Category: Utilities

Bridge to Prosperity: New Bridge Between U.S. and Canada Approved

Varnum LLP

Michigan farmers are among legions of organizations expressing gratitude now that a new bridge between the U.S. and Canada has been approved by the Obama Administration, setting the stage for a sharp increase in trade between Michigan and Canada.

The presidential permit awarded by the State Department April 12 clears the way for construction to begin in Michigan on the New International Trade Crossing Bridge.  The new span  will “serve the national interest,” the State Department said in granting the permit.

Michigan is Canada’s largest trade partner, with trade in 2011 exceeding $70 billion. That’s nearly 11.7 percent of the total U.S. trade with Canada. More than 8,000 trucks currently cross the Detroit-Windsor border daily.

Called “Michigan’s Bridge to the Future,”  the New International Trade Crossing Bridge will be built near the existing Ambassador Bridge that links Detroit with Windsor. Michigan voters in November overwhelmingly rejected a ballot proposal spearheaded by Ambassador Bridge owner Matty Moroun to require voter approval for any bridge built between the U.S. and Canada.

Under a deal struck last year between Michigan Gov. Rick Snyder and Canadian Prime Minister Stephen Harper,  Canada will pay for the bridge, with construction costs repaid by Canada through tolls.  Snyder said in a statement the crossing will create jobs and get Michigan-made products to market quicker.”

From the standpoint of Michigan agriculture, this additional transportation capacity is vital to streamline and expand our access to markets in Canada,” Michigan Farm Bureau Legislative Counsel Matt Smego said in prepared remarks.

Construction has already started on the Canadian side. Michigan Gov. Snyder said he hopes for groundbreaking on the Detroit side within the next two to three years. Construction is expected to take seven years.

The city of Windsor, meanwhile,  on May 28 asked Michigan officials for more information regarding the Michigan Department of Transportation’s recommendation to open the existing Ambassador Bridge to trucks carrying hazardous materials for the first time in its 83-year history. The recommendation excludes the transportation of explosives.

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Watt’s New? Michigan Energy Newsletter – May 2013

Varnum LLP

New DTE Electric PPAs for Wind Energy

Two 20-year power purchase agreements (PPAs) between DTE Electric and Pheasant Run Wind, LLC and Pheasant Run Wind II, LLC received ex parte approval from the Michigan Public Service Commission (MPSC) on May 15, 2013. Each PPA is for 74.8 MW of wind energy for projects in Michigan’s Thumb region. Also approved was an option agreement wherein DTE Electric can purchase the Pheasant Run Wind II project. This option expires on March 31, 2014. These contracts resulted from unsolicited proposals from Next Era Resources on a timetable which would qualify for production tax credit benefits. The price in each PPA is “up to” $49.25 per MW hour (4.925¢ kWh). The average net capacity factor is estimated to be 43%. Geronimo Energy LLC attempted to intervene at the MPSC, arguing that its 100 MW Apple Blossom Wind Project in Huron County was a competing proposal that would pass through the same tax benefit. Its request that DTE Electric be made to undertake a competitive bidding process was rejected and its petition was denied.

Five Ethanol Plants in Michigan

Michigan has five corn ethanol refineries. In 2008 it appeared there would be six more, but ultimately the demand for ethanol in Michigan did not justify 11 facilities. The operating plants are in Riga Township, Albion, Caro, Marysville, and Lake Odessa. Generally they have 40-50 employees, each with a capacity between 50-60 million gallons per year. Total ethanol production in the state is approximately 240 million gallons per year.

Offshore Team Sails to Cleveland

Muskegon-based Andrie Inc. has been hired to assist in the development of an offshore wind energy project in Lake Erie. The company’s 90’ by 50’ jack-up barge recently traveled to Cleveland to assist in lake bottom sediment testing seven to nine miles offshore. A jack-up barge is a floating platform with long poles in each of the four corners that can be lowered into the water down to the lake bottom to secure the platform above the water surface. LEEDCo, a public-private partnership, is developing a 27 MW, five to nine turbine offshore project.

Energy Forum Update

Initial review and gap analysis of the information presented at the seven energy forums and on line is now being conducted. It is expected that the gap analysis will be complete by the end of May. The month of June will see an effort to fill in the gaps. By the end of June it is expected everything needed for reports will be in hand. Draft reports are targeted for the end of September, with public comment beginning as early as mid-October.

Nuclear Plant Off-Line Again

The Palisades Nuclear Power Plant in Covert has been shut down due to a water leakage issue in the Safety Injection Refueling Water Tank. The leak was estimated to be 34 gallons per day, with 79 gallons of slightly radioactive water having drained into Lake Michigan. A half-inch crack about the width of a thumbnail is believed to have been the source of the leak. Entergy Corporation, a New Orleans-based company, owns and operates the Palisades facility and has a 15-year power purchase agreement with Consumers Energy that will expire in 2021.

43 Degrees North @ Muskegon

The Michigan Energy and Technology Center has been formed by a consortium of companies to generate economic activity in the state. The founding members of the group include Consumers Energy, Energetx Composites LLC, Rockford Berge, Sand Products Co., and Verplank Dock Co. Initial affiliate members are Astraeus Wind Energy Inc. and Ventower Industries. The group will initially focus on two projects. The first is to enhance the infrastructure at the Port of Muskegon, the only deep water port on the Michigan side of Lake Michigan. In support of this project, Consumers Energy has made a commitment to allow access to its coal port at the Cobb generating plant, which will be idled within the next three years. The second project is a pilot program by Michigan State University to develop a virtual clean technology and logistics research center [MTEC @ MSU] to assist in developing clean energy technology, scaling up manufacturing, and transporting products.

Michigan Energy Fair Returns

The Great Lakes Renewable Energy Association will conduct the 13th annual Michigan Energy Fair in Ludington on June 7-8. The event will take place at the Mason County Fairgrounds. The program on Friday is intended for energy professionals, facility managers, and educators and will run from noon to 5 p.m. There is a $25 charge for the workshops. The Saturday events begin at 9 a.m., will be more oriented toward the general public, and are free. Energy Fair exhibits will provide information on solar, wind, energy efficiency, and other energy related topics.

Michigan Shorts

NextEra has ordered 59 1.7 MW wind turbines from General Electric for its Tuscola II project scheduled to be complete by the end of the year.  Tecogen has purchased the proprietary 5300 permanent magnet generation line as part of the liquidation of Danotek Motion Technologies of Canton.  The Great Lakes Renewable Energy Association has been awarded a $33,304 grant from the Michigan Energy Office to conduct a feasibility study of community solar in Michigan.  Ornicept, a startup with technology to study bird migration issues associated with wind turbines, has relocated to Ann Arbor.  Muskegon’s Wastewater Management System director has reported that six months of meteorological testing by Gamea Energy has confirmed average wind speeds are sufficient to support a viable wind energy project Ω The Michigan Public Service Commission has approved an opt out option for residential smart meters consisting of an initial fee of $67.20 and a $9.80 monthly fee.  NextEra has selected General Electric’s new 1.7-100 brillant wind turbine for its new Michigan wind farm project.  WindTronics LLC of Muskegon has ceased manufacturing its gearless wind turbine and ended operations.  Nexteers Sunsteer solar tracking system is manufactured in Michigan with 90 percent U.S. content and 50 percent Michigan content.

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Department of Energy Approves Liquefied Natural Gas (LNG) Export Authorization for Freeport LNG – A Win for LNG Exports?

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The Department of Energy recently authorized Freeport LNG Expansion, L.P. (“FLEX”) to export LNG to non-Free Trade Agreement countries. Importantly, this is the first order on LNG exports issued by the DOE since it collected comments on its two-part LNG Export Study and likely represents the analysis DOE will use in reviewing the queue of pending LNG export applications.

FLEX proposes to export 1.4 Bcf/day from the Freeport LNG terminal, which is situated on the Gulf Coast in Texas. After filing its export application, FLEX secured long-term contracts with three entities for 88 percent of the requested export capacity; most of the gas for export would be sourced from Texas, and in particular, the Eagle Ford Shale.

By way of background, as the domestic natural gas markets shifted to favoring LNG exports in recent years, numerous applications were filed with the DOE for authorization to export LNG. In response to this onslaught, DOE commissioned a two-part study, consisting of (1) an Energy Information Administration study on the effects on increased natural gas exports on domestic energy markets; and (2) a NERA Economic Consulting study on the macroeconomic imports of LNG exports (together, the “LNG Export Study”). The NERA study has recently been the subject of substantial debate as DOE noted that it received over 188,000 comments and 2,700 reply comments, though DOE admits the majority of such comments were nearly identical form letters. Substantive and unique comments numbered nearly 800, with 11 different economic studies prepared by commenters.

In general, the FLEX order is a positive development for LNG exporters for two main reasons:  (1) DOE found the LNG Export Study to be sufficiently reliable and supportive of LNG exports; and (2) DOE strongly suggested that it would let market forces govern LNG exports (while being closely monitored by DOE). The FLEX order tracks with and builds upon DOE’s last order granting authorization for LNG exports to non-FTA countries, Sabine Pass, issued nearly two years ago. In approving the application as “not inconsistent with the public interest,” DOE considered the same public interest factors relied upon in its earlier Sabine Pass order, namely, the economic impacts, international impacts, and security of natural gas supply. DOE continued to consider the factors identified in its now-expired 1984 policy guidelines, including whether the arrangement is consistent with DOE’s policy of promoting market competition.

While at first glance the FLEX order appears to represent a big win for the LNG export industry, there are several conclusions worth attention. Arguably, the order is a broad endorsement of free-market principles as DOE determined the competitive market to be the proper mechanism for allocating a scare resource like natural gas. However, although DOE did not state it would impose limits or caps on LNG exports, DOE did indicate that it will take a “measured approach” in reviewing other pending LNG export applications. “Specifically, DOE/FE will assess the cumulative impacts of each succeeding request for export authorization on the public interest with due regard to the effect on domestic natural gas supply and demand fundamentals.” This approach suggests lower-queued applications may face a higher hurdle due to the cumulative impacts of the preceding applications and possibly suggests that DOE has a “cap” in mind. Third, DOE confirmed that the Federal Energy Regulatory Commission will conduct the environmental review, subject to independent review by DOE. Fourth, DOE found that the net economic benefits to the U.S. from LNG exports outweigh potential harms. Fifth, DOE continued to caution LNG export applicants that it will monitor the market and the impact of LNG exports and “may issue, make, amend, and rescind such orders . . . as it may find necessary . . . .” Such statements continue to inject some uncertainty into the contracting process. Finally, DOE suggested that local and regional benefits in terms of employment and income may be important in deciding whether to grant specific applications. Moreover, with respect to FLEX project, DOE noted that no one challenged the data provided by applicant in this regard.

A significant issue raised by commenters on the LNG Export Study was to what extent LNG exports would raise natural gas prices, how natural gas production would react to increased demand, and whether the net economic benefits accruing from LNG exports would outweigh negative impacts for higher domestic natural gas prices. As discussed in the FLEX order, DOE is clearly concerned about these issues, but it found arguments persuasive that the U.S. had a substantial oversupply of natural gas that would mitigate the preceding concerns. DOE cautioned that it would closely monitor the domestic natural gas markets and reiterated its authority to revise or rescind LNG export authorizations should the public interest require it. DOE did not indicate what market conditions would trigger such action, but changes in the domestic natural gas oversupply condition could be pivotal in subsequent approvals of LNG export applications or in rescinding/amending already issued export authorizations.

DOE imposed numerous conditions on the export authorization, including a requirement that FLEX must file publicly with DOE (a) all executed long-term contracts associated with the long-term export of LNG; and (b) all executed long-term contracts associated with the long-term supply of natural gas to the terminal. DOE noted that commercially sensitive provisions may be redacted. DOE also reduced the duration of FLEX’s requested 25-year export authorization and approved only a 20-year authorization.

Overall, our sense is that the FLEX order is a step in the right direction for the LNG exports industry and is a sign that, after a two-year study period, DOE once again will begin its process of issuing non-FTA export authorizations. As previously rumored, we expect that those projects that are further along in the development process (e.g., those that have completed FERC’s pre-filing process and have commercial arrangements in place for a sizable portion of the terminal capacity) will receive priority processing regardless of the project’s place in DOE’s queue. As a result, less developed projects will face greater uncertainty, especially if DOE has a “cap” in mind. Further, project sponsors should continue to include provisions in their contracts that address the possibility that DOE would modify or revoke a non-FTA authorization in the event of changes to the current domestic natural gas oversupply condition.

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The Stockton Saga Continues: Untouchable Pensions on the Chopping Block?

Sheppard Mullin 2012

Judge Christopher M. Klein’s decision to accept the City of Stockton’s petition for bankruptcy on April 1, 2013 set the stage for a battle over whether public workers’ pensions can be reduced through municipal reorganization.

Stockton’s public revenues tumbled dramatically when the recession hit, leaving Stockton unable to meet its day-to-day obligations. Stockton slashed its police and fire departments, eliminated many city services, cut public employee benefits and suspended payments on municipal bonds it had used to finance various projects and close projected budget gaps. Stockton continues to pay its obligations to California Public Employees’ Retirement System (“CalPERS”) for its public workers’ pensions. Pension obligations are particularly high because during the years prior to the recession, city workers could “spike” their pensions—by augmenting their final year of compensation with unlimited accrued vacation and sick leave—in order to receive pension payments that grossly exceeded their annual salaries.

When Judge Klein accepted Stockton’s petition April 1, 2013, he reasoned that Stockton could not perform its basic functions “without the ability to have the muscle of the contract impairing power of federal bankruptcy law.” Judge Klein noted that his decision to “grant an order for relief … is merely the opening round in a much more complicated analysis.” The question looming is whether the contract-impairing power of federal bankruptcy law is strong enough to adjust state pension obligations.

Stockton will have the opportunity to present a plan of adjustment, which must be approved through the confirmation process. No plan of adjustment can be confirmed over rejection by a particular class of creditors unless the plan (1) does not discriminate unfairly, and (2) is fair and equitable with respect to each class of claims that is impaired under or has not accepted a plan. Judge Klein said that if Stockton “makes inappropriate compromises, the day of reckoning will be the day of plan confirmation.”

Stockton’s plan of adjustment will likely propose periods of debt service relief and interest-only payments for some municipal bonds, followed by amortization. Stockton intends to actually impair other municipal bonds, potentially paying only cents on the dollar. However, Stockton does not intend to reduce its pension obligations to CalPERS under the plan. Provisions of the California Constitution and state statutes prohibit the reduction of public workers’ pensions, even in bankruptcy proceedings. These California state law provisions were thought to make public pensions virtually untouchable. Yet, the plan may not be confirmable if it impairs Stockton’s obligations to bondholders but not its obligations to CalPERS. Bondholders and insurers will surely vote against and object to the plan, claiming it unfairly discriminates against them, and Judge Klein will have to decide whether the treatment constitutes unfair discrimination. The unfair discrimination claim may have merit, because an overarching goal of federal bankruptcy law is to equitably allocate losses among competing creditors. Federal bankruptcy law often trumps state laws, but there is no precedent for how federal bankruptcy law applies to California’s pension provisions.

For now, cash-strapped municipalities around the country—and their creditors—are watching to see just how Stockton will restructure its obligations.

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Shippers Rolling the Dice to Gain Oil Pipeline Capacity

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With the growing capacity constraints on oil pipelines, the Federal Energy Regulatory Commission (“Commission”) has recently extended the bounds of what it considers acceptable methods of apportioning limited capacity. In Seaway Crude Pipeline Company LLC, 143 FERC ¶ 61,036 (2013), the Commission approved a new lottery system that will select, at random, new shippers who will be permitted to tender the minimum monthly volume requirement. The catch, however, is that there are approximately 275 new shippers on the system, meaning a given shipper has roughly only a 5 percent chance of winning the lottery each month. And to achieve regular shipper status and thus gain access to the 90 percent of system capacity reserved for regular shippers, it must win that lottery twelve consecutive times.

After reversing flow on its Longhaul System and commencing north-to-south transportation service, Seaway saw the number of new shippers dramatic multiply from 5 (when to service commenced) to 275 by April, 2013. Seaway alleged that some of the proliferation was due to shippers attempting to game the system and broker capacity in the secondary market. Like other oil pipelines, Seaway dedicates 90 percent of the system capacity to regular shippers and 10 percent to new shippers, and to achieve regular shipper status, Seaway’s customers must tender the minimum volume (60,000 barrels per month) for 12 consecutive months. Before the lottery, Seaway allocated the 10 percent of capacity to new shippers on a pro rata basis, but with so many new shippers, none was able to meet the requirements to achieve regular shipper status because of the relatively high minimum tender requirement. As a result the number of new shippers multiplied with those shippers informally aggregating batches to meet Seaway’s minimum monthly tender requirement.

Seaway concluded that such a system was unworkable and proposed a lottery system to replace its existing pro rata system. The lottery system will use a software-generated random process to determine which new shippers will be allowed to tender the 60,000 barrel minimum each month, meaning about 13 new shippers will get capacity for a given month.

Despite several protests, the Commission approved Seaway’s lottery system for two main reasons. First, the Commission reasoned that the lottery system will deter manipulation during the nomination process and thus make capacity more readily available to legitimate new shippers; and second, the lottery would not be unduly discriminatory because the system would apply to all new shippers.

Although this is not the first time that the Commission has approved the use of a lottery system to award new shipper capacity when a pipeline faces apportionment problems, Seaway’s proposed lottery system, coupled with the requirement that new shippers must tender the minimum monthly volumes for 12 consecutive months, means that it will be highly improbable for new shippers to ever achieve regular shipper status, unless the number of new shippers dramatically decreases. Thus, the decision treads slightly new ground on what the Commission is willing to consider as a “reasonable” remedy to address the multiplication of new shippers and the vast over-nomination issues some crude pipelines are facing in the current environment.

Finally, the Seaway decision underscores the importance of open seasons as being the principle method of obtaining reliable transportation service on oil pipelines. For example, gaining access to the Longhaul System as a new shipper is difficult enough because a prospective new shipper will now have to win the lottery simply to tender the minimum amount requirement in one month. However, to gain access to the remaining 90 percent of system capacity, that prospective customer must win the new shipper lottery 12 consecutive times. By contrast, Seaway held two opens seasons for capacity on its Longhaul System and committed shippers were able to access the 90 percent of the system capacity reserved for regular shippers. Thus, shippers seeking access to reliable capacity might consider a commitment during an open season rather than gambling on a future—and perhaps unforeseen—lottery.

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Is Environmental Protection Agency (EPA) Setting Its Sights on Hydraulic Fracturing Compounds?

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Agency implements rule requiring companies to disclose information regarding the use of certain industrial chemical substances commonly used in natural gas and oil well drilling.

On May 9, the U.S. Environmental Protection Agency (EPA) issued a Direct Final Rule[1] identifying 15 chemical substances[2] that will require notice prior to manufacturing, importing, or processing for an activity designated as a significant new use. These chemicals were flagged pursuant to the Toxic Substances Control Act (TSCA) significant new use rules (SNURs). The notices, referred to as Significant New Use Notices (SNUNs), must be submitted to EPA 90 days before a listed chemical is manufactured, imported, or processed for an activity designated as a significant new use. EPA states that this will provide the agency with an opportunity to evaluate the intended use and determine whether it is necessary under TSCA to prohibit or limit the activity before it occurs.

While chemicals in the rule include those that can be employed in a broad range of uses, of particular interest is the listing of one compound[3] used in natural gas and oil well drilling and hydraulic fracturing to eliminate bacteria in the water that produce corrosive by-products. EPA included this compound due to its potential toxicity to aquatic life at concentrations above 11 parts per billion (ppb). Pursuant to the Direct Final Rule, 40 C.F.R. Part 721, Subpart E [Significant New Uses for Specific Chemical Substances] is expected to be amended to include section 721.10666, which would require reporting and associated recordkeeping obligations for the following significant new uses of this compound:

  • Industrial, commercial, and consumer activities other than as described in the original premanufacture notice (PMN) for this substance (PMN P-12-437)
  • Release to water resulting in surface water concentrations exceeding 11 ppb

EPA also recommended additional testing to help characterize the fate and environmental effects of the substance.

This is in line with EPA’s declared intent to use TSCA to require companies to disclose information regarding chemical substances and mixtures used in hydraulic fracturing. However, it has been nearly two years since the agency, partly in response to a petition filed by Earthjustice, stated that it would propose rules to require certain reporting requirements for chemicals used in hydraulic fracturing.

Under TSCA, SNUNs must contain the following:

  • Common or trade name of the chemical substance
  • The chemical identity and molecular structure of the chemical substance
  • The categories or proposed categories of use
  • The total amount of each chemical substance manufactured or processed per category or use
  • A description of by-products resulting from the manufacture, processing, use, or disposal of each such chemical substance or mixture
  • All existing data concerning the environmental and health effects of the substance
  • Estimates of the number of people exposed in their places of employment and the duration of such exposure
  • Changes in disposal methods
  • Any test data in the possession or control of the person giving the notice that is prescribed by EPA

Accordingly, while this rule does not implement a broad reporting requirement for hydraulic fracturing chemicals, it points to the likelihood of increased reporting for these substances. What is unclear, for the moment, is whether this new rule is a stopgap measure or a preview to a comprehensive proposal for TSCA reporting requirements for hydraulic fracturing chemicals.

The rule is effective on July 8, 2013, unless written “adverse or critical” comments on any of the SNURs, including potential alternatives and likely financial burdens, are received on or before June 10, 2013. Those chemical substance(s) and new use that receive comments or notice of intent to comment will be withdrawn before the effective date and a proposed SNUR for the specific chemical substance will be issued with a 30-day comment period. For purposes of judicial review, the rule is promulgated on May 23, 2013.

The rule highlights the need for firms using TSCA-listed chemicals for new and innovative technologies to bear in mind the PMN and SNUR implications for their applications. Additionally, the hydraulic fracturing industry should carefully watch for potential regulation of additional substances used in fracturing fluids.

[1]. View the Direct Final Rule here.

[2]. The chemical substances and associated PMNs subject to this Direct Final Rule are as follows:

  • Methylenebis[isocyanatobenzene], polymer with alkanedoic acid, alkylene glycols, alkoxylated alkanepolyol, and substituted trialkoxysilane (generic). PMN No. P-11-60.
  • Acetaldehyde, substituted-, reaction products with 2- butyne-1, 4-diol (generic). PMN No. P-11-204.
  • Functionalized multi-walled carbon nanotubes (generic). PMN No. P-12-44.
  • Alkenedioic acid dialkyl ester, reaction products with alkenoic acid alkyl esters and diamine (generic). PMN Nos. P-12-408, P-12-409, P-12-410, P-12-411, P-12-412, and P-12-413.
  • 2-Propenoic acid, (2- ethyl-2-methyl-1,3-dioxolan-4-yl)methyl ester. PMN No. P-12-414.
  • Quaternary ammonium compounds, bis(fattyalkyl) dimethyl, salts with tannins (generic). PMN No. P-12-437.
  • Slimes and sludges, aluminum and iron casting, wastewater treatment, and solid waste. PMN No. P-12-560.
  • Trisodium diethylene triaminepolycarboxylate (generic). PMN No. P-13-18
  • Tertiary amine alkyl ether (generic). PMN No. P-13-78.
  • Bromine, manufacture of, by-products from, distillation residues. PMN No. P-13-108.

A generic name was provided if the specific chemical substance named was claimed as confidential business information.

[3]. The “quaternary ammonium compounds, bis(fattyalkyl)dimethyl, salts with tannins (generic).”

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Vapor Intrusion Regulation and Environmental Remediation

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EPA recently issued two draft guidance documents on vapor intrusion and will accept comments on them through May 24, 2013. If finalized in current form, these guidance documents would formalize and enhance EPA’s existing practice of prioritizing vapor intrusion as a central issue in environmental remediation and could result in increases in the expense and effort required from responsible parties to achieve compliance for cleanup of contaminated sites conducted under federal authorities such as CERCLA or RCRA. They could also be highly influential in clean-ups overseen by state regulators.

Lastly, while intended for use in the regulatory context, recommendations in these guidance documents may be used to establish a standard of care in litigation involving vapor intrusion (e.g., RCRA citizen suits or common law toxic tort litigation).

Vapor intrusion is the migration of hazardous vapor from contaminated soil or groundwater into an overlying building.  It is considered potentially harmful to human health, creates risks in real estate transactions and financing due to potentially diminished property values and environmental liability, increases exposure in toxic tort litigation, and, in the federal regulatory context, is considered a pathway of possible exposure that must be evaluated as part of the evaluation and selection of a site remediation plan.

The first of these two guidance documents was prepared by EPA’s Office of Solid Waste and Emergency Response (OSWER) and is a comprehensive set of technical and policy recommendations regarding indoor air contamination arising from subsurface-source vapor intrusion attributable to all classes of volatile, or vapor-forming, chemicals (VI Guidance).[1]  The VI Guidance modifies and expands draft guidance on vapor intrusion issued by the agency in 2002 (2002 Draft VI Guidance), which provided general direction for evaluating the potential for vapor intrusion pathways at cleanup sites but omitted any measures for delineation and mitigation of potential risks.[2]  In a 2009 report, EPA’s Office of the Inspector General (OIG) recommended that EPA update the 2002 Draft VI Guidance to reflect the numerous technical and policy advancements made since that time in both the public and private sectors.

The second guidance document was prepared by EPA’s Office of Underground Storage Tanks (OUST) and is focused on investigations and assessments at petroleum contaminated sites where vapor intrusion by petroleum hydrocarbons may occur (Petroleum VI Guidance).[3]

VI Guidance

The VI Guidance presents a step-by-step vapor intrusion assessment plan, beginning with gathering and evaluating data for an initial conceptual site model, through collecting and evaluating additional data from various sources, and culminating in a risk assessment.  According to EPA, the VI Guidance addresses the recommendations made in the OIG’s 2009 report and takes into consideration more recent guidance developed by states and other technical working groups.  Some of the elements in this document may well trigger an increase in expense in addressing VI risks and lengthen the site evaluation process.

·        Superfund Five-Year Reviews: At Superfund sites that require five-year reviews,[4]EPA will gather data on vapor intrusion pathways and assess the sufficiency of the selected remedy for follow up in the five-year review report.  Therefore, according to the VI Guidance and related Directive 9200.2-84,[5] the five-year review process could result in the re-opening of established Superfund remedies to address vapor intrusion, “even if vapor intrusion was not addressed as part of the original remedial action.”[6]

·        Preemptive Mitigation/Early Action: EPA recommends consideration of engineered methods to reduce vapor in buildings (e.g., by installing a radon-type detection system or vapor barriers), even in the absence of all pertinent lines of evidence necessary to characterize the vapor intrusion pathway.  Any such measure would be an early effort to cut off exposure before completing investigations, but would not address the subsurface vapor source.  The agency’s rationale is that installation of engineered exposure controls in buildings is typically more cost-effective and less disruptive than conventional vapor intrusion investigations and subsurface characterization.  Once preemptive mitigation measures are installed, however, that may conclude only an initial step rather than complete remediation.  In the context of brownfields programs, treating preemptive mitigation now as only an interim solution may affect long term redevelopment plans.

·        Aggregate Noncancer Health Risk: Even when the exposure level for each contaminant at a site is below screening levels and it is assumed that each “acts independently (i.e., there are no synergistic or antagonistic toxicity interactions among the chemicals)”, the VI Guidance nevertheless proposes that a risk manager aggregate the individual noncancer health risks associated with each contaminant exposure to determine whether a response is warranted.  The aggregated risk is reflected in a “noncancer hazard quotient” that would ultimately drive the response.  This approach could be overly precautionary if the aggregated sum overstates the actual risks presented by the individual constituents.  Furthermore, the VI Guidance recommends use of multiple lines of evidence in calculating and evaluating these risks, a process that may prolong response decisions and negatively affect situations where quick resolution of VI issues is paramount (e.g., brownfield redevelopment projects).  On the other hand, evaluation of multiple lines of evidence may be more advantageous to the extent it provides for a more informed view of likely risk.

·        Background Levels: Time-integrated sampling of volatile chemicals (as opposed to short-duration, or “grab” sampling) at multiple locations in and around a site is, in EPA’s view, necessary to distinguish among potential sources of these chemicals (i.e., ambient sources, indoor sources, or vapor intrusion).  In the past, generic values of historic background concentrations have been used to characterize ambient or indoor source concentrations.  However, EPA now recommends against the use of these generic values, even those from peer-reviewed sources, and instead asserts that only site-specific data (e.g., sub-slab, indoor air, and ambient air sampling data) should be used.  This recommendation will likely lead to improved accuracy and better understanding of site conditions, while at the same time increasing the time and cost related to characterization efforts.

Petroleum VI Guidance

The 2009 OIG report expressed concern that EPA’s 2002 Draft VI Guidance did not address petroleum vapor intrusion at UST sites.  The proposed Petroleum VI Guidance seeks to address that concern for UST sites and RCRA-driven activities undertaken by private UST owners and operators.  In addition to the traditional chemicals found in petroleum products (such as benzene), the Petroleum VI Guidance would require consideration of vapor risks associated with gasoline additives (such as MTBE) and chemicals that develop from biodegradation of petroleum in soil and groundwater (such as methane).

As proposed, at least two parts of the Petroleum VI Guidance may, in comparison with past experience, result in increased response costs and delays for responsible parties.[7]  First, the Petroleum VI Guidance rejects the notion that a single sampling event is a sufficient basis to conclude that further vapor intrusion investigation is unnecessary because “periodic monitoring and sampling over more than one annual cycle is generally needed” to address fluctuations in groundwater levels and contaminant plumes over time.  Second, the Petroleum VI Guidance includes a number of recommendations that suggest EPA seeks to reduce reliance on models.  Specifically, when modeling requires the use of literature values due to the unavailability of site-specific data, EPA “recommends that an uncertainty analysis be conducted to provide error bounds on predictions of the computer model,” and that the results of any modeling exercise be verified with field data.

Considerations for Both Guidance Documents

In conclusion, both of these proposed guidance documents signal an increased focus on vapor intrusion within EPA.  As they are amended and finalized, there is a limited opportunity to comment on them to try to encourage a final guidance that is workable and effective for remediation of sites with vapor intrusion issues.  There may be ways to improve the guidance by clarifying where there is site-specific flexibility and where the guidance is overly prescriptive.

Notably, these guidance documents may help define the standard of care in the context of RCRA citizen suits or common law toxic tort litigation.  Clarifying key assumptions in the guidance may buffer some of that impact.

Even though these guidance documents are in draft form and will likely be subject to considerable comment, EPA regions and states can be expected to consult and employ them during what may be a long interval before they are finalized.  To the extent EPA or a state regulatory agency does so and an affected party disagrees with aspects of the guidance at issue, parties should be aware that the draft guidances are non-binding on their face.  The documents state that they do “not impose any requirements or obligations on the [EPA], the states, or the regulated community.”  Accordingly, parties should be free to suggest alternative, technically sound approaches to regulators.  Moreover, because these documents are solely drafts and have not been tested by external expertise that will be provided in public comment, reliance on them in their current state is arguably premature.

Given the potential long term impact on cleanup requirements, interested parties should evaluate the guidance and strongly consider submitting comments to EPA by May 24, 2013.  In light of the complex technical issues involved, interested parties may also wish to request that EPA extend the comment period.

[1] EPA OSWER, “Final Guidance for Assessing and Mitigating the Vapor Intrusion Pathway from Subsurface Sources to Indoor Air” (Apr. 11, 2013)

[2] EPA OSWER, “Draft Guidance for Evaluating the Vapor Intrusion to Indoor Air Pathway from Groundwater and Soils” (Nov. 29, 2002).  This draft document was never finalized.

[3] EPA OUST, “Guidance for Addressing Petroleum Vapor Intrusion at Leaking Underground Storage Tank Sites” (Apr. 9, 2013).

[4] Section 121 of CERCLA (42 U.S.C. § 9621) requires that remedial actions that result in any hazardous substances, pollutants, or contaminants remaining at the site be re-evaluated every five years to ensure that the remedy is and will continue to be protective of human health and the environment.

[5] “Assessing Protectiveness at Sites for Vapor Intrusion: Supplement to the ‘Comprehensive Five-Year Review Guidance’” (Nov. 14, 2012).

[6] In a related context, EPA officials have already acknowledged that later discovery of vapor intrusion at Superfund sites may trigger parties to litigate over whether site remedies provided for in consent decrees should be revisited under the reopener provisions in those decrees.  SeeInsideEPA, “EPA Official Says Vapor Intrusion May Drive Suits To Reopen Cleanup Pacts” (May 3, 2013), available at http://insideepa.com/201305032433234/EPA-Daily-News/Daily-News/epa-official-says-vapor-intrusion-may-drive-suits-to-reopen-cleanup-pacts/menu-id-95.html?s=mu. 

[7] These issues may also be relevant in scenarios involving vapor intrusion from sources other than those covered by the Petroleum VI Guidance.  However, because these points were emphasized in that guidance document, we highlight them here.

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Watt’s New? Michigan Energy News

Varnum LLP

Community Solar Success

Cherryland Electric Cooperative has installed 48 solar panels on a site adjacent to its offices in Grawn.  Individual customers have signed up to lease each panel for 25 years for a one-time fee of $470 per solar panel. A rebate of up to $150 will be given the customer to account for energy optimization credits. The customer will also receive a monthly billing credit for the electricity produced by the solar panel, which is expected to be at least 25 kWh per month. As many as 360 panels will be installed on the racking at the site, depending on customer support.

Energy Innovation with Nanoparticles

Grid Logic Incorporated of Lapeer is developing a low-cost superconducting wire for electric utility application. Using a new manufacturing technique, it will embed very fine particles into metals to induce superconductivity. This will reduce the cost of transmission lines, motors, wind turbines, and other electric devices. At Michigan Technological University in Houghton research on growing manganese dioxide nanorods may lead to new high performance electric capacitors. By minimizing internal resistance, such material will store more energy, allow extraction of energy more quickly, and operate longer between recharging. University of Michigan labs in Ann Arbor have added silver nanoparticles to increase solar cell efficiency by 8 percent. The nanoparticles also allow for thinner silicon layers, which means lower costs (ten times less silicon used) and flexible substrates for solar panels.

Annual Meeting of Energy Group

The Michigan Energy Innovation Business Council held its Annual Meeting on April 17 in Lansing and elected new Board members. The meeting featured a solar industry panel discussion and a keynote address on the Department of Energy’s New Clean Energy Manufacturing Initiative. The new Board is composed of top officials from Astraeus Wind Energy, Growth Capital Network, Novi Energy, Ecotelligent Homes, Dowding Industries, Advanced Energy Group, Dow Chemical Company, TOGGLED, Sakti 3, First Energy Finance, Wind Resource LLC, and Ventower Industries. These are companies already engaged in wind, solar, bioenergy, geothermal, energy storage, and energy efficiency businesses. Committees on policy and advocacy, membership and marketing, and market and business development were also formed. The group participated in all seven energy forums held around Michigan in February, March, and April.

Wind Buoy Goes Back into Lake Michigan

The Grand Valley State University Wind Sentinel research buoy, one of only three in the world, will be returned to Lake Michigan this month. It will be placed about seven miles offshore, northwest of the Muskegon Channel, for its third research season. The project is running short of funding, and its future activities beyond this year are uncertain. Project partners include researchers from: Michigan Technological University, who are studying wind turbulence; Michigan Natural Features Inventory, a component of the Michigan State University Extension program, who are studying bird and bat activity (and who confirmed for the first time ever last summer that bats do fly over the Great Lakes); and the University of Michigan, who are conducting research on large data sets.

DOE Renews MSU Biofuels Funding

The U.S. Department of Energy has awarded $25 million per year for another five years to fund the Great Lakes Bioenergy Research Center. Michigan State University is a partner in the Center which is physically based at the University of Wisconsin-Madison. The Center supports nearly 400 researchers, students and staff working in disciplines ranging from microbiology to economics to plant biology to engineering aimed at advanced cellulosic biofuels technologies.

Courts to Rule on Wind Issues

Seventeen neighbors of the Consumers Energy Lake Wind Energy Park have filed a complaint in Mason County claiming the wind farm has negatively impacted property values and caused sleep disruption, headaches, ringing ears, dizziness, stress, extreme fatigue, nausea, and other physical and mental problems. A cease and desist order is being sought, together with damage awards, in a jury trial. In Clinton County, Forest Hill Energy-Fowler Farms LLC is suing Essex, Dallas, and Bengal townships for adopting ordinances that effectively block its wind farm development. The county had previously granted a special land use permit to Forest Hill Energy for its $120 million wind project, and the townships have moved to override that permit.

Energy Forums Concluded

With the conclusion of the last of the seven energy forums ordered by Governor Snyder in November, the next stage of fact-finding is underway. The schedule describes the May-June period as the time when the two forum chairs will be “outlining reports in each program and laying out plan for development of information that is not yet available.” The following three months is reserved for “compilation/development of information.” October-November will see the release of draft reports for public feedback. Final reports will be released in the November-December timeframe. Governor Snyder will be “making his comprehensive recommendations regarding Michigan’s energy future in December of 2013.”

Orisol Energy US, Inc. of Ann Arbor is one of the companies selected to bid on leases for submerged land in the Atlantic Ocean for offshore wind developments in the coastal waters of Virginia Midwest Independent System Operator (MISO) reported that on November 23 more than a quarter of its total generation came from wind turbines at 10,012 MW  The Michigan Public Service Commission has approved a special rate contract between Cloverland Electric Cooperative and the Manistique paper mill of MPI Acquisition LLC  State Senator Hoon-Yung Hopgood has introduced a bill to increase Michigan’s renewable energy standard to 22 percent by 2022  Mascoma, cellulosic ethanol maker with plans for commercial operations in the U.P., has withdrawn its $100 million initial public offering citing market conditions

Exporting Pure Michigan

Two years ago President Obama challenged the nation to increase its exports. American exports are up 34 percent since that time, with 70 percent of total exports being manufactured goods. “Made in America” still has a huge cache around the world. “Made in Michigan” can and should have significance overseas as well. Now is the time for Michigan’s alternative energy supply chain and manufacturers to look abroad for new markets, niche and otherwise. The demand for electricity is exploding in emerging markets of developing and less developed countries. The Kyoto Treaty and other international efforts are aimed at satisfying this demand with renewable resources rather than fossil fuels. With its technology, engineering, and lean manufacturing prowess, Michigan could be on the leading edge of this effort. The export market is wide open. Let’s go to work on exporting “Pure Michigan.

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Expanding Market for Technologies to Clean Wastewater from Hydraulic Fracturing

Michael Best Logo

Since 2005, U.S. production of natural gas has increased exponentially, from a negligible amount to almost 7.5 trillion cubic feet in 2011. The U.S. is now the largest producer of natural gas in the world.

The new-found supply of this energy source has also had a significant effect on public policy. Domestic energy production, and natural gas in particular, is caught in a battle between proponents of sustainable sources of energy such as wind and solar, the interests of traditional coal-fired plants, national security interests in reducing dependence on foreign energy sources, environmentalists and proponents of natural gas.

The epic increase in the supply of natural gas has come from the effectiveness of hydraulic fracturing. In the hydraulic fracturing process, water mixed with chemicals and sand is injected into a well at ultra-high pressure to shatter and hold open the rock below and release the gas. According to the U.S. Department of Energy, the hydraulic fracturing fluid is composed of approximately 95% water, 4.5% sand and .05% different chemicals. These chemicals can number up to about 65 and include benzyne, glycol-ethers, toluene, ethanol and nonphenols. All of these chemicals have been linked to human health disorders when exposure and concentrations are too high. Because the percentages are by weight, it is estimated that approximately 20 tons of chemicals are added to each million gallons of water. A typical hydraulic fracturing procedure involves 4-7 million gallons of water so about 80-140 tons of chemicals. Each well requires millions of gallons of water (which separately is leading to confrontations over water supply in drought-stricken states). Some of the water comes back up immediately, along with additional groundwater. The rest returns over months or years.

A major issue is how to deal with the wastewater. The amount of water is significant. In most cases, the contaminated water is pumped into disposal wells, but this is not without risk. The wells and pumps can leak, allowing disposal water to contaminate existing aquifers.  In Texas alone, the amount of wastewater increase is significant. According to The New York Times, the state has more than 8,000 active disposal wells. The amount of wastewater being pumped into those wells has increased to approximately 3.5 billion barrels in 2011 from just 46 million barrels in 2005. A recent study dealing with the Marcellus Shale formation, which stretches from New York to Virginia, indicates that wastewater disposal from hydraulic fracturing could soon overwhelm the general wastewater treatment infrastructure of the formation. So cleaning this wastewater is important and represents a significant economic opportunity.

Insurers who write coverage on these environmental risks acknowledge that premiums are favorably impacted by the presence of effective technologies to clean the wastewater.

Water technology is a rapidly growing industry. Global Water Intelligence estimates the global water industry is $483 billion/year and growing by several percentage points annually. Water technology hubs are emerging to encourage and facilitate economic development, notably in Milwaukee, Singapore, Ontario and Israel.

Technologies are already being developed to treat wastewater from hydraulic fracturing. A new desalinization process developed at MIT can scrub the contaminants from the wastewater, uses significantly less energy and is less complicated than other desalinization techniques. The technique is called a carrier gas process in which water is sprayed onto warm air. The water vaporizes, and the water vapor, which contains only pure water, is bubbled through cool water and the vapor then condenses. Researchers at the University of Minnesota have developed a process of creating centimeter-sized silicon beads that have chemical-degrading bacteria inside them. The beads are porous so the chemicals can enter but not porous enough for the bacteria to leave. These represent just two of the developing technologies to treat the wastewater. This alone will become a multi-billion dollar industry in the coming years.

Private equity and venture capitalists should take note. There is a distinct need for this technology and a rapidly increasing, lucrative market. The economic and societal benefits of cheap, plentiful natural gas cannot be denied. Hydraulic fracturing makes it happen. And hydraulic fracturing requires billions of gallons of water annually which need to be treated and/or disposed of.

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FERC Decides to Retain Existing Merger Review Policies

The National Law Review recently published an article by Daniel E. Hemli and Jacqueline R. Java of Bracewell & Giuliani LLP regarding a recent FERC Decision on Merger Reviews:

On February 16, 2012, FERC issued an order (February 16 Order) reaffirming its existing merger review policies under Section 203 of the Federal Power Act (FPA) and its current framework for analyzing requests for market-based rate authority under section 205 of the FPA. In March of last year, FERC had sought comment in a Notice of Inquiry (NOI) on whether it should amend its existing policies in these two areas in light of new Horizontal Merger Guidelines (2010 HMG) issued jointly by the Federal Trade Commission (FTC) and Department of Justice (DOJ) on August 19, 2010. The NOI explained that the 2010 HMG deemphasize market definition as a starting point for merger analysis and depart from the sequential analysis found in the prior 1992 version of the Horizontal Merger Guidelines (1992 HMG), and instead support the use of a fact-specific inquiry and greater analytical flexibility.

Section 203 of the FPA requires parties to public utility mergers and acquisitions involving jurisdictional facilities to seek FERC authorization before closing. Section 203(a) provides that FERC should approve such transactions if they are consistent with the public interest. As part of that determination, FERC must consider the proposed transaction’s effect on competition in the relevant market(s). FERC currently uses a five-step framework that was adopted from the 1992 HMG, as well as a Competitive Analysis Screen (CAS) which focuses on the first step of the analysis: whether the proposed transaction would significantly increase concentration and result in a concentrated market. One component of the CAS includes an analysis of market concentration using the Herfindahl-Hirschman Index (HHI). Under Section 205 of the FPA, parties that can demonstrate they do not have, or have adequately mitigated, their horizontal and vertical market power are granted authority to make sales of electric energy, capacity and ancillary services at market-based rates. FERC’s analysis under Section 205 includes the use of two indicative screens that rely on market share as well as market concentration as measured by HHI.

In its February 16 Order, FERC declined to follow the 2010 HMG’s approach as the framework for the Commission’s analysis of horizontal market power. The Commission explained that it would retain its five-step framework, including the CAS as part of its first step, as the CAS provides a useful conservative check to allow parties to quickly identify mergers unlikely to present competitive problems at a relatively low cost. The Commission stated that its current approach, which provides analytical and procedural certainty, is also flexible enough to incorporate theories outlined in the 2010 HMG, and that it has previously, and will continue to, look beyond the HHI screens in its review process when warranted.

The Commission also declined to adopt the revised, higher HHI thresholds presented in the 2010 HMG for use in its CAS. Noting its extensive experience with electrical markets and their distinct characteristics, as well as its intent to use the CAS to identify proposed transactions that clearly would have no adverse effect on competition, FERC stated that its current HHI thresholds are appropriate. The Commission also declined to initiate a more formal coordination process with the FTC and DOJ, as requested by one commenter. FERC stated that it will continue to coordinate with the federal antitrust agencies as appropriate, on a case-by-case basis.

Regarding its electric market-based rate program, FERC decided not to modify the current market power analysis and declined to alter the HHI threshold used in that screening process, noting that its current HHI threshold is already consistent with the 2010 HMG approach. With regard to the existing market share screen, FERC explained that, due to the physical and economic characteristics of electricity markets, including low elasticity of demand, market power is more likely to be present at lower market shares. Thus, FERC concluded that the current indicative screens used in its market-based rate analysis provide an appropriate balance between a “conservative but realistic screen” and imposing undue burdens on applicants. FERC also noted that its current analysis provides adequate flexibility to consider additional evidence when raised by an applicant or an intervenor.

© 2012 Bracewell & Giuliani LLP