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Northwest Energy & Environmental Law Blog

Ashley II Holdings Require Caution

By Larry Burke on Posted in Environmental Quality, Land Use

On April 4, 2013, the Fourth Circuit Court of Appeals issued a much anticipated decision in PCS Nitrogen, Inc. v. Ashley II of Charleston LLC, No. 11-1662 (4th Cir. April 4, 2013) (Ashley II).

This wide-ranging decision is most notable for requiring buyers to be very careful if they wish to avail themselves to the protections of the Bona Fide Prospective Purchaser (“BFPP”) defense. But there are three other cautionary Ashley II rulings:

1.         A party may be liable for hazardous waste disposal even if it just moved around clean dirt.  In Ashley, a developer was found liable because it could not prove that it did not move contaminated dirt when it graded portions of a contaminated property.

Lesson:  Sampling is important – even in clean areas – before you disturb soil on a contaminated property.

2.         Leasing property which contains contamination below cleanup levels may not protect the lessee from liability.  One of the parties leased a discrete portion of a facility not included in the original contribution claim.  However, the court found that a “facility” includes those properties that are “part of a pattern of widespread contamination.”  That lessee was found liable for a portion of the cleanup costs for the entire facility.

Lesson:  When evaluating a lease, it is important to consider the entire history of contamination, as well as the levels.

3.         An Asset Purchase Agreement can be read to be a stock sale if not carefully and consistently drafted throughout.  A buyer can inherit all liabilities of the company in a stock sale, even liabilities resulting from assets sold before the transaction.

Lesson:  Business attorneys and environmental attorneys should work closely to achieve the intended characterization of a transaction.

Section 1603 Cash Grant Modified Annual Report Form

By Davis Wright Tremaine on Posted in Land Use

From DWT tax partner, Pamela Charles:

Recipients of Section 1603 cash grants are required by the Terms and Conditions of the program to provide annual project performance reports to the Treasury Department for the first five years after the project is placed in service.  Beginning May 13, 2013, the Treasury Department will have a modified annual report form for its online reporting system.  This modified annual report will include the following new questions:

  • In section 2, all awardees must answer a question about whether the owner of the energy property has filed for bankruptcy.
  • In section 4, all awardees must answer questions about whether the energy property has stopped producing and any actions taken to resume production.
  • In section 1, awardees who have sold the energy property to an eligible purchaser must upload the written agreement between the awardee and the eligible purchaser to be jointly liable for any recapture.

For more information, please click here.

IRS Revises Guidance on “Beginning of Construction” for ATRA 2012 Tax Credit Extensions

By Davis Wright Tremaine on Posted in Renewables

From DWT tax partner, Pamela Charles:

Last month, the IRS issued guidance (Notice 2013-29) on satisfying the new “beginning of construction” requirement for the renewable energy production tax credit under Code Section 45 (PTC) and energy investment tax credit under Code Section 48 (ITC).  The IRS has revised Notice 2013-29 to provide guidance clarifying the definition of a “binding written contract,” which can be relevant for both methods of establishing the beginning of construction – performing physical work of a significant nature or satisfying the safe harbor.  (See previous blog post from April 17, 2013).

Do We Really Have A Section 404 Permit?

By Scott Broadwell on Posted in EPA, Water Law

The United States Court of Appeals for the District of Columbia Circuit issued an opinion on April 23 in Mingo Logan Coal Co. v. United States Environmental Protection Agency upholding the Environmental Protection Agency’s (“EPA”) invalidation of a discharge permit issued four years prior by the United States Army Corps of Engineers (“USACE”).  The decision effectively creates uncertainty for permittees under Section 404 of the Clean Water Act (“CWA”), which provides for the discharge of dredged or fill material into waters of the United States.  Under the D.C. Circuit’s precedent, a permtitee will have to recognize a continued risk to investment in any project requiring a Section 404 discharge permit even after a permit has issued, even where EPA itself was involved in and approved issuance of the permit in the first instance.

The Mingo Logan Coal Co. dispute involved a Section 404 permit issued by USACE to cover the discharge of waste generated in conjunction with mountaintop coal mining in West Virginia into three separate streams.  Section 404 of the CWA prohibits the discharge of dredged or fill material into waters of the United States without a permit issued by the USACE.  In reviewing and issuing a permit, USACE will review a proposed project and alternatives to the proposal, determining whether a permittee has taken steps to avoid wetland impacts, minimized potential wetland impacts, and provided compensation for unavoidable impacts. While USACE administers the day-to-day Section 404 program, EPA develops and interprets the policy and criteria employed by USACE in its evaluation of permit applications and retains the authority to prohibit, deny, or restrict the use of any defined area as a disposal site. 33 U.S.C. § 1344(b) & (c).

EPA’s authority to prohibit or deny a permit, overriding USACE’s permitting authority, arises under Section 404(c) of the CWA and is generally referred to as EPA’s “veto authority.”  EPA may initiate the 404(c) veto process if it determines that the impact of a permit presents “unacceptable adverse effects.”  40 C.F.R. § 231.2(e).  EPA may exercise its Section 404(c) authority before a permit is applied for, while an application is pending, or after a permit has been issued. 40 C.F.R. § 231.1(c).  EPA’s use of its veto authority is rare, with only 13 examples despite USACE’s processing approximately 80,000 permits per year.  See EPA, “Clean Water Act, Section 404(c) ‘Veto Authority.’”

In Mingo Logan Coal Co., Mingo Logan’s predecessor applied to USACE for a Section 404 permit.  EPA expressed concerns at the time regarding the environmental impacts of the proposed  mountaintop mining, but declined to veto issuance of the permit.  USACE issued a discharge permit in 2007, effective through 2031.  In 2009, EPA wrote to USACE and requested that USACE exercise its discretion to revoke the permit based on “new information and circumstances” and the project’s “potential to degrade downstream water quality.”  USACE declined to do so, after which EPA initiated the public process required to exercise its veto authority.  EPA issued its final determination to veto Mingo Logan’s permit in 2011, leading to Mingo Logan’s immediate challenge to EPA’s authority in the courts.

On summary judgment, the District Court for the District of Columbia held that invalidating an existing permit exceeded EPA’s authority under the CWA.  On appeal, Mingo Logan argued in support of the lower court that the statutory language of the CWA required EPA to issue its veto pre-permit, that allowing a veto to an existing permit conflicted with the CWA as a whole and undercut statutory permit shields designed to create certainty and finality, and that the legislative history of the CWA showed that Congress intended EPA to act under Section 404(c) prior to permit issuance.  The D.C. Circuit rejected these arguments, relying in large part on the plain text of the CWA, which allows EPA to prohibit, restrict, or withdraw a specification “whenever” EPA finds unacceptable adverse effects.  33 U.S.C. § 1344(c).

The case was ultimately remanded to the district court for further consideration as to whether EPA’s post-permit decision to veto was arbitrary and capricious under the Administrative Procedure Act.

 

City of Seattle and King County Agree to Major Upgrades to Settle Discharge Violations

By Lynn T. Manolopoulos on Posted in Environmental Quality, EPA, Water Law

To settle an enforcement action by the U.S. Environmental Protection Agency (“EPA”) and the State of Washington (“State”), King County and the City of Seattle have agreed to complete major upgrades to their local sewage and combined stormwater collection, piping and treatment systems to address allegedly illegal discharges.  In addition, the County and City have agreed to pay civil penalties of $400,000 and $350,000 respectively.  On April 16, 2013, the parties filed a Consent Decree in Federal District Court, starting the clock on a 30 day period during which the public can comment on the proposed settlement.

The settlement stems from allegations that the County discharged approximately 900 million gallons of raw sewage to waters of the U.S. each year between 2006 and 2010.  EPA and the State also allege the County exceeded the specific numeric limitations in its National Pollutant Discharge Elimination System (“NPDES”) permit and allowed wastewater to bypass secondary treatment.  The City is alleged to have discharged 200 million gallons of raw sewage each year during the same time frame.

This settlement is part of the continuing efforts by EPA and State agencies to address contaminant sources to our nation’s waterways.  Addressing municipal contaminant sources has been an important component of efforts to clean up our rivers and streams.

For more information on EPA and the City’s settlement with King County and the City of Seattle, including copies of the Consent Decrees, click here.

Can We Please Talk About Outcomes for a Change???

By Richard Glick on Posted in EPA, Water Law

I get it that environmental groups place strict compliance with regulatory controls at a premium.  After all, the standards are designed to be protective of the resource, and they are The Law, which must be obeyed.

But I sometimes find it dismaying when people conflate immediate, measured and guaranteed compliance with ecological outcomes.  They are not the same.  I have been in settlement discussions in which I propose that we first come to agreement on what’s best for the resource, and then figure out how to make that fit into the regulatory framework, but have had few takers.  The number is the number is the number.

A recent example arises in the context of water quality trading.  EPA policy promotes alternative means of achieving regulatory compliance that promise environmental results at least as good as conventional, engineered approaches, and at lower cost.  For example, if discharge water temperatures are the problem, riparian shade tree planting could substitute for mechanical chillers.  Of course, measurable cooling would be deferred by many years while the trees grow, but the ancillary benefits of watershed restoration to habitat and ecosystem function are intuitive and compelling.  This approach is supported by academia, government and many in the NGO community.  Some though are skeptical.

The City of Medford, Oregon, is embarking on a riparian vegetation approach to reduce temperatures at its wastewater treatment outfall, in full cooperation with Oregon DEQ.  A regional NGO, Northwest Environmental Advocates, however, has raised objections.  In a letter dated March 15, 2013, NEA asks EPA to look into DEQ’s implementation of the water quality trading policy with reference to Medford.  NEA questions allowance of “credits” for watershed restoration work that upstream nonpoint sources would have to do anyway, and asserts that no credits should be allowed until the new trees actually yield shade.

The problem is that the upstream nonpoint sources are not obligated by law to restore riparian vegetation, they just need to adopt best management practices to avoid further degradation.  More to the point, restoration of the watershed will simply not occur without the funding provided by a point source with a regulatory problem to solve, such as Medford.  By denying the City credits, the incentive to use a watershed approach disappears.  Similarly, if no credits are awarded until the trees are grown, funds that could go toward watershed restoration will be diverted to engineered controls on temperature.  As DEQ Director Dick Pedersen so aptly puts it, “if we ever build a chiller at the expense of ecosystems, we’ve failed.”

IRS Guidance on “Beginning of Construction” for ATRA 2012 Tax Credit Extensions

By Davis Wright Tremaine on Posted in Renewables

DWT tax partner Pamela Charles reports:

The IRS has issued guidance (Notice 2013-29) on satisfying the new “beginning of construction” requirement for the renewable energy production tax credit under Code Section 45 (PTC) and energy investment tax credit under Code Section 48 (ITC).  These credits are available to qualifying projects if construction of the facility begins before January 1, 2014.

Notice 2013-29 provides two methods for establishing that construction of a qualified facility has begun:  (1) by starting physical work of a significant nature or (2) meeting a safe harbor.

Physical Work of a Significant Nature:  This is a facts and circumstances test that takes into account both on-site and off-site work performed by the taxpayer and by other persons under a binding written contract (entered into before the construction or manufacturing of the property  for use in the taxpayer’s trade or business or production of income begins) on tangible personal property and other tangible property used as an integral part of the activity performed by the facility.  The IRS will closely scrutinize any project that does not maintain a continuous program of construction.  Preliminary activities (e.g., planning, securing financing, clearing a site) are not taken into account and neither is work on components that are or are normally held in a vendor’s inventory.  A facility generally includes all components of property that are functionally interdependent, and for purposes of determining whether construction of a facility has begun, multiple facilities that are operated as part of a single project (a facts and circumstances determination) will be treated as a single facility.

Safe Harbor:  Construction of a facility will be considered as having begun before January 1, 2014 if:  (1) a taxpayer pays or incurs 5% or more of the total cost of the facility before January 1, 2014 and (2) thereafter, the taxpayer makes continuous efforts to advance towards completion of the facility (a facts and circumstances determination).  All costs properly included in the depreciable basis of the facility are taken into account.  Costs incurred with respect to the property by another person under a binding written contract are deemed incurred by the taxpayer when they are incurred by the other person.  If the total cost of a facility that is a single project comprised of multiple facilities exceeds its anticipated cost, the safe harbor will be satisfied with respect to some, but not all, of the individual facilities comprising the single project as long as the total cost of those individual facilities is not more than 20-times greater than the amount the taxpayer paid or incurred before January 1, 2014.

States Consider Legislative Proposals Regulating Toxic Chemicals in Consumer Products

By Peter Sergienko on Posted in Health and Safety

There is high and growing concern among the general public regarding adverse health effects from exposures to toxic chemicals in consumer products, especially from exposures to children. These concerns initially came to a head in the mid-2000s, resulting in passage of the federal Consumer Product Safety Improvement Act of 2008 (CPSIA). CPSIA imposed numerical limits on lead and certain phthalates in children’s products along with mandatory testing and conformity certifications. These requirements went into effect earlier this year following a lengthy rulemaking process.

Being limited to lead and phthalates, CPSIA is not structured as a comprehensive statute designed to regulate additional chemicals when new information concerning toxicity or adverse health effects from exposures comes to light. Given CPSIA’s limited scope, a few states have adopted statutes creating a comprehensive process to identify and regulate chemicals of concern. The statutes are structurally similar, assigning roles to both product manufacturers and state agencies to identify and maintain lists of chemicals of concern and to disclose relevant information to the state and consumers. The statutes also grant states legal authority to limit the use of chemicals of concern in children’s or consumer products consistent with standards that are protective of human health. California, Washington, Maine, and Minnesota currently have such statutes.

Many state legislatures are considering similar legislation in their 2013 sessions. Alaska, Connecticut, Massachusetts, Nevada, New York, Oregon, and Vermont have all proposed legislation generally following the identification, listing, evaluation, and restriction formula in the existing state statutes. Idaho and Florida are considering statutes requiring identification of chemicals of concern only, encouraging voluntary efforts to find alternatives to chemicals of concern when feasible.

In addition to comprehensive statutes, many states are evaluating legislation to ban, limit, or require disclosure of specific chemicals known to cause adverse health effects. For example, the following states are currently considering some sort of bisphenol A (BPA) ban in food and drink containers for children (and in some states, in all food and drink containers, in toys, and in retail receipts): Arizona, Connecticut, Hawaii, Kentucky, Massachusetts, Maine, New Jersey, New York, Pennsylvania, Tennessee, Texas, and West Virginia. Many states are considering bans, limits, or disclosure requirements in the use of flame retardants and metals such as cadmium and lead in consumer and children’s products. Finally a few states are considering legislation requiring disclosure of cancer-causing or other toxic chemicals in cosmetics, which would be novel law if passed.

Manufacturers are ill-served by a system of varied state requirements that, essentially, requires manufacturers to continually identify and comply with the most stringent state standards applicable to their products. The Maryland house has proposed a joint resolution recognizing the problems inherent in a state-by-state system, expressing support for reform of the Toxic Substances Control Act to create a comprehensive federal system to identify and regulate toxic chemicals in children’s and consumer products effectively. Given the existing state statutes and the likelihood of additional states adopting similar laws this year, the patchwork system appears to be here and in place until the federal government steps in. Manufacturers and retailers will be better served by a balanced federal approach, which will avoid all of the problems inherent in a hodgepodge system of different state standards.

Links to websites linking to existing state statutes and regulations and to pending state statutes in turn are here and here.

Further information concerning CPSIA is available here.

BLM Fails to Review Fracking Impacts of Oil & Gas Leases in California

By Davis Wright Tremaine on Posted in NEPA, Oil & Gas

From Allison A. Davis of our San Francisco Office:

The U.S. District Court in San Jose recently found that the Bureau of Land Management (BLM) failed to adequately review the environmental impacts of fracking on four oil and gas leases it recently auctioned off in the Monterey Shale area of Monterey and Fresno counties in California.  As a result, all work on the wells has stopped until the environmental impacts can be assessed.

To read the full decision, please click here.

Fracking, a technique used since the 1940s, involves creating fractures in rock formations by injecting fluid into cracks to allow more oil and gas to flow into the wellbore, where it can then be extracted.  This process can make an otherwise uneconomic well viable.  Fracking has been met with controversy in many areas of the country,  including New York where a ban on fracking has been attempted.

The court held that BLM “violated NEPA (National Environmental Policy Act) in its environmental assessment of the leases by unreasonably relying on an earlier single-well development scenario” because the BLM did not consider the environment effects of fracking.  The judge did not go as far as plaintiffs Center for Biological Diversity and Sierra Club wanted, finding that the leases did not violate the Mineral Leasing Act of 1920.

It seems likely that if the BLM or the leasees deem the leases to be worth conducting an environmental impact report, that the fracking will be able to commence.  That is sure to bring the activists back out to protest as they did last December when the leases were first auctioned off.

Regulatory Issues Cause ConocoPhillips to Join Shell Oil in Suspending its Drilling Program in Arctic Waters off Alaska

By Mike Jungreis on Posted in Oil & Gas

Today, ConocoPhillips announced that it is suspending its drilling program in the Chukchi Sea off the northwest coast of Alaska for 2014, due to uncertainty regarding the changing regulatory requirements.

“While we are confident in our own expertise and ability to safely conduct offshore Arctic operations, we believe that more time is needed to ensure that all regulatory stakeholders are aligned,” said Trond-Erik Johansen, President, ConocoPhillips Alaska.  The company stated that it was unwilling to commit the significant resources necessary for the drilling program while regulatory requirements were still in flux.  The Federal Bureau of Ocean Energy Management estimates that the Chukchi Sea contains 12 billion barrels of recoverable oil.

ConocoPhillips thus joins Shell Oil in suspending its arctic offshore drilling program.  Shell, which has leases in the adjacent Beaufort Sea, suspended its drilling program earlier this year.

Alaska Governor Sean Parnell released the following statement in response to ConocoPhillips’ announcement that it will halt its 2014 Outer Continental Shelf (OCS) exploration drilling plan:

“I am disappointed that the federal government’s unstable regulatory environment has led Conoco to make this business decision,” Governor Parnell said.  “The federal government’s inability to provide regulatory certainty is once again reducing jobs and economic opportunities for Alaskans.”