As we look forward to 2012, the environmental and energy attorneys at Reed Smith will be on top of a range of issues, and offer the following analysis of what we view, in no particular order, to be 10 key issues likely to affect you and your business in 2012. This post is based on input and analysis from Reed Smith attorneys across the United States. The 10 issues to watch are:
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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.
