EPA Will Not Require Financial Assurances From Electric Power Sector : Clean Energy Law Report : Renewable Energy Lawyer and Environmental Law Attorney : Latham & Watkins Law Firm

Go to Source July 16, 2019

EPA’s decision to forego financial requirements will likely face opposition by eNGOs.

By Claudia M. O’Brien and Stacey L. VanBelleghem

On July 2, 2019, the US Environmental Protection Agency (EPA) published its proposed decision not to impose new financial responsibility requirements on the Electric Power Generation, Transmission, and Distribution industry under Section 108(b) of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), following nearly a decade of litigation, stakeholder input, and EPA assessment.

Section 108(b) and EPA’s Path to This Decision

CERLCA imposes a joint and several liability scheme that holds certain entities (e.g., certain owners and operators, generators, arrangers, and transporters of hazardous substances) liable for the costs or damages associated with environmental remediation. Section 108(b) of CERCLA authorizes EPA^[i] to develop regulations requiring owners or operators of certain “classes of facilities [to] establish and maintain evidence of financial responsibility consistent with the degree and duration of risk associated with the production, transportation, treatment, storage, or disposal of hazardous substances.” Section 108(b)(2) identifies factors to consider to determine the level of financial assurances necessary in light of the level of risk. These factors include:  “the payment experience of the [Hazardous Substance Superfund], commercial insurers, courts settlements and judgments, and voluntary claims satisfaction.”

EPA’s electric power sector proposal follows nearly ten years of litigation filed by environmental non-governmental organizations (eNGOs) and resulting court-ordered EPA rulemaking. Pursuant to court order, EPA must finalize this regulation by December 2, 2020.

EPA’s Interpretation of Its Authority

EPA’s first rulemaking under Section 108(b), for the Hardrock Mining sector, was not completed until 2018, so minimal precedent exists under Section 108(b). Moreover, pending litigation challenging EPA’s 2018 findings creates uncertainty regarding how a court will view EPA’s authority under this provision. The July 2019 notice asserts that CERCLA confers significant discretion on the agency. Although the statute requires EPA to determine the level of financial responsibility necessary to protect against the level of risk, it imposes no particular methodology for that determination. EPA also takes the position that CERCLA’s list of factors is not exhaustive and that the statute is silent on how EPA should weigh the factors. Thus, EPA’s analysis relies on several additional factors:

• Other federal financial responsibility requirements
• State law requirements
• Modern conditions at facilities rather than legacy practices or conditions

EPA’s Process and Rationale

EPA reviewed current industry practices for operational and decommissioning materials and wastes to evaluate the types of hazardous materials used and released by the electric power sector. EPA also looked at the financial health of the industry, cleanups in the sector, federal and state regulatory requirements governing releases of hazardous substances in the sector, and voluntary practices.

EPA made several interesting findings, including:

• Financial Stability of Electric Power Sector: EPA explained that financial risk varies among different types of electric power entities (federally-owned, publicly-owned, regulated, and merchant). According to EPA, federally-owned facilities present extremely low risk of default on environmental liabilities, while publicly-owned utilities present a low risk of bankruptcy because of financial reporting and government oversight. EPA also found that regulated utilities pose low risk because they have reasonable opportunity to recover necessary and prudent costs through rate regulation — generally including environmental costs. EPA acknowledged, however, that merchant generators’ performance of environmental cleanup is more susceptible to market forces and a company’s ability to pay. In particular, EPA identified high dependence on coal and nuclear, and rapid consolidation of the sector through mergers and acquisitions as risk areas. EPA acknowledged recent high-profile bankruptcies in the sector, but asserted that the sector as a whole experiences less bankruptcy than other industries. EPA also stated that debtors have retained environmental liability in most bankruptcies in the power sector and, in any event, remain subject to environmental regulations where plants are still operational. EPA therefore concluded that the electric power industry overall is financially stable, pointing to diversified fuel sources and vertical integration.
• “Prevalent Sources of Risk”: EPA identified the most prevalent sources of risk as:
  • Groundwater contamination from unlined or leaking Coal Combustion Residual (CCR) surface impoundments or landfills
  • Breaches of dikes
  • Collapse of dry ash stacks
  • Contamination from Polychlorinated biphenyls (PCBs) and asbestos
• CERCLA Cleanups: EPA looked at taxpayer-funded CERCLA cleanup in the sector to evaluate the nature and extent of risks. Consistent with EPA’s current interpretation of its Section 108(b) authority, the agency screened out any sites where release or cleanup occurred before 1980, finding that these sites were not within the modern regulatory framework. EPA also screened out potentially responsible party (PRP) Performed Construction sites because private parties in those instances paid for response actions. In its evaluation, EPA identified:
  • Four National Priority List sites, but eliminated them from further evaluation because release dates were prior to 1980 or the federal government owned them
  • One Superfund Alternative Site, but did not include it in this assessment because the site reached a state of no further action and the PRP covered the costs
  • 24 non-National Priority List CERCLA sites, and only two of those sites had releases post 1980 and required taxpayer-funded expenditures

Thus, in this evaluation of CERCLA cleanups, EPA concluded that two out of 10,330 establishments in the industry involved significant costs covered by the Hazardous Substance Superfund in the modern regulatory framework. EPA observed that coal fired plants have presented a minimal impact on Superfund resources to date.

• CCR Rule Damage Cases: EPA also reviewed the CCR damage cases evaluated for the agency’s 2015 CCR Rule. These included documented evidence of CCR-caused “proven damage” in 17 groundwater and 10 surface water contamination cases. EPA eliminated from further evaluation 17 of those 27 CCR cases as having occurred before 1980. EPA also ruled out the remaining 10 based on the promulgation of the CCR rule, finding that the rule was specifically designed to address risks from CCR disposal. EPA explained that “[i]n any cases where releases might occur, the 2015 CCR Rule includes both closure and corrective action provisions that could be used to remedy those releases.”

Interestingly, EPA noted that the CCR Rule has not yet been fully implemented. EPA points to the CCR Rule’s groundwater monitoring and corrective action program as an example of the CCR Rule already providing “meaningful protection.” However EPA acknowledged that “[b]ased on information made publicly available by electric utilities, current groundwater monitoring results show that a significant percentage of utilities will need to implement the rule’s corrective action program.” Because the corrective action responses are not yet underway, EPA could not yet fully discern whether taxpayer cleanup may result. EPA noted that the CCR Rule did not include financial assurance requirements, but that EPA committed to continue to investigate financial responsibility requirements under other statutes. EPA expects a significant percentage of surface impoundments to begin to close in coming years.

What Does This Mean for the Electric Power Sector?

A final EPA decision not to require evidence of financial responsibility for the Electric Power Generation, Transmission, and Distribution industry would essentially codify the status quo, as there are no current financial assurance requirements for this sector.  However, any such decision will almost certainly be litigated by the eNGOs who are advocating for financial assurance obligations for this and other sectors under Section 108(b). Indeed, these eNGO groups are currently challenging EPA’s decision not to impose financial responsibility requirements for the Hardrock Mining sector. Opponents of the rule could focus their challenge on, for example, EPA’s statements regarding the financial stability of the electric power sector and its reliance on the CCR rule regulatory requirements as a basis for not imposing requirements on this sector. Given that CCR-required corrective action is not fully underway, findings from that experience could serve as fodder for litigation.

To the extent that future developments related to the financial stability of the sector or EPA’s experience related to CCR rule corrective action measures subsequently call into question EPA’s current findings, this could provide support for a future administration to revisit the decision.

Importantly, even if EPA does not impose financial assurance requirements under Section 108(b), the agency retains general enforcement authority under CERCLA and other statutes under which EPA could impose liability on this sector, including the Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, or the Toxic Substances Control Act.

What’s Next?

EPA will take public comment on the proposed decision for 60 days after the notice is published in the Federal Register. Per a court-ordered schedule, EPA must issue a notice of final decision regarding the Electric Power Generation, Transmission, and Distribution industry Section 108(b) requirements by December 2, 2020.

^[i] The statute authorizes the President to carry out this responsibility, but it has long been delegated to EPA by Executive Order.