Latham's Clean Energy Law Report

Court Reissues LCFS Opinion Per ARB Petition For Reconsideration

Posted in Finance and project development, Permitting

By Joshua T. Bledsoe and Max Friedman

As discussed in a previous post, the California Court of Appeal for the Fifth Appellate District (Court of Appeal) ruled on April 10, 2017 that the California Air Resources Board (ARB) had failed to properly follow a writ of peremptory mandate (the Writ) requiring ARB to remedy violations of the California Environmental Quality Act (CEQA) that occurred during adoption of the original Low Carbon Fuel Standard (LCFS). The Court of Appeal largely agreed with the petitioner, POET, LLC (POET), a South Dakota-based ethanol producer, holding that ARB had failed to comply with CEQA’s requirement that it analyze the degree to which nitrogen oxide (NOx) emissions from biodiesel fuels had been and would be impacted by the implementation of the LCFS. Indeed, the Court of Appeal found that ARB had acted in bad faith in selecting a definition of the “CEQA project” that failed to account for NOx emissions attributable to the original LCFS.

As a result, the Court of Appeal directed the Fresno County Superior Court (Superior Court) to deny ARB’s request for dismissal of the Writ and to set aside its 2015 approval of the CEQA analysis regarding NOx emissions from biodiesel until ARB had conducted a revised analysis. The Court of Appeal also froze the carbon intensity (CI) targets for diesel fuel at 2017 levels until ARB had completed its revised NOx assessment. The Superior Court implemented the Court of Appeal’s ruling on April 20, 2017, vacating its prior discharge of the Writ and modifying the reissued Writ as required by the higher court. However, on April 28, 2017 the Superior Court vacated its April 20th order as premature due to subsequent filings by ARB.

On April 25, 2017, ARB and intervenor-respondent the Natural Resources Defense Council (NRDC, and together, Respondents) filed a petition with the Court of Appeal requesting rehearing and modification of its prior ruling. While asserting that ARB already had commenced its work on the revised NOx analysis, Respondents requested that the Court of Appeal make modifications to its prior ruling to clarify alleged ambiguities. Respondents requested that the Court of Appeal clarify which specific provisions of the LCFS regulations the Court of Appeal was targeting to effectuate freezing the diesel CI mandates at 2017 levels. ARB interpreted the freeze to apply to Table 2 of Section 95484(c) of the LCFS regulations, which sets the CI targets applicable to diesel fuel and its substitutes, but wished to confirm its interpretation so as to avoid future litigation over the Court of Appeal’s intent.

Second, Respondents sought clarification that the Court of Appeal did not intend to require an agency amending any regulation to define the “CEQA project” as including the original regulation, potentially even when the original regulation had gone unchallenged or been upheld. ARB understood the Court of Appeal to mean that the project included the original LCFS only for those portions of the CEQA analysis addressing NOx impacts. ARB sought to confirm that the Court of Appeal did not intend to interpret the term “project” so broadly, either for all portions of this case or for future agency actions. ARB argued that such a broad reading could significantly increase the time and expense necessary for agencies to revise even unchallenged regulations, with ambiguity increasing the likelihood of future CEQA litigation on this issue.

Finally, Respondents attempted to push back against the Court of Appeal’s finding that ARB had not acted in good faith when conducting its revised CEQA process with respect to NOx emissions. ARB argued that it had not previously been obvious that the instructions in the Writ contemplated an interpretation of the “project” as including the original regulation, and that ARB had acted reasonably, transparently, and thoroughly in accordance with its understanding of the Writ, without receiving any objections to its approach until after the fact.

On May 5, 2017, the Court of Appeal granted Respondents’ petition for rehearing and directed POET and other Petitioners to respond to Respondents’ brief on the proposed modifications. Petitioners filed their response on May 16, 2017, arguing that the Court of Appeal should deny the modifications sought by Respondents. POET disputed ARB’s reading that the Court intended the “project” to encompass the original LCFS regulation only for purposes of the NOx emissions section, rather than for the entire LCFS regulatory regime. POET suggested that the Court of Appeal’s intent was, in fact, to assert that the project included both the original and revised LCFS regulations (as well as the 2015 Alternative Diesel Fuels (ADF) regulations) for all purposes. Petitioners suggested that ARB’s interpretation was contrary to established CEQA precedent, constituted a major revision of the ruling, and should be rejected.

Similarly, Petitioners disputed ARB’s claims that it had acted in good faith and called upon the Court of Appeal to reject Respondents’ request that the bad faith portion of the opinion be struck. Petitioners challenged ARB’s argument that its interpretation of “project” was reasonable due to the novel nature of the Court of Appeal’s application of the term to a regulatory scheme; POET suggested that there was nothing novel or ambiguous about the situation. Petitioners also contested ARB’s contention that it had provided early notice of its narrow definition of the CEQA project and that it had disclosed the quantity of earlier NOx emissions in its Draft Environmental Assessment. POET did not oppose Respondents’ request for clarification regarding identification of the particular regulations to freeze, but suggested that clarification was unnecessary.

On May 24, 2017, the Court of Appeal filed an order stating that no further briefing or oral argument would be required, and that the matter was deemed submitted. A week later, on May 30, 2017, the Court released its revised opinion. The Court of Appeal only made a few minor modifications to its original decision. In short, the revised opinion changes little about the Court of Appeal’s original opinion, although it does provide ARB and other LCFS stakeholders with a greater degree of certainty regarding the precise meaning of certain sections of the opinion.

The Court of Appeal adopted ARB’s suggestions for clarifying that the freeze applies only to the CI standards applicable to diesel fuel and its substitutes, as set out in Table 2 of Section 95484(c) of LCFS regulations. The Court of Appeal also partially clarified its intent regarding the scope of the “CEQA project.” While the Court of Appeal did not adopt ARB’s suggested changes to the opinion, it did nod toward the agency’s concern that a broad definition of the “project” could have implications for future litigation. The Court modified one sentence, in an apparent effort to confine its definition of the project to the context of this case, stating: “Therefore, we conclude that for purposes of CEQA the activities associated with the original LCFS regulations, the 2015 LCFS regulations, and the ADF regulations constitute a single project under the circumstances of this case.”[1] This change was not nearly as expansive as what ARB had requested, but it appears to be an effort to limit the Court of Appeal’s interpretation to the facts of the case. Additionally, the Court of Appeal declined to amend its language regarding ARB’s lack of good faith in assessing NOx impacts. While the Court was willing to clarify certain ambiguities in its original opinion, it was unwilling to reconsider substantive issues, such as whether ARB had acted in deliberate bad faith.

This revised opinion pauses judicial proceedings in this particular case regarding the original LCFS (POET I), at least until ARB has completed its revised NOx analysis and seeks discharge of the reissued Writ. However, the parallel case between POET and ARB regarding the readopted LCFS (POET II) is slated for oral argument in the Superior Court on July 26, 2017. Many of the same issues litigated in POET I will be before the Superior Court in POET II court, which is why the Superior Court previously delayed oral argument until after POET I had been resolved by the Court of Appeal. While it is likely that the Superior Court in POET II will borrow from the Court of Appeal’s recent POET I ruling (indeed, some of the issues in POET II may be precluded by res judicata), there remains a real possibility that the Superior Court in POET II could upend certain other portions of the readopted LCFS regulations. This added uncertainty will not be resolved for months—or even longer if the POET II ruling is appealed.

[1] Emphasis added to indicate new text.

Proposed Amendments to Cap-and-Trade Extension Bill Could Undermine Program

Posted in Environmental and approvals, Permitting

By Bob Wyman, JP Brisson, Joshua Bledsoe, Andrew Westgate, and Brittany Dryer

On April 18, 2017, California Assembly Members Garcia, Holden, and Garcia proposed amendments to Assembly Bill No. 378 (AB 378) that are intended to extend but significantly reshape California’s Cap-and-Trade Program.[1] This post briefly summarizes the backdrop against which AB 378 has been proposed and discusses the key provisions of AB 378.


The Members initially introduced AB 378 on February 9, 2017 to “make sure social justice [and] environmental justice [are] addressed” as the California Legislature contemplates how to meet Governor Brown’s 2030 greenhouse gas (GHG) emission reduction goals, as codified in Senate Bill 32 (SB 32).[2] As discussed below, it would appear that the amendments to AB 378 would support the extension of the Cap-and-Trade Program through 2030. The amendments to AB 378, however, propose a number of fundamental changes to the Program. For example, the amendments would create individual facility GHG emissions caps and empower the California Air Resources Board (ARB) to establish “no-trade zones” and facility declining caps. These changes, taken together, would gut the flexibility that is otherwise inherent to a cap-and-trade program, convert the Program into an unwieldy command-and-control mechanism, and ultimately undermine the ability of the state to meet the SB 32 GHG emission targets in a cost-effective way. Finally, the amendments also would require ARB to adopt new criteria pollutants and air toxics emissions standards in response to ongoing concerns expressed by the Environmental Justice (EJ) Community. Continue Reading

California Court Rules Against Air Resources Board over LCFS but Preserves 2017 Status Quo

Posted in Environmental and approvals, Finance and project development

By Joshua T. Bledsoe and Max Friedman

In two recent posts, we discussed how California’s Low Carbon Fuel Standard (LCFS) had been thrown into a state of potential upheaval by two interrelated legal challenges commonly known as POET I and POET II, including a recent oral argument before the California Court of Appeal for the Fifth Appellate District (Court of Appeal) in POET I. That proceeding aimed to determine whether a lower court correctly dismissed a writ of peremptory mandate (the Writ) requiring the California Air Resources Board (ARB) to remedy violations of the California Environmental Quality Act (CEQA) that occurred during promulgation of the original LCFS regulation. ARB re-adopted the revised LCFS regulations in September 2015, but POET, LLC (POET), a South Dakota-based ethanol producer, contended that these revisions failed to properly discharge ARB’s responsibilities under the Writ.

Court Rules Against ARB over NOx Analysis

In its published April 10, 2017 opinion in POET I, the Court of Appeal largely agreed with POET, reversing the lower court’s dismissal of the Writ and holding that ARB had failed to comply with CEQA’s requirement that it analyze the degree to which nitrogen oxide (NOx) emissions from biodiesel fuels had been and would be impacted by the implementation of the LCFS rules. The Court found that ARB’s failure to properly define the scope of the project caused ARB to use an improper baseline against which NOx emissions could be measured. As a result, the Court concluded that ARB’s analysis of NOx emissions from biodiesel fuel was deficient under CEQA, and the environmental analysis was inadequate as an informational document disclosing the entirety of the project’s impacts. Continue Reading

U.S. Army Corps Reissues Fifty Existing and Two New Nationwide Permits

Posted in Energy regulatory, Environmental and approvals, Permitting

By Janice Schneider, Joel Beauvais, Stacey VanBelleghem, Jennifer Roy, and Francesca Bochner

On March 19, 2017, 52 new or reissued nationwide permits (NWPs) for discharges into “waters of the United States,” issued pursuant to Section 404(e) of the Clean Water Act (CWA) and Section 10 of the Rivers and Harbors Act went into effect. The U.S. Army Corps of Engineers (Corps) requires a Section 404 permit when development activities discharge dredged or fill materials into jurisdictional waters (i.e., “waters of the United States,” including wetlands). The NWPs – which are used to permit tens of thousands of new projects each year – cover a broad range of activities, including development of oil and gas pipelines, transmission and other utility lines, linear transportation projects, renewable energy, coal mining activities, and residential development. The Corps developed the NWPs as programmatic permits to expedite approval of specific types of activities deemed to have minimal environmental impacts. Seeking authorization under an NWP is less expensive and less time-consuming than obtaining an individual permit.

The prior NWPs were issued in March 2012 and expired on March 18, 2017. In the new NWPs, the Army Corps: (1) reissued all 50 of its existing NWPs, with revisions to twenty-seven; (2) issued two new permits; and (3) added one new general condition. The new NWPs include a grandfather provision that allows activities authorized under the 2012 NWPs that have commenced or are under contract to commence by March 18, 2017, to have until March 18, 2018, to complete the activity under the terms and conditions of the 2012 NWP. Activities that have not commenced by March 18, 2017, and/or will not be complete by March 18, 2018, must seek authorization under the new NWPs.

While the 2017 NWPs largely preserve the availability of these critical general permits without major changes, the revised permits incorporate a number of new features that may affect both new and existing projects in key industry sectors. Further, it is likely that environmental groups will challenge the NWPs in court on a number of grounds, including the National Environmental Policy Act, the Endangered Species Act, and consistency with the requirements of CWA Section 404(e). Effective implementation and successful defense of the new permits will be of critical importance for multiple sectors – including oil and gas, electric utilities, mining, and others. Latham & Watkins’ Environment, Land and Resources attorneys participated directly and intensively in the development of the new 2017 NWPs, and have substantial experience in securing and defending NWP authorizations for new projects. For further discussion of the new NWPs, including important changes to the permits and issues likely to be raised in future litigation, please see our Client Alert.

California Court of Appeals Upholds Cap-and-Trade Auctions

Posted in Energy regulatory

By Michael Romey, J.P. Brisson, Michael Dreibelbis and Andrew Westgate

Yesterday, the Court of Appeals for California’s Third Appellate District issued its decision in California Chamber of Commerce, et al., vs. State Air Resources Board, et al., upholding the district court’s decision and allowing the cap-and-trade system to remain in place. The suit was filed by business groups just prior to the state’s first auction of allowances in 2012, arguing that the sale of allowances exceeded the Air Resources Board’s authority under AB 32 and is an unconstitutional tax under Proposition 13, which requires a supermajority in the legislature to pass tax increases (AB 32 did not have such a supermajority).

In the 2-1 decision, the court held that the legislature gave broad discretion to the Air Resources Board to design a distribution system to distribute allowances, and the decision to implement auctions was a valid exercise of that discretion. Turning to the Proposition 13 question, the court held that the “tax or fee” analysis in Sinclair Paint is inapplicable to the cap-and-trade system, and that purchase of cap-and-trade allowances at auction is a “voluntary purchase of a valuable commodity and not a tax under any test.” The trial court had treated the auction program as a regulatory fee.

In a vigorous dissent, Justice Hull agreed with the majority that ARB did not exceed its authority in choosing an auction system, but argued that the auctions are an unconstitutional tax because they are not voluntary, because the allowances do not confer any property rights, and because the some of the proceeds have been used for non-regulatory purposes, which Justice Hull called “a hallmark, if not the gold standard,” for determining if a state exaction is a tax.  The California Chamber of Commerce and other business groups will likely pay close attention to Justice Hull’s dissent in weighing whether to appeal the decision to the California Supreme Court.

President Trump Takes First Step on Long Road to Roll Back Climate Rules

Posted in Energy regulatory, Environmental and approvals

Claudia O’Brien, Bob Wyman, Joel Beauvais, Stacey VanBelleghem, Bridget Reineking, and Kimberly Leefatt have authored an article entitled President Trump Takes First Step on Long Road to Roll Back Climate Rules. On March 28, 2017, President Donald Trump signed an executive order (EO) directing executive departments and agencies to review regulations that potentially burden the development or use of domestically-produced energy resources. This EO sets the stage for what could become a series of sweeping reversals of the Obama Administration’s greenhouse gas (GHG) reduction and climate change polices. In particular, the order lays the groundwork for reform of the Clean Power Plan (CPP) and the new source pollution standards for new, modified and reconstructed power plants (NSPS).

The issuance of this EO kicks off a long and complex process for EPA to review both the CPP and NSPS, draft and publish proposals to revise or rescind the rules, accept notice and comment on the proposals, address comments on the proposals, and then issue final rules. Regardless of whether EPA proposes to suspend, revise, or rescind the rules, legal challenges are sure to follow. The outcome of these rulemakings and subsequent litigation will be consequential for the future of federal regulation of GHGs under the Clean Air Act (CAA).

The current uncertainty over the GHG regulations governing the electric power sector is likely to remain for the foreseeable future. Since CPP implementation was stayed by the Supreme Court, existing sources in the electric power sector will be free of federally-imposed emissions constraints while EPA reevaluates the CPP and NSPS and completes its rulemakings, and while EPA faces legal challenges to its determinations, assuming the Agency opts for full rescission of the CPP rather than a limited, inside-the-fence regulation. Some states and regulated entities will view potential revision or rescission of the CPP and NSPS as a welcome reprieve from the requirements imposed by these rules. Other states and regulated entities will fight attempts to weaken the CPP and NSPS, which they supported as a framework for achieving emission reductions or as a competitive advantage based on their portfolio mixes and for setting the stage for more uniform regional or nationwide GHG regulations and markets. In the interim of federal regulatory uncertainty, states will assume the principal role of GHG regulators, and the electric power sector will continue to encounter a patchwork of regulations lacking any degree of national uniformity. In any event, strong economic and policy drivers are likely to continue to move the country towards lower-emitting generation.

California State Court Poised to Destabilize Low Carbon Fuel Standard

Posted in Environmental and approvals, Finance and project development, Permitting

By Joshua T. Bledsoe and Max Friedman

Big changes appear to be imminent for California’s Low Carbon Fuel Standard (LCFS).

As discussed in greater detail in our recent post, the LCFS currently is the subject of two interrelated legal challenges commonly known as POET I and POET II. Here we provide an update on recent proceedings before the California Court of Appeal for the Fifth Appellate District (Court of Appeal) in POET I. These proceedings concern the California Air Resources Board’s (ARB) attempts to comply with a peremptory writ of mandate (the Writ) that primarily required ARB to remedy violations of the California Environmental Quality Act (CEQA) that occurred during promulgation of the original LCFS regulation.

On March 20, 2017, three days before oral argument occurred, the Court of Appeal issued a tentative ruling in the POET I Writ appeal. The tentative ruling alerted the parties that the Court of Appeal intended to overturn the Superior Court’s discharge of the Writ and suggested that some or all of the existing LCFS regulatory regime was in jeopardy. The tentative ruling found that ARB failed to comply with the Writ by excluding from its CEQA analysis information relating to nitrogen oxide (NOx) emissions from biodiesel, resulting in the utilization of an improper baseline for measuring NOx emissions. The tentative ruling also found that ARB’s treatment of NOx emissions was not a “good faith” attempt at corrective action because it relied on an objectively unreasonable interpretation of the CEQA term “project.” The Court of Appeal then further underscored its dim view of ARB’s response to the Writ: “ARB’s actions do not appear to be a sincere attempt to provide the public and decision makers with the information required by CEQA and omitted from the earlier documents.” Continue Reading

CAISO Expects It May Need to Curtail Up to 8,000 MW This Spring and Up to 13,000 MW By 2024, Which Could Test Curtailment Risk Allocation Provisions in Renewable PPAs

Posted in Energy regulatory

By Michael Gergen, Tyler Brown, David Pettit and Christopher Randall

At the most recent meeting of the Board of Directors of the California Independent System Operator (CAISO) held on February 16, 2017, the President and Chief Executive Officer of the CAISO reported that because of the “bountiful hydro conditions expected this year and significant additional solar installations both in the form of central station and on rooftops” in California, the CAISO “expects to see significant excess energy production this coming spring.” As a result, the CAISO is forecasting that it may “need to curtail from 6,000 MW to 8,000 MW.”

Based on the CAISO’s Monthly Market Performance Reports, it doesn’t appear that there were any significant curtailments prior to a few isolated days in the Spring of 2015, the Spring and Fall of 2016, and this Winter. This stands in marked contrast to the scale of curtailments that appear to be expected for this Spring. Moreover, in 2014 the CAISO reported that by 2024 it expects maximum hourly curtailments of over 13,000 MW in California under a scenario where the Renewables Portfolio Standard (RPS) targets 40 percent of retail sales by 2024. (This RPS requirement was enacted in October 2015.)

CAISO Graphic depicting renewable curtailment by resource type

Continue Reading

Near-Term Opportunities for Industry to Reduce Compliance Costs, Avoid “Nonattainment” Designation,” in the Face of Tightened Ozone NAAQS

Posted in Environmental and approvals

Joel Beauvais, Claudia O’Brien, Stacey VanBelleghem and Bridget Reineking have authored an article entitled Reducing Ozone Regulation Costs Under the New Administration. Over the past four decades, compliance with the ozone National Ambient Air Quality Standards (NAAQS) has proven to be among the most costly of Environmental Protection Agency (EPA) regulations. EPA tightened the primary and secondary ozone standards to 70 parts per billion (ppb) in late 2015, which will likely result in more areas of the country being identified as failing to attain the standards. Areas designated “nonattainment” face significant consequences, ranging from regulatory constraints on existing emission sources to expensive emission offset requirements for new or expanded facilities.  

Companies avoid the most rigid requirements and significant costs when the areas in which they operate are designated “attainment.” Companies still have a window of time to engage in EPA’s area designation process and avoid unnecessary nonattainment designations. Even in areas where monitoring data conclusively demonstrates nonattainment, companies can act to mitigate costs and secure operational flexibility. These strategies require engagement at the federal, state and local levels to support adaptable and efficient compliance mechanisms in SIP revisions after the designation process is finalized.

Given the Trump administration’s “pro-business” orientation, industry may be able to play a more influential role in the designation process and program design than it has in the past. Companies must act in the near term to pursue advocacy and planning to help leverage potential compliance flexibilities. Especially in states that EPA indicates will be most affected by the more stringent standards — California, Texas, Louisiana, Utah, Arizona, Colorado, Arkansas, Missouri, Ohio, Virginia, Pennsylvania, New York and New Jersey — proactive engagement can enable companies to meaningfully reduce the cost of compliance.

President Signs Executive Order Directing EPA and Army to Review and “Rescind or Revise” Clean Water Rule

Posted in Environmental and approvals

Joel Beauvais and Claudia O’Brien have authored an article entitled “Re-Evaluating the Clean Water Rule: The Long Road Ahead.” President Donald Trump, on February 28, signed an executive order (EO) directing the U.S. Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (the Corps) to issue a proposed rulemaking for notice and comment to rescind or revise their joint 2015 Clean Water Rule, also known as the Waters of the United States or “WOTUS” rule. The rule was intended to clarify the jurisdictional scope of the Clean Water Act. Shortly after the EO was issued, the EPA and the Corps issued a notice indicating their intent to review and either rescind or revise the rule.

The EO and the agencies’ notice signal a potential move to substantially narrow the jurisdictional scope of the Clean Water Act (CWA). This is a critical issue for many sectors of the economy and environmental protection and has been the subject of uncertainty and litigation since the statute was enacted in 1972 — with the U.S. Supreme Court having issued three major decisions on the subject.

Notwithstanding the president’s high-profile announcement, however, the current uncertainty over the CWA’s scope is likely to remain for the foreseeable future.  The executive order begins a lengthy process to re-evaluate the Clean Water Rule that likely will take years for completion of the rulemaking and subsequent litigation. Whether the Trump Administration seeks full rescission or a replacement of the rule, there will be substantial legal risk for the agencies involved — though the nature of that risk will differ greatly between these two courses. Moreover, the extended timeline associated with the regulatory process and litigation means continued regulatory uncertainty for several years, including a continuation — at least in the near term — of the current process of case-by-case jurisdictional determinations.