Environmental Defense v. Duke Energy: Take 2

The following argument analysis is the second of two entries about the argument in Environmental Defense v. Duke Energy (the first entry is here). It was written by David B. Rivkin, Jr., a partner in the Washington, D.C. office of Baker & Hostetler LLP. He participated in this case as an amicus, filing a brief on behalf of a group of law professors, supporting the jurisdictional aspects of the respondent’s position.

After Wednesday’s oral argument in Environmental Defense v. Duke Energy Corp., it is clear that if the Supreme Court really accepted certiorari to defend the D.C. Circuit’s prerogative to decide the validity of agency action (a claim made by many an environmental pundit in the last several months), the Court spent an awful lot of time trying to figure out the answer to merit questions that the government and environmental groups allege it shouldn’t even be deciding. And, while it is uncertain which party will ultimately prevail in Duke Energy, it is clear that the case will not be the cakewalk for petitioners that many observers had predicted when the Supreme Court accepted the case for review over the government’ and Duke Energy’s objections.

At issue in Duke Energy is the legality – at least in part – of the Environmental Protection Agency’s (“EPA”) new source review (“NSR”) enforcement initiative, which was commenced in the late 1990s and has been going on ever since. NSR is a Clean Air Act program designed to manage economic growth in a way that balances both economic and environmental prerogatives. Under the program, new and modified stationary sources of air pollution have to undergo preconstruction permitting, and possibly install pollution control technology, when they are constructed.

Significantly, the NSR enforcement initiative does not allege that wholly new sources of pollution were constructed without permits. Instead, the government alleges that regularly undertaken projects at existing sources that allowed them to operate more hours, and therefore emit more pollution, than they did before the change were “major modifications” – a regulatory term that EPA claims supersedes the statutory requirement that there be a “modification” before NSR can be triggered. Duke Energy’s position is that, unlike other Clean Air Act programs that force existing sources to reduce pollution as a matter of course, like the Title IV acid rain program and reasonably available control technology requirements, the NSR program was never designed to force existing sources to go through the NSR process unless an activity at the source caused the source to emit new pollution. The new pollution, under Duke’s line of thinking, is the pollution generated by a source that was not previously accounted for and regulated in the State Implementation Plan (“SIP”) — a state-proposed and EPA-approved master plan, detailing how a given geographical area will come into compliance with the relevant clean air standards applicable to that source. Such a pollution can only come as a result of an increase in the source’s maximum hourly emissions. Duke and similarly situated companies also point out that, SIP accounting issues aside, running their power plants more hours, following the completion of various repair and replacement projects, does nothing more than preserve the ability of these facilities to operate the way they have operated in the past.

Duke Energy prevailed on summary judgment at the trial court level. That court held that EPA’s litigation position — that an increase in the hours of operations stemming from a repair or replacement activity that did not increase the source’s maximum hourly emissions rate was capable of triggering NSR — was based on a retroactive reinterpretation of its NSR regulations that was divorced from the regulatory text, the history of the regulations, and the plain language of the Clean Air Act. An ideologically-diverse Fourth Circuit panel, comprised of the Court’s most liberal judge, Diana Gribbon Motz, and one of its most conservative members, Michael Luttig, unanimously approved the district court’s decision, albeit on somewhat different grounds.

The Fourth Circuit claimed that, because the Clean Air Act predicated NSR program applicability on a “modification” as that term was either “used” or “defined” in the context of another Clean Air Act program (the new source performance standards (“NSPS”) program), that EPA must interpret its NSR regulations consistently with regulations implementing the NSPS program. Consistent interpretation means that the NSPS modification definition, which beyond a doubt requires an increase in the source’s hourly emission rate, applies. In its motion for rehearing en banc, the government claimed that this judgment implicated the validity of the NSR regulations themselves, which it claimed was barred by Clean Air Act provisions precluding review by enforcement action courts of agency action of which review could have been obtained earlier.

The Supreme Court accepted two issues for review. The first issue is jurisdictional: whether the Fourth Circuit exceeded its jurisdiction by holding that the NSR regulations must be interpreted consistently with the NSPS regulations. The second issue is not — it was a merit question, going to the heart of the government’s enforcement initiative — and asked whether the Fourth Circuit erred in interpreting the NSR regulations consistently with the NSPS regulations. Although the Supreme Court appeared interested in both issues, it was the latter issue on which seven members of the Court who actively participated in the oral argument appeared to focus.

First to argue was Sean Donahue, counsel for Environmental Defense. Almost immediately, Donahue faced difficult questions from from Justices Roberts, Alito, and Scalia. For instance, when Donahue claimed that the NSR regulations were “clear on their face,” Justice Roberts interjected and said “that’s an audacious statement.” Justice Alito appeared equally dubious when Donahue claimed that several early applicability determinations by Edward Reich, EPA’s Director of Stationary Source Enforcement – the official who issued nearly every NSR and NSPS applicability determination from the late 1970s to early 1980s – that supported the industry’s position that EPA can and did interpret the NSPS and NSR definitions of modification consistently, were not particularly probitive, because Reich simply did not understand the allegedly clear and unambiguous NSR regulations. Finally, in an exchange with Justice Scalia, Donahue admitted that it is not improper for courts to interpret ambiguous regulations consistent with their governing statute. Given Justice Roberts’ statement that it is “audacious” to claim that the NSR regulations are clear, one wonders whether these Justices, at least, will find at all objectionable the Fourth Circuit’s use of the Clean Air Act’s text in interpreting the regulations.

The United States government’s attorney, Deputy Solicitor General Thomas Hungar, faced equally pointed questioning from the Justices. Upon hearing Hungar’s claim that, when Congress explicitly incorporated in 1977 the NSPS “modification” definition into the NSR program, it did not restrict EPA’s ability to define the latter, Justice Scalia stated that this construction rendered the statutory cross-reference “entirely meaningless.”

For his part, Justice Kennedy seemed genuinely disturbed that, under the government’s construction of the Clean Air Act (under which courts handling government-initiated enforcement cases cannot revisit the statutory language to ascertain whether the regulatory interpretation in issue is consistent with the statute), courts might “have to take as binding a legal proposition that they think is dead wrong.” Justice Breyer, on the other hand, began to stir during Hungar’s presentation and characterized the Fourth Circuit’s approach to Duke Energy as that “the Fourth Circuit took [Duke Energy’s] argument and changed it all around and made some propositions of law that it’s hard for even them to defend.” This gave Hungar the opportunity to agree and cite back to Justice Breyer a decision on the NSR modification provision he wrote during his time on the First Circuit, Puerto Rican Cement v. EPA.

Next up was Carter Phillips, Duke Energy’s counsel. Right off the bat, Justice Ginsburg pressed Phillips about why the company did not seek a determination from EPA that the activities at issue in the suit were legal under the NSR program. Following Justice Ginsburg’s questions, Justice Breyer again returned to his old stomping grounds, Puerto Rican Cement, and closely questioned Phillips about why he was focusing on inconsistent guidance provided by EPA, when the Fourth Circuit did not predicate its opinion on those grounds. Justice Breyer also expressed concern that, under Duke Energy’s reading of the statute, existing stationary sources could operate more hours and produce more pollution without installing pollution controls, despite the fact that any pollution that could be produced by round-the-clock operations is already accounted for in the SIP applicable to that source.

Consistent with his tough questioning of the petitioner’s counsel, Justice Scalia presented Phillips with an ample opportunity to explain why, under Duke Energy’s reading of the regulations, that there first must be a modification, i.e., a change in the source’s emissions rate, before there can be a “major modification,” i.e., a change in the source’s annual emissions, noting that EPA proposed to replace the “modification” definition with the “major modification” definition but never enacted that proposal. When Phillips struggled with a question from Justice Stevens about the legal principle on which his statutory construction argument relied, Justice Roberts answered the question for him. Finally, Phillips counseled the Court not to adopt the government’s “gotcha” interpretation of the Clean Air Act, which would allow the government to change its interpretation of the regulation but preclude challenges to the government’s reinterpretation of the regulation, advanced in the context of an enforcement case.

Donahue then returned for three final minutes, during which time he addressed both the issue of what activity constitutes a “modification,” and left the Court with a stern admonition that, if the Clean Air Act precluded review of the NSR regulations in the Fourth Circuit, it too must honor this jurisdictional limit. One wonders how well his admonition would play with the Justices, who are not used to being told that there are some legal sources, whether foreign or domestic, regulatory or statutory, that they should not consult.

While the Justices sometimes tip their hands during oral argument, the outcome of Duke Energy is uncertain. It is worth noting, however, that none of the seven Justices who actively participated in the oral argument evidenced great respect for the government’s position. A victory for Duke Energy, depending on how the Court words its decision, would either ensure that EPA’s NSR enforcement initiative, which includes suits around the country against all prominent electric utilities, would come to an immediate and unsuccessful end, or at least substantially undermine it.

By contrast, a victory for Environmental Defense would likely lead to years more litigation, as the battleground in the NSR enforcement initiative would then shift to whether the activities in which it engaged were shielded by the “routine maintenance, repair and replacement” exclusion from the NSR program. Indeed, Duke Energy and at least one other electric utility have prevailed on this issue. However, it was not considered by the Fourth Circuit and was not before the Supreme Court in this case.

Finally, depending on how you view the issue, the government either can’t win or can’t lose. As has been well publicized, the government has pursued its NSR enforcement actions simultaneous with attempts to promulgate legislative rules that make the conduct in which the enforcement action defendants engaged legal. So if the government loses Duke Energy, it will very likely succeed in its attempts to reform the NSR program, and if the government prevails in Duke Energy, its attempts to reform the NSR program might be dealt a blow, but it will be in a better position in the enforcement actions.