Latham's Clean Energy Law Report

Wildlife Agencies Propose Regulatory Changes to Species-Listing Process Under Endangered Species Act

Posted in Environmental and approvals

By Marc Campopiano and Max Friedman

On May 18, 2015, the federal agencies that oversee the enforcement of the Endangered Species Act, the US Fish and Wildlife Service and National Marine Fisheries Service proposed significant changes to the process by which parties can petition for the listing of species as protected under the Act or the designation of critical habitat.

The proposed new rules, for which 60 days of public notice and comment will commence upon their publication in the Federal Register, would amend the governing regulations at 50 CFR 424.14 in two key ways:

  • First, petitioners (often environmental groups) would need to solicit information from state wildlife agencies in each state where the species occurs before they could reach out to the federal services overseeing the ESA to petition for listing. Petitioners to the FWS (but not the NMFS[1]) would need to certify that a copy of the petition was provided to the various relevant state agencies, and include any data or comments provided by the state agencies in response.
  • Second, the new regulations would bar multi-species petitions, which environmental groups have often used, but which the agencies argue can make it difficult to discern which supporting materials apply to which species, rendering petitions difficult to follow. Petitions would also be required to demonstrate that the proposed species is in fact a species, subspecies, or distinct population within the meaning of the ESA. Petitioners would also be required to include a detailed description of the species’ range and a certification stating that they had gathered and attached all readily available relevant information regarding the species. The agencies also previewed additional regulatory changes that are expected in coming months. These include rules streamlining interagency consultation procedures and the preparation of habitat conservation plans, expanding conservation banking and other mitigation tools, and further increasing collaboration among state and federal agencies.

The stated goal of these changes is to improve the content and specificity of petitions and to enhance the efficiency of the entire process.

The agencies also previewed additional regulatory changes that are expected in coming months.  These include rules streamlining interagency consultation procedures and the preparation of habitat conservation plans, expanding conservation banking and other mitigation tools, and further increasing collaboration among state and federal agencies.

[1]           The federal agencies are actively seeking comment on whether or not to extend these proposed rules to the NMFS, but currently do not intend to do so, due to the difficulty for state agencies of coordinating with respect to marine species and wide-ranging anadromous species.

Bill to Streamline Federal Permitting for Major Energy and Infrastructure Projects Advances in the US Senate

Posted in Energy regulatory, Finance and project development

By Andrea Hogan and Joshua Marnitz

On May 6, 2015, the US Senate Committee on Homeland Security and Governmental Affairs voted 12-1 in favor of a bill designed to streamline the Federal permitting process for major energy and infrastructure projects. The bill, first introduced in January 2015 by Senators Rob Portman (R-Ohio) and Claire McCaskill (D-Missouri) as S. 280 or the Federal Permitting Improvement Act of 2015, will now proceed to the full U.S. Senate for consideration.

If passed, the proposed bill would establish a multi-agency permitting council known as the Federal Infrastructure Permitting Improvement Steering Council (Council) to oversee and coordinate the Federal permitting process for covered projects. The Council would be chaired by an Executive Director appointed by the President, and would consist of a designated member of each Federal agency with permitting authority over covered projects — including, without limitation, the US Department of Energy, the US Department of the Interior, the US Environmental Protection Agency, and the Federal Energy Regulatory Commission — as well as the Chairman of the Council on Environmental Quality and the Director of the Office of Management and Budget (OMB). Of note, in the version of the bill introduced in January 2015, the chair role was to be held by an officer of the OMB.

The proposed bill defines a “covered project” as any construction activity in the United States (1) involving renewable or conventional energy production, electricity transmission, surface transportation, aviation, ports and waterways, water resource projects, broadband, pipelines, manufacturing, and any other sector as determined by a majority vote of the Council (2) that is likely to require a total investment of more than $200 million and does not otherwise qualify for abbreviated authorization or environmental review processes, or (3) the size and complexity of which make the project likely to benefit from enhanced oversight and coordination. A project likely to benefit from enhanced oversight and coordination includes any project likely to require authorization from or environmental review involving more than two Federal agencies, or the preparation of an Environmental Impact Statement (EIS) under the National Environmental Policy Act (NEPA).

The legislation would, among other things, direct the Executive Director to establish and maintain an inventory of covered projects for which a Federal review or authorization is pending, categorize that inventory based on sector and project type, and designate a lead Federal agency for each category of covered project. It would also require the Executive Director to maintain an online database (known as the Permitting Dashboard) to track the status of Federal reviews and authorizations for covered projects. In addition, the Executive Director is required to develop nonbinding performance schedules that include intermediate and final deadlines for Federal reviews and authorizations for each category of covered project. Those performance schedules would set the deadline for a Federal agency decision on an environmental review or authorization at 180 days from the date the relevant agency receives all information needed to complete the review. Additionally, the bill provides that the comment period for a draft EIS shall not be less than 45 days or greater than 60 days, unless the lead agency, project sponsor and any cooperating agency agree to a longer period, or unless the lead agency extends the deadline for good cause. The Executive Director would be required to review and revise the performance schedules at least once every two years, in consultation with the full Council.

Also under the proposal, the Council would be required to issue annual recommendations on the best practices for:  enhancing early stakeholder engagement; ensuring timely decisions regarding environmental reviews and authorizations; improving coordination between Federal and non-Federal governmental entities; increasing transparency; reducing information collection requirements and other administrative burdens on agencies, project sponsors and other interested parties; developing and making available to applicants appropriate geographic information systems and other tools; creating and distributing training materials to Federal, state, tribal and local permitting officials; and addressing other aspects of infrastructure permitting, as determined by the Council. Any agency designated as the facilitating or lead Federal agency for a project would also be required to establish and submit to the Executive Director a concise plan (the Coordinated Project Plan) for coordinating agency and public participation in any required Federal environmental review or authorization for the project. The Coordinated Project Plan must include: a list of, and roles and responsibilities for, all entities with environmental review or authorization responsibility for a project; a permitting timetable setting forth a comprehensive schedule of dates (including intermediate and final deadlines) by which all Federal environmental reviews and authorizations, and to the maximum extent practicable, state permits, reviews and approvals, must be made; a discussion of potential avoidance, minimization and mitigation strategies, if required by applicable law and known; and plans and a schedule for public and tribal outreach and coordination, to the extent required by applicable law. A facilitating or lead agency must also establish a process for early consultation between project sponsors and participating agencies to identify and address key issues of concern, and to communicate issues that must be addressed before an environmental review or authorization can be completed.

To reduce delays, the proposed bill includes provisions requiring responsible agencies to coordinate environmental reviews and authorizations to the maximum extent practicable. To that end, the bill would allow, on the request of a project sponsor, a lead Federal agency to consider and, as appropriate, adopt or incorporate by reference the analysis and documentation that has been prepared for a covered project under state laws and procedures as the documentation, or part of the documentation, required to complete the Federal environmental review. The analysis and documentation prepared under state laws, however, must have been prepared under circumstances that allowed for opportunities for public participation and consideration of alternatives and environmental consequences that are substantially equivalent to NEPA.

To minimize litigation delays, the bill would reduce the statute of limitations for claims arising under Federal law and relating to Federal authorizations for covered projects from six years to two years from the date of publication in the Federal Register of the final record of decision or approval or denial of a permit. For an action pertaining to an environmental review under NEPA, the action would also need to be filed by a party that submitted a comment during the environmental review or a party that lacked a reasonable opportunity to submit a comment, and that comment would need to have been sufficiently detailed to put the lead agency on notice of the issue for which the party is seeking judicial review. The proposal would also require courts to consider the effects on public health, safety, and the environment, the potential for significant job losses, and other economic harm resulting from an order or injunction, and not presume that these harms are reparable, before issuing a temporary restraining order or preliminary injunction.

Finally, the bill would also authorize the Federal government to issue regulations to establish a fee structure by which project proponents would reimburse the Federal government for reasonable costs incurred in conducting environmental reviews and authorizations for covered projects. Such a fee structure would be established by the heads of the Federal agencies with permitting authority, with guidance from the Director of the OMB and the Executive Director, in consultation with the affected project proponents, industries and other stakeholders, after public notice and an opportunity for comment.

Proponents of the bill contend that the current Federal permitting process is laden with uncertainty and unpredictability that hinders investment, economic growth and job creation.  They believe the proposal would improve the review and authorization process for major capital projects by promoting better agency coordination, setting deadlines for permitting decisions, enhancing transparency, and reducing litigation delays. The bill appears to have strong support from Senate Republicans, who control the chamber 54-46, and it may gain the support it needs to pass in the full Senate with Democratic co-sponsorship. Notably, the bill also has support from some environmental groups, including the Natural Resources Defense Council. Project sponsors should pay close attention to this legislation, as it may have far-reaching impacts on the process for siting and developing major energy and infrastructure projects in the United States.

 

The Department of the Interior does not list sub-population of greater sage-grouse as a threatened or endangered species, but broader review under the Endangered Species Act continues

Posted in Environmental and approvals

By Marc Campopiano and Gunnar Gundersen

On April 21, 2015, Sally Jewell, the Secretary of the Department of the Interior, announced that a sub-population of greater sage-grouse along the California-Nevada border does not require Endangered Species Act protection.

In 2010, the US Fish and Wildlife Service declared the bi-state population of greater sage-grouse a “distinct population segment” under the ESA because it has significant genetic differences from other greater sage-grouse. The population had declined significantly from urbanization, encroachment of sagebrush by conifers, and a cycle of wildfire and fire-adapted invasive grasses.

A key factor in the Department’s decision not to list the grouse was the development of the “Bi-State Action Plan,” a conservation plan developed by multiple federal, state and private participants. The plan established population monitoring, urbanization abatement measures, livestock management, wild horse management, pinyon and juniper removal, disease and predation studies and other habitat improvement and restoration projects. Secretary Jewell said, “Thanks in large part to the extraordinary efforts of all the partners in the working group to address threats to greater sage-grouse and its habitat in the Bi-State area, our biologists have determined that this population no longer needs ESA protection.” Secretary Jewell cited the plan as “proof that we can conserve sagebrush habitat across the West while we encourage sustainable economic development.”

Notably, the Service continues to conduct a separate, more far-reaching review of the greater sage-grouse across its 11-state range in the western United States. The Service must complete that review by September 30, 2015, in accordance with a 2011 court-ordered settlement. The deadline is based on a stipulated settlement between the Service and WildEarth Guardians, which sued the Service to evaluate 251 candidate species.

If the Service ultimately lists the greater sage-grouse as a threatened or endangered species, the listing would require federal agencies that carry out, permit, license, fund or authorize activities that may affect the grouse to consult with the Service under Section 7 of the ESA to ensure that those activities are not “likely to jeopardize the continued existence” of the greater sage-grouse.  Also, for non-federal actions, Section 9 of the ESA would disallow any project that would result in a taking of the greater sage-grouse unless the developer obtains a Habitat Conservation Plan under Section 10 of the ESA.

Several industries could be affected by a listing, including the energy sector. For example, according to a report by Temple Stoellinger from the University of Wyoming, “81.7 percent of the total gas produced and 86.6 percent of the total coal produced in Wyoming was located within” the sage-grouse’s habitat in 2012.

The Northern Long-Eared Bat’s listing as threatened under the Endangered Species Act could affect development in the Northeastern United States

Posted in Environmental and approvals

By Marc Campopiano and Max Friedman

On April 1, 2015, the US Fish and Wildlife Service (“FWS”) announced that it would list the northern long-eared bat as a “threatened species” under the Endangered Species Act (“ESA”).

The listing comes in response to a sharp drop of more than 90 percent of the northern long-eared bat’s population in the eastern portion of its range over the last decade.  In 2006, a new form of fungal disease, known as white-nose syndrome, began to afflict portions of the population and spread throughout the range, accelerating the species’ decline.  The disease causes bats to end their winter hibernation prematurely, leading them to die of starvation and exhaustion due to lack of food.  Currently, the disease has been identified in one or more counties of 28 states and the District of Columbia, out of the species’ 37-state overall range.  In regions where the disease has not yet spread, bat populations remain stable.

For now, the bat species’ listing is only on an interim basis, with a finalized listing expected to come before the end of 2015.  FWS has also extended the public comment period for the final rule and will continue to accept comments regarding the listing until July 1, 2015.

At the same time that FWS announced the bat’s listing, it also announced that it was instituting an interim rule, known as a “4(d) Rule” for the provision of the ESA from which it derives, to provide flexibility to landowners, forest managers, government agencies, and others by allowing the incidental “take” of northern long-eared bats during certain types of activity, such as forest and native prairie management, maintenance of existing rights-of-way and transmission corridors, and the removal of a minimal number of trees or hazardous trees.  Incidental “take” refers to the accidental killing or harming of individual bats, including through the modification or degradation of crucial habitat.

Thus, under the interim 4(d) Rule, an exemption from the need to acquire an incidental take permit applies if the activity falls within certain categories, or if the activities occur outside the zone in which white-nose syndrome has been found or the surrounding buffer zone.  FWS has prepared a questionnaire to help landowners and developers determine whether the exemption applies to specific activities.  Non-exempt activities may trigger the obligation to obtain incidental take coverage from FWS, which can be a time-consuming and expensive permitting process, thereby impacting development in affected areas.

California Supreme Court Hears Oral Argument Over City’s Inclusionary Housing Set-Aside

Posted in Environmental and approvals

By Chris Garrett, Cindy Starrett, Jim Arnone, John Morris

On April 8, 2015, the California Supreme Court heard oral argument in California Building Industry Association v. City of San Jose (Affordable Housing Network of Santa Clara County et al.), S212072, a case with statewide significance for local affordable housing measures.  At issue is the City of San Jose’s Inclusionary Housing Ordinance (the “Ordinance”), adopted by its City Council on January 12, 2010, which requires new residential developments of 20 or more units to set aside 15 percent for purchase at below-market rates to buyers earning no more than 110 percent of area median income.  Alternatively, the Ordinance may be satisfied through dedication of land or payment of an “in-lieu fee” not to exceed the difference between the median sale price of a market-rate unit and the cost of an affordable housing unit.  The California Building Industry Association (“CBIA”) filed a complaint on March 24, 2010, seeking declaratory and injunctive relief against the City on grounds that the Ordinance is facially unconstitutional under the state Constitution.

CBIA Challenged the Court of Appeal’s Decision to Uphold the Ordinance

The case rose to the Supreme Court on CBIA’s appeal of a decision favoring the City.  CBIA had been successful in the Superior Court, which granted CBIA’s requested relief and found that the City had failed to demonstrate a nexus between the Ordinance and the “deleterious public impacts of new residential development.”[i]  CBIA argued that the builders of new housing should not be required to pay for the costs of subsidizing affordable housing, and that the City’s justification for shifting that burden to the builders was not adequate.  However, the Court of Appeal reversed, holding that the Superior Court had erred by applying an overly rigorous standard of judicial review to the City’s reasoning.[ii]  Whereas the Superior Court had applied the  test previously announced by the Supreme Court in San Remo Hotel L.P. v. City & County of San Francisco,[iii] in which the Court upheld a local development mitigation fee against a constitutional takings claim, here the Court of Appeal pointed out that a takings claim had not been asserted.  The Court of Appeal applied a more lenient standard of review, finding that “the Ordinance should be reviewed as an exercise of the City’s police power.”[iv]  Accordingly, under the Court of Appeal’s view, the Ordinance represents a valid exercise of the City’s police power if it bears a “substantial and reasonable relationship to the public welfare,” and it is invalid “only if it is arbitrary, discriminatory, and without a reasonable relationship to a legitimate public interest.”[v]  The Court of Appeal directed that a remand to the Superior Court should occur for the City’s justification to be analyzed under this less exacting standard.

Oral Argument Challenged Counsel for Both Sides With Critical Questions About the Standard of Review and Public Policy Implications

In oral argument before the Supreme Court last week, the Justices peppered attorneys for CBIA and the City with questions.  As to the strict standard of review supplied by San Remo in a constitutional takings challenge to a local development mitigation fee, the Justices called upon the attorneys to  distinguish such fees from an inclusionary housing set-aside like the Ordinance.

To the attorney for the City, the Justices questioned whether the Court of Appeal’s lenient “legitimate public interest” test might be too broad.  In particular, Justices Chin and Liu asked whether any inclusionary housing measure could possibly fail the standard of review applied by the Court of Appeal.

On the other side, the Justices probed counsel for CBIA to answer whether the Ordinance in fact deprived developers of a legally identifiable property interest.  Additionally, after noting the state and local interest in addressing the housing shortage, Chief Justice Cantil-Sakauye asked how application of the stricter San Remo standard might cast doubt upon the over 170 existing inclusionary housing measures adopted by localities statewide.

What to Watch For

California is in the midst of a well-documented housing shortage.  Just weeks ago, on March 17, 2015, the state Legislative Analyst’s Office published a report attributing high housing costs to undersupply, including shortage of  market-rate units.  The Court’s decision whether to affirm or reject the Court of Appeal’s treatment of the Ordinance could have substantial ramifications, not only for existing local inclusionary housing measures, but also for localities considering future such measures and for housing developers transacting in these markets.  We will report in an updated post when the opinion is issued, which is expected by July 7, 2015.

[i]   California Building Industry Association v. City of San Jose (2013) 216 Cal.App.4th 1373, 1376.

[ii]   Id. at p. 1387.

[iii] San Remo Hotel L.P. v. City & Cnty. of San Francisco (2002) 27 Cal.4th 643.

[iv] California Building Industry Association, supra, 216 Cal.App.4th at pp. 1387-88 (citing Cal. Const. art. XI, § 7 [“A county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws.”].)

[v]   Id. at p. 1388.

Carbon Trading: A New Dawn in China

Posted in Environmental and approvals

By Paul Davies and R. Andrew Westgate

This document is a translation of the recently released Tentative Measures for the Administration of Trading of Carbon Emissions Rights promulgated by the National Reform and Development Commission (“NDRC”) on December 10, 2014.  As discussed in a recent article by Latham & Watkins partner Paul Davies, this development represents the first details the NDRC has provided on how the national carbon market in China, currently the world’s second largest consumer of energy, will work.  This translation was prepared for clients of Latham & Watkins for informational purposes only, and should not be relied upon as an official translation or interpretation of Chinese law.

 This article was originally published by China Law & Practice and can be found here.

Low Carbon Fuel Standard Overview

Posted in Environmental and approvals

Joshua Bledsoe and Michael Dreibelbis of Latham & Watkins, recently co- wrote a LCFS Fact Sheet with the International Emissions Trading Association (IETA). The article is available on IETA’s website and below:

The California Global Warming Solutions Act of 2006 (aka Assembly Bill 32 or “AB 32″) mandates a reduction in California statewide greenhouse gas (GHG) emissions to 1990 levels by 2020. The Low Carbon Fuel Standard (LCFS) is one of the primary Emission Reduction Measures promulgated by the California Air Resources Board (ARB) to achieve AB 32’s 2020 target. It is expected to contribute approximately 20% of the required statewide GHG reductions under AB 32.

The LCFS focuses on the transportation sector and requires a 10% reduction in the carbon intensity (CI) of gasoline and diesel from 2010 levels by 2020, with CI targets designed to become more stringent each year. The CI of fuels, expressed as grams of CO2e per megajoule, is calculated across the full lifecycle of transportation fuels (i.e., well-to-wheel) and includes all GHG emissions associated with producing, distributing, and using the fuel.

Who is regulated by the LCFS?

  • Typically, a producer within California or the importer of a refined/final product constitutes the Regulated Party.
  • Suppliers of low-carbon fuels (e.g., electricity, biofuels, natural gas) can “opt-in” to Regulated Party status and generate LCFS credits that can be sold to another party that needs them for compliance.

How does one comply?

Each Regulated Party must ensure that the overall CI score for its fuel pool at least meets the annual target for the given year. Excess CI reductions from one type of fuel can be used to compensate for insufficient reductions in another fuel. A fuel that has a CI below the target for a given year will generate LCFS credits on a volumetric basis (i.e., the more low CI fuel one sells, the more credits one generates). Conversely, a fuel with a CI above the target will generate deficits, also on a volumetric basis. Each LCFS credit represents one metric tonne of CO2e avoided and each deficit represents one metric tonne of CO2e added – both as measured against the pertinent year’s CI target.

In each annual compliance period, a Regulated Party must balance its deficits with credits. The banking of surplus LCFS credits is allowed and credits do not expire due to passage of time. A negative balance for a calendar year that persists until April of the next year results in the Regulated Party being out of compliance. Regulated entities can comply by:

  1. Lowering the CI of their fuels (e.g., via efficiency improvements anywhere in the lifecycle, blending lower carbon fuels); and/or
  2. Purchasing LCFS credits from other Regulated Parties.

The LCFS also imposes recordkeeping requirements (e.g., retention of Product Transfer Documents) and quarterly reporting requirements that must be followed to remain in compliance.

Relationship with Cap-and-Trade Program

While the LCFS has surficial similarities to ARB’s other carbon trading regime, the Cap-and-Trade Program (e.g., both trade in increments of one metric tonne of CO2e), the two operate separately. Among other key differences, the two regimes: (1) establish distinct compliance instruments that are non-fungible across programs; (2) use different compliance instrument tracking systems; (3) require different registrations; and (4) have different rules regarding trading confidentiality. Entities covered by the LCFS and the Cap-and-Trade Program need to comply with both regimes, and cannot use over-compliance in one program to compensate for under-compliance in the other.

What’s next for the LCFS?

The LCFS has been challenged in both California state court and US federal court, and ARB largely has been successful defending the Program. However, due to procedural errors committed by ARB during the initial adoption of the LCFS regulations, the CI targets have been frozen at 2013 levels. ARB presently is attempting to cure these procedural flaws by readopting the Program. Concurrently, ARB also is overhauling many aspects of the LCFS, including but not limited to credit cost containment, credit invalidation procedures, and enforcement of violations.

ARB anticipates extending the LCFS beyond the scheduled 2020 sunset date, just as with the other AB 32 Emission Reduction Measures it implements. Finally, ARB has expressed interest in linking the LCFS with similar programs in Oregon, Washington, and British Columbia.

Governor Brown Orders California’s First Mandatory Water Restrictions

Posted in Environmental and approvals

By Paul Singarella, Lucas Quass and John Morris

On Wednesday April 1, 2015, in the wake of the state’s four-year drought and a winter that brought record-low snowfalls, Governor Brown issued an executive order mandating statewide water use restrictions for the first time in California’s history (the “Executive Order”).  The Executive Order follows on the heels of state legislation signed by the Governor on March 27, which appropriated approximately $1 billion for water projects including emergency drought relief.

Governor Brown announced the Executive Order from a snow-bare Phillips Station in the Sierra Nevada mountains, in his words, “standing on dry grass where there should be five feet of snow.”  The same day, state regulators announced that the state’s snowpack was only at five percent of normal, presaging a very small amount of spring snowmelt that Californians rely upon to replenish their reservoirs.  This January reportedly was the driest January in California since recordkeeping began in 1895.

To address the ongoing drought, the Executive Order primarily aims to: (1) conserve water and (2) increase enforcement against waste throughout the state.

Mandatory Water Use Restrictions

Governor Brown’s announcement builds upon recent emergency water conservation regulations, which the State Water Resources Control Board (“SWRCB”) renewed and updated several weeks ago on March 17, 2015.  The emergency water conservation regulations prohibit excessive outdoor water use and, among other things, require urban water suppliers to implement water shortage contingency plans.  The Executive Order directs SWRCB to implement mandatory statewide water restrictions to reduce potable urban water use by 25% through February 28, 2016.  These restrictions will obligate California municipal water suppliers to reduce usage as compared to 2013 levels.  Additionally, the restrictions will require areas with high per capita use to achieve proportionally greater reductions than those areas with lower uses.  The Executive Order also directs the California Public Utilities Commission to require investor-owned utilities providing water services to implement similar restrictions.  To help achieve these objectives, the Executive Order will instate the following conservation measures:

  • The California Department of Water Resources (“DWR”), in conjunction with local agencies, shall implement a program to replace 50 million square feet of lawns and ornamental turf with drought-tolerant landscaping;
  • The California Energy Commission, DWR and SWRCB shall implement a temporary statewide consumer rebate program to replace inefficient household appliances;
  • SWRCB shall implement water use restrictions on commercial, industrial, and institutional properties, requiring campuses, golf courses, cemeteries and other large landscapes to make significant cuts in water use;
  • SWRCB will prohibit the use of potable water for irrigating at new homes and developments, unless efficient irrigation systems are used, and will prohibit watering ornamental grass on public street medians; and
  • Urban water suppliers must develop and implement rate structures and other conservation pricing to maximize water reductions and discourage water waste. The Executive Order includes measures intended to monitor certain water users and prevent wasteful practices. The Executive Order adds additional scrutiny to agricultural water users, who already have faced significantly reduced water allocations. Under the Executive Order, agricultural users must provide more frequent water use information to SWRCB, which will increase the state’s ability to prevent illegal diversions, waste and unreasonable use. Additionally, the Executive Order requires local water agencies located in high- and medium-priority groundwater basins to implement the California Statewide Groundwater Elevation Monitoring Program, which mandates statewide groundwater elevation monitoring to track seasonal and long-term trends in groundwater elevations. DWR and SWRCB are tasked with monitoring these local agencies to promote appropriate enforcement and compliance. SWRCB is expected to develop emergency regulations to implement the Executive Order in the coming weeks. Following a public hearing, SWRCB may approve the regulations by early May. These conservation measures, coupled with last week’s $1 billion water package, should reduce water use, provide some emergency relief, and avoid an outright moratorium for the most wasteful uses. If the drought persists, Californians, and likely residents of other western states, may see further mandatory water conservation actions.

 Waste Prevention and Monitoring

The Executive Order includes measures intended to monitor certain water users and prevent wasteful practices.  The Executive Order adds additional scrutiny to agricultural water users, who already have faced significantly reduced water allocations.  Under the Executive Order, agricultural users must provide more frequent water use information to SWRCB, which will increase the state’s ability to prevent illegal diversions, waste and unreasonable use.  Additionally, the Executive Order requires local water agencies located in high- and medium-priority groundwater basins to implement the California Statewide Groundwater Elevation Monitoring Program, which mandates statewide groundwater elevation monitoring to track seasonal and long-term trends in groundwater elevations.  DWR and SWRCB are tasked with monitoring these local agencies to promote appropriate enforcement and compliance.

Next Steps

SWRCB is expected to develop emergency regulations to implement the Executive Order in the coming weeks.  Following a public hearing, SWRCB may approve the regulations by early May.  These conservation measures, coupled with last week’s $1 billion water package, should reduce water use, provide some emergency relief, and avoid an outright moratorium for the most wasteful uses.  If the drought persists, Californians, and likely residents of other western states, may see further mandatory water conservation actions.

Legislature Approves $1 Billion Drought Relief Legislation; Governor Brown Expected to Sign

Posted in Environmental and approvals

By Paul Singarella, Daniel Brunton and Lucas Quass

California Legislature Enacts Bill Package on Drought 

On Thursday March 26, 2015, the California Legislature adopted legislation which it describes as allocating approximately $1 billion to emergency drought relief in the state.  As more than 50 percent of the new appropriations target flood control, it remains to be seen to what extent the legislation will mitigate drought conditions.

The legislation consists of two appropriations bills (Assembly Bill 91 and Senate Bill 75) and two policy trailer bills (Assembly Bill 92 and Senate Bill 76) (collectively the “Legislation”), which were announced on March 19, 2015 by Governor Brown as a mobilization of state resources to face the fourth consecutive year of extreme drought.  Governor Brown is expected to sign and enact the Legislation imminently.  The Legislation is intended to direct state funds to drought relief on a faster track than the drought relief contained in the Governor’s January 2015 budget proposal which likely will not be approved until June.

Background

California is currently in the midst of a record drought; this January reportedly was the driest January in California since recordkeeping began in 1895.  The state’s snowpack levels, which supply the state with water throughout the summer, are at historic lows.  There are some reports that California has water remaining in its reservoirs to last just one more year.   California’s groundwater reserves are at historic lows, and reportedly have been decreasing by 12 million acre-feet a year since 2011.  A key factor in the decline of the state’s groundwater reserves is pumping in the Central Valley for agricultural purposes and to replace surface water allocations that have been reduced and, in some cases, eliminated.  On March 17, 2015, the State Water Resources Control Board (“SWRCB”) renewed and updated its statewide emergency water conservation regulations which prohibit excessive outdoor water use and, among other things, require urban water suppliers to implement water shortage contingency plans.  If the drought continues, more curtailments on water usage are expected.

Overview of Legislation

Emergency Relief.  The Legislation appropriates to SWRCB $15 million for emergency drinking water projects, including the design and construction of connections to public water systems and the construction/rehabilitation of wells, and $4 million to provide emergency drinking water to communities affected by the drought.  The Legislation allocates $4.4 million to the Office of Emergency Services to provide communities with drought disaster recovery support.  $24 million is appropriated to the Department of Social Services to provide food assistance to people affected by the drought.  Emergency help for fisheries includes $14.6 million, mostly from the state general fund, allocated to the California Department of Fish and Wildlife (“DFW”) to continue its drought-related operations, which include fish rescues, hatchery operations and fish and wildlife monitoring.

Infrastructure.  The Legislation includes approximately $272 million from the $7.545 billion Water Quality, Supply, and Infrastructure Improvement Act of 2014, also known as Proposition 1, which was approved by California voters last November.  Specifically, the Legislation will accelerate Proposition 1 funding by allocating approximately $132 million to water recycling and demonstration projects and approximately $136 million to improve access to clean drinking water and pay for wastewater treatment in disadvantaged communities.  These appropriations can mitigate drought by producing water suitable for beneficial use and/or for groundwater replenishment.

Mitigation & Monitoring.  The Legislation makes funds available to monitor and mitigate drought conditions and potentially produce new water, including through conservation.  $11.6 million is allocated from the general fund to the California Department of Water Resources (“DWR”) to continue its evaluation of surface and groundwater conditions, expedite water transfers and provide guidance to water agencies.  $20 million is allocated to DWR to fund water use efficiency programs which reduce greenhouse gas emissions.  $10 million is allocated to the Department of Food and Agriculture for agricultural water efficiency projects which reduce greenhouse gas emissions.

The Legislation also includes funding for species and environmental preservation, including a $2 million allocation to DFW to maximize water delivery and efficiency to endangered species including their habitat, and Delta monitoring.  $4 million  is allocated to the Department of Parks and Recreation to control invasive aquatic species within the Sacramento-San Joaquin River Delta and the Suisun Marsh.  $4 million  is allocated to the SWRCB and DFW to enhance instream flows in certain stream systems that support critical habitat for anadromous fish.

Regulatory Oversight.  Approximately $23 million is allocated to the SWRCB for enforcement of water rights and water curtailment actions.

Flood Control.  The largest allocation ($660 million) is earmarked for flood control including the completion, operation or replacement of flood control projects.  While new flood control projects, or repairs to existing facilities, play a role in water capture, it appears that these aspects of the Legislation were designed to allocate funds remaining under Proposition 1E before its expiration, rather than solely focus on drought relief.  Set to expire on July 1, 2016, Proposition 1E  is otherwise known as the Disaster Preparedness and Flood Prevention Bond Act of 2006, which authorizes $4.1 billion in bonds for disaster preparedness and flood prevention projects.  Of the $660 million, approximately $320 million will be available to reduce urban flood risks and $118 million for rural flood management.  $222 million will be granted to DWR for local assistance projects.

Establishment of the Office of Sustainable Water Solutions

The Legislation establishes the Office of Sustainable Water Solutions (“OSWS”) within the SWRCB.  OSWS’s mandate is to promote sustainable drinking water and wastewater treatment solutions and safeguard the effective and efficient provision of safe, clean, affordable, and reliable drinking water and wastewater treatment services.  OSWS will be particularly focused on aiding small communities with modest resources and large infrastructure needs.  OSWS will help communities seek out state and federal funding for water supply projects.

Limited Suspension of Public Contracting and Procurement Requirements

Generally, the State Contract Act provides for a contracting process by which public agencies engage contracts through a competitive bidding process, under which bids are awarded to the lowest bidder, with specified alternative bidding procedures authorized in certain cases.  This process can be  cumbersome and may frustrate public agencies from promptly engaging in emergencies.  As several communities in the Central Valley are without water entirely, the Legislation provides public agencies with greater flexibility to respond to an urgent drinking water need and temporarily suspend the State Contract Act.

Broader Context

The Legislation is the latest response from Sacramento to attempt to address the ongoing drought.  In April 2014, the Governor issued a Proclamation of a Continued State of Emergency in response to the state’s ongoing drought, which extended his January 2014 Emergency Drought Declaration.  In 2014, Governor Brown signed a $687.4 million drought package, which offered aid to communities, food and housing assistance and funds for projects to help communities capture and manage water.  In October 2014, the Governor signed the Sustainable Groundwater Management Act, intended to address the alarming loss of groundwater reserves over the last four years, and to bring groundwater management into a comprehensive regulatory scheme. The Governor’s January 2015 budget proposal includes $532 million in expenditures under Proposition 1 and the last $1.1 billion in funds available under Proposition 1E for flood protection.

Certainly, these actions in the aggregate should make important funding available to real projects, potentially helping to produce new sources of water for beneficial use, capture and store water when available, conserving water that otherwise would be used, and mitigating the impacts of chronic drought conditions.  Given the scale and complexity of the drought, however, and should the drought persist as some scientists predict, similar and even more robust legislation may be in the offing.  These actions  may do less to provide immediate relief, than to lay groundwork important to long-term water security in  California.

Don’t Skip the Credits: The Oft-Overlooked Importance of Air Emission Credits in Mergers and Acquisitions

Posted in Environmental and approvals

By Michael Scott Feeley and Aron Potash

There is no shortage of environmental matters to navigate when buying a company or facility.  Environmental counsel must first lead a diligence effort that delineates the target’s environmental footprint and then suss out the environmental risks and liabilities attendant to the deal.  This diligence process often involves Phase I environmental site assessments, environmental, health and safety compliance evaluations, interviews of target personnel, and review of seller-provided permits, reports, and other documentation.  The knowledge gained from the diligence process feeds into negotiation of purchase agreement terms, including the purchase price, environmental representations, warranties and covenants, corresponding definitions and indemnification provisions, disclosure schedules, and permit transfer provisions.  Myriad environmental matters must be addressed, including compliance with environmental laws, the release of hazardous substances, the presence and validity of environmental permits, ongoing environmental litigation or the possibility of it, and health and safety matters.

One issue that all too frequently gets lost in the shuffle during the diligence and purchase agreement negotiation process is the evaluation of whether air emission credits are necessary to run the business, and if so, how these credits will be treated in the deal documents.  Air emission credits take many shapes and forms but, at bottom, are governmentally issued or approved authorizations to emit air contaminants.  A wide variety of facilities—from power plants to petroleum refineries to manufacturers to hospitals—must often obtain air emission credits in order to lawfully operate.  In recent years, air emission credit programs have even expanded to cover emissions beyond facility fencelines; certain companies, such as transportation fuel suppliers, must now obtain air emission credits to cover emissions linked to the products the companies sell.

This article provides an overview of the air emission credit landscape from the perspective of acquirer’s counsel (although, many of the issues we raise herein must also be dealt with by sellers in M&A transactions, as well as by environmental counsel in financings and other matters).  A first step in addressing air emission credits is to identify the applicable regulatory regime(s).  In tandem, an evaluation is needed of the target’s operations and air emissions.  It is also essential to understand market conditions for air emission credits, potential changes to the regulatory regime, and a client’s business plans for facility operation.  The structure of the transaction—whether the transaction is the stock purchase of an entire company, the asset purchase of a facility or a division, or a merger—also bears upon how air emission credits should be handled.  All of these inputs should inform deal strategy and purchase agreement negotiation.

Programs Requiring Air Emission Credits

Air emission credits are required by many different programs, and a threshold consideration is identifying which programs are applicable.  Emission credit requirements may be implemented by local, state, federal, or foreign authorities.  Some facilities, such as power plants, face numerous potentially applicable air emission credit programs.  Some of the most common air emission credit programs are described below.

In the United States, one of the most frequently encountered air emission credit programs is the federal Clean Air Act’s (“CAA”) New Source Review (“NSR”) program.  The CAA NSR program requires permits prior to the construction or modification of stationary sources of air emissions.  “Nonattainment” NSR permits are required for new and modified major sources of air emissions in areas where air pollutant concentrations exceed the National Ambient Air Quality Standards (“NAAQS”) set by the United States Environmental Protection Agency (“US EPA”) for criteria pollutants: carbon monoxide, lead, nitrogen dioxide, ozone, particulate matter, or sulfur dioxide.  In order to obtain an NSR permit, a facility must purchase air emission credits to offset any increase in emissions.  NSR air emission credits are created when a facility reduces emissions at an existing source (such as by installing more stringent control technology or shutting down operations).  The idea is that, if an area is in nonattainment with the NAAQS, no facility will be allowed to increase its emissions unless the increased emissions will be counterbalanced by an emissions reduction at another facility.  State and local regulators to whom CAA enforcement authority is delegated are left to flesh out the exact rules of the nonattainment NSR credit requirements, and these rules accordingly differ by jurisdiction.

There are also a number of cap and trade programs that regulate criteria pollutant emissions.  Although these programs vary in their particulars, they largely feature the same components: (i) the requirements that any emitter of a regulated air pollutant both (1) measure its emissions and (2) obtain emission credits commensurate to its emissions; (ii) a “cap” on the amount of market-wide credits in a given time period (which serves to limit market-wide emissions during that time period); and, (iii) the ability to trade credits among regulated entities on an open market.  Cap and trade programs have found favor because they offer regulators the ability to set the caps at levels necessary to ensure given levels of emission reductions (and to dial the caps back over time to steadily reduce market-wide emissions) and because they offer emitters compliance flexibility.  That is, regulated entities have the option of either reducing their own emissions or buying credits from parties who are able to make more cost-effective emission reductions.  These criteria pollutant cap and trade programs include US EPA’s “Acid Rain Program,” which went into effect in 1995 and targets emissions of precursors to acid rain—oxides of sulfur (“SOx”) and nitrogen (“NOx”)—from fossil fuel-fired power plants.  US EPA rolled out in 2015 a successor program, the Cross-State Air Pollution Rule, which requires power plants in twenty-three states to reduce emissions via a cap and trade mechanism.  California’s South Coast Air Quality Management District (“SCAQMD”) instituted the Regional Clean Air Incentives Market (“RECLAIM”) in 1994 to reduce NOx and SOx emissions from facilities emitting over 4 tons per year of either pollutant, including refineries, power plants, aerospace manufacturing facilities, paper mills, chemical companies, food industry facilities, printers, airline facilities, asphalt plants, and many others.  Texas’s Mass Emissions Cap and Trade Program applies to NOx emitters in the Houston-Galveston-Brazoria area, including oil and gas industry facilities, chemical companies, manufacturers, power plants, hospitals, universities, and others.

New and emerging climate change laws make matters more complex, as companies now face requirements to obtain greenhouse gas (“GHG”) emission credits.  In January 2013, California instituted an emission credit regime that caps aggregate annual emissions of GHGs from certain sectors of the economy.  Covered sectors include the following: (i) electricity generators and importers; (ii) producers of cement, glass, hydrogen, iron, steel, lime, and nitric acid; (iii) petroleum refiners; (iv) paper manufacturers; and, (v) stationary combustion sources.  In 2015, suppliers of natural gas and transportation fuels were added to the program.  The Regional Greenhouse Gas Initiative (“RGGI”), an emission credit-based regime covering power sector GHG emissions, went into effect in 2009 in 10 northeastern and mid-Atlantic states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont), although New Jersey withdrew in 2011.  RGGI caps total power sector carbon dioxide (“CO2”) emissions and reduces them over time by requiring fossil fuel-fired electric power generators with a capacity of 25MW or greater to obtain allowances in amounts equal to their respective CO2 emissions.

Abroad, the European Union Emissions Trading Scheme (“EU ETS”), which began in 2005, covers over 11,000 power generation and manufacturing facilities in 28 European Union and 3 other countries.  Chinese provinces and cities, including Beijing, Chongqing, Guangdong, Hubei, Shanghai, Shenzhen, and Tianjin, began implementing GHG cap and trade systems in 2013, and a national program is planned for next year.  South Korea implemented a GHG cap and trade program in 2015.  Similar programs are underway or under consideration in a number of other foreign jurisdictions.

Due Diligence on a Target’s Air Emissions

Once the applicable regulatory regime or regimes have been identified, a potential buyer must evaluate what the business it is acquiring must do in order to comply with the law.

This task is complicated by the fact that sellers often have failed to comply with complex air emission rules and credit requirements.  Sellers may not have been accurately monitoring or reporting air emissions.  This may be a matter of not knowing what their air emissions have been (or, worse, intentional misrepresentation of those emissions to regulators).  To the extent past emissions have not been accurately reported to regulators, a facility may not have the air emissions credits it needs to operate at present levels.  In fact, a facility may have been altogether left out of emissions credit programs (such as a cap and trade program) if regulators failed to realize that the facility has emissions of a magnitude that require its inclusion.  In many cap and trade programs, the early years of the program are when credits are freely allocated by the regulators to covered facilities.  Being left out during these early years can mean missing out on an allocation of free credits.  Regulators are often loathe to disturb carefully-calibrated emissions caps by giving out additional free credits years down the road, so skillful negotiation is called for in such a situation.  If mishandled, underreported emissions problems can spell years of headaches and litigation, and in the worst case scenario, large fines or a forced facility shutdown.

Determining whether emissions have been reported properly can require careful and context-specific diligence.  Air emissions are not within the scope of a Phase I environmental site assessment, and unlike indicia of hazardous materials releases, they are not readily observable.  Even a limited environmental compliance audit will usually fail to quantify a facility’s air emissions.  In order to identify air emissions, it may be necessary to have an environmental consultant knowledgeable as to the business’s processes and emissions profile conduct an in-depth review of the equipment that is present (which may be different than the equipment that is permitted) and how emissions from the equipment are monitored and quantified.  Different jurisdictions have different rules as to how emissions need to be monitored and quantified.  For example, certain jurisdictions allow facilities to estimate emissions using emissions factors (such as by monitoring production and assuming that emissions from the facility are constant and can be determined using a conversion factor that translates production into emissions).  In other cases, a facility must continuously monitor contaminant emissions and report those emissions to regulators in real time.

One helpful tool is the annual third party auditing required by some programs, such as California’s GHG cap and trade program, to verify that facilities are accurately monitoring and reporting emissions.  If available from the seller or the regulatory agency, such reports can be helpful in gauging the risk that a facility is inaccurately reporting emissions.

Market Conditions, Regulatory Developments, and Business Plans

In negotiating the purchase agreement for a facility or company, it may be protective to specify both what kind of and how many credits will be transferred.   These issues, particularly the latter, often require an examination of the air emission credit market, actions the regulator may be taking to influence the market or otherwise modify the program, and a client’s business plans for the facility.

Emission credits come in different flavors and are often classified based on their duration and source of generation.  Certain emission credits are only good for a specific compliance period, such as a calendar year or multiyear period.  Others are good for indefinite periods.  Emission credits may also differ in how they were generated.  For example, in cap and trade markets, compliance credits are normally created and distributed by the regulator running the market, while offsets are generated by entities voluntarily reducing their emissions.  There can be wide price discrepancies between different types of credits, and the different types of credits may be subject to different regulatory requirements (such as invalidation requirements or holding limits).

Analyzing how many credits the buyer will need is more involved than asking how many the seller has to provide.  If a seller has been purchasing credits on an annual basis, the seller may not have any credits to provide to cover operations going forward.  Even if a facility receives through the transaction enough air emission credits to permit future operation at the seller’s pre-transaction production levels, additional credits may be needed if a facility is to expand production or modify its operations.

If a buyer does not obtain through a transaction the air emission credits it requires to operate a business in the future at the production levels it would like, it could be expensive to obtain the credits—or even worse, there may not be any credits available.  In certain markets, credits may be held by a relatively small number of market participants who could be unwilling to sell credits to competitors.  Or there may be far fewer emissions reductions available to generate credits than there is demand for such credits.  As one example of credit scarcity, the SCAQMD published in 2009 the following estimates of nonattainment NSR credit prices based on average market prices.  Credits necessary to permit a printing press would cost $390,000.  A spray booth at an auto body shop would require credits worth $500,000.  Air emission credits for a boiler at a hospital would run $2,000,000, the same price as permitting a tortilla chip fryer and oven at a food-manufacturing facility.  A sewage treatment plant digester and flare would increase the cost to $3,000,000, and a new landfill would really up the ante, to $140,000,000.  In order to determine how many credits would be needed, it is important to understand future production levels and credit market conditions.

Another important consideration is how regulators may modify emission credit rules over time.  Regulators will often tinker with regulatory schemes to hasten the pace of emission reductions if necessary to meet regulatory goals, or to slow the pace of reductions if the economic cost of the program is too high.  For example, regulators will sometimes shrink marketwide emission caps by reducing the value of each market participant’s holding, and buyers can protect themselves by understanding the program’s history regarding and rules governing such matters.

Closing the Deal

As to the purchase agreement itself, a key consideration is the extent to which the representations and warranties, any indemnities, and other provisions, will shift the risk of a failure to comply with air emission credit requirements.  As one example, regulators may seek to invalidate seller-held credits following the closing—even if the seller did no wrong, which is a risk the purchase agreement could be crafted to address.

The overall structure of the transaction bears upon how risk can best be shifted.  Representations and risk-shifting provisions differ among stock purchase agreements, asset purchase agreements, and merger agreements.  For example, in a public company-style merger agreement, there may be little ability to seek indemnification for breaches of representations and warranties, making pre-signing diligence all the more important.  With respect to the purchase of a single facility or a division via an asset purchase agreement, the buyer may have the ability to both (1) classify liabilities related to air emission credit noncompliance as “excluded liabilities” that the seller is stuck with and also (2) classify needed air emission credits as “transferred assets” to be conveyed as part of the deal.  If the primary risk-shifting mechanism is to be via environmental representations and warranties (and an indemnity covering any breaches), as would be common in a stock purchase agreement, then it becomes important that the representations and warranties survive for a period of time sufficient for the buyer to confirm that it, its third party auditor, and the regulator are all satisfied that the representations and warranties are accurate.

The particulars of the applicable regulatory regime and its expected evolution, a buyer’s planned use of the facility, the relevant emissions market, the seller’s processes and emissions monitoring and reporting mechanisms, the type and quantity of credits available for conveyance, and the structure of the transaction all should inform purchase agreement negotiation and pricing.  Air emission credits may often be overlooked in the transactional context, but careful attention to them is necessary if a buyer wants to be sure the value of its investment will not go up in smoke.

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