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report on, we hope you will still benefit from our take on how it pertains to you.

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Settlement Requiring Climate Change Corporate Disclosures May
Become De Facto Standard Practice

On August 27, 2008, New York State Attorney General Anthony Cuomo
announced a groundbreaking settlement agreement with Xcel Energy Inc.
that provides a good indication of the types of disclosures about the impact
of climate change on a business that investors and regulators may expect.  
Cuomo’s office began an investigation of Xcel and other electric power
generators last year, issuing subpoenas designed to assess whether the
companies' disclosures to investors about the companies’ potential liabilities
associated with climate change were consistent with their internal
documents and with statements made to the public and the media.

Without admitting any wrongdoing, Xcel agreed to include information in its
future Form 10-K filings with the Securities and Exchange Commission about
financial risks associated with three categories of climate-change activities:
(1) present and anticipated future regulation; (2) litigation involving Xcel
and judicial decisions involving others that may have a material adverse
effect on Xcel; and (3) physical risks, e.g., risks to facilities from rising sea
levels or increased temperature.  Xcel also committed to include in its 10-Ks
an analysis of the company's own greenhouse gas emissions, its policies and
procedures for managing and mitigating those emissions, and the
anticipated results of Xcel’s actions.  For a copy of the entire settlement
agreement, click here.

Although SEC representatives and interest groups have spoken out about
allegedly inadequate corporate disclosures about climate change risks, and
the SEC is currently considering a petition requesting it to issue guidance on
environmental disclosures specifically related to climate change, at present
companies have had to make their own decisions about what, if any, type
of disclosure is appropriate without any official guidance.  The Xcel
settlement may well become the model for the types of climate-change
related disclosures that companies will include in their Form 10-Ks and other
disclosures to investors.  An important lesson from the New York Attorney
General’s investigation, which included comparison of Xcel’s SEC
disclosures to information Xcel provided to a private group, the Carbon
Disclosure Project, is that publicly held companies need to make sure that
their formal disclosures to investors are consistent with statements the
company makes about climate change matters to interest groups, in
advertising, in its annual report to shareholders, and the like.  (This includes
statements a company makes in advocacy before Congress and regulatory
agencies, such as comments in response to EPA’s Advance Notice of
Proposed Rulemaking, discussed below.)

(Russell Frye has advised clients for a number of years on their climate
change disclosures in SEC filings, and his personal involvement in much of
the ongoing policy debate and litigation about federal regulation of
greenhouse gases gives him a sound basis for assisting companies in assessing
and describing their financial risks associated with climate change
regulation and litigation.)

EPA Issues Sweeping Request for Comments on Possible Approaches to
Climate Change Regulation

On July 30, 2008, EPA published a 166-page Advance Notice of Proposed
Rulemaking concerning regulation of greenhouse gases (“GHGs”) under the
Clean Air Act (“the ANPR”), 73 Fed. Reg. 44,354.  The ANPR raises (but
generally does not offer the government’s tentative conclusions on) a very
wide range of issues that EPA asserts arise from the Supreme Court’s
decision, in Massachusetts v. EPA, 127 S. Ct. 1438 (2007), that the Clean Air
Act’s definition of “air pollutant” encompasses GHGs.  (FryeLaw PLLC
represented a dozen national trade associations and business organizations
that were parties to the Supreme Court case.)

The ANPR, for example, discusses implications of regulation of GHGs for the
permitting of vast numbers of stationary sources that emit GHGs, describes
(and speculates about) potentially available technologies for reducing GHGs
emissions from both mobile and stationary sources, offers possible legal
interpretations of the extent of EPA’s authority to require such things as
“green” building design or tradable emission credits, and suggests potential
for overlapping regulatory authority under other statutes.  The ANPR also
offers for comment the opinion of EPA Administrator Johnson and the
Secretaries of Agriculture, Commerce, Energy, and Transportation that the
Clean Air Act is a poor vehicle for addressing global climate change.

Although it has sometimes been described as a “roadmap” for EPA action to
combat global climate change, in fact the ANPR is more of a “laundry list”
of all of the actions EPA believes it might be able to take to reduce GHG
emissions.  There seems to be an implicit assumption underlying the ANPR
that any available means to reduce GHG emissions is necessary to combat
climate change and should be taken.  In short, it would not be hyperbolic to
describe the ANPR as unprecedented in scope and character.

Companies will want to study the ANPR carefully for indications of possible
future regulatory activity that could affect their business, and many
companies will want to submit comments, either individually or through
their trade associations, by the November 28, 2008 comment deadline.  
While there will be an opportunity to comment on any specific regulatory
actions that EPA proposes to take in the future, the current comment period
undoubtedly will have a significant effect on the scope and nature of those
proposals.  For a copy of the ANPR, click here.


EPA Proposes Fine Particulate Nonattainment Designations

EPA has announced the availability of, and solicited public comments on, its
proposed designations of those areas of the country that will be
"nonattainment" for the 24-hour average National Ambient Air Quality
Standard for PM2.5 (particulate matter 2.5 micrometers in diameter and
less) that was established in 2006.  See 73 Fed. Reg. 51,259 (September 2,
2008), available at http://edocket.access.gpo.gov/2008/pdf/E8-20241.pdf.  
The designated counties or parts of counties that would become PM2.5
nonattainment areas can be found at http://www.epa.
gov/pmdesignations/2006standards/state.htm.  Comments may be filed by
October 2, 2008.  Designation of an area as "nonattainment" can have a
number of adverse consequences.  Importantly, any major new source of
PM2.5 or major modification that commences construction after EPA makes
the nonattainment designations (which EPA says will be effective in early
2009) will be subject to stringent new source review requirements,
including requirements for emission offsets and achievement of the Lowest
Achievable Emission Rate (LAER).  Thus, companies should look to see
whether they have facilities operating in an area proposed for designation
as a PM2.5 nonattainment area.  For more information about the
consequences of nonattainment designation or about what is involved in
"commencing" construction, contact Russ Frye.


Enforcement Actions Continue To Impose Record Penalties

Contrary to popular impression that the Bush Administration has stopped
enforcing environmental laws, EPA has been aggressively pursuing
enforcement actions.  On January 17, 2008, EPA announced the largest civil
penalty ever in a Clean Water Act case, a $20 million penalty imposed in a
settlement with Massey Energy for NPDES discharge permit violations at
numerous Massey coal mines.  In just the last four months, EPA has
announced settlements imposing over $49 million in civil penalties, including
the settlement with American Electric Power which was the biggest
environmental enforcement action ever, requiring AEP to invest in air
pollution control equipment valued at over $4 billion, pay a $15 million civil
penalty, and invest in $60 million worth of supplemental environmental
projects.  Clearly businesses cannot assume that EPA will give them a “pass”
on recurring environmental noncompliance.  The vast majority of significant
EPA enforcement actions in the past year continue to be focused on Clean
Air Act compliance, especially New Source Review for modified facilities,
and Clean Water Act NPDES permit compliance.


Homeland Security Rule Triggers Requirements for Many Facilities
Handling Chemicals

On November 20, 2007, the U.S. Department of Homeland Security (DHS)
published “Appendix A” to its interim rules on chemical facility security
requirements, 72 Fed. Reg. 65,396.  With few exceptions, a facility that
possesses the specified “screening threshold quantity” (STQ) of one or more
of the 335 chemical listed on Appendix A is presumptively considered to
present a high risk of a serious adverse impact from a chemical release or
theft and must perform an on-line “Top Screen” analysis for review by DHS,
as specified in the DHS interim rules, published at 72 Fed. Reg. 17,688 (April
9, 2007).  DHS estimates that as many as 50,000 facilities may be subject to
the requirement to submit the Top Screen analysis, which is due January 22,
2008.  After that, DHS will notify those facilities (estimated to be around
5000) that DHS considers high risk, and those facilities then will be required
to perform a Security Vulnerability Assessment and develop and implement a
Site Security Plan that meets specified performance-based standards.

The Appendix A list contains explosives and other obvious targets for
terrorists, but it also includes chemicals commonly used at industrial
facilities.  For example, the list includes anhydrous ammonia (STQ = 10,000
lbs.), chlorine (2500 pounds, or 500 pounds if in small containers presenting
a theft potential), nitric acid (15,000 pounds), and propane (60,000 lbs.).  
The regulations, although they talk about “chemical facilities,” are not just
for chemical manufacturers, and in fact they may even apply to non-
industrial facilities.  For additional information, email to:
info@fryelaw.com.   


Ninth Circuit Decision Shows that Climate Change Impacts of Projects
Must Be Assessed

A recent decision by the U.S. Court of Appeals for the Ninth Circuit, Center
for Biological Diversity v. National Highway Traffic Safety Administration,
508 F.3d 508, (Nov. 15, 2007), is a good indication that, in the current
political climate, climate change impacts will often need to be considered
in Environmental Assessments or Environmental Impact Statements.  Center
for Biological Diversity involved judicial review of Corporate Average Fuel
Economy (CAFE) standards for light trucks.  The Ninth Circuit held, among
other things, that the National Highway Traffic Safety Administration failed
to comply with the National Environmental Policy Act when it dismissed as
insignificant the differences in greenhouse gas emissions among alternatives
being considered.  Specifically, the court held that NHTSA could not
conclude that its action may not adversely affect the environment by
pointing out that the CAFE alternatives it was considering would only result
in approximately 0.2 percent lower annual greenhouse gas emissions from
light trucks than the base case.  The court reasoned that, for an issue like
global climate change, even a very small percentage difference in
greenhouse gas emissions could result in a significant environmental impact,
especially when considered along with other, cumulative impacts.  See 508
F.3d at 548-50.

The Ninth Circuit also chastised NHTSA for not attempting to evaluate the
full panoply of effects of greenhouse gas emissions, including health
effects.  The language of the opinion—citing extensively to reports by the
Intergovernmental Panel on Climate Change and other statements about the
threat of climate change and the extent that United States’ emissions
contribute to that threat—as well as the Supreme Court’s Massachusetts v.
EPA decision in 2007 and several other recent opinions, indicates that courts
will likely require an Environmental Assessment or Environmental Impact
Statement that addresses potential adverse effects associated with climate
change even for projects that result in greenhouse gas emissions that are a
very small fraction of total greenhouse gas emissions.


Circuit Court Limits Modifications Subject to PSD Permitting

On June 15, 2005, the United States Court of Appeals for the Fourth Circuit
issued a very important decision concerning applicability of Clean Air Act
Prevention of Significant Deterioration (PSD) regulations.  United States v.
Duke Energy Corp., No. 04-1763, was an appeal from a District Court EPA
enforcement action against eight Duke Energy coal-fired power plants in
North Carolina. (The EPA case was combined with a citizen suit by
Environmental Defense and other environmental organizations for similar
alleged violations.)  The only issue for the appeal was whether EPA could
interpret its PSD regulations such that a source may undergo a “major
modification” subject to PSD if it makes improvements that will increase
the hours of operation of the source but will not increase its emission rate,
i.e. its maximum pounds-per-hour emissions.

The Fourth Circuit held that, because Congress defined “modification” for
PSD purposes to be the same as for New Source Performance Standards
(NSPS) purposes, EPA cannot interpret “modification” differently for the
PSD program than it has for the NSPS program.  Since EPA regulations have
specified since the early 1970s that an affected facility is considered to be
“modified” only if a change results in an increase in the facility’s maximum
emission rate, the Fourth Circuit concluded that EPA could not interpret the
PSD provisions of the Clean Air Act and EPA’s PSD regulations such that a
source may be “modified” if it will have greater annual emissions because
of increased hours of operation but not because of increased emission rate.  
For a copy of the court’s opinion, click here.

This decision represents a huge setback in EPA’s long-running PSD
enforcement initiative.  EPA or the environmental groups may well petition
the Fourth Circuit for reconsideration of this decision en banc, or they may
attempt to get the Supreme Court to review it.  It also has the potential to
affect a pending decision by the U.S. Court of Appeals for the District of
Columbia Circuit, which is considering multiple challenges to EPA’s
December 31, 2002 New Source Reform regulations.  One of the key issues
in that case is the relationship between the PSD and NSPS regulations
concerning the definition of “modification.”  Judging from comments at the
oral argument in the NSR Reform case (where Russell Frye has been
representing steel industry trade associations), there is a good chance that
the D.C. Circuit will apply a somewhat different interpretation to the
definition of “modification,” perhaps making it more likely that the
Supreme Court ultimately will review the issue.  (See February 2005 “News
You Can Use” item.)  EPA also might take the position that the Duke Energy
decision is binding only in the Fourth Circuit (Maryland, North Carolina,
South Carolina, Virginia, and West Virginia).

In the meantime, source operators should resist any interpretation of the
federal PSD regulations, or of state regulations that adopt the same or
similar language, that would require a PSD permit for a physical change or
change in the operation of a source that will not increase in the source’s
maximum emission rate.  This will not relieve all of the problems sources
have been facing with respect to EPA’s enforcement of the PSD
regulations.  Issues still remain about whether emissions increases should be
judged on a past-actual-emissions to future-potential-emissions basis under
the pre-2002 EPA regulations; what kinds of activities can be considered to
constitute a “change in the method of operations”; the meaning of the
exemption for “routine maintenance, repair, and replacement; determining
net emissions increases where a change results in “debottlenecking” of a
process line; and so forth.  But the Duke Energy opinion, if it “sticks,”
eliminates a large category of activities that EPA has been asserting trigger
PSD permitting -- those changes that improve a facility’s “uptime” or
otherwise increase its hours of operation without increasing its maximum
hourly emission rate.  

While the Duke Energy decision concerns PSD permitting, the same logic
arguably applies to New Source Review permits in nonattainment areas,
although the Clean Air Act uses slightly different language when referencing
the NSPS definitions in the discussion of nonattainment NSR for"
modifications.”

For further information about how the Duke Energy opinion might be
applied to new projects or to enforcement-related reviews of existing
projects, please contact Russell Frye.
D.C. Circuit Orders MEK Off Toxics Release Inventory (TRI) List
On May 10, 2005, the U.S. Court of Appeals for the District of Columbia
Circuit ruled that U.S. EPA wrongly denied a petition to  remove methyl
ethyl ketone (MEK) from the list of "toxic" chemicals for which reporting is
required under the Emergency Planning and Community Right-to-Know Act
(EPCRTKA). American Chemistry Council v. Johnson, No. 04-5189.

The opinion rejected EPA's interpretation of EPCRTKA that a chemical is
"toxic" if it contributes to the formation in the atmosphere of ozone.
Because MEK did not meet any other criteria for being included on EPA's list
of "toxic" chemicals for which annual release reporting to the Toxic Release
Inventory (TRI) is required, the Circuit Court remanded the case to the D.C.
District Court, to direct EPA to remove MEK from the TRI list.  This decision
may open the way for delisting of other chemicals included on the TRI list
primarily because of their role as ozone precursors.
It is not yet clear whether MEK will be removed from the TRI list before
the July 1, 2005 deadline for reporting 2004 releases.  A copy of the slip
opinion can be obtained at:
http://pacer.cadc.uscourts.gov/docs/common/opinions/200505/04-5189a
.pdf
February 2005 – Oral argument in the D.C. Circuit case reviewing EPA’s
12/31/02 New Source Review reform regulations might provide insights into
the future of those reforms. (Click Here)

Copyright FryeLaw PLLC 2005-2008.

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Oral Argument in Challenge to NSR Reform Regulations