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Report on State Preparedness to Implement EPA Clean Power Plan

States are well positioned to implement the Environmental Protection Agency’s (EPA) Clean Power Plan, according to a new study conducted by Analysis Group Senior Advisor Susan Tierney and Vice Presidents Paul Hibbard and Andrea Okie. The report, “EPA’s Clean Power Plan: States’ Tools for Reducing Costs & Increasing Benefits to Consumers,”is based on a careful analysis of states that already have experience regulating carbon pollution. It finds that those states’ economies have seen net increases in economic output and jobs. “Several states have already put a price on carbon dioxide pollution, and their economies are doing fine. The bottom line: the economy can handle – and actually benefit from – these rules,” said Dr. Tierney.

The EPA’s proposed Clean Power Plan would regulate carbon emissions from existing fossil-fueled power plants using EPA’s existing authority under the Clean Air Act. The draft rules, due to be finalized next year, allow a variety of market-based and other approaches states can choose from to cut greenhouse gas emissions from power plants.

The Analysis Group team analyzed the carbon-control rules already in place in several states to see what insights they might hold for the success of the national rule. The report was based on states’ existing track records, rather than projecting costs and benefits that might be expected under the Clean Power Plan. The report, funded by the Energy Foundation and the Merck Family Fund, was released at the summer conference of the National Association of Regulatory Utility Commissioners (NARUC) in Dallas, Texas.

Read the report

ARTICLE BY

Susan F. Tierney, PhD

Paul J. Hibbard

Andrea Okie

Analysis Group, Inc.

Energy and Environmental Law Update: Week of 8/25/2014

Now that summer is drawing to a close, let’s check in on one important bill that lost momentum just as the summer was beginning. Remember the Senate Finance Committee’s tax extenders package (S. 2260), which the committee marked up on a bipartisan basis in mid-May? The one that was poised to pass the Senate but that surprisingly failed to reach cloture after Senate leadership blocked Republican amendments on the bill? At the time, congressional staff and lobbyists—and even Majority Leader Harry Reid (D-NV) —suggested that the extenders package would come up again in the lame duck session after the November election. The House was not expected to vote on an extenders package before then anyway, so the Senate delay would not really impact the timing of final passage of this two-year extension of more than 50 tax provisions.

Well, that was then. Today, almost two months before the mid-term elections, the future of the clean energy provisions in an extenders package—particularly the production tax credit (PTC) and investment tax credit in lieu of the PTC—depends a great deal on which party wins control of the Senate. Republicans are more confident that they can win the necessary six seats to take back the top chamber; and if they do, they will have more leverage in the lame duck about what the contents of an extenders package would be. The $84 billion EXPIRE Act of 2014 not only extends the PTC by two years but also extends key clean energy depreciation benefits and tax credits, including a $1-per-gallon credit for biodiesel and a 50-cent-per-gallon credit for alternative fuels. Senate Democrats strongly support the clean energy provisions. Certain Republicans, such as Chuck Grassley (R-IA), remain staunch supporters of the PTC and biodiesel credits, but many other Republicans are eager to eliminate or scale back the PTC and other clean energy provisions. If Senator Orrin Hatch (R-UT) learns he will be chairman of the Finance Committee next year in a Republican chamber, he has less of an incentive to work with current Chairman Ron Wyden (D-OR) and Democrats during the lame duck session. He can simply hold out and put forward his own extenders bill next year with popular provisions like the research and experimentation (R&D) credit and without clean energy incentives.

The extension of a handful of relatively popular and less controversial business and individual extenders such as the R&D credit and bonus depreciation are more assured. House Republicans, as part of a “tax-reform-lite” effort, have passed several bills making select provisions such as these permanent. For clean energy advocates, they have to cling to the more popular parts of the overall package and make sure their provisions are not trimmed away when Congress eventually takes it up. The business community, which wants many of the non-energy provisions in the EXPIRE Act extended, also must be much more vocal if the bill is to rise to the front of the agenda.

If Democrats do manage to hold onto control of the upper chamber, they very likely will be dealing with a reduced majority, and that too will give Republicans more leverage. With all the competing priorities in a very short legislative period, it will be difficult for the package to be enacted before the end of the year. Another retroactive extension in early 2015 could be possible. Congress has let the PTC lapse several times since 1992 before renewing it again. While it’s hard to avoid feeling a feeling of déjà vu when faced with another “will-they-or-won’t-they” end-of-year extension, this time also seems different. Many legislators thought the previous PTC extension would be the last one, so the stakes are high. Anti-PTC campaigns financed by conservative groups and utilities ratchets up the pressure on lawmakers. One possible way to blunt some Republican opposition would be to modify the PTC and either reduce the amount of the credit or include a deadline by which projects must complete construction—or both.

Several scenarios exist where even a change of control in the Senate would not preclude the passage of a tax extenders package. A short-term extension would give lawmakers some breathing room to debate tax reform. Some Republicans from wind-friendly states might prefer the clean energy provisions to pass under a Democratic watch rather than under Republican leadership in the new Congress. In this optimistic scenario, the lame duck session could mirror the productive session of 1980.

Ironically, election results in any one of three bio-energy and wind states–Colorado, South Dakota, and Iowa—could help decide the balance in the Senate and the fate of clean energy tax credits.

ARTICLE BY

Bryan M. Stockton

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

EPA Clarifies Standards for Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) Assessments

In a move designed to provide greater certainty to those purchasing, selling, or evaluating industrial or commercial properties, the Environmental Protection Agency (EPA)recently proposed to remove any lingering effect of ASTM International’s E1527-05, a nine-year-old industry standard practice for evaluating potentially contaminated sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

As explained in detail in our February 24, 2014 E-Alert, “Amended All Appropriate Inquiries (AAI) Rule Offers New Due Diligence Standard, Focuses on Vapor Releases,” the EPA referenced and countenanced ASTM International’s updated framework, E1527-13, as an alternative due diligence standard to ASTM E1527-05. Issued on June 16, 2014, the Proposed Rule would clarify Phase I Environmental Site Assessment (ESA) standards by replacing ASTM E1527-05 with ASTM E1527-13. Yet these requirements still leave significant uncertainty in the absence of more detailed guidance about how to conduct vapor intrusion evaluations.

I. Background

International standards organization ASTM International modeled E1527-05 on the EPA’s All Appropriate Inquiries (AAI) Rule in 2005. The AAI Rule is a due diligence standard that allows buyers of potentially contaminated properties who conduct an investigation meeting the rule’s requirements to preserve certain defenses to federal cleanup liability under CERCLA when conducting Phase I ESAs. See 40 C.F.R. § 312 (2013). The ASTM E1527-05 framework was developed to provide guidance for such investigations, and instructed would-be purchasers to undertake all appropriate inquiries regarding the condition of a property before completing its sale. Any buyer who conducted such inquiries in compliance with ASTM E1527-05 could then qualify for certain landowner liability protections under CERCLA, including the innocent landowner, bona fide prospective purchaser, and contiguous property owner defenses.

Last December, the EPA amended the AAI Rule to allow a purchaser to satisfy Phase I ESA requirements by following either ASTM E1527-05 or ASTM E1527-13. See 78 Fed. Reg. 79319 (Dec. 30, 2013). As explained in our February 24, 2014 E-Alert, the 2013 framework included new regulatory file review requirements, updated definitions of certain key terms, including “de minimis condition,” “release,” “Recognized Environmental Condition,” and “Historical Recognized Environmental Condition,” and expanded ASTM E1527-05’s definition of “migrate/migration” to include vapor migrations.

II. Proposed Rule

The EPA amended the AAI Rule through direct final rulemaking, an approach whereby an agency publishes a rule and a notice of proposed rulemaking simultaneously because it expects that the rule will prove non-controversial. But the move nonetheless introduced confusion because in endorsing both ASTM E1527-05 and ASTM E1527-13, it recognized two distinct standards.

Responding to that criticism, the EPA has now proposed to replace ASTM E1527-05 with ASTM E1527-13 for purposes of the AAI rule so as “to reduce any confusion associated with the regulatory reference to a historical standard” and “promote the use of the standard currently recognized by ASTM International as the consensus-based, good customary business standard.” Amendment to Standards and Practices for All Appropriate Inquiries, 79 Fed. Reg. 34480 (proposed June 16, 2014) (to be codified at 40 C.F.R. 312), at 11. Besides removing all references to ASTM E1527-05, the Proposed Rule would not alter the substance of the AAI Rule.

III. Implications

ASTM E1527-13 incorporates new language about the need to evaluate soil vapor risk when conducting Phase I ESAs. Soil vapor intrusion is of particular focus with respect to TCE and other volatile organic compounds, but can also involve other contaminants. The EPA has suggested, however, that a vapor intrusion evaluation may already have been required under ASTM E1527-05. In its preamble to the rule offering ASTM E1527-13 as a new due diligence standard, the agency stated that it “in its view, vapor migration has always been a relevant potential source of release or threatened release that, depending on site-specific conditions, may warrant identification when conducting all appropriate inquires.” 78 Fed. Reg. 79319 (Dec. 30, 2013). It is unclear, however, whether the EPA intended this statement to reflect near contemporary Phase I ESAs (conducted after ASTM E1527-13 was developed) or instead intended to suggest that the obligation has always existed. Consequently, there may be future disputes as to whether a Phase I ESA not describing an evaluation of soil vapor intrusion actually satisfied the AAI Rule.

ASTM E1527-13 leaves open a number of key questions about vapor intrusion evaluations. Neither ASTM E1527-13 nor the AAI Rule describes, for example, what levels in soil gas or groundwater should lead to concern or what levels would require mitigation. The EPA and various states are developing guidance in this area to further clarify acceptable levels, how evaluations are to be conducted, whether one can evaluate risk based upon groundwater conditions alone, whether an evaluation must consider multiple lines of evidence, what vapor levels would be deemed acceptable in a residential setting, and what actions are required to mitigate risk.^[1]

IV. Conclusion

Consultants have already been transitioning toward the ASTM E1527-13 standard. Should the Proposed Rule be adopted, ASTM E1527-05 will still satisfy the AAI Rule for properties acquired between November 1, 2005 and the effective date of the new action. The EPA also anticipates providing for a delayed effective date of one year following any final action, to give those still using the previous framework time to complete ongoing investigations and become familiar with the updated standard.

However, it is important to recognize the potential that the EPA may claim that a failure to evaluate soil vapor, where otherwise appropriate, is a requirement under ASTM E1527-05 and not only ASTM E1527-13. It is therefore essential that potentially-affected individuals keep current on EPA developments with respect to the evaluation of soil vapor intrusion, and obtain sound and up to date advice from environmental professionals.

^[1] See http://www.epa.gov/oswer/vaporintrusion/index.html.

ARTICLE BY

Covington & Burling LLP

New Supreme Court Ruling On EPA Authority Over Greenhouse Gases (GHGs) – Little Clarification on the 111(d) Regulations

Last week, the United States Supreme Court issued a significant decision in Utility Air Regulatory Group v. EPA, that substantially restricts the authority of the U.S. Environmental Protection Agency (EPA) to regulate greenhouse gas emissions (GHGs) from stationary sources under the Clean Air Act’s Prevention of Significant Deterioration (PSD) and Title V permitting programs. The Supreme Court’s decision holds that EPA may not impose permitting requirements on facilities based solely on their emissions of GHGs, but may regulate GHG emissions under the PSD and Title V programs, only if a facility is otherwise subject to major source permitting requirements.

Background

EPA interpreted the Clean Air Act to require stationary sources to obtain construction and operating permits under the PSD and Title V programs whenever a facility emits GHGs above certain threshold levels. The threshold levels EPA chose were different than the levels established by Congress in the Clean Air Act, because the statutory levels when applied to GHGs were too low (as compared to criteria pollutant thresholds), and applying those levels to GHG emissions would lead to “absurd results” by subjecting millions of small sources such as shopping malls, hospitals and churches to major source permitting requirements. These thresholds were established in what is known as the “Tailoring Rule.”

The Tailoring Rule triggered regulatory review for two different source categories (for purposes of GHG emissions): sources that were already subject to major source review under the Clean Air Act because of emissions of criteria pollutants in excess of the major source thresholds (so-called “anyway” sources) and those sources that would trigger major source review for the first time based solely on emissions of GHGs in excess of the “tailored” thresholds set by EPA.

Holding

The Supreme Court’s divided 5-4 decision, authored by Justice Scalia, held that EPA’s rulemakings setting “tailored” thresholds for GHGs were invalid. The Court, however, stopped short of holding that GHGs could not be regulated at all under the PSD and Title V programs.

Specifically, the Supreme Court upheld EPA’s approach of requiring “best available control technology” (BACT) standards for GHGs for those sources otherwise required to obtain a PSD permit (the “anyway” sources). The Court emphasized, though, that it was not approving EPA’s current approach to BACT regulation of GHGs, or of any future approach that EPA might adopt. The Supreme Court categorized this aspect of the holding as having only a small impact on the regulated community, stating that 85 percent of all GHG major sources are “anyway” sources, while only an additional 3 percent would be major sources under the GHG tailoring trigger.

The Supreme Court also reaffirmed its decision in Massachusetts v. EPA, which held that GHGs qualify as an “air pollutant” for purposes of the term’s general definition in the Clean Air Act.

Takeaways and Import of This Case on 111(d) Regulations:

1) GHG Emissions Alone Do Not Trigger Major Source Permitting Obligations – The principal legal holding of the decision is also considered the most significant from a practical perspective. Stationary sources cannot, under the Court’s ruling, be subject to permitting requirements based solely on their emissions of GHGs. The Court’s math on the number of sources impacted by this core aspect of the decision is questionable, and there is suspicion that many potentially major sources were specifically planning facilities to avoid major source permitting review by designing facilities to avoid the tailoring trigger for GHGs. In short, the impact of this decision is potentially very significant for the regulated community.

2) Greenhouse Gas Emissions Are an “Air Pollutant” Subject to Regulation under the Clean Air Act. While the decision holds that GHGs are not an “air pollutant” for purposes of triggering PSD and Title V permitting requirements, it stops short of holding that GHGs are not an “air pollutant” for other purposes. To the contrary, the Court affirmed its prior holding in Massachusetts v. EPA, that the term “air pollutant,” as generally defined in the Clean Air Act, includes GHGs.

3) Mixed Signals About EPA’s Authority to Issue NSPS Regulations Under 111(d). The Supreme Court was careful to note that EPA’s authority to regulate GHG emissions under the New Source Performance Standards (NSPS) were not at issue and did not need to be addressed (that is, the Court specifically did not address the proposed 111(d) rules).

a) As noted above, the Supreme Court reinforced that GHGs may be regulated as an air pollutant under other aspects of the Clean Air Act (just not PSD or Title V). Though the Supreme Court found that EPA was right to determine that the statutory thresholds for major source review would lead to “absurd results” in the PSD and Title V context for major source triggers, the Court said nothing about EPA’s authority to regulate under the NSPS provisions of Section 111(d). One way to interpret the decision is that it cloaks EPA with apparent authority to address GHGs as an “air pollutant” under Section 111(d).

b) On the other hand, the Supreme Court took a stern tone in admonishing EPA for over-stepping its bounds. As an example, the Court warns EPA: “[W]hen an agency claims to discover in a long-extant statute an unheralded power to regulate ‘a significant portion of the American economy,’ we typically greet its announcement with a measure of skepticism.” That statement was directed at EPA’s attempt to regulate GHGs in the PSD and Title V programs, but the same argument might be made in the 111(d) context.

Conclusion

There are still many questions to be answered surrounding the 111(d) regulations proposed by EPA. This decision clarifies the overall picture of GHG regulation slightly, but does little to provide a clear boundary on EPA’s authority over GHGs. No doubt, this decision will be cited by both those in favor and those against the 111(d) regulations.

Article By:

Adam DeVoe

Of:

Lewis Roca Rothgerber LLP

What Does Regulation of Greenhouse Gas Emissions as Described by EPA in the “Tailoring Rule” have to do with the Clean Air Act?

UARG v. EPA: Tailoring Rule Litigation

On June 23, 2014 Justice Scalia delivered the opinion of the U.S. Supreme Court on the question of whether EPA motor vehicle greenhouse gas regulations necessarily automatically triggers permitting requirements under the CAA for stationary sources that emit greenhouse gases. The statements in the opinion concerning EPA’s assertions of power are quite provoking. If read carefully, this opinion launches a warning to EPA about its future regulatory actions relative to greenhouse gases. The text of the opinion can be found here. The following quotes are offered as examples of that warning.

“EPA’s interpretation is also unreasonable because it would bring about an enormous and transformative expansion in EPA’s regulatory authority without clear congressional authorization. When an agency claims to discover in a long-extant statute an unheralded power to regulate “a significant portion of the American economy,” Brown & Williamson, 529 U.S. at 159, we typically greet its announcement with a measure of skepticism. We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast “economic and political significance.” Id., at 160; See Also MCI Telecommunications Corp. v. American Telephone & Telegraph Co., 512 U.S. 218, 231 (1994); Industrial Union Dept., APL-CIO v. American Petroleum Institute, 448 U.S. 607, 645-646 (1980) (plurality opinion). Slip op at 19.

“. . . in EPA’s assertion of that authority, we confront a singular situation: an agency laying claim to extravagant statutory power over the national economy while at the same time strenuously asserting that the authority claimed would render the statute “unrecognizable to the Congress that designed” it. “ Slip op at 20.

“We are not willing to stand on the dock and wave goodbye as EPA embarks on this multiyear voyage of discovery. We reaffirm the core administrative-law principle that an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.” Slip op at 23.

In a step wise fashion the opinion presents and answers the following:

1. The question before the Court was “. . .whether it was permissible for EPA to determine that it motor-vehicle greenhouse-gas regulations automatically triggered permitting requirements under the Act for stationary sources that emit greenhouse gases.” Slip op at 2.

First we decide whether EPA permissibly interpreted the statute to provide that a source may be required to obtain a PSD or Title V permit on the sole basis of its potential greenhouse-gas emissions. Slip op at 10.

“It is plain as day that the Act does not envision an elaborate, burdensome permitting process for major emitters of steam, oxygen, or other harmless airborne substances. It takes some cheek for EPA to insist that it cannot possibly give “air pollutant” a reasonable, context-appropriate meaning in the PSD and Title V context when it has been doing precisely that for decades.” Slip op at 12.

“Massachusetts does not strip EPA of authority to exclude greenhouse gases from the class of regulable air pollutants under other parts of the Act where their inclusion would be inconsistent with the statutory scheme.” Slip op at 14.

“In sum, there is no insuperable textual barrier to EPA’s interpreting “any air pollutant” in the permitting triggers of PSD and Title V to encompass only pollutants emitted in quantities that enable them to be sensibly regulated at the statutory thresholds, and to exclude those atypical pollutants that, like greenhouse gases, are emitted in such vast quantities that their inclusion would radically transform those programs and render them unworkable as written.” Slip op at 16.

2. . . . we next consider the Agency’s alternative position that its interpretation was justified as an exercise of its “discretion” to adopt “a reasonable construction of the statute.” Tailoring Rule 31517. We conclude that EPA’s interpretation is not permissible.” Slip op at 16.

“EPA itself has repeatedly acknowledged that applying the PSD and Title V permitting requirements to greenhouse gases would be inconsistent with – in fact, would overthrow – the Act’s structure and design.” Slip op at 17.

“A brief review of the relevant statutory provisions leaves no doubt that the PSD program and Title V are designed to apply to, and cannot rationally be extended beyond, a relative handful of large sources capable of shouldering heavy substantive and procedural burdens.” Slip op at 18.

3. “We now consider whether EPA reasonably interpreted the Act to require those sources to comply with “best available control technology” emission standards for greenhouse gases.” Slip op at 25.

“EPA argues that carbon capture is reasonably comparable to more traditional, end-of-stack BACT technologies, . . . and petitioners do not dispute that.” Slip op at 26. “. . . it has long been held that BACT cannot be used to order a fundamental redesign of the facility.” “. . . EPA has long interpreted BACT as required only for pollutants that the source itself emits; accordingly, EPA acknowledges that BACT may not be used to require “reductions in a facility’s demand for energy from the electric grid.” Slip op at 27.

“The question before us is whether EPA’s decision to require BACT for greenhouse gases emitted by sources otherwise subject to PSD review is, as a general matter, a permissible interpretation of the statute under Chevron. We conclude that it is.” Slip op at 27.

“We acknowledge the potential for greenhouse-gas BACT to lead to an unreasonable and unanticipated degree of regulation, and our decision should not be taken as an endorsement of all aspects of EPA’s current approach, nor as free rein for any future regulatory application of BACT in this distinct context. Our narrow holding is that nothing in the statute categorically prohibits EPA from interpreting the BACT provision to apply to greenhouse gases emitted by “anyway” sources.” Slip op at 28.

Opinion of Breyer, with whom Ginsburg, Sotomayor and Kagan join, concurring in part and dissenting in part. Rather than exempting certain air pollutants like greenhouse gas emissions from the statute, it makes more sense to read into the statute an exemption for certain sources that were never intended to be subject to PSD.

Opinion of Alito, with whom Thomas joins, comments that Massachusetts v. EPA was wrongly decided at the time, and these cases further expose the flaw with that decision.

Curbing Greenhouse Gas (GHG) Emissions – Good for the Environment, Bad for Investors?

On June 2, 2014, EPA issued a proposed rule to control greenhouse gas emissions (GHGs) from the electric power generation sector of the United States. EPA’s goal is to obtain a reduction of GHG emissions in 2030 from this sector of 30% from the baseline year 2005. The 2005 baseline allows EPA to take credit for GHG emission reductions that have occurred since that time without any regulatory obligation. The proposal establishes GHG emission targets for each State (expect the District of Columbia and Vermont who do not have goals under the rule). Interim emission targets must be obtained in the 2020-2029 timeframe with final targets obtained by 2030.

The proposal does not suggest any particular emission limit on particular plants, but imposes the obligation on the States to derive a plan to achieve the reductions. The only penalty for noncompliance in the proposal is that EPA would impose an EPA-developed plan within the State if it fails to submit an approvable plan. While EPA has not dictated any particular approach a State may employ, the proposal favors a cap and trade or carbon tax system as the primary manner to obtain GHG emissions reductions.

So here are the two burning questions from the perspective of investors. First, will this rule actually survive in anywhere near this form? Second, when will affected power projects need to start ramping up investment in order to comply with the rule, i.e., when should investors start to worry about financial capacity?

In terms of a “review for reality,” many industry experts suggest that it is nearly impossible to obtain the proposed 6% efficiency improvement at existing coal-fired power plants without major capital improvements, which could require complex Clean Air Act permitting under other provisions of the law. Other goals can only be achieved through substantial purchases of carbon credits (i.e., offsets) or the implementation of technologies that haven’t yet been proven to be commercially viable. (You’ve likely heard the aspirations to develop carbon capture and sequestration.) EPA also assumes that natural gas-fired power plants will be running at 70% capacity year-round, which may be difficult to achieve in practice. Finally, EPA assumes that energy efficiency improvements at the consumer level will be obtained at a rate of 1.5% every year until 2030 – an ambitious goal.

In terms of a “review for timing,” this is only the beginning of a very long process. After the usual rounds of public comment, EPA has targeted issuance of the final rule by June 1, 2015. Then the lawsuits will start. Then a new President with his/her own views will take office. Plus, even under the EPA’s own best case scenario, the proposed rule allows states until June 2016 to submit plans, with the potential for extension to June 2017. Once a state submits a plan, EPA must approve or disapprove it through notice and comment rulemaking. The proposal allows for EPA to complete the review of the plans within 12 months of the state plan submittal. If a state doesn’t submit a plan or EPA disapproves the plan, EPA must make a plan for the state. State plans must begin to meet an interim goal in 2020 and must achieve their final goal by 2030. Plus, State plans and EPA approval/disapproval present a separate source of litigation and associated delay.

So no need for panic dumping of carbon-intensive investments just yet, but keeping an eye on the process would be wise, including consideration of whether, if your industry investments are large enough, you should participate in, or form/join a group to participate in, the comment-making phase plus working with members of Congress. The earlier the involvement, the greater the opportunity to help shape the results.

Article By:

Of:

Bracewell & Giuliani LLP

EU Sanctions And The International Oil And Gas Industry

The international oil and gas industry is continuously tasked with adapting to an ever evolving sanction-regulated environment. The level of sanction activity and implementation in recent years has been unprecedented, partly as a result of the political events which gave rise to the Arab Spring and the opposition to Iran’s nuclear programme. The recent crisis in the Ukraine, and associated sanctions against Russia, have sparked further debate around the need for effective, targeted punitive measures and the consequences they may have for Europe.

This article considers the EU’s sanction regime, explores the effect it has on international oil and gas companies and addresses the short-comings of the EU’s decentralised system.

What are sanctions?

Sanctions are political policy instruments used to encourage jurisdictions acting in contravention of international law to adopt standards supported by the wider global community. They impose measures designed to cause damage to the targeted government, non-state entity or individual (“Target”) in order to force it to undertake, or prevent it from undertaking, certain behaviour. They may inhibit the Target from accessing foreign markets for trade or deny it from pursuing financial and other forms of commerce. The professed ultimate objective of a sanction is to preserve or restore global peace and security.

What is the source of EU sanctions?

The UN Security Council imposes sanctions through Security Council resolutions which are binding on the EU. The EU implements all sanctions imposed by the UN Security Council through legislation enacted by the European Council. The process typically results in a European Council regulation which has direct effect in EU member states’ separate legal systems, creating rights and obligations for those subject to them, and overrides national law. Additionally, the EU may decide to impose self-directed sanctions or restrictive measures which go further than a UN Security Council resolution in circumstances in which the EU deems such action to be necessary.

Why do EU sanctions affect international oil and gas companies?

Over the past two decades, the EU has engaged in an active use of restrictive measures in the form of economic and financial sanctions, embargoes and restrictions on admission to a country. Economic and financial sanctions typically take the form of asset-freeze measures which involve the use of funds and economic resources by Targets or persons acting for and on behalf of Targets, and the provision of funds and economic resources to designated Targets. Embargoes may prohibit trade in certain goods, and activities relating to such trade, with Targets (including the flow of arms and military equipment). Visa or travel bans can be imposed preventing certain persons from entering the EU or transit through the territory of EU member states. These sanction measures are part of the EU’s strategy to support the specific objectives of the Common Foreign and Security Policy.

At the time of writing, the EU has announced asset freezes and travel bans against around twenty individuals in Russia and the Ukraine. Companies conducting their business in the oil and gas sector should be particularly vigilant to ensure they act in compliance with EU sanctions, as Ukrainian and Russian entities and individuals who operate in this industry may increasingly become sanction targets.

US sanctions are questionable under international law because they apply extra-territorially to third state parties involved in business activities with the Target. Unlike the US, the EU has refrained from adopting legislation with extra-territorial effect. However, the EU’s recent sanctions against Iran displayed a greater resemblance to those levied by the US than had previously been the case. For example, sanctions were imposed prohibiting the provision of key resources to various parts of the Iranian oil and gas industry, as well as the provision of financial services to that sector. As a result of EU financial sanctions most, if not all, banks and other financial institutions have declined from conducting any business relations with the Iranian regime.

It is clear that EU sanctions are wide reaching and their scope has a significant impact on business activities. They will apply to international oil and gas companies in the following situations:

within EU territory, including its airspace;
on board of aircrafts or vessels under the jurisdiction of an EU member state;
to EU nationals, whether or not they are in the EU;
to companies and organisations incorporated under the law of a member state, whether or not they are in the EU (this captures branches of EU companies in non-EU countries); and
to any business done in whole or in part within the EU.

The corporate behaviour, performance and conduct of international companies are powerful channels through which the objectives of sanctions against Targets are achieved. Since an international oil and gas company has little option but to observe EU sanctions to the extent such company falls within the EU’s jurisdiction, these restrictive measures are likely to play a big part in a company’s commercial decision making processes.

Why are EU sanctions difficult to manage?

A principal reason why EU sanctions are difficult for international oil and gas companies based in various EU member states to manage largely stems from the fact that the European Union lacks a centralised licensing body. Instead, the responsibility for implementing and enforcing EU sanctions is delegated to the relevant competent authorities of the EU member states. The potential for variance and discrepancy is rife in a system where there are twenty-eight EU member states, each with their individual national resource constraints and self-centred policy objectives.

Typically, the competent authorities of EU member states are responsible for:

granting exemptions and licences;
establishing penalties for sanction violations;
coordinating with financial institutions; and
reporting upon the implementation of sanctions to the European Commission.

There have been calls for a central EU licensing body which would produce a single licensing and exemption policy for EU member states. Although EU guidelines on sanctions and best practices for the effective implementation of restrictive measures go some way to plug the gap, arguably a more comprehensive regime for implementing sanctions is required to provide a better level of certainty to international businesses operating in the realms of the EU.

Managing the risks

International oil and gas companies have always had to function in politically active climates. As sanctions initiated by multilateral organisations such as the UN and EU become more fashionable, so too does the exposure to political risk that these companies will face. Given the considerable levels of investment that can only be recouped over extended periods of time, and in accordance with pre-determined contractual apportionments, international oil and gas companies need to be able to recognise, assess and manage these political risks effectively.

Oil and gas companies can relieve the risks imposed on them by sanctions through political lobbying, taking pre-emptive measures and by reacting quickly to sanctions once they are implemented. Commercial negotiations will need to focus on the allocation of risk as a result of one party’s failure to perform or withdrawal from the contract on the grounds of applicable sanctions.

International oil and gas companies need to be proactive and consider both the legal solutions and pre-cure safeguards. Time and effort should be spent focusing on drafting and negotiating the relevant contractual documentation, following a careful risk assessment, instead of deferring to dispute resolution provisions. For instance, careful construction of force majeure provisions can allocate each party’s obligations in the circumstance where an event outside of a party’s control causes contractual performance to become impossible. Thus, whilst conventional force majeure clauses relating to physical events afford relief to an affected party from its liabilities under the contract, oil and gas companies should consider expanding such contractual provisions to cover sanctions and other restrictive measures imposed on them by the UN and EU.

To avoid falling foul of existing EU sanctions, oil and gas companies should also consider putting in place comprehensive compliance procedures and systems to implement applicable sanction regimes. Penalties for breach of sanctions can be severe; a person guilty of a sanction-related offence may be liable on conviction to imprisonment and/or a fine. Falling foul of sanctions also means that a transaction can immediately become unlawful.

Conclusion

In view of the economic significance of the EU, the application of economic financial sanctions can be a powerful tool. But like a chain is no stronger than its weakest link, the effectiveness and success of the EU’s sanction regime depends on all EU member states applying, implementing and enforcing EU sanctions in a consistent manner.

The current EU sanction regime warrants a fully integrated approach which would undoubtedly benefit its policy objectives and move some way to reducing the unduly high economic cost that international oil and gas companies face when operating their businesses in the EU.

In voicing the sentiments of Henry Kissinger: “No foreign policy – no matter how ingenious – has any chance of success if it is born in the minds of a few and carried in the hearts of none”, perhaps now, in the dawn of the recent events which have taken place in the EU’s backyard in the Ukraine and Russia, the EU should further global security measures by tightening its ranks and implementing a more centralised, and better monitored, sanction regime.

Article By:

Rebecca Downes

Of:

Andrews Kurth

Phosphorus in Wisconsin: The Clean Waters, Healthy Economy Act

On April 23, 2014, Wisconsin Governor Scott Walker signed the Clean Waters, Healthy Economy Act (Act) into law. This legislation establishes the basis for creating a multi-discharger variance for point sources struggling to meet Wisconsin’s stringent numeric phosphorus water quality criteria. Although several conditions must be met before it is available to permit holders, this legislation could have significant impacts on Wisconsin agribusinesses that hold Wisconsin Pollution Discharge Elimination System (WPDES) permits, as well as agricultural produces that may be targeted for non-point source reductions of phosphorus. In addition, since the Environmental Protection Agency (EPA) has noted that it generally favors these multi-discharger permit approaches, Wisconsin’s approach may be replicated in other areas of the country that are considering stricter water quality standards for nutrients like phosphorus and nitrogen.

What does the Act do?

Very simply, the Act sets in motion the collection of economic information to justify a multi-discharger variance based on a finding of adverse widespread social and economic impact. The Act requires the Department of Administration (DOA) to look at costs of compliance for categories of point source dischargers statewide. If the DOA finds that the “cost of compliance with water quality based effluent limitations for phosphorus by point sources that cannot achieve compliance without major facility upgrades” would cause substantial adverse social and economic impacts on a statewide basis, then the Department of Natural Resources (DNR) will seek approval from the EPA for a variance under 40 CFR Part 131. The Act also defines the criteria for qualifying for the variance and what a point source must do if it opts into the variance.

How would this multi-discharger variance work for permit holders?

Agribusinesses that hold WPDES permits may be eligible for the variance. To qualify, permit holders will need to:

1) Demonstrate the economic determination made by the DOA applies to the source;

2) Certify the permittee cannot achieve compliance without a major facility upgrade (defined to mean the addition of both new treatment equipment and a new treatment process); and

3) Agree to comply with the requirements of the variance.

Once DNR has confirmed these requirements have been met, the permittee may participate in the variance for up to four permit cycles as long as it meets the discharge limits established by the multi-permit variance and takes steps to reduce phosphorus contributions from other sources.

First, the permit must comply with decreasing phosphorus discharges. These concentrations begin at 0.8 mg/L in the first permit term and then drop to 0.6 mg/L and 0.5 mg/L in the third and fourth permit term, respectively. In the fourth permit for which the variance is available, the DNR will require the permittee to achieve – by the end of the term of that permit – the water quality based effluent limit for phosphorus that would apply without the variance.

Second, while complying with these reduced discharge limits, the permittee must also undertake some activity to reduce phosphorus contributions from other sources in its watershed. This concept borrows from Wisconsin’s EPA-approved adaptive management program, and requires the permittee to:

1) Enter into a binding, written agreement with the DNR under which it implements a project or plan designed to reduce phosphorus contributions from other sources; or

2) Enter into a binding, written agreement that is approved by DNR with another person under which the other person implements a project or plan designed to phosphorus contributions from other sources; or

3) Make a payment to the counties of the watershed in which the permittee is located. These payments are calculated by multiplying $50/lb times the difference between what the permittee is currently discharging, and what the permittee would discharge if its effluent met a target limit. The target limit is either the limit set by a TMDL (total maximum daily load), if applicable, or 0.2mg/L if no TMDL is approved.

How might the Act affect producers as nonpoint sources?

Counties that receive money through this program must use at least 65% of the amounts received to fund cost-sharing for projects governed by 281.16(3)(e) or (4) (the state’s nonpoint source program). These must be applied to projects that have been prioritized by their potential to “reduce the amount of phosphorus per acre entering the waters of the state, based on an assessment of land and land use practices in the county.” Up to 35% can be used for staffing, or toward modeling or monitoring to evaluate the amount of phosphorus in waters for planning purposes. In Wisconsin, producers that are not currently meeting state performance standards may be asked to install certain practices when cost share dollars are available. The Act has the potential to increase the amount of cost share dollars available to county work in this area.

What’s Next for the Act?

Before this program is available to permittees, a number of things must happen. First, the DOA must complete an economic study that demonstrates compliance with the phosphorus standard will have adverse and widespread social and economic impact. This study must also identify the categories of dischargers that will be eligible for the multi-discharger variance. Second, EPA must approve the variance before it may be implemented in Wisconsin. Finally, permittees would need to apply for the variance to alter any existing permit conditions that have been imposed to implement the phosphorus standard. Look for further updates in 2015!

Article By:

Angela A. James

Of:

Michael Best & Friedrich LLP

Massachusetts' Highest Court Upholds State's Endangered Species Regulations

In a long-awaited ruling, the Massachusetts Supreme Judicial Court affirmed the legality of the “priority habitat” regulations created by the Division of Fisheries and Wildlife (DFW) of the Massachusetts Department of Environmental Protection under the Massachusetts Endangered Species Act (MESA). In Pepin v. Division of Fisheries and Wildlife, SJC No. 11332 (February 18, 2014), the petitioners challenged the DFW’s establishment of “priority habitat” regulations “for which MESA makes make no express provision.”

MESA does expressly authorize DFW to designate certain areas as “significant habitats” of endangered or threatened species. Land designated a “significant habitat,” entitles an owner to (i) advance written notice that the land is being considered for designation as a significant habitat, (ii) a public hearing before any decision on the proposed designation is made, and (iii) an opportunity to appeal and seek compensation under the “takings” clause of the U.S. Constitution. Arguably to avoid paying just compensation, the DFW has never designated land “significant habitat.”

Instead, the DFW promulgated regulations establishing a second type of protected habitat denoted “priority habitat,” to protect species that are either endangered or threatened, or that fall into a third category of “species of special concern.” Delineations are “based on the best scientific evidence available.” A sixty-day public comment period follows the reevaluation of the priority habitat map every four years and a final map is posted on the DFW’s web site. The DFW reviews projects in a “priority habitat” on a case-by-case basis to determine whether it would result in either (i) a “no” take, (ii) a “conditional” no take, or (iii) a take. Even if DFW finds the project would be a “conditional” no take or a “take,” the project may proceed under DFW-imposed conditions or a “conservation and management permit.”

Here, the petitioners’ property consists of two building lots, totaling approximately 36 acres. In 2006, the property was delineated a priority habitat for a species of special concern (eastern box turtle). Challenging the validity of the “priority habitat” regulations, the petitioners maintained that MESA’s creation of the “significant habitat” designation with critical procedural protections meant that all landowners were entitled to the same protections whenever property development is restricted under MESA. Citing the broad authority granted by MESA, the Court rejected this view and instead found that that statute “extends to the formulation of the priority habitat concept as a means of implementing MESA’s prohibition on takes.” The Court refused to “substitute [its] judgment as to the need for a regulation, or the propriety of the means chosen to implement the statutory goals, for that of the agency, …[where] the regulation … [was] rationally related to those goals.” The petitioners could not overcome the presumption of validity accorded “duly promulgated regulations of an administrative agency….”

The Court also ruled that in deciding the petitioners’ challenge to the application of the priority habitat mapping guidelines to their property, a Division of Administrative Law Appeals (DALA) magistrate judge properly ruled in favor of the DFW even without a hearing because the petitioners failed to meet their burden of demonstrating that the DFW improperly delineated their property as priority habitat.

Article By:

Brian C. Levey

Marc J. Goldstein

Of:

Beveridge & Diamond PC

Environmental Review Commission Holds Final Meeting Prior to Start of 2014 Short Session

It seemed fitting that the Environmental Review Commission (the Commission), met yesterday, Earth Day, for its last scheduled meeting before the start of the 2014 short session. Yesterday’s meeting was chaired by Representative Ruth Samuelson. The Commission heard presentations from Tom Reeder, Director of the Division of Water Resources at DENR, Paul Newton, North Carolina State President of Duke Energy, Edward Finley, Jr., Chairman of the North Carolina Utilities Commission, and Chris Ayers, Executive Director of the North Carolina Utilities Commission Public Staff. At the close of the meeting the Chairwoman entertained public comment for close to an hour.

Duke Energy presented its support for a coal ash plan that could potentially incorporate several options into one solution and addresses, not only the Dan River, but other active and retired sites. Duke Energy presented three scenarios to the committee. The first plan, costing $2.0-2.5 billion, 1) incorporates the use of hybrid caps in places of the closure of some sites, 2) moves some sites to new lined structural fills or landfills, 3) continues the Asheville structural fill, and 4) converts some sites to dry fly ash. The second plan, costing $6.0-8.0 billion, would incrementally excavate ash from 10 sites to landfills over a 20 to 30 year period. The third plan, costing $7.0-10.0 billion, would incrementally move the ash to all-dry pneumatic bottom ash handling systems and include the thermally-driven evaporation of other process water. Mr. Newton stated Duke believed the answer was somewhere between the first and second options.

The Sierra Club, the Roanoke River Basin Association, and the Catawba Riverkeeper, among several others, offered their comment.

The Sierra Club urged that the General Assembly set minimum standards for the closure of coal ash ponds such that Duke Energy could propose alternatives that adequately demonstrate effective protection of water supplies. The Sierra Club also asked the legislature to bring coal ash under its waste management laws, since North Carolina is the only state that does not treat wet coal ash as solid waste. Finally, the Sierra Club asked legislators to regulate structural fills and require liners and groundwater monitoring when coal ash is used as structural fill.

Other speakers asked the Commission to require the drainage and removal of coal ash from all open coal ash pits and the storage of all coal ash in dry, sealed above-ground containers or the reuse of the ash in products such as concrete.

The Commission did not take any votes and did not introduce any potential legislation. The Commission had previously met on April 9th of this month and voted to approve its final report for the 2014 short session, which includes the Commission’s legislative proposals.

Article By:

Jillian DeCamp

Of:

Poyner Spruill LLP

Tag: environment

Report on State Preparedness to Implement EPA Clean Power Plan

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Energy and Environmental Law Update: Week of 8/25/2014

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