Indianapolis Power & Light Co. v. U.S. E.P.A., 93-1197

• Decision Date: 23 June 1995
• Docket Number: No. 93-1197,93-1197
• Citation: 58 F.3d 643
• Parties: , 313 U.S.App.D.C. 83, 64 USLW 2063, 25 Envtl. L. Rep. 21,217 INDIANAPOLIS POWER & LIGHT COMPANY, Petitioner, v. UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, Respondent, Environmental Defense Fund, et al., Intervenors.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 643

58 F.3d 643

41 ERC 1097, 313 U.S.App.D.C. 83, 64

USLW 2063,

25 Envtl. L. Rep. 21,217

INDIANAPOLIS POWER & LIGHT COMPANY, Petitioner, v. UNITED STATES ENVIRONMENTAL PROTECTION AGENCY, Respondent, Environmental Defense Fund, et al., Intervenors.

No. 93-1197.

United States Court of Appeals, District of Columbia Circuit.

Argued May 18, 1995.

Decided June 23, 1995.

Stephen E. Roady, argued the cause, for petitioner. On brief were Thomas E. Starnes and Bryan G. Tabler.

Patricia Ross McCubbin, Atty., Dept. of Justice, argued the cause, for respondent. On brief were Lois J. Schiffer, Asst. Atty. Gen., Patricia A. Embrey, Atty., Dept. of Justice, and Alan W. Eckert, Associate Gen. Counsel, E.P.A.

David G. Hawkins, entered an appearance, for intervenors Natural Resources Defense Council, Inc. and Adirondack Council.

Howard I. Fox, entered an appearance, for intervenor Environmental Defense Fund.

Before: SILBERMAN, SENTELLE and HENDERSON, Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

Separate concurring opinion filed by Circuit Judge SENTELLE.

KAREN LeCRAFT HENDERSON, Circuit Judge:

Petitioner Indianapolis Power & Light Company (IPL) challenges regulations promulgated by the Environmental Protection Agency (EPA) pursuant to the acid rain program begun under 42 U.S.C. Secs. 7651-7651o (Clean Air Act). IPL argues that the regulations relating to the calculation and allocation of "extension allowances" should allow for the adjustment of a utility unit's 1988-1989 emissions data if the unit was out of operation for an extended period during those two years. Because the Clean Air Act is silent on the issue of adjusting a utility unit's 1988-1989 emissions data and the EPA's interpretation is permissible, we deny IPL's petition for review.

I. Background

Title IV of the Clean Air Act establishes an acid rain program to reduce emissions of sulfur dioxide and nitrogen oxides, the primary precursors of acid rain. See 42 U.S.C. Secs. 7651-7651o. Title IV imposes a national cap of 8.90 million tons of sulfur dioxide emissions per year on electric utilities. 42 U.S.C. Secs. 7651b(a)(1), 7651d(a)(3). The emissions reductions are to occur in two phases. In Phase I, at issue here, 110 utilities with the largest coal-fired utility electric generating units must reduce their emissions to 2.50 pounds of sulfur dioxide per million British thermal units (Btus) of fuel consumed by each power-generating unit in the "baseline" years of 1985, 1986 and 1987. 42 U.S.C. Sec. 7651c. ¹ Each utility unit is allocated a number of fully marketable pollution allowances so that it may emit sulfur dioxide at this level. 42 U.S.C. Sec. 7651c. Each allowance authorizes the emission of one ton of sulfur dioxide during one calendar year and may be bought, sold, traded or banked for future use or resale. 42 U.S.C. Secs. 7651a(3), 7651b(b).

Beginning in 1995, the emissions from each Phase I unit may not exceed the number of allowances that unit holds. 42 U.S.C. Sec. 7651c(a). Emissions from a Phase I unit that exceed the number of allowances allocated to it are unlawful and are subject to various fines and penalties. 42 U.S.C. Secs. 7651b(g), 7651j. To comply with Title IV requirements and ensure that its emissions do not exceed its allowances, a utility has three options. A utility can switch from coal with a high sulfur content to low-sulfur coal, purchase allowances from other utilities or install costly sulfur dioxide control technology known as "scrubbers." Congress encouraged the installation of scrubbers by establishing an extension allowance program. 42 U.S.C. Sec. 7651c(d).

Under the program, utilities that install and operate scrubbers on their Phase I units to reduce sulfur dioxide emissions qualify for "extension allowances" in addition to the allowances initially allocated. 42 U.S.C. Sec. 7651c. The EPA is authorized to "approve an extension proposal in whole or in part, and with such modifications or conditions as may be necessary, consistent with the orderly functioning of the allowance system...." 42 U.S.C. Sec. 7651c(d)(3). Utilities whose extension proposals are approved are not exempt from the Title IV prohibition on emissions in excess of allowances. Instead, the EPA raises their emissions limitation and grants a corresponding number of extension allowances for a two-year period according to the following formula:

[T]he difference between the lesser of the average annual emissions in calendar years 1988 and 1989 or the projected emissions tonnage for calendar year 1995 [and 1996] of each eligible phase I extension unit ..., and the product of the unit's baseline multiplied by an emission rate of 2.50 lbs/mmBtu, divided by 2,000.

42 U.S.C. Sec. 7651c(d)(4)(A); 40 C.F.R. Sec. 72.42(c). That is, the EPA bases the number of extension allowances on the difference between the maximum emissions level set by Congress (i.e., 2.50 pounds of sulfur dioxide per million Btus of fuel consumed by the unit in the baseline years of 1985-1987) and the lesser of the unit's expected emissions in 1995 and 1996 or its actual emissions in 1988 and 1989.

Seventeen utilities, including IPL, decided to install scrubbers and applied for extension allowances. According to the formula, the utilities were entitled to 4.0-4.5 million extension allowances. The Clean Air Act, however, capped the number of available extension allowances at 3.5 million. 42 U.S.C. Sec. 7651c(a)(2). The EPA therefore held a lottery in March 1993 to determine the selection priority for granting extension allowances to the applicants. The seventeen utilities had prepared for this eventuality, however, by entering an extension allowance pooling agreement in March 1992 (Agreement). Under the Agreement, the utilities agreed to pool the extension allowances and to re-allocate them, based in part on the formula used by the EPA, so that each applicant, regardless whether it was selected in the lottery, received a percentage of the number of allowances it would have received in the lottery had it been selected. Although IPL was not selected in the lottery it nonetheless received extension allowances under the Agreement.

IPL's Petersburg, Indiana Unit # 2, a Phase I unit, was out of operation from October 1, 1988, through April 6, 1989, for unexpected major repairs. As a result, the unit's sulfur dioxide emissions during the two-year period were lower than usual. ² According to the EPA's calculations using actual emissions data for 1988 and 1989, Petersburg Unit # 2 is entitled to approximately 14,000 extension allowances. According to IPL's calculations, however, if the emissions data were normalized or annualized to reflect what emissions would have been in 1988 and 1989 but for the outage, Petersburg Unit # 2 would be entitled to at least 20,000 additional extension allowances. Consequently, the number of extension allowances to which IPL is entitled under the EPA formula, and thus under the Agreement, varies dramatically according to whether actual or normalized emissions data for 1988 and 1989 are used.

The EPA considered the issue of adjustments to emissions data in its proposed rulemaking. 56 Fed.Reg. 63,002 (1991) (Joint Appendix (JA) 2). In December 1991, in requesting comment "on the appropriateness of allowing an adjustment in the limited situations where a forced outage occurred," the EPA explained that allowing adjustments was not warranted for several reasons:

First, the Phase I Extension is voluntary. If a utility finds that it is not favorable to apply for a Phase I Extension, it can chose [sic] another compliance option. Second, the information is historical, actual data reported by the utility itself and the statute does not provide for adjustment.... Third, the Agency is attempting to respond to industry's need for certainty at an early date regarding allocation of allowances from the Phase I Extension reserve. Allowing an opportunity for adjustments to be made to essential historical data would delay certainty.

56 Fed.Reg. 63,017 (JA 9). The EPA did not allow for adjustments in the final rules issued on January 11, 1993. 58 Fed.Reg. 3,590, 3,669 (1993) (JA 57, 63); 40 C.F.R. Sec. 72.42(c)(3) (JA 63). ³ In the final acid rain permit issued to IPL, the EPA affirmed that it intended to allocate allowances without adjusting the emissions data to account for the fact that Petersburg Unit # 2 was out of operation for six months in 1988 and 1989. IPL petitions the court to vacate the regulations which do not provide for adjustments and to remand the matter to the EPA with instructions to adjust the emissions data for Petersburg Unit # 2.

II. Discussion

IPL makes three principal arguments. First, it claims that the Clean Air Act obliges the EPA to adjust a utility unit's 1988-1989 emissions data to account for an unexpected prolonged outage. Second, IPL argues that even if the statute is silent on the issue, the EPA mistakenly interpreted the statute as prohibiting it from adjusting the 1988-1989 emissions data. Finally, IPL maintains that the EPA interpretation is unreasonable. We reject each argument. We may set aside the regulations promulgated pursuant to the acid rain program only if they are:

(A) arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law;

(B) contrary to constitutional right, power, privilege, or immunity;

(C) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right; or

(D) without observance of procedure required by law....

42 U.S.C. Secs. 7607(d)(9), 7607(d)(1)(F). The EPA's interpretation of the Clean Air Act must be reviewed under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) (Chevron ). Applying these standards, we uphold the EPA regulations.

The Clean Air Act provides that extension allowances are to be allocated in part on the "average annual emissions in calendar years 198...