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Clean Air Act: Federal Court Emphasizes Deference To Oregon State Regulator’s Technical Determinations

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Introduction
On December 30, 2015, a federal district court in Oregon rejected claims that a crude oil transloading terminal unlawfully failed to obtain a federal preconstruction permit under the Clean Air Act (CAA) Prevention of Significant Deterioration (PSD) program. Nw. Envtl. Def. Ctr. v. Cascade Kelly Holdings, LLC,No. 3:14-cv-01059-SI, 2015 WL 9581754, at *21 (D. Or. Dec. 30, 2015).

The decision in Northwest Environmental Defense Center v. Cascade Kelly Holdings, LLC,  is notable for its examination of the issues surrounding a federal citizen suit PSD challenge where a state regulator previously determined that no PSD permit was required. In particular, Cascade Kelly Holdings is important for the potentially dispositive deference accorded by the district court to the Oregon Department of Environmental Quality (DEQ) on the question whether an existing state permit—which restricted emissions of volatile organic compounds (VOCs) to a level below the major source PSD threshold—was “practically enforceable.” The decision is also important for its refusal to limit the availability of federal CAA citizen suits that question state-issued air quality permits limiting a source’s potential to emit (PTE).

Background
In Cascade Kelly Holdings, several citizen groups sought to enjoin construction and operation of an oil transloading facility on the Columbia River in Clatskanie, Oregon. The facility was originally constructed as an ethanol refinery in 2009, with the help of state tax credits, but its owner soon went bankrupt. In 2012, a new owner began repurposing the facility to store and transload crude Bakken oil from trains to barges bound for west coast refineries.

The plaintiffs in Cascade Kelly Holdings argued that, in its new iteration, the facility could not realistically limit its VOC emissions below the PSD threshold of 100 tons per year, and that construction and operation of the facility were unlawful unless it obtained a preconstruction PSD permit. The defendant, on the other hand, argued that a DEQ-issued permit restricting the facility’s VOC emissions to 78 tons per year was dispositive evidence that a PSD permit was unnecessary.

Court Rejects Defendant’s Jurisdictional Arguments
In its December opinion, issued after a bench trial, the district court first rejected three procedural arguments advanced by the defendant that would have barred the plaintiffs’ citizen suit. First, the court rejected the defendant’s argument that the plaintiffs must exhaust state-law remedies prior to filing suit in federal court over the DEQ issued permit. Although the plaintiffs could have challenged the DEQ permit in state court, they were not required to do so before bringing a citizen suit in federal court.

Second, the federal citizen suit was not prohibited by the doctrine of issue preclusion as a result of the plaintiffs having submitted comments on the permit to DEQ. Although prior state court litigation may preclude subsequent relitigation of the same issues in federal court, the district court in Cascade Kelly Holdings declined to find that prior state-level administrative determinations could likewise preclude subsequent federal litigation. The mere fact that the plaintiffs did not persuade DEQ to adopt their comments in the administrative process, prior to permit issuance, did not mean the plaintiffs could not later bring a federal citizen suit founded on the same issues raised in its comments to DEQ.

In a third threshold determination, the district court rejected the facility owner’s argument that the plaintiffs’ suit was a collateral attack on a facially valid state permit, and, consequently, that the district court did not have jurisdiction over the suit. The district court found that such an argument applies only in the context of challenges to PSD permits issued under state programs that integrate CAA Title I and Title V permitting procedures, where objections to an allegedly unlawful Title I permit must be presented to the EPA administrator and later to a federal court of appeals rather than a district court. Where a citizen suit is instead based upon the failure to obtain a required PSD permit under Title I of the Clean Air Act, theCascade Kelly Holdings court concluded that federal district courts have jurisdiction over such a claim even if a state regulator previously determined that no PSD permit was required.

Court Grants Deference to State Agency Technical Determinations
On the merits, the plaintiffs’ arguments turned on the question of whether the state permit VOC emissions limit was “practically enforceable.” A source that has a PTE above the PSD threshold in the normal course of its operations can only avoid PSD permitting requirements if it limits its PTE below the PSD threshold through physical or operational limitations. Those limitations must both be “federally enforceable,” 40 C.F.R. § 51.165(a) (1)(iii), and “effective as a practical matter,” Nat’l Mining Ass’n v. U.S. Envtl. Prot. Agency, 59 F.3d 1351,1363 (D.C. Cir. 1995); see also EPA Memorandum, Guidance on Limiting Potential to Emit in New Source Permitting (June 13, 1989), available at http://www3.epa.gov/airtoxics/pte/june13_89.pdf.

Although the facility in Cascade Kelly Holdings obtained a state permit limiting its PTE to 78 tons per year of VOCs, the plaintiffs presented evidence that the facility had underestimated its likely VOC emissions, and that it could not reasonably measure those emissions in the future as a means of ensuring compliance with the state permit.  In fact, a key issue in the case was the inherent difficulty of measuring actual VOC emissions at a facility whose emissions are all fugitive—i.e., a facility without discrete emission units. As a result of that challenge, the emissions limit in the DEQ permit relied solely on agency emissions estimates derived from EPA emissions factors and from an Environmental Protection Agency (EPA) emissions calculation computer program known as “TANKS.”

Given the difficulty of measuring actual VOC emissions at the facility, and the “razor thin” margin between emitting 78 tons per year of VOCs and 100 tons per year (the PSD threshold for VOCs), the plaintiffs argued that the state permit was not a practically enforceable PTE limitation. As such, the plaintiffs argued that a major source PSD permit—based upon a best available control technology (BACT) analysis—was required by the CAA.

The court’s opinion exhaustively recounted technical evidence submitted by the parties concerning VOC emissions. Although the court indicated that its decision was a close call, it ultimately concluded that the plaintiffs failed to carry their burden to show by a preponderance of the evidence that the state permit underestimated VOC emissions or was otherwise not practically enforceable. A key basis for the district court’s decision was its express deference to DEQ’s technical determinations in estimating VOC emissions at the facility.

Federal courts commonly defer to federal agencies on their interpretation of federal statutes, e.g., Chevron, U.S.A., Inc. v. Natural Res. Def. Council, 467 U.S. 837, 865–66 (1984), on their interpretation of federal agency regulations, e.g., Decker v. Nw. Envtl. Def. Ctr., 133 S. Ct. 1326, 1337–38, and on factual issues within an agency’s area of technical expertise, e.g., Marsh v. Or. Natural Res. Council, 490 U.S. 360, 377 (1989). Federal courts also defer to state agencies’ interpretations of state laws they are charged with enforcing. City of Bangor v. Citizens Commc’ns Co., 532 F.3d 70, 94 (1st Cir. 2008). But federal courts do not defer to state agencies on their interpretation of federal law. See id.; see also Hosp. v. Belshe, 103 F.3d 1491, 1495–96 (9th Cir. 1997).

The distinct question raised in Cascade Kelly Holdings is the extent to which federal courts should defer to the technical expertise of state agencies when deciding questions of fact such as the veracity of emissions estimates. Other federal courts have infrequently, if ever, addressed this question squarely. The Supreme Court noted in Alaska Department of Environmental Conservation v. United States Environmental Protection Agency, 540 U.S. 461, 490 (2004), that EPA itself generally defers to state agency BACT determinations in the PSD permitting context. But that case did not address the question whether federal courts themselves should likewise accord such deference to a state agency’s fact-based determinations.

In Comprehensive Environmental Response, Compensation, and Liability Act actions, state agency decisions related to the entry of consent decrees may be entitled to “some deference,” but not the same level of deference that federal courts would accord EPA under similar circumstances. See Arizona v. City of Tucson, 761 F.3d 1005, 1013–15 (9th Cir. 2014); City of Bangor, 532 F.3d at 94; see also Comm’r v. Esso Standard Oil S.A.,  Ltd., 326 F.3d 201, 205 (3d Cir. 2003) (deferring to Virgin Islands’ territorial regulator). Similarly, the Eighth Circuit has given deference to a stipulated agreement resolving a state agency enforcement action under the Clean Water Act (CWA), noting the important role of states in the CWA’s statutory scheme.Comfort Lake Ass’n, Inc. v. Dresel Contracting, Inc., 138 F.3d 351, 355, 357 (8th Cir. 1998). The Supreme Court recently declined to take up the appropriateness of such deference by denying a petition for certiorari in Arizona v. City of Tucson.

Despite these murky precedents, the district court in Cascade Kelly Holdings determined that at least some deference to DEQ’s technical determinations was appropriate. The court appears to have concluded that such deference is especially appropriate in cases that involve federal statutory schemes—like the CAA—that assign substantial authority to state regulators. Ultimately, deference to DEQ’s emissions estimates and calculations in Cascade Kelly Holdings was a critical factor— perhaps even the dispositive factor—in the court’s determination that a PSD permit was not required.

Conclusion
Cascade Kelly Holdings is an important CAA decision for two reasons. First, regulated sources that limit their PTE through state-issued permits, in order to avoid PSD permitting requirements, are not necessarily immune from citizen suits in district court alleging that a PSD permit is nonetheless required under the CAA. Second, plaintiffs in such cases may have to overcome the initial factual hurdle of federal court deference to state agency technical determinations. In order to carry their burden to demonstrate the need for a PSD permit by a preponderance of the evidence, citizen suit plaintiffs may need to assemble especially persuasive evidence that the technical determinations underpinning a state regulator’s permit are incorrect or otherwise invalid.

Endnote
In a somewhat ironic coda to the Cascade Kelly Holdings case, the facility owner announced in late January that it would lay off much of its workforce and that, as a result of low oil prices, the facility will once again be repurposed. By mid-2016, the facility will be used to store and trans-load ethanol—the fuel that the original refinery at the site was supposed to have produced.


This article first appeared in the April 2016 Air Quality Committee Newsletter published by the American Bar Association’s Section of Environment, Energy, and Resources.

Emerson Hilton is an associate in the Environmental Law Group. He focuses on environmental litigation, air quality compliance issues, and contaminated site cleanups under CERCLA and state superfund laws.

The opinions expressed in this article are those of the authors and do not necessarily reflect the views of Riddell Williams or its clients.  This article is for general informational purposes and is not intended to be, and should not be taken as, legal advice.

The Riddell Williams Environmental Law Group has played a key part in addressing some of the most challenging environmental issues in the Pacific Northwest and throughout the nation.  Our group’s clients include utilities, pulp and paper manufacturers, petroleum companies, regional energy companies, airlines and airfreight carriers, steel manufacturers, waste management companies, technology businesses, real estate development partnerships, private landowners, and some of the state’s leading environmental groups.