Case 2:99-cv EAS-TPK Document 419 Filed 11/07/2005 Page 1 of 32

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1 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 1 of 32 IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO EASTERN DIVISION UNITED STATES OF AMERICA, and Plaintiff, STATE OF NEW YORK, ET AL., v. Plaintiff-Intervenors, AMERICAN ELECTRIC POWER SERVICE CORP., ET AL., Defendants. OHIO CITIZEN ACTION, ET AL., v. Plaintiffs, AMERICAN ELECTRIC POWER SERVICE CORP., ET AL., Defendants. Consolidated Civil Action Nos. C and C Judge Edmund A. Sargus, Jr. Magistrate Judge Terence P. Kemp DEFENDANTS MOTION FOR STAY Defendants move for a stay of these cases pending the outcome of an appeal in a similar case now before the United States Court of Appeals for the Sixth Circuit, which should establish for this Circuit a controlling legal principle that will apply to all claims in these cases, and could eliminate forty-six of Plaintiffs sixty liability claims. The Sixth Circuit s ruling could thus eliminate the need for this Court to consider these claims and the basis for extensive remedy

2 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 2 of 32 discovery, and slash the scope of the Court s future consideration of remedies, if required, by nearly seventy-five percent. Defendants also move for a stay to allow the Court sufficient time to consider and decide the legal impact of recent rulemaking actions by the United States Environmental Protection Agency ( USEPA ). Defendants submit that USEPA s actions eliminate the need for both further liability and future remedy proceedings. USEPA recently admitted in official statements (70 Fed. Reg. 61,081) supporting proposed New Source Review ( NSR ) regulations that Congress in the Clean Air Act ( CAA ) intended to require NSR permits for projects that would expand capacity, but not for the increased use of existing capacity. These admissions severely undercut Plaintiffs liability claims, because Plaintiffs theory of liability is based on Defendants increased use of existing capacity, rather than on construction of new, additional capacity. Moreover, USEPA s recent rulemaking renders moot Plaintiffs claims for injunctive relief, and thus would substantially narrow the scope of remedy proceedings if and to the extent they are needed at all. As set forth in the attached Memorandum in Support, a stay of these cases would support the interests of judicial economy, avoid the waste of resources by the Court and the Parties on further liability and future remedy proceedings, and insure the fair application of the legal requirements administered by USEPA. Respectfully submitted, s/ D. Michael Miller D. MICHAEL MILLER ( ), Trial Attorney American Electric Power Service Corporation 1 Riverside Plaza, 29 th Floor Columbus, OH (614) dmmiller@aep.com 2

3 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 3 of 32 Counsel for Defendants Ohio Power Company, Appalachian Power Company, Indiana Michigan Power Company, and Columbus Southern Power Company OF COUNSEL JANET J. HENRY American Electric Power Service Corp. 1 Riverside Plaza, 29 th Floor Columbus, OH Phone (614) jjhenry@aep.com DAVID T. BUENTE, JR. Sidley Austin Brown & Wood LLP 1501 K Street, NW Washington, DC Phone (202) dbeunte@sidley.com RALPH F. GILDEHAUS JAMES B. HADDEN ERIC B. GALLON MOLLY S. CRABTREE Porter Wright Morris & Arthur LLP 41 South High Street Columbus, OH Phone (614) rgildehaus@porterwright.com jbhadden@porterwright.com mcrabtree@porterwright.com s/ Alvin J. McKenna ALVIN J. MCKENNA ( ), Trial Attorney Porter Wright Morris & Arthur LLP 41 South High Street Columbus, OH (614) ; amckenna@porterwright.com Counsel for Defendants American Electric Power Service Corporation and Cardinal Operating Company 3

4 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 4 of 32 SUMMARY OF ARGUMENT I. INTRODUCTION... 1 Primary authorities 28 U.S.C. 2462; Nat l Parks Conservation Ass n v. TVA, No. 301-CV-71, slip op. (E.D. Tenn. Mar. 11, 2005) (attached as Ex. A); TVA Notice of Appeal (attached as Ex. B); TVA Briefing Schedule (attached as Ex. C); 70 Fed. Reg. 61,081 (Oct. 20, 2005); Landis v. North American Co., 299 U.S. 248, 253 (1936). II. LAW AND ARGUMENT... 3 A. The Sixth Circuit s Decision In TVA Could Bar Plaintiffs Claims Based On 46 Of 60 Projects And Slash Remedy Proceedings By Nearly 75% Primary authorities 28 U.S.C. 2462; Nat l Parks Conservation Ass n v. TVA, slip op. at 8, (attached as Ex. A); United States v. American Elec. Power Service Corp., 137 F. Supp. 2d 1060, (S.D. Ohio 2001); Landis, 299 U.S. at 253 KK Motors v. Brunswick Corp., No. Civ , 1999 WL , at *2 (D. Minn. Feb. 23, 1999) (attached as Ex. F). B. USEPA s Official Rulemaking Statements In Support Of Its Proposed NSR Regulations Defeat Plaintiffs Liability Claims, Thus Eliminating The Need For Any Remedy Proceedings... 5 Primary authorities CAA 165(a)(1), 42 U.S.C. 7475(a)(1); CAA 169(2)(C), 42 U.S.C. 7479(2)(C) CAA 172(c)(5), 42 U.S.C. 7502(c)(5); 70 Fed. Reg. at 61,081; 61,099 col USEPA s rulemaking statements validate that Congress intended the modification definition to apply to expansions in capacity, but not to apply to the use of existing capacity... 6 Primary authorities 70 Fed. Reg. at 61,083 col. 2; 61,088 col. 1; 61,093 col. 3; 61,099 col. 1; 61,101 col. 1; Puerto Rican Cement Co., Inc. v. USEPA, 889 F.2d 292, 298 (1st Cir. 1989); Wis. Elec. Power Co. v. Reilly, 893 F.2d 901, , 918 n.14 (7 th Cir. 1990); United States v. Duke Energy Corp., 278 F. Supp. 2d 619, 643 (N.D.N.C. 2003); Defs. Ex. 1119, USGAO, Electricity Supply Older Plants Impact on Reliability and Air Quality (Sept. 1990), at 29-31; Defs. Ex. 1219, USEPA, Response to Issues Raised by Industry on Clean Air Act Implementation Reform (May 30, 1995), at 19; Defs. Ex. 1528, Expert Report of Kenneth Schweers, at 1 2, 5 16, App. A; 70 Fed. Reg. 33,838, 33,840, 33, (June 10, 2005); 68 Fed. Reg. 61,248, 61,252, 61,263-64, 61,269-70, 61,273 (Oct. 27, 2003); Chevron U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837, 842 (1984). 2. USEPA s rulemaking statements support that Congress intended to incorporate the maximum hourly emissions rate test from the NSPS regulations into the NSR programs i

5 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 5 of 32 Primary authorities United States v. Duke Energy Corp., 411 F.3d 539, (4th Cir. 2005), reh g and reh g en banc den d, No (4th Cir. Aug. 30, 2005); 70 Fed. Reg. at 61,083 cols. 1-2; 61,095 col. 1-61,096 col. 2; 61,097 col. 2.; 61,098 col. 3; 61,099 at col. 1; 61,100 col. 2; 61,110 col. 2-3; Bragdon v. Abbott, 524 U.S. 624, 632 (1998); Defs. Ex. 1576, Rockwell PSD Applicability Determination, at 1; Chevron, 467 U.S. at USEPA s admissions establish the basic unfairness of applying Plaintiffs proposed emissions test when this test will not be applied to similar equipment replacement projects Primary authorities 70 Fed. Reg. at 61,083 cols. 1-2; Mem. from M. Peacock to Regional Administrators and State Environmental Commissioners (Oct. 13, 2005) (attached as Ex. G); County of Los Angeles v. Shalala, 192 F.3d 1005, 1023 (D.C. Cir. 1996); Transactive Corp. v. United States, 91 F.3d 232, 237 (D.C. Cir. 1996); Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985); Nat l Coal. Against the Misuse of Pest. v. Thomas, 809 F.2d 875 (D.C. Cir. 1987); Oyler v. Boles, 368 U.S. 448, 456 (1962). 4. USEPA s admissions establish that there was no fair notice that NSR applied to increased use of existing capacity Primary authorities 70 Fed. Reg. at 61,091 cols. 1, 3; 61,093 col. 3; 61,094 col. 1; 61,095 col. 1-61,096 col. 2; 61,097 col. 2; 61,099 col. 1; 61,100 col. 1; Defs. Ex. 1534, Letter from L. Reed to E. Weathersbee re Portland General Electric (Jan. 1, 1978) at 1; Defs. Ex. 1576, Rockwell PSD Applicability Determination, at 1, 3-5; 68 Fed. Reg. at 61,269; 45 Fed. Reg. 52, 676, 52, 700 (Aug. 7, 1980). C. USEPA s Official Policy Statements Also Render Moot Plaintiffs Injunctive Relief Claims, Thus Eliminating The Need For A Substantial Portion Of The Remedy Proceedings Primary authorities Walling v. Nashville, C. & St. L. R. Co., 60 F. Supp. 1004, 1008 (M.D. Tenn. 1945); Goldmeier v. Allstate Ins. Co., 337 F.3d 629, 637 (6 th Cir. 2003); Prater v. City of Burnside, 289 F.3d 417, 433 (6 th Cir. 2002); Duplex Printing Press Co. v. Deering, 254 U.S. 443 (1921); Landgraf v. USI Film Prods., 511 U.S. 244, 274 (1994); Mojica v. Reno, 970 F. Supp. 130, 179 (E.D.N.Y. 1997) Miller v. French, 530 U.S. 327, 345 (2000); Pennsylvania v. Wheeling & Belmont Bridge Co., 54 U.S. 518 (1852); Yellow Springs Exempted Village School Dist. Bd. of Educ. v. Ohio High School Athletic Ass n, 647 F.2d 651, 654 n.2 (6 th Cir. 1981); 70 Fed. Reg. at 61,083, col. 2; 61,083 col. 3-61,088 col. 1; 61,094 col. 2; 61,094 col. 3 66,095 col. 1; Unauthorized Practice of Law Committee v. Parsons Technology Inc., 179 F.3d 956 (5 th Cir. 1999); Salute v. Stratford Green Apts., 136 F.3d 293, 298 n.2 (2 nd Cir. 1998); Neilsen v. Stepping Stones Assocs., L.P., 930 F. Supp. 910, 912 (S.D.N.Y. 1996). D. The Court Should Exercise Its Discretion To Stay These Cases Pending The Outcome Of The TVA Appeal And In Light Of USEPA s Recent Official Admissions ii

6 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 6 of 32 Primary authorities Landis, 299 U.S. at 254; Lynch v. Johns-Manville Sales Corp., 710 F.2d 1194 (6th Cir. 1983); Ohio Environmental Council v. United States, 565 F.2d 393, 396 (6th Cir. 1977); Bedel v. Thompson, 103 F.R.D. 78 (S.D. Ohio 1984); Clinton v. Jones, 520 U.S. 681, 706 (1997); Kerotest Mfg. Co. v. C-O-Two Fire Equip. Co., 342 U.S. 180, (1952); Romine v. Compuserve Corp., 160 F.3d 337, 338 (6th Cir. 1998); Ferrell v. Wyeth-Ayerst Labs., Inc., 2005 WL , at *2 (S.D. Ohio Oct. 21, 2005) (attached as Ex. I); Stark v. Wickard, 321 U.S. 288, 310 (1944); Michael v. Ghee, 325 F. Supp. 2d 829 (N.D. Ohio 2004); Badalament, Inc. v. Mel-O-Ripe Banana Brands, Ltd., 265 B.R. 732, 738 (E.D. Mich. 2001); Newsome v. Northwest Airlines Corp., 225 F. Supp. 2d 822 (W.D. Tenn 2002); Hahn v. Star Bank, 190 F.3d 708, 719 (6 th Cir. 1999); Texas Indep. Producers & Royalty Owners Ass n v. EPA, 410 F.3d 964, 980 (7 th Cir. 2005) Florida Farmworkers Council, Inc. v. Marshall, 710 F.2d 721, 726 (11 th Cir. 1983); Marshel v. AFW Fabric Corp., 552 F.2d 471 (2d Cir. 1977) (per curiam); Wing Shing Prods. (BVI) Ltd. V. Simatelex Mfg. Co., No. 01 Civ. 1044, 2005 WL , at **2-3 (S.D.N.Y. Apr. 19, 2005) (attached as Ex. J); O Connell v. Sec y of Health & Human Servs., 63 Fed. Cl. 49, 55 (2004); In re Literary Works in Elec. Databases Copyright Litig., No. M-21-90, MDL 1379, 00 Civ 6049, 00 Civ 9411, 2001 WL , at **2-3 (S.D.N.Y. Mar. 1, 2001) (attached as Ex. K); Marbury v. Colonial Mortgage Co., No. Civ. A. 98-D-355-N, 2001 WL , at *9 (M.D. Ala. Jan. 12, 2001) (attached as Ex. L); KK Motors, 1999 WL , at *2 (attached as Ex. F); Colorado River Water Conservation Dist. v. United States, 424 U.S. 800, 817 (1976). III. CONCLUSION CERTIFICATE OF SERVICE iii

7 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 7 of 32 MEMORANDUM IN SUPPORT I. INTRODUCTION The Court should stay further proceedings in these cases for two reasons. First, the case should be stayed pending the outcome of an appeal presently before the United States Court of Appeals for the Sixth Circuit in a similar CAA case, National Parks Conservation Ass n, Inc. v. TVA, No ( the TVA appeal ). At issue in the TVA appeal is whether the federal fiveyear statute of limitations, 28 U.S.C. 2462, bars CAA NSR enforcement claims based on equipment replacement projects undertaken more than five years before suit was filed. The District Court in TVA ruled that such claims, whether for civil penalties or injunctive relief, are barred by the applicable statute of limitations. 1 The District Court s decision was appealed on August 22, 2005, 2 and will be fully briefed within the next few months. 3 If the Sixth Circuit affirms the District Court s TVA decision, then the law of this Circuit would bar Plaintiffs claims based on forty-six of the sixty projects at issue in these cases. Those forty-sixty projects were undertaken more than five years before Plaintiffs filed suit on November 3, Such a ruling would narrow the scope of liability issues for the Court to decide, by eliminating consideration of NSR law before November 3, Such a ruling also would greatly narrow the scope of the remedy proceedings, if needed, because all claims at nearly 75% of the electric generating units involved in the AEP cases would no longer be at issue. For this reason alone, a stay would postpone the need for the Court s further consideration of liability issues and the burden of extensive remedy discovery and trial proceedings that may not be necessary, in whole or in part, after the Sixth Circuit s decision. 1 Nat l Parks Conservation Ass n v. TVA, No. 301-CV-71, slip op. (E.D. Tenn. Mar. 11, 2005) (attached as Ex. A). 2 See TVA Notice of Appeal (attached as Ex. B, without its attachments) 3 See TVA Briefing Schedule (attached as Ex. C). 1

8 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 8 of 32 The Court also should stay further proceedings because of the legal impact of official rulemaking statements by USEPA in support of its recently-proposed NSR regulations. 5 USEPA s statements concede that Congress did not intend to apply NSR to projects that increase use of existing capacity, thus repudiating Plaintiffs theory of liability. Indeed, USEPA s statements support Defendants legal argument that the CAA s NSR provisions do not require an existing electric generating unit to obtain an NSR permit unless it would expand capacity by increasing the maximum hourly emissions rate. If the Court rules against Plaintiffs on the basis of USEPA s rulemaking statements, this would eliminate the need for resolving all other liability issues presently before the Court. Such a ruling also would eliminate the need for remedy witness development, extensive remedy discovery, and scheduled remedy trial proceedings. Moreover, USEPA s recent rulemaking decision not to require pollution controls on units that do not expand, because other CAA programs are reducing emissions more efficiently, renders moot Plaintiffs claims for injunctive relief. The elimination of Plaintiffs injunctive relief claims substantially narrows the scope of remedy proceedings in these cases. It is injudicious for discovery to proceed concerning Plaintiffs claims for injunctive relief when those claims have been eliminated by USEPA s rulemaking. In addition, the AEP Companies installation, or planned installation, of NO x and SO 2 pollution controls on a large number of units, including many at issue in this litigation, 6 and planned retirement of two units at issue, 7 eliminates the need for any rush to conduct a remedy trial in these cases. 4 See Chart (attached as Ex. D), showing projects took place more than five years prior to filing of suit. 5 See 70 Fed. Reg. 61,081 (Oct. 20, 2005). 6 See Defendants Response 1(b) & 2(b) to U.S. First Set of Interrogs. (Oct. 24, 2005) (attached as Ex. E). 7 See News Release, AEP Seeks Permission To Retire Conesville Units 1 and 2 (October 3, 2005) (attached as Ex. H). 2

9 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 9 of 32 This Court has discretion to stay further proceedings in these cases pending resolution of an appeal that could affect both liability and remedy issues. 8 Defendants request that the Court issue a stay of further proceedings pending the outcome of the Sixth Circuit s decision in the TVA appeal and this Court s decision on the legal impact of USEPA s official rulemaking on further liability and future remedy proceedings. II. LAW AND ARGUMENT A. The Sixth Circuit s Decision In TVA Could Bar Plaintiffs Claims Based On 46 Of 60 Projects And Slash Remedy Proceedings By Nearly 75%. The Sixth Circuit in the TVA appeal will decide whether the five-year statute of limitations, 28 U.S.C. 2462, bars NSR enforcement claims based on equipment replacement projects that took place more than five years prior to filing suit. The District Court in TVA held that the statute of limitations barred civil penalties for alleged NSR violations based on projects undertaken more than five years before suit was filed, and dismissed those claims. 9 The court also ruled that the plaintiffs claims for declaratory and injunctive relief were barred by the concurrent remedy rule, and dismissed those claims as well. 10 This Court, in these cases, ruled that the five-year statute of limitations does not bar Plaintiffs penalty claims, but limits recovery of penalties, if any, by Plaintiffs to a period of five years. 11 This Court also ruled that the statute of limitations did not bar Plaintiffs injunctive relief claims based on projects undertaken more than five years before Plaintiffs brought suit. 12 Thus, the TVA decision considered essentially almost identical legal questions to those 8 See Landis v. North American Co., 299 U.S. 248, 253 (1936). 9 Nat l Parks Conservation Ass n v. TVA, slip op. at 8, 14 (attached as Ex. A). 10 Id. at (citing Int l Ass n of Machinists & Aerospace Works v. TVA, 108 F.3d 658, 668 (6 th Cir. 1997)). 11 See United States v. American Elec. Power Service Corp., 137 F. Supp. 2d 1060, (S.D. Ohio 2001). 12 Id. at

10 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 10 of 32 considered by this Court in its statute of limitations decision in these cases, but reached opposite results. If the Sixth Circuit rules in the TVA appeal that the statute of limitations bars penalty and injunctive relief claims based on projects undertaken more than five years before suit was filed, then Plaintiffs claims based on 46 of the 60 projects at issue in these cases would be barred. 13 Dismissal of those claims would obviate the need for the Court to consider all liability issues before the Court concerning those claims, and would eliminate the need for remedy proceedings concerning 19 electric generating units at which projects took place more than five years prior to suit. Even if the Court found liability on the non-barred claims, only 7 units would remain at issue, out of the 26 units at which Plaintiffs alleged violations. 14 The Court should order a stay pending the outcome of the TVA appeal, because the Sixth Circuit s decision could drastically narrow the scope of remedy discovery currently underway 15 and the remedy trial scheduled for May of 2006, 16 if necessary, by almost 75% See Chart (attached as Ex. D), showing which projects took place more than five years before suit was filed. 14 These units are Amos 3, Clinch River 1-3, Kammer 2, Muskingum River 4, and Tanners Creek 4. See id. The scope of remedy proceedings would be narrower still, because SCR systems for NO x control have been installed, and FGD systems for SO 2 control are scheduled to be installed, at Amos Unit 3. See Defendants Responses 1(b) & 2(b) to U.S. First Set of Interrogs. (Oct. 24, 2005) (attached as Ex. E). Clinch River 1-3 and Tanners Creek 4 are also equipped with overfire air or deep staging systems for NO x control. See id. at Response 1(b). 15 See Order (Docket No. 395) (Sept. 16, 2005). 16 See Order (Docket No. 377) (July 26, 2005). 17 See Landis, 299 U.S. at 253 (stating that staying proceedings is particularly appropriate when a ruling in another proceeding will likely narrow the issues in the pending case ); see also KK Motors v. Brunswick Corp., No. Civ , 1999 WL , at *2 (D. Minn. Feb. 23, 1999) (attached as Ex. F) (noting that scope of discovery, motions practice, and trial will be shaped by appellate decision in another case). 4

11 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 11 of 32 B. USEPA s Official Rulemaking Statements In Support Of Its Proposed NSR Regulations Defeat Plaintiffs Liability Claims, Thus Eliminating The Need For Any Remedy Proceedings. The central question in these cases is whether sixty equipment replacement projects undertaken by five electric utility operating companies ( the AEP Companies ) 18 were both modifications and major modifications that allegedly required NSR permits under the CAA. 19 Official statements by USEPA in recent rulemaking answered no to that question. These statements were made in the context of a notice of proposed rulemaking, published by USEPA in the Federal Register on October 20, 2005, to make the NSR emissions increase test similar to the emissions test in USEPA s New Source Performance Standards ( NSPS ) regulations. The new regulations would specify that a change at an existing electric generating unit is not a modification, and thus would not require an NSR permit, unless it would cause an increase in the maximum hourly emissions rate increase of a regulated pollutant. 20 In justifying its proposed regulations, USEPA made the crucial admission that Congress intended the modification definition to apply to expansions in capacity, but not to the use of existing capacity. 21 Plaintiffs entire theory of these cases depends upon their argument that NSR applies to increased use of existing capacity. Matching Defendants legal position now supported as it is by USEPA s recent official rulemaking position with the facts of these cases, 18 The five operating company Defendants include Appalachian Power Company, Cardinal Operating Company, Columbus Southern Power Company, Indiana Michigan Power Company, and Ohio Power Company. 19 See CAA 165(a)(1), 42 U.S.C. 7475(a)(1) (stating for PSD, [n]o major emitting facility... may be constructed in any area to which this part applies unless (1) a permit has been issued for such proposed facility in accordance with this part setting forth emission limitations for such facility which conform to the requirements of this part ), 169(2)(C), 42 U.S.C. 7479(2)(C) ( The term construction when used in connection with any source or facility, includes the modification (as defined in Section 111(a)) of any source or facility. ); see also CAA 172(c)(5), 42 U.S.C. 7502(c)(5) (stating that, for NNSR, [t]he plan provisions... required to be submitted under this part shall... require permits for the construction and operation of new or modified major stationary sources anywhere in the nonattainment area, in accordance with section 173 ) Fed. Reg. at 61, Id. at 61,099 col. 1. 5

12 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 12 of 32 makes even clearer that Plaintiffs liability claims cannot survive, and there is no reason for remedy discovery or further proceedings in these cases. Accordingly, Defendants request a stay of proceedings while the Court decides the legal impact of USEPA s admissions on Plaintiffs liability claims. 1. USEPA s rulemaking statements validate that Congress intended the modification definition to apply to expansions in capacity, but not to apply to the use of existing capacity. USEPA emphasized in its notice of proposed rulemaking that the primary purpose of the major NSR program is not to reduce emissions, but... to minimize emissions increases from new source growth. 22 USEPA stated, [t]he central policy goal of the NSR programs is not to limit productive capacity of major stationary sources. 23 USEPA explained that projects which would improve the efficiency, reliability, availability, and safety of existing power plants without increasing existing capacity (such as those undertaken by the AEP Companies at issue in these cases 24 ) should not be subject to the NSR permitting process. 25 USEPA in its official rulemaking admitted that the statute shows that Congress intended the modification definition to apply to expansions in capacity, but not to the use of existing capacity. 26 USEPA s admissions that Congress intended NSR to apply only to expansions of existing capacity, and not to increased availability or increased hours of operation within existing capacity, has substantial support in the legislative record of the 1977 CAA Amendments Id. at 61,088 col Id. at 61,083 col Defs. Prop. Findings of Fact and Concls. of Law 1-13, 27, 36-38, 56-70, 73, 83, , Fed. Reg. at 61,083 at col. 2; 61,093 col. 3; 61,101 col Id. at 61,099 col See Defs. Prop. Findings of Fact and Concls. of Law 33, ; see also id. 396 (quoting 68 Fed. Reg. 61,248, 61,269 (Oct. 27, 2003)); Mem. of Defs. in Opp. to Plfs. Prop. Findings of Fact and Concls. of Law, at

13 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 13 of 32 USEPA s recent admissions are also consistent with past interpretations of Congressional intent by the First Circuit in Puerto Rican Cement 28 and the Seventh Circuit in WEPCo. 29 In Puerto Rican Cement, the court explained that NSR is triggered by the construction of new capacity to emit, rather than increased use of existing capacity the statute refers to the construction of facilities, not to increased use of existing facilities. See 42 U.S.C. 7479(2)(C).... [T]here is no logical contradiction in rules that, on the one hand, permit firms using existing capacity simply to increase their output, and, on the other, use the potential output of new capacity as a basis for calculating an increase in emissions levels. 30 The First Circuit s reasoning is entirely consistent with USEPA s recent rulemaking admissions. In WEPCo, the Seventh Circuit found that WEPCo s planned renovation projects would increase the maximum hourly emissions rates of its units (triggering NSPS). 31 Then, to determine whether PSD applied, the court instructed USEPA to hold hours of operation and the production rate constant in determining whether the emissions rates increases would result in significant and net increases in annual emissions. 32 In other words, the court instructed USEPA to convert any maximum hourly emissions rate increases (for threshold PSD applicability) into annual emissions rates (for netting and significance levels) while holding production rates and hours of operation constant based on the definition of actual emissions in the 1980 regulations. 33 As the District Court in Duke explained Unlike NSPS which is always triggered whenever there is an increase in the hourly rate of emissions, PSD is potentially triggered when there is an increase in 28 Puerto Rican Cement Co., Inc. v. USEPA, 889 F.2d 292 (1st Cir. 1989). 29 Wis. Elec. Power Co. v. Reilly, 893 F.2d 901 (7 th Cir. 1990) ( WEPCo ). 30 Puerto Rican Cement, 889 F.2d at 298 (emphasis in original). 31 See WEPCo, 893 F.2d at Id. at 918 n.14 (instructing USEPA to review whether the renovated plant would cause a significant net emissions increase if it were operated under present hours and conditions to determine... whether the Port Washington plant [would] be subject to the PSD program. ) (emphasis added)). 33 Id.; see also Defs Proposed Findings of Fact and Concls. of Law

14 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 14 of 32 the hourly emissions rate but only if the annualized emissions increase (1) exceeds the significance levels... and (2) is not offset by contemporaneous decreases at the source. These two conditions for PSD applicability significance levels and netting effectuate the air quality purpose of the [NSR] program[s]. See Alabama Power Co. v. Costle, 636 F.2d 323, 401 (D.C. Cir. 1979) (explaining that PSD is concerned only with air quality and thus requires netting). These conditions also explain why emissions under PSD must be calculated on an annual basis measuring emissions in tons per year makes possible netting (addition and subtraction) of emissions rates between various units at a plant. 34 Consistent with USEPA s recent rulemaking admissions as to Congressional intent, Puerto Rican Cement and WEPCo applied NSR only to increases in a source s capacity to emit, not to increased use of already-existing capacity. 35 USEPA s admissions resolve the critical question before this Court of whether Congress intended NSR to apply only to expansions of existing capacity, as Defendants submitted, or also to increased availability and hours of operation within existing capacity, as Plaintiffs argued. Under the Supreme Court s Chevron decision, since Congress has directly spoken to the precise question at issue... that is the end of the matter. 36 USEPA was delegated authority to require NSR permits for projects that would expand capacity, but not delegated authority to apply NSR to projects that would increase availability or hours of operation within existing capacity. 37 This decision by Congress resolves Plaintiffs liability claims in Defendants favor. 34 United States v. Duke Energy Corp., 278 F. Supp. 2d 619, 643 (N.D.N.C. 2003). 35 These rulemaking statements are also consistent with a number of post-wepco pronouncements by the agency, including USEPA s statements that (1) the WEPCo ruling would not apply to the vast majority of utility lifeextension projects (Defs. Ex. 1119, USGAO, Electricity Supply Older Plants Impact on Reliability and Air Quality (Sept. 1990), at 29-31); (2) routine restorations of lost capacity of existing units do not trigger NSR requirements (Defs. Ex. 1219, USEPA, Response to Issues Raised by Industry on Clean Air Act Implementation Reform (May 30, 1995), at 19); (3) utility unit refurbishments would occur without triggering regulatory constraints in its analyses of the Acid Rain program and the NO x SIP Call, (Defs. Ex. 1528, Expert Report of Kenneth Schweers, at 1 2, 5 16, App. A); and (4) that functionally equivalent equipment replacement projects similar to the AEP Companies projects are not anticipated to result in an emissions increase and should not be subject to NSR requirements (70 Fed. Reg. 33,838, 33,840, 33, (June 10, 2005); 68 Fed. Reg. 61,248, 61,252, 61,263-64, 61,269-70, 61,273 (Oct. 27, 2003)). 36 Chevron U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837, 842 (1984) Fed. Reg. at 61,099 col. 1. 8

15 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 15 of USEPA s rulemaking statements support that Congress intended to incorporate the maximum hourly emissions rate test from the NSPS regulations into the NSR programs. In its proposed rulemaking, USEPA recognized the holding of the Fourth Circuit in United States v. Duke Energy Corp. 38 that Congress adopted a maximum hourly emissions rate test for the NSR programs when it incorporated the term modification from the NSPS program into NSR. 39 In justifying its proposed regulations, USEPA admitted essential predicates which lead to the inescapable legal conclusion that Congress intended to incorporate the maximum hourly emissions rate test from USEPA s NSPS regulations into the NSR programs, as the Fourth Circuit held in Duke Energy. The predicates USEPA admitted are a. Before Congress amended the CAA in 1977 to create the statutory NSR programs, USEPA s 1975 NSPS regulations interpreted the component term increases in the amount of any air pollutant emitted within the statutory term modification to require a maximum hourly emissions rate increase as expressed in kilograms/hour. 40 b. Before 1977, USEPA s 1975 PSD regulations applied the term modification to require a maximum hourly emissions rate increase expressed in kilograms/hour, since USEPA intended the PSD definition of modified source to be consistent with the definition of that term under the NSPS regulations. 41 c. Congress was likely aware, before it enacted the 1977 Amendments, that we calculated emissions increases in terms of kg/hr to determine whether a project resulted in a modification. Congress did not indicate anywhere in the 1977 Amendments or the legislative history that our use of a kg/hr measure would be contrary to the purposes of the NSR program[s]. 42 Supreme Court precedent recognizes the presumption that Congress intends a statutory term to be construed in the same manner as that term is construed under regulations in existence F.3d 539, (4th Cir. 2005), reh g and reh g en banc den d, No (4th Cir. Aug. 30, 2005) Fed. Reg. at 61,083 cols. 1-2; 61,098 col Id. at 61,095 col. 3-61,096 col. 2; 61,110 col Id. at 61,097 col. 1; 61,099 at col Id. at 61,100 col. 2. 9

16 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 16 of 32 at the time of the statutory enactment, unless Congress specifies otherwise. 43 USEPA now admits, in its official rulemaking, that Congress did not specify that the term modification should be construed in a different manner under the statutory NSR programs than it has been construed previously in the pre-1977 NSPS and PSD regulations. 44 The inescapable conclusion is that Congress incorporated into the NSR programs the pre-1977 NSPS and PSD regulations treatment of the component term increases in the amount of any air pollutant emitted, within the statutory definition of modification, to require an increase in the maximum hourly emissions rate, expressed as kilograms per hour, under NSR. 45 Again, under the Supreme Court s Chevron decision, because Congress has directly spoken to the precise question at issue... that is the end of the matter. 46 The intent of Congress to incorporate the maximum hourly emissions rate test in the NSR programs defeats Plaintiffs liability claims in these cases. 43 See Defs. Prop. Findings of Fact and Concls. of Law (citing Bragdon v. Abbott, 524 U.S. 624, 632 (1998)). In its recent NSR opinion, the D.C. Circuit stated a different test it required indications in the statutory language or history to infer that Congress intended to incorporate into a statute a preexisting regulatory definition. New York v. USEPA, 413 F.3d 3, 19 (D.C. Cir. 2005) (citing Cont l Air Lines, Inc. v. Dep t of Transp., 843 F.2d 1444, 1454 (D.C. Cir. 1988)). Clearly, however, this Court is bound, not by a 1988 opinion from the D.C. Circuit, but by the precedent of the Supreme Court s 1998 opinion. 44 Although USEPA embraces much of the logic of Duke Energy in its proposed rulemaking, Plaintiffs argued before this Court that Duke Energy was wrongly decided. Notwithstanding that the D.C. Circuit disclaimed any opinion on the matter, Plaintiffs placed heavy reliance on the D.C. Circuit s opinion in New York v. USEPA to argue that Congress did not incorporate the NSPS approach into the NSR programs. The D.C. Circuit stated that the rules of statutory construction do not compel the conclusion that Congress incorporated the NSPS definition of modification into NSR because it found that the NSPS and NSR programs pre-1977 regulations contained different definitions of modification. 413 F.3d at However, that finding of different definitions is not accurate. As Plaintiffs have admitted, the pre-1977 NSPS and PSD definitions of modification are the same, and both required an increase in a source s maximum hourly emissions rate. See Pls. Prop. Concls. Of Law USEPA repeated this concession in its proposed rulemaking. See 70 Fed. Reg. at 61,095 col. 1-61,096 col. 2; 61,097 col. 2. The reasoning of New York v. USEPA does not apply because Plaintiffs have repudiated the basis of that decision. 45 Thus, the definition of modification is the same for both NSPS and NSR, but the difference between the programs is that NSR permits are required only if a modification (an increase in the maximum hourly emissions rate) is also a major modification (an increase by a significant amount in terms of tons per year net for the entire source). See Defs. Prop. Findings of Fact and Concls. of Law 42-45, 47-48, 71-78, ; see also Defs. Ex. 1576, Rockwell PSD Applicability Determination, at 1 (acknowledging that a modification would need to be determined to be major in order for a PSD permit to be required under the 1980 regulations). 46 Chevron, 467 U.S. at

17 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 17 of USEPA s admissions establish the basic unfairness of applying Plaintiffs proposed emissions test when this test will not be applied to similar equipment replacement projects. In its recent rulemaking, USEPA proposes to apply the Duke Energy approach nationally, not just in the Fourth Circuit. As such, the revised regulations would provide national consistency and avoid the potential disparity of applying the emissions test proffered by Plaintiffs in these cases in some parts of the country, but having to apply the Duke Energy approach in the jurisdictional region covered by the Fourth Circuit. 47 Concurrent with the rulemaking, USEPA announced its official policy that it would not pursue new enforcement actions concerning past projects that did not increase the maximum hourly emissions rate of a regulated pollutant. 48 However, USEPA signaled an intent to continue to pursue these cases (and a few other pending enforcement actions) against power plants, 49 and thus ask courts to require NSR permits for past projects based on increased use, but not expansion, of existing capacity an approach whereby USEPA attempts to withhold the benefit of its proposed regulation from a few sources based on nothing other than the arbitrary distinction that a plant is currently the subject of an NSR enforcement proceeding in some jurisdiction other that the Fourth Circuit Fed. Reg. at 61,083 cols See Mem. from M. Peacock to Regional Administrators and State Environmental Commissioners (Oct. 13, 2005) (attached as Ex. G). 49 Id. at The AEP Companies projects at issue are similar to equipment replacements completed by other utilities across the country, as Plaintiffs own witnesses admitted. See Koppe, Tr. Vol. I at 82, line 2 83, line 4 (stating the projects at issue in these cases including the replacement of economizers, condenser tubes, pulverizers, burners, lower furnaces, primary and secondary superheaters, cyclones, furnace floors, and heaters are routine projects at non-aep generating units throughout the industry); Hekking Dep. (Jan. 7, 2003) (U.S. v. Ill. Power Co., et al., 99- CV-833-MJR) at 213, line 6 214, line 1. Defendants witnesses confirmed the same conclusion. See Defs. Ex. 1524, Expert Report of William Tuppeny, at 5, 115 (noting the decisions made and actions taken by AEP regarding the various pressure parts and firing system component projects were consistent with utility practices ); Tuppeny Dep. (Nov. 18, 2004) at 68, lines (stating AEP projects are common in the industry ); Defs. Ex. 1516, Expert Report of John Burns, at 1; Defs. Ex. 1519, Expert Report of Jerry Golden, at 12 (noting in particular, [r]eplacement, in whole or in part, of superheaters, reheaters, economizers, waterwalls, headers, feedwater heaters, condenser tubes, etc., occur frequently within the industry ). 11

18 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 18 of 32 The basic unfairness of USEPA s attempt to apply different standards to similar projects in different parts of the country is particularly acute in these cases. In the pending cases, 25 equipment replacement projects took place at 14 electric generating units among 5 electric generating stations the Amos, Clinch River, Kammer, Mitchell, and Sporn Plants which are all physically located in States where the Fourth Circuit s Duke Energy decision is currently effective. 51 USEPA thus wants to have it both ways, by applying the new regulations to future projects and past projects not under suit, while continuing to prosecute already-filed actions under the old enforcement formula, thereby attempting to penalize the identical types of projects that improve unit reliability and availability without increasing hourly emissions rates that the proposed rule rightly encourages. As already established, USEPA s attempt to have its cake and eat it too must fail. USEPA s official statements interpreting the CAA in support of its proposed regulations contradict essential elements of Plaintiffs legal position in these cases. For this reason alone, the Court should stay the remedy phase of these cases and ultimately enter judgment against Plaintiffs on their liability claims. In addition, USEPA s continued attempt to apply NSR to a handful of utilities that undertook equipment replacements without expanding existing units, and then not applying NSR to other utilities that undertook similar projects, is not only contrary to Congressional intent, but arbitrary, capricious, and in violation of due process. USEPA s assertion that it is entitled to continue prosecuting this enforcement action against the AEP Companies while at the same time maintaining a contrary interpretation of the CAA for all other similarly-situated power plants is a violation of basic notions of due process. While federal agencies retain a considerable measure of discretion to interpret statutory commands, this discretion is not a license to treat cases 51 See Chart (Ex. D), showing which projects took place in West Virginia and Virginia, within the Fourth Circuit. 12

19 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 19 of 32 differently. 52 Instead, [a] long line of precedent has established that an agency action is arbitrary when the agency offer[s] insufficient reasons for treating similar situations differently. 53 Here, USEPA has provided no reason for why it should be able to assert completely opposing interpretations of the same CAA provisions, one for pending enforcement cases, and the other for all other coal-fired power plants in the nation. In a regulatory context, such agency conduct is viewed as arbitrary or capricious. This polarity, when adopted in the context of criminal or civil enforcement actions, presents serious due process issues of constitutional dimensions. Clearly, USEPA retains discretion to bring enforcement actions, and to refuse to bring others. However, the agency has failed to provide any clear reasoning explaining why USEPA can maintain simultaneously two completely opposite interpretations of the CAA. When a governmental entity bases its prosecution determinations upon unjustifiable or nonexistent standards, that is a violation of constitutional rights. 54 For this reason, too, the Court should enter judgment against Plaintiffs on their liability claims. 4. USEPA s admissions establish that there was no fair notice that NSR applied to increased use of existing capacity. Plaintiffs liability claims also should be rejected because USEPA failed to provide fair notice that NSR permits were required for past projects that did not expand existing capacity. USEPA as much as admitted there was no fair notice of what types of projects require NSR permits, because it can be difficult for the owner or operator to know with reasonable certainty 52 County of Los Angeles v. Shalala, 192 F.3d 1005, 1023 (D.C. Cir. 1996). 53 Transactive Corp. v. United States, 91 F.3d 232, 237 (D.C. Cir. 1996); see also Airmark Corp. v. FAA, 758 F.2d 685 (D.C. Cir. 1985); Nat l Coal. Against the Misuse of Pest. v. Thomas, 809 F.2d 875 (D.C. Cir. 1987). 54 Oyler v. Boles, 368 U.S. 448, 456 (1962). 13

20 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 20 of 32 whether a particular activity would trigger major NSR. 55 Indeed, USEPA observed that there is a possibility that EPA could... make a different applicability determination than the State has made. 56 As deposition testimony offered at trial in these cases bears out here, state regulatory officials including in Ohio and in the Plaintiff States of New York and Connecticut did not require NSR permits for the types of equipment replacements at issue in these lawsuits. 57 There was no fair notice in USEPA s pre-1980 NSR regulations that NSR would apply to increased use of existing capacity. Both Plaintiffs and Defendants agree that USEPA s pre NSPS and PSD regulations set forth the same maximum hourly emissions rate test. 58 Both Plaintiffs and Defendants agree that USEPA s 1978 PSD regulations and 1979 NNSR offset ruling following the 1977 CAA Amendments adopted capacity-based emissions tests. 59 This latter admission is particularly important here because, as Defendants have established, seven projects at issue were undertaken when these pre-1980 regulations were in effect, and none required NSR permits. 60 Statements by USEPA made in 1978, before any of the projects at issue here took place, and one year after Congress created the statutory NSR programs, are entirely consistent with USEPA s recent admissions about Congressional intent. USEPA explained in 1978 that [t]he purpose of the stringent new source review requirements is to assure that sources not factored into the State Implementation Plan strategy will not interfere with attainment and maintenance Fed. Reg. at 61,093 col Id. at 61,094 col See Defs Prop. Findings of Fact and Concls. of Law Plfs. Prop. Concls. Of Law ; 70 Fed. Reg. at 61,095 col. 1-61,096 col. 2; 61,097 col. 2; Defs. Prop. Findings of Fact and Concls. Of Law Plfs. Prop. Concls. of Law ; 70 Fed. Reg. at 61,099 col. 1; Defs. Prop. Findings of Fact and Concls. of Law Defs. Prop. Findings of Fact and Concls. of Law 49-55; Mem. of Defs In Opp. to Plfs. Prop. Findings of Fact and Concls. of Law, at

21 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 21 of 32 of any ambient standard or contribute to a significant deterioration of air quality. 61 Under this rationale, a project that ensures reliable operation of an existing source, but does not affect original design capabilities, does not require an NSR permit. Emissions from that source, operated at its original full design capabilities for every hour of the year, already have been factored into the State Implementation Plan. 62 Consistent with that 1978 explanation of Congressional intent, USEPA now has confirmed that Congress intended the modification definition to apply to expansions in capacity, but not to the use of existing capacity. 63 There also was no fair notice in USEPA s 1980 NSR regulations that NSR would apply to increased use of existing capacity. Plaintiffs entire case depends on the theory that USEPA in 1980 intended to depart from the NSPS approach and apply NSR not only to expansions in capacity, but also to increased use of existing capacity. However, when USEPA reworded the definition of major modification in 1980 to focus on changes in actual emissions, it did so to bring NSR more in line with NSPS, and not to reject the practice under NSPS. As USEPA explained in the Preamble to its 1980 NSR regulations In the June 1979 opinion in Alabama Power, the [D.C. Circuit] held that the [NSPS] definition of modification in section 111(a)(4) governs the definition of that term for PSD purposes.... In its December 1979 opinion... the court used... language [to describe modification ] which, like the section 111(a)(4) definition, suggest changes in actual emissions.... Following the lead of the court, EPA has also shifted the focus of its regulatory definitions... to actual emissions See Defs. Prop. Findings of Fact and Concls. of Law 107 (citing Defs. Ex. 1534, Letter from L. Reed to E. Weathersbee re Portland General Electric (Jan. 1, 1978) at 1) (emphasis added). 62 See id ; see also Defs. Ex. 1576, Rockwell PSD Applicability Determination, at 3-5 (not requiring a PSD permit under the 1978 regulations where a project was not expected to change the original design capacity of the source) Fed. Reg. at 61,099 col. 1; see also 68 Fed. Reg. at 61, Defs. Prop. Findings of Fact and Concls. of Law 86 (quoting 45 Fed. Reg. 52, 676, 52, 700 (Aug. 7, 1980)). 15

22 Case 299-cv EAS-TPK Document 419 Filed 11/07/2005 Page 22 of 32 Moreover, contrary to prior arguments made by Plaintiffs to this Court, 65 as USEPA has now admitted, the maximum hourly emissions rate test measures increases in actual emissions. 66 Thus, there is no logical or legal inconsistency between the 1979 Alabama Power decision and application of a maximum hourly emissions rate test under the 1980 regulations. 67 There was no fair notice in the 1980 regulations of a radical departure from prior practice because USEPA changed the definition of major modification, but not the definition of modification requiring a maximum hourly emissions rate increase when it issued its 1980 NSR regulations. 68 Thus, the 1980 regulations did not require an existing source to obtain an NSR permit unless it undertook both a modification (maximum hourly emissions rate increased) and a major modification (actual annual emissions increased in tons per year for the entire source as a whole by a significant amount). 69 This application of the 1980 regulations is entirely consistent with USEPA s admission that Congress intended the modification definition to apply to expansions in capacity, but not to the use of existing capacity. 70 Under these circumstances, Plaintiffs enforcement approach, using Dr. Rosen s methodologies created for litigation, 71 is the inconsistent aberration in the statutory and 65 Transcript, Oral Argument (June 21, 2005), at Fed. Reg. at 61,091 cols. 1, 3; 61,100 col See Defs. Prop. Findings of Fact and Concls. of Law 71, Id Id.; see also id. at ; Defs. Ex. 1576, Rockwell PSD Applicability Determination, at 1 (acknowledging that a modification would need to be determined to be major in order for a PSD permit to be required under the 1980 regulations); Duke Energy, 278 F. Supp. 2d at 643 (similar) Fed. Reg. at 61,099 col See Rosen, Tr. Vol. II at 205, line , line 2; Bush Dep. (Aug. 2, 2001) (United States v. Ohio Edison, C ) at 257, line , line 18. USEPA s recent rulemaking statements also show that Dr. Rosen created his own idiosyncratic methodologies for litigation purposes because the results of his emissions calculations in these cases are wildly inconsistent with USEPA s statements. Dr. Rosen s calculations were all based on his own interpretations of the actual-to-projected-actual test in USEPA s 1992 regulations (despite that fifty out of sixty projects were undertaken before those regulations were effective). USEPA stated in its rulemaking that [w]e do not believe that today s revised emissions test is substantially different from the actual-to-projected-actual test. 70 Fed. Reg. at 61,088 col. 1; see also id. at 61,100 col. 3. Contrary to USEPA s explanation, however, Dr. Rosen found 16