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Supreme Court Reverses Fourth Circuit in Duke Energy Corp.

Beveridge & Diamond, P.C., April 4, 2007

On April 2, 2007, the U.S. Supreme Court held that EPA is not required to use an “hourly rate test” in determining whether a project requires a permit under the Clean Air Act’s New Source Review (“NSR”) program.  Environmental Defense v. Duke Energy Corp., No. 05-848 (Apr. 2, 2007).   The unanimous ruling vacated a decision by the U.S. Court of Appeals for the Fourth Circuit, which had stalled an enforcement action brought by the United States and several citizen-intervenors against Duke Energy Corporation (“Duke”) for various modifications that Duke undertook without NSR permits.  See United States v. Duke Energy Corp., 411 F.3d 539 (4th Cir. 2005). 

The Court’s ruling can be expected to have a significant impact on federal NSR enforcement and policy.  On the one hand, by eliminating the “hourly rate test,” the decision will likely increase the number of “modifications” that will be deemed to result in a “significant net emissions increase” for purposes of NSR – although EPA is currently considering revisions to the NSR program that may reinstitute this test.  On the other hand, the Supreme Court’s holding also emphasized the use of actual emissions as the basis for determining whether or not a modification requires NSR authorization, which would appear to undercut EPA’s longstanding policy (pre-NSR Reform) of evaluating an emissions increase by comparing the actual emissions prior to the modification to the theoretical potential emissions that could follow it.

Factual Background

Environmental Defense v. Duke Energy Corp. originated in 2000, when EPA filed a lawsuit against Duke in the U.S. District Court for the Middle District of North Carolina.  EPA claimed among other things, that Duke violated Prevention of Significant Deterioration (“PSD”) requirements when it replaced steel tube assemblies in the boilers for various coal-fired electric generating units without first obtaining a PSD permit.  Environmental Defense and other environmental groups intervened as plaintiffs in the case.

Duke asserted that none of the projects qualified as a major modification requiring a PSD permit, because none of them resulted in any increase in the plant’s hourly emission rates.  The District Court agreed (United States v. Duke Energy Corp., 278 F.Supp. 2d 619 (M.D.N.C. 2003)), and its decision was affirmed by the Fourth Circuit in 2005 (411 F.3d 539).  Even though EPA declined to seek Supreme Court review, Environmental Defense and other plaintiff-intervenors did so.

Regulatory Background

In the Clean Air Act, Congress defined the term “modification” in its provisions on New Source Performance Standards (“NSPS”) as “any physical change in, or change in the method of operation of, a stationary source which increases the amount of any air pollutant emitted by such source or which results in the emission of any air pollutant not previously emitted.”  42 U.S.C. § 7411(a).  For purposes of PSD, Congress explicitly incorporated the NSPS definition of “modification” by reference.  Id. at 7479(2)(C). 

But while both the NSPS and PSD programs are derived from the same statutory definition of “modification,” EPA’s implementing regulations for these two programs define the term differently.  Specifically, NSPS regulations define “modification” in terms of increases to emission rates as measured on an hourly basis.  40 C.F.R. § 60.14(a), (b).  The PSD regulations, on the other hand, define “modification” in terms of actual net emission increases as measured on an annual basis.  See 40 C.F.R. §§ 51.166(b)(2)(i), (b)(3), (b)(21)(ii), and (b)(23)(i).

According to the Fourth Circuit, by defining a PSD “modification” by reference to the NSPS definition, Congress had “affirmatively mandated that this term be interpreted identically” in the regulations promulgated under both programs.  411 F. 3d at 547.  This meant that, when determining whether a modification requires PSD authorization, EPA was bound to its definition of “modification” in the NSPS context, and had to measure an emissions increase in terms of hourly rate.  EPA and the plaintiff-intervenors disagreed, and argued that EPA was free to make a different regulatory interpretation in the PSD and NSPS contexts on the common statutory definition of “modification.”

The Supreme Court Decision

The Supreme Court unanimously vacated the Fourth Circuit’s holding.  First, the Court found no statutory basis for restricting EPA’s authority to interpret the statutory PSD provisions in a manner that may differ from its interpretation of the NSPS provisions.  Second, the Court found it impossible to equate the plain text of the PSD regulatory definition of “modification” with its NSPS counterpart.  To do so, the Court concluded, would implicitly invalidate the PSD regulations, and thereby overstep the judicial review authority granted by the Clean Air Act, which narrowly limits challenges to the validity of a regulation during an enforcement proceeding when that review could have been obtained at the time of the rulemaking.  42 U.S.C. § 7607(b).  The obvious effect of the Court’s holding is to eliminate the “hourly rate” method that the Fourth Circuit had established for calculating emissions increases associated with a modification. 

Equally notable, however, is the Court’s detailed analysis of EPA’s PSD regulations – most specifically, the Court’s emphasis on the regulations’ use of “actual” emissions as the basis for determining whether a modification requires PSD authorization. 

Prior to significant revisions of the NSR regulations in 2002 (the “NSR Reform” regulations), EPA had long argued that the appropriate test for determining whether a modification triggers PSD was to compare the actual emissions at the source before the modification with the theoretical potential emissions after the change.[1]  Regulated entities have historically disagreed with this interpretation, given the reference in both the regulations and the Clean Air Act itself to “actual” emissions.  The Supreme Court’s decision appears to support industry’s argument.  Most specifically, the Court summed up the PSD program as “requir[ing] a permit for a modification only when it is a major one and only when it would increase the actual annual emission of a pollutant above the actual average for the two prior years.” Slip Op. at 5 (emphasis added).  This is in direct conflict with EPA’s “actual-to-potential” test method.  Thus, while the Duke Opinion is a victory for EPA with respect to the hourly rate test, it will apparently also provide significant ammunition for regulated entities against EPA’s entrenched actual-to-potential policy.   

The Court’s Opinion does not mark the end of the Duke case; the Court remanded it to the lower court for further review.  Key claims left to be resolved include Duke’s claims that the projects at issue qualify as “routine maintenance” exempt from PSD permitting, and whether EPA provided adequate notice of a change in its interpretation of the PSD regulations that led to the Duke and other enforcement actions against power companies.  On a parallel track, still pending is an EPA proposed rule to modify the PSD regulations to apply the hourly rate emissions increase test to new modifications at power plants.  70 Fed. Reg. 61081 (Oct. 20, 2005).  Statements from the Administration immediately following the decision indicate that EPA will continue to pursue this and other NSR reform provisions in light of the decision.

To view a copy of the opinion, please click here.

For a printable PDF of this article, please click here.

For more information, please contact David Friedland at, (202) 789-6047, Amy Lincoln at, (202) 789-6016 or Laura McAfee at, (410) 230-1330.

[1] The NSR Reform regulations replaced the “actual to potential” approach with an “actual to actual” approach for many modifications; however, in some cases, EPA still insists on the “actual to potential” approach.




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