THE LEGAL TIMES

January 31, 2005

Page 1

Circuit Reviews New EPA Rules on Pollution

Critics say revised regs allow plants to escape federal emission limits.

Lily Henning
Legal Times
The most recent episode in the protracted fight over controversial air pollution regulations governing industrial and
power plant emissions played out in a packed courtroom in Washington last week.

At issue before the U.S. Court of Appeals for the D.C. Circuit are key elements of one of the longest-running
environmental squabbles in Washington: When must industrial and power plants add pollution controls that could cost
billions?

New rules proposed by the Bush Environmental Protection Agency would reduce the burden on industrial polluters to
report changes made to their plants that could raise emissions — a measure supported by industry. But states and
environmental groups say the proposal will harm the public health and undermine a law aimed at controlling pollution
from the oldest and dirtiest of more than 20,000 power plants and factories nationwide.

The hearing stemmed from one of several cases about the EPA's revised air pollution rules; two more are on the D.C.
Circuit's docket. The battle involves more than 50 parties and a dizzying duel between the interests of environmental
groups, states, and big industry, which says that the old rules deterred expansion.

"It's pretty unwieldy," says Russell Frye of the litigation, in which he represents the Steel Manufacturers Association,
which has sided with the EPA. "It's fairly clear to me that a lot of people won't get what they're asking for."

Frye, a partner with Collier Shannon Scott in the District, is part of what a decade ago would have made for an
unlikely alliance: industry groups siding with their federal environmental watchdog.

It's a role that lawyers who represent corporate interests in environmental matters are becoming more accustomed
to under the Bush administration. "Environmental lawyers in D.C. have found themselves in the relatively unfamiliar
position of defending EPA actions as often as we're challenging them," Frye says.

The appeals court hearing was unusual in that lawyers from multiple parties — including the federal government, states,
environmental groups, and industry — argued the case for roughly four hours. Normally, each side is allotted from 10 to
15 minutes.

The three-judge panel that heard the arguments was made up of Judges Judith Rogers and David Tatel, both Bill Clinton
appointees, and Senior Judge Stephen Williams, a Ronald Reagan appointee.

GOING TO THE SOURCE

At the heart of the dispute is the perpetual struggle over how agencies interpret and enforce the rules that Congress
directs them to write.

The coalition of environmental groups and 14 states contend that rule changes proposed by the Bush administration,
which involve an EPA permitting program called New Source Review, will help some companies do a dramatic end run
around agency inspections and emissions-control requirements that would have been mandatory under former
regulations.

Three years ago, the EPA issued a revision to a 1978 rule about when and how the agency reviews and calculates
emissions from existing sources of air pollution — such as coal-fired electrical utilities, oil refineries, and factories —
and how it responds to increases in these emissions. The proposed revisions would alter how the agency would enforce
these New Source Review provisions of the Clean Air Act.

When first passed by Congress during the Carter administration, New Source Review was interpreted by the EPA to
require that the best available pollution-control technologies be installed when plants are built or when they are
modified in a way that significantly increases emissions of pollutants like sulfur dioxide and nitrogen oxides. Both of
these pollutants contribute to acid rain and can aggravate or cause serious health problems, including emphysema and
asthma.

The Bush administration has proposed new rules that give plants more leeway to make modifications without triggering
New Source Review and, therefore, the need for added pollution controls.

For roughly the last 25 years, which included the Reagan and George H.W. Bush presidencies, and the eight years of
Clinton's tenure, the enforcement of New Source Review fluctuated.

"There was great ambiguity as to what the rules meant and how they were interpreted," says William Lewis, a Morgan,
Lewis & Bockius D.C. partner who represents the American Chemistry Council and others who support the EPA.

The industry complains that the EPA ramped up enforcement of the industrial emissions rules in the 1990s and started
seeking to reduce emissions from existing plants through the program.

The EPA did not respond to calls for comment.

F. William Brownell, a Hunton & Williams attorney in the District who represented industry groups in oral arguments Jan.
25, believes that the Bush administration is on the right track by narrowing the scope of New Source Review. "New
Source Review is a program about managing new emissions growth, not an emission-reduction program for existing
facilities," Brownell says.

According to a report released in September by the EPA Office of the Inspector General, the Clinton EPA took a tougher
line on enforcing New Source Review of existing facilities. The reason, according to the report: An increasing number
of plant owners were modifying their facilities and emitting more pollution. Yet they weren't going through permit
review and were potentially not adding new pollution-control technology.

MONEY, MONEY, MONEY

One of the roots of industry's historical resistance to the New Source Review rules is cost. Putting new pollution controls
on old plants is expensive.

Among the biggest polluters, say those who are challenging the Bush administration, are the coal-fired plants built in the
1950s and 1960s that were expected to operate for only 20 to 30 years. As those plants neared retirement age, the
companies realized how expensive it was going to be to build new ones, says Robert Reiley, an attorney for the
Pennsylvania Department of Environmental Protection, one of the parties challenging the Bush rules.

Building a new power plant could cost nearly a billion dollars, says Reiley. But it can cost up to $500 million to add state-
of-the-art pollution controls to an existing plant.

Under the proposed Bush rules, old plants could be perpetually "grandfathered" into an exemption from having to build
better pollution controls, critics say.

Lisa Rector, a policy analyst with Northeastern States for Coordinated Air Use Management, an interstate association of
air-quality-control divisions in eight states, says the new regulations also give companies alarming leeway in reporting
their emissions.

For example, under the original 1978 rules, plant owners must notify the EPA if they want to modify facilities in ways
that could increase pollutants. The owners are allowed to go forward with modifications, as long as they do not
increase emissions beyond the peak production levels of the prior two years.

The new Bush regulations allow a plant owner to go back 10 years to make that same determination — often to a time
when the plants were functioning at a higher capacity and producing pollutants at a greater volume. Environmental
groups and some states warn that this could encourage plants to backslide to previous, higher emission rates.

IN THE COURTROOM

Last fall, the composition of the D.C. Circuit panel reviewing the case changed when Judge Harry Edwards, a Jimmy
Carter appointee, was replaced by Reagan appointee Williams. The court gave no explanation for the change. But the
swap of the Democratic appointee for the Reagan pick may not be as significant as some might think.

Williams and panel member Tatel in 1999 handed a defeat to the EPA when, as part of a three-judge panel, they set
aside new air-quality standards issued by the Clinton administration in 1997 that toughened health standards for smog-
causing ozone. But Tatel dissented from some parts of the decision, and in the majority opinion in American Lung
Association v. EPA he deferred to the EPA, writing, "Generally speaking, we will not second-guess EPA in its area of
special expertise."

The D.C. Circuit is expected to hear a second case later this year about another major component of the EPA's
emissions-control rules that environmentalists say would allow companies to essentially rebuild key parts of their plants
and increase emissions — and sidestep EPA review.

Under that new regulation, companies can spend up to 20 percent of the value of a plant each year on modifications,
allowing them to rebuild and replace worn equipment and, in turn, potentially increase emissions under looser federal
oversight, says Victor Flatt, a professor of environmental law at the University of Houston Law Center, who represents
lawmakers, including Sens. Hillary Rodham Clinton (D-N.Y.), John Kerry (D-Mass.), and Patrick Leahy (D-Vt.) in support
of Northeastern states that have filed suit against the EPA.

CLEARING THE AIR

The D.C. Circuit isn't the only forum where the Bush administration is pressing its environmental agenda. The president's
Clear Skies Act would eliminate New Source Review for many plants. But it has been stalled in the Senate, and many say
it is unlikely to pass, leaving critics to suggest that the administration is trying to nudge forward its agenda through
agency rule making.

"They are trying to do administratively what they couldn't do legislatively," says Flatt, the Houston law professor.

In briefs, the state challengers call the Bush administration's revision of New Source Review "a radical departure from
judicial and agency precedent," saying that even while the new rules are still tied up in litigation, enforcement of the
older and what they say is a more-stringent rule has effectively been stalled as well.

The September report from the EPA Office of the Inspector General to an extent agreed with them.

The inspector general's report found that the rule change harmed the agency's ability to enforce pollution actions
against coal-fired electric utilities, saying that the change has "seriously hampered EPA settlement activities, existing
enforcement cases, and the development of future cases."

The report stated that three of nine utilities in active litigation with the EPA have used the modified rules as an
argument to halt or reduce EPA enforcement, saying the emissions in question wouldn't violate the new EPA rules.

The report also concludes that nearly all of the projected emission reductions of 1.75 million tons of sulfur dioxide and
629,000 million tons of nitrogen oxides resulting from recent sanctions under the old rule wouldn't be realized under the
Bush administration's new approach.

Lily Henning can be contacted at
lhenning@legaltimes.com.