Safety Code section 25257(a) governing the same issue.

In addition to the revisions made to the text of the SCPA Regulations, DTSC also added documents to the rulemaking file supporting the enactment of the regulations, which include scientific peer-review documents and a resolution by the California Environmental Policy Council (CEPC) concluding that the regulations would not have any significant adverse impacts on public health or the environment. CEPC’s determination was strongly opposed by industry, based upon the adverse impacts the SCPA Regulations could cause by replacing certain chemicals with other substances that pose an even greater threat. Deferring the analysis of such potential impacts is arguably a violation of the California Environmental Quality Act.

Despite the significant changes reflected in the current version of the SCPA Regulations, those regulations and the underlying green chemistry program remain very controversial. Common criticisms include environmentalists’ persistent claims that the program is not broad enough in scope and would not regulate fast enough, compared to industry’s claims that the program would essentially regulate every product sold in California. Another major area of disagreement is how the regulations treat confidential information, such as trade secret protections. Additionally, complementary regulations drafted by OEHHA to create the toxics information clearinghouse, a key component of the green chemistry program, have also come under fire for potentially exceeding that agency’s authority because they would conclusively link chemicals with specific hazard traits, instead of merely publishing data concerning hazard traits and toxicology for public review.

Although DTSC is legally authorized to issue another revised version of the SCPA Regulations after considering the comments received on the current draft, the time to do so is very short. DTSC has a statutory mandate to enact the SCPA Regulations by January 1, 2011, and releasing another revised draft of those regulations would have to include another 15-day public comment period.

• How wide to cast the net – a threshold issue is how to balance the goal of regulating chemicals in consumer products to reduce their potentially harmful effects with the financial burden imposed on the regulated community, particularly in this challenging economy. For instance, some wish to maximize the number of chemicals addressed and populate the public clearinghouse mandated by SB 509 with a great deal of data in a very short period of time. However, the burdens of this approach must also be recognized, which include the enormously time consuming and expensive tasks of identifying all the chemicals used in the broad array of consumer products sold throughout the State, followed by preparing life cycle assessments for each one of them.

Early versions of the SCPA regulations were strongly criticized for borrowing "lists of lists" of chemicals from other regulatory programs and adopting broad categories of loosely defined consumer products. The Green Chemistry Alliance warned that unless chemicals and products are selected and prioritized based upon real life exposure risk, the green chemistry initiative will collapse under its own weight. The current draft relies on this approach to a lesser degree, and instead applies a lengthy list of prioritization factors to chemicals in consumer products that exhibit hazard traits. Nevertheless, the number of chemicals covered at the outset – which include all 800+ listed under California's Proposition 65 – is still an ambitious first step.

• Prioritizing chemicals of concern – An effective mechanism is needed to prioritize the chemicals addressed, but various stakeholders have advocated for different criteria to govern that process. Industry’s position is that a policy automatically equating any amount of exposure with harm is not only contrary to AB 1879, but would also put an onerous burden on manufacturers to develop, gather and analyze vast amounts of data on hazard traits and exposure in very little time, and in some cases without good reason. Scientists, including those on the Green Ribbon Science Panel, are concerned that without an effective prioritization mechanism, the green chemistry program will fall victim to “paralysis by analysis.” Environmentalists are similarly concerned that if the regulations do not take effect quickly enough, the primary goal of the program – to avoid adverse human health and environmental impacts – will be thwarted.

The current draft of the SCPA regulations uses a mechanism of funneling down those chemicals and consumer products to be regulated. Chemicals and consumer products are first "considered" based on their volume, toxicity and exposure potential, and then the highest priority products containing the highest priority chemicals are selected for further regulatory analysis. However, there are currently no deadlines for completing the various steps of this subsequent funneling process, which will follow DTSC's January 1, 2011 deadline to specify the threshold hazard traits to be regulated.

• Alternatives analysis – The process by which manufacturers will be required to study potential alternative chemicals for use in consumer products remains the subject of much debate. Of particular concern to all involved is who will perform those assessments – industry, third parties working for industry, independent third parties, regulators, or some combination of those entities. Manufacturers prefer to conduct their own alternatives analyses, given the complexity of evaluating chemical uses and exposures, the risks associated with being bound by others’ decisions, and the desire to control the dissemination of confidential information. Assemblyman Feuer, the author of AB 1879, has commented on the need to counter the “adverse incentives” that would result if industry could sidestep regulation by failing to develop data upon which regulatory decisions could be based, e.g., by purposefully neglecting to fill critical "data gaps." Similarly, environmentalists insist that the data considered must be completely transparent to the public and subject to DTSC oversight.

Another criticism of the alternatives analysis process is the lack of deadlines to force industry to complete the various steps involved. DTSC's Acting Director Maziar Movassaghi has acknowledged that the timeframe under the current regulations is variable and that it could take years to find suitable alternatives for certain chemicals currently in use.

• Confidential business information (CBI) – CBI is a hotly disputed issue and is closely tied to the alternatives analysis process. That process requires industry to provide detailed information about chemicals of concern (COC) and potential alternatives, including their identity, composition and performance characteristics, as well as redesign of COC-containing products, redesign of associated manufacturing processes, and manufacturers' customer lists. Much of this information is typically considered by industry to be proprietary CBI to protect substantial investments made in research and development, and its public disclosure would have severe economic consequences. Industry is also concerned that publicizing information about chemical and product design alternatives will pave the road for product liability lawsuits.

While the draft regulations do protect trade secrets identified by industry, they also: restrict the scope of data for which such protection can be claimed; reserve for DTSC the discretion to accept or reject claims of trade secret status; allow for disclosure of trade secrets in cases of "substantial need" as determined by DTSC; fail to specify the precise measures to be used to protect such confidential information; and do not impose legal liability against DTSC employees who fail to safeguard such information.

• Conflicting and duplicative regulations – Faced with a new, all-encompassing system of chemical regulation, industry is concerned about how that system will overlap, and perhaps conflict, with the existing patchwork of chemical and product regulations already in effect on the federal and state level. For example, federal agencies could regulate a particular public health or environmental risk under their existing authority that could conflict with the regulatory actions taken under the draft SCPA regulations. Moreover, due to the perceived sluggish operation of the current SCPA regulations, lawmakers are currently considering the need for additional chemical-specific bans, the elimination of which was a goal of the green chemistry laws. The draft regulations allow for the exemption of COCs regulated in a similar manner under other laws, but leave exemption determinations to DTSC's discretion and do not specify the criteria to be considered when making such determinations.
• Cost of implementation – Perhaps the one thing that all parties involved – scientists, industry, activists and regulators – appear to agree on is that implementing the new SCPA regulations will require significant funding and staffing resources. While much of this burden appears destined to fall on industry, a substantial role must also be played by the regulators to administer and enforce the program. However, the source of government funding remains unclear amidst the State’s budget crisis and service cutbacks.

Thus, while progress has been made in developing the SCPA regulations, there is much disagreement about whether this progress is headed in the right direction. For instance, industry representatives have recently commented that DTSC’s latest draft of the SCPA regulations may overreach the agency’s authority under the green chemistry laws and appear to be considering grounds for challenging the regulations in court. However, DTSC has not yet issued a final draft of the SCPA regulations, which will trigger further hearings and a 45-day public comment period under the formal rulemaking process. Consequently, there is still time and opportunity for further debate and revision of the SCPA regulations.