Law and the Environment

Recent Appellate Court May Expose Companies for Disclosures in Title V Deviation Reports

The U.S. Fifth Circuit Court of Appeals recently (May 27, 2016) reversed a federal district court in a citizen’s suit that sough hundreds of millions of dollars in civil penalties under the federal Clean Air Act for alleged thousand of violations.  In the case Environment Texas Citizen Lobby, Inc. v. ExxonMobil Corp., the district court had ruled that only 94 of the allegations were actually violations, and that no penalty was in order.  In reversing this decision, the Fifth Circuit may have opened the door to civil penalties for all of the statements in Title V Deviation Reports that indicate a violation of the Title V permit or regulations have occurred.  This raises significant issues as companies are required to make deviation reports every year, and in most, cases, it is difficult to avoid any deviations in such reports.

 

“Know when to hold ‘em, know when to fold ‘em”: When to Disclose All in an Environmental Criminal Investigation

Kenny Rogers sang a song years ago with the lines “Know when to hold ‘em, know when to fold ‘em.” While referring to a poker game and a life lesson, I was reminded of the song in a recent criminal investigation a client was facing.  In these investigations, you always have to decide how much you will volunteer versus waiting on specific requests from environmental criminal investigators or attorneys.Making the decision on how much to volunteer is a true judgment call.

In some cases, like the one I just worked on, you have to decide if the facts demonstrate a clear lack of criminal intent or knowing violation in the case of most state and environmental statutes.  Some are based on strict liability or negligence, but most are “knowing” violations.  The line between civil and criminal enforcement is often largely a matter of enforcement discretion by environmental agencies or attorneys, prosecutors, agency attorneys, or district attorneys.

Evaluating the facts and circumstances, and how they may be perceived by the individuals involved is critical.  Different people will see matters differently.  One sees something as a mistake, others as an intentional, knowing act.

Sometimes this may mean federal and state agencies, sometimes two or three.  Occasionally, a local city or county investigator may want to be involved.  In addition to environmental agencies, in Texas EPA and the Texas Commission on Environmental Quality, you may face review by wildlife agencies such as the US Fish and Wildlife Service or the Texas Department of Parks and Wildlife.

In the right case, it can be productive to disclose the facts and make facilities available for tour by the investigators.  It can be effective to avoid a criminal investigation to disclose all and push for a decision that the matter should be referred to civil enforcement representatives, rather than being investigated by the criminal side of the agency house.

Often a rather early meeting and provision of documents and information may gain great confidence from the criminal investigators that the parties under review acted in good faith, but for whatever reason violated the law, even causing environmental damage.  Avoiding the criminal investigation can be more important for reputation of the entity and potentially even stock price.  Criminal environmental investigations tend to gain focus by the media and reverberate through the Internet and social media.  A turn from the criminal to the civil can avoid much of the damaging reputational impact.  For some parties that work with the government, criminal investigations can result in debarment from federal, state, or local contracts—with even greater damage than any fine.

When an event occurs that leads to a criminal investigation, a rapid legal analysis and strategy development is crucial.  Sometimes, it makes a significant difference if the alleged violator acts quickly and presents information and explanation before any subpoena or other request for information is received.  

The pro-active disclosure strategy does not fit every case. Sometimes waiting for any requests for information or documents is the best strategy.  Every instance must be considered based on its unique facts and actions by the entity’s or contractor’s employees.  

You have to “know when to hold ‘em, know when to fold ‘em.” I have found that in the right case, the full disclosure approach can turn a potentially damaging criminal investigation into a civil settlement of a small penalty.  

Texas Moving Closer to Issuing Vapor Intrusion/Indoor Air Guidance

In recent advising and representation of clients on vapor intrusion/indoor air issues from soil and/or groundwater plumes containing chlorinated solvents or other volatile chemicals, a representative of the Texas Commission on Environmental Quality (TCEQ) advised us that the agency is moving forward with issuing guidance on vapor intrusion in the coming months.  How that comes out will have potential impact not only on industrial facilities, but on real estate transactions where light industry, gas stations, dry cleaners, and other current or historical uses may affect groundwater on-site or off-site.

In transactions I have been involved in, buyers often look to address potential vaport intrusion in terms of remediation, insurance, indemnities, and other provisions in sales contracts.  Lenders consider these issues and have to be convinced it will not cause liability to the borrower or cause issues with tenants and payments on leases.  Lenders are concerned with payment of loans and protectin of collateral value.  Vapor intrusion/indoor air has spawned lawsuits in some states.

In Texas, currently, the Texas Risk Reduction Program (TRRP) rules required notification of the TCEQ and persons exposed or who may be exposed, as soon as possible or within 60 days.  The rules do allow the use of Occupational Health and Safety Administration (OSHA) or the American Conference of Governmental Industrial Hygienists (ACGIH) levels for occupational exposure.  To use these levels a health and safety plan must be submitted and a certification it is being followed must be submitted to the TCEQ.  Currently, these levels rather than the very low Risk Based Exposure Levels for commercial and industrial sites may be used.

In other parts of the country, EPA regional offices and some states have adopted very low levels at least as screening levels that may be below the method detection limit for testing protocols for indoor air.  This makes management of indoor air and vapor intrusion difficult for some chemicals, particularly trichloroethylene.  These low levels are orders of magnitude below the OSHA and ACGIH levels, and appear to be below what is necessary to protect workers.

Fortunately, it appears the TCEQ is going to continue to allow worker standards developed by an agency or organisation with a long history of developing safe levels for workers.  This will allow a more rational approach to vapor intrusion and indoor air issues.  The need to follow and comment on TCEQ policy and guidance on vapor intrusion/indoor air is critical to a sound policy on worker protection under environmental remediation regulations in Texas.

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EPA Issues Final Greenhouse Gas Monitoring and Reporting Rule

On September 22, 2009, the United States Environmental Protection Agency (EPA)  issued its final greenhouse gas monitoring and reporting rule that will require as many as 10,000 facilities in the United States to measure their greenhouse gases (GHGs) and start reporting them in early 2011 (GHG Reporting Rule).  Some industry groups had asked EPAfor a delay until 2011 to start monitoring and 2012 to start reporting their GHG emissions.  EPA chose not to provide such a delay and regulated facilities only have three and a half months to prepare for the monitoring that they must begin January 1, 2010.  This may be particularly challenging for those companies that must install or modify continuous emission monitors.

Following a Congressional amendment to the Omnibus Spending Bill in December of 2007 that required the EPA to issue a proposed rule by September of last year and a final rule by June of this year, the EPA under the Obama Administration has now moved forward with an initial step in establishing a GHG regulatory system.

In the GHG Reporting Rule, EPA has adopted a substantial program of GHG monitoring and reporting with a publicly available registry.  The program is “economy wide” and covers 85-90 percent of GHG emissions in the United States.

The EPA is in part implementing the GHG Reporting Rule to gather information for future regulatory and policy decisions. Thus, many of those sources that would be required to report under the GHG Reporting Rule may also be those that would be regulated under a federal GHG cap and trade system being discussed by Congress and the Obama Administration.

While the rule does not impose any reduction obligations, as prior reporting rules, such as the Toxic Release Reporting of SARA Title III, have shown, companies reporting emissions “manage what they measure.”  In other words, once companies must publicly report their emissions, they start to invest in ways to reduce those emissions.

I.     WHEN MUST YOU START MONITORING?

As stated above the monitoring must begin on January 1, 2010.

 

II. WHEN MUST YOU START REPORTING TO EPA?

The first report will have to be submitted to EPA by March 31, 2011, and then for subsequent years thereafter.

 

III.    WHAT GASES ARE COVERED?

The EPA has identified the traditional GHGs for reporting: carbon dioxide (CO2), methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons, chlorofluorocarbons, perfluorocarbons, and certain other fluorinated gases. For purposes of comparing emissions of the various gases using a single unit, the gases are converted into the equivalent GHG impact of CO2. The conversion is based on the principle that the other gases have a greater impact in terms of causing the greenhouse effect and thereby global warming. As an example, one metric ton of methane emissions would be reported in terms of the carbon dioxide equivalent (CO2e) of 21 metric tons. This is critical in understanding the threshold levels for application of the reporting requirements, as the non-CO2 GHG emissions may need to be converted to CO2e before determining whether the GHG reporting obligations apply to a particular facility.

IV.   WHAT FACILITIES ARE COVERED?

Four categories of facilities are required to measure and report their GHG emissions. In addition, vehicle manufacturers would be required to report the GHG emissions of their vehicles. We will focus on facility-based emitters in this Article.

1. Source Categories

The first category of facilities required to report under the GHG Reporting Rule are facilities that fall under a list of source categories identified by the EPA. These sources include, among others,

• coal-fired electric generating plants subject to the Acid Rain program,
• aluminum,
• ammonia,
• cement,
• electronics,
• lime,
• petrochemical,
• petroleum refining,
• certain underground coal mines, and
• municipal landfills.

2. Other Facilities That Emit 25,000 Tons Per Year or More of CO2e of Combined Emissions From Listed Source Categories

The second category of sources required to report are facilities that emit 25,000 or more metric tons of CO2e per year of combined emissions from stationary fuel combustion units, miscellaneous uses of carbonate, and all source categories that are listed and located at the facility in any calendar year.

These sources include, among others,

• electricity generation,
• electronics,
• ethanol production,
• food processing,
• glass production,
• iron and steel production,
• ferrous alloy production,
• oil and natural gas systems,
• pulp and paper,
• industrial landfills, and
• wastewater treatment.

3. Facilities That Do Not Meet the First Two Source Categories, but That Emit 25,000 Metric Tons of CO2e Per Year From Stationary Fuel Combustion Sources

The third source of facilities required to report are those that meet all of the following conditions:

(1) the facility does not contain any source category designated for the first two groups of categories;

(2) the aggregate maximum rated heat input capacity of stationary fuel combustion units at the facility is 30 mmBtu/hr or greater; and

(3) the facility emits 25,000 metric tons of CO2e per year or more from all stationary fuel combustion sources.

4. Entities That Sell, Import, or Export Fossil Fuels, Industrial GHGs, and CO2

The final category of entities required to submit GHG emission reports under the proposed GHG Reporting Rule are suppliers of coal, coal-based liquid fuels, petroleum products, natural gas and natural gas liquids, producers of industrial GHGs as listed in the Rule, importers and exporters of industrial GHGs and CO2, and importers and exporters of industrial GHGs and CO2 exceeding 25,000 metric tons of CO2e per year.

V. WHAT MONITORING AND MEASUREMENT APPROACH MUST BE USED?

The EPA reviewed several monitoring or measurement options in developing the GHG Reporting Rule. The EPA selected the option of combined direct emission measurement and facility-specific calculations. Facilities that already have continuous emission monitoring (CEM) devices are generally required to add a GHG measurement capability. Those that do not have CEM devices would have the choice to install them or to use facility-specific calculation methods.

VI.   WHAT CERTIFICATION AND VERIFICATION IS REQUIRED?

The EPA reviewed several options regarding certification and verification of the GHG emissions reported to the EPA. The agency decided to require certification by a designated representative of the facility submitting the report and to have the EPA verify the emissions report. No third-party verification is currently proposed.

VII.     WILL THE INFORMATION REPORTED TO EPA BE AVAILABLE TO THE PUBLIC?

The information provided by the regulated facilities will be made available to the general public by a website developed by EPA.

VIII. WHAT CORPORATE FINANCIAL DISCLOSURE AND CORPORATE STRATEGIES SHOULD BE DEVELOPED AS A RESULT OF THIS NEW REGULATION?

The GHG Reporting Rule is one of the significant steps made by the Obama Administration into climate change regulation and extends GHG measurement and reporting to a large part of the economy. As companies continue to review and develop their strategies for evaluating the potential risks and opportunities that a GHG regulatory system and potential cap and trade system will present, the GHG Reporting Rule is the one of the first salvos in what will be a concerted effort by Congress and the President to impose a GHG regulatory system in the United States.  Since establishing a company’s “carbon footprint” is now mandatory, understanding the implications of the reporting and public disclosure of the amount of greenhouse gas emissions raises several issues.

With this rule and potential future legislation that may be passed as early as this year or early next year, many publicly traded companies should also consider their disclosures in their filings with the Securities and Exchange Commission to determine if any further description of the risks or opportunities presented by climate change legislation should be discussed in their public filings.

Companies that may be regulated by any future climate change legislation, whether state, federal, or both, should develop a climate change strategy. Such strategies should include an evaluation of the number of GHG or carbon allowances that may be required to comply with climate legislation. One allowance would be required for every ton of emissions of CO2e equivalent. In addition, those companies selling or importing fossil fuels may be required to obtain allowances for every ton of CO2e equivalent of fuel sold. In engaging in this planning, companies should consider the extent to which low cost offsets purchased today could reduce the ultimate liabilities of the company in the future.

Many utilities, oil and gas companies, and other potentially regulated companies are already investing in carbon offset projects or purchasing credits now. In what could be one of the most significant environmental regulatory programs in the history of the United States, planning today could pay off with significant savings or dividends in the future. For many companies, climate change impacts should be a key strategic issue for the board and management.

Thompson & Knight Attorney Publishes Article on Climate Risk Disclosure

Texas- "Earlier this month, Xcel Energy entered into a settlement with the state of New York as a result of an investigation of several publicly traded utility companies with coal-fired power plants," according to Thompson & Knight Environmental Partner Scott D. Deatherage. His article "Climate Risk Disclosure: Xcel Raises Questions" was published in the September 17, 2008 editions of Energy Law360 and Environmental Law360.

According to the article, "the attorney general's office alleged that Xcel and four other named utilities - AES Corporation, Dominion Resources, Dynegy, and Peabody Energy - had failed to properly disclose climate risk in the companies' public filings." Deatherage says the settlement raises important questions, including "to what extent should publicly traded utilities that operate coal-fired power plants consider the Xcel settlement as appropriate precedent for future disclosure in SEC filings?" and "to what extent does the settlement reflect further pressure or liability on operators of existing or proposed coal-fired power plants?" He concludes, "the combined actions of environmental groups, certain state governments, and public pension and other public funds to influence the behavior of corporate America, and ultimately the legal and legislative process, may prove to be one of the broadest and most effective such campaigns ever witnessed."

Xcel Energy Settlement with New York Attorney General Requires Greater Climate Risk Disclosure

Xcel Energy entered into a settlement with Andrew Cuomo, the Attorney General of New York, as a result of an investigation of several publicly traded utility companies that the Attorney General's office alleged failed to properly disclosure climate risk in the companies' public filings.  The other utility companies that are being investigated are AES Corporation, Dominion Resources, Dynegy, and Peabody Energy.  In the settlement, Xcel Energy agreed to a variety of additional disclosures relating to climate risk.

The agreement requires that Xcel provide detailed disclosure of climate change and associated risks in its “Form 10-K” filings, the annual report required under securities laws and regulations issued by the Securities and Exchange Commission (SEC) to provide financial performance information to investors. 

The climate risk disclosure agreed to by Xcel includes analysis of the impact of the following: 

the potential impact of present and probable future climate change regulation and legislation;

climate-change related litigation;

physical impacts of climate change;

current carbon (or greenhouse gas) emissions;

projected increases in carbon emissions from planned coal-fired power plants;

company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions; and

corporate governance actions related to climate change, including whether environmental  performance is incorporated into officer compensation.

“This landmark agreement sets a new industry-wide precedent that will force companies to disclose   the true financial risks that climate change poses to their investors,” said Attorney General Andrew Cuomo. “Coal-fired power plants can significantly contribute to global warming and investors have the right to know all the associated risks. I commend Xcel Energy for working with my office to establish a standard that will improve our environment and our marketplace over the long-term.” 

Ceres has been a proponent of increased climate risk disclosure.  Ceres is a nonprofit organization, supported by what it asserts is institutional investors with more than $6 trillion in capital, including the treasurers and  comptrollers of Newy York, California, Florida, Maryland, Rhode Island and five other states, and two of the country's largest pension funds--CalPERS and CalSSTRS. 

Ceres President Mindy S. Lubber said, “This groundbreaking settlement will send ripples far beyond Xcel Energy. It serves notice that all companies face financial exposure from climate change and will be expected to better inform investors of their strategies for dealing with it.”

The Director of the Natural Resources Defense Council's State Climate Change Program and the Deputy General Counsel of the Environmental Defense Fund, cheered the settlement.

Obviously, these statements reflect the views of parties that are promoting greater disclosure and hope they will be successful in forcing some form of change in the corporate emissions of greenhouse gases. Industry reaction has not been published as yet.  Many industries may find this development to raise additional questions as to disclosure obligations when it comes to the potential physical impact of climate change, the financial impact of current and future regulations, and future potential litigation.

These questions are particularly important for utilities that operate coal-fired power plants.  The degree to which other publicly traded companies feel compelled to consider similar disclosure will be something that will unfold over the next year or so.    At present, there is perhaps considerable uncertainty as to what is legally required.  In 2009, we may see developments that help reduce the uncertainty as to what degree of climate disclosure is necessary as new federal greenhouse gas reporting requirements will be issued and climate change legislation may be passed.  Many proposed bills offered in Congress require that the SEC create guidance and then regulations governing climate risk disclosure.

Andrew Cuomo’s investigation of the financial disclosure of Xcel and the other utilities is only one part of a larger attack by environmental groups, certain state governments, and public pension and other public funds on coal-fired power plants and the companies that owne and operate them.  As Congress and the Whitehouse had been an impossible place to achieve any climate change legislation, the environmental groups moved to the state legislatures, have filed lawsuits to try to force action under federal and state statutes, and have brought public nuisance suits.  Finally, they have tried to force action through shareholder initiatives and petitions and through an attempt to pressure public companies, especially those that operate coal-fired power plants to disclose what the environmental groups believe to be significant financial risk from operating plants that emit significant greenhouse gases.

If these actions are successful, the use of coal may be curtailed or the operators of coal-fired plants may begin to install a means of capturing the carbon dioxide emissions from the plants and injecting it underground.  If either occurs, alternative forms of producing electricity or capturing and “sequestering” carbon dioxide may lead to higher electricity prices.  Any federal legislation that places controls on carbon dioxide emissions from coal-fired power plant will likely increase power prices as well.

Chairman of Accounting Standards Board Challenges Wall Street Journal Editorial on Proposed New Accounting Standard That Would Affect Environmental Disclosure

The Chairman of the Financial Accounting Standards Board (FASB), Robert Herz, wrote a letter to the Wall Street Journal challenging the editorial published in the paper criticizing the proposed new standard for reporting loss contingencies.  This standard largely covers environmental liability disclosure.

Herz rejects the Wall Street Journal editorial in his letter, stating, "Under the proposal, the amount that would be required to be disclosed is the claim amount, or, if there is no claim amount, the company's best estimate of its maximum exposure to loss. The Board attempted to insure the proposal would not require a company to "[show] its hand to plaintiffs' attorneys" as the editorial says. For example, the proposal allows companies to aggregate claim amounts, so that the plaintiffs attorneys would not be able to identify specific cases. We have also proposed an exemption for certain disclosure situations that would be clearly prejudicial to the company."

He goes on to defend the proposal, stating, "It is because of the strong and extensive input we've received from investors who want greater transparency relating to a wide range of contingencies -- including litigation -- that we are proposing these expanded disclosures. The new disclosures are aimed at providing information earlier to existing and potential investors in order to give them a greater understanding of the risks companies are facing. We believe that information would improve their ability to make informed investment decisions."

The truth may lie somewhere between the view of Herz and the Wall Street Journal writer.  The changes will likely present risks to public and private companies, but particularly public companies whose financial statements and 10Ks are available on the Internet for all to see, including plaintiff's lawyers.  If the changes are adopted, public companies will not only need to revamp how they measure and report loss contingencies, but for those of us who address these issues that arise under environmental statutes or tort suits, we may have to rethink how environmental claims are measured and reported, and consider what internal controls are necessary to ensure these claims are adequately measured.

Stay tuned for further developments in this potentially dramatic change in the reporting of environmental liabilities.

Georgia State Court Rejects Air Permit for Coal-Fired Power Plant for Lack of Regulation of Carbon Dioxide

On June 30, 2008,  the Fulton County Superior Court in Georgia revoked a permit for construction of a proposed 1200-megawatt coal-fired power plant in the state.  The court truled that the permit issued to Longleaf Energy by the Georgia Environmental Protection Division failed to consider the best available pollution control technology (BACT) for reducing the proposed plant’s estimated annual emissions of 8-9 million tons of carbon dioxide (CO2).  The defense had argued that a BACT analysis was not required because CO2 is not a pollutant subject to regulation under the federal Clean Air Act. The court found that the U.S. Supreme Court’s decision in Massachusetts v. EPA, in which the Court found that CO2 met the definition of pollutant under the Act.  The ruling by the Georgia court appears to be the first time a court has rejected an air emissions permit as a result of the environmental agency to regulate CO2 emissions.

The defendants reportedly will appeal the court’s decision.

New Federal Greenhouse Gas Reporting Regulations

EPA is set to propose new federal greenhouse gas reporting rules in September.  Under a provision inserted into the Omnibus Spending Bill in late 2007, the EPA must propose rules by September of this year and issue final rules by June 2009.  I have been keeping in touch with my contacts at EPA and the draft rule will be issued in little over a month..

EPA will be proposing several approaches to measuring and reporting greenhouse gas emissions, and then will recommend an approach.  The Agency then will be looking for comments from the public and industry on the approach they will ultimately take in the final rules that will be issued next year.

According to my contacts at EPA, several issues will arise:

• Threshold of emissions that will have to be reported--EPA is looking at 1,000, 10,000, or 100,000 tons per year as a cutoff, below which no reporting would be necessary.  Since proposed legislation in Congress would regulate sources at or above 10,000 tons per year, this may be the likely threshold that EPA will adopt.
• Who reports, the individual facility or the company?--This an issue EPA will address in the proposed rule.
• Data flow--this is a question of to whom will the information be submitted, whether to EPA or to states.
• Methodology for estimating emissions--EPA is planning on using established methodologies as much as possible, whether from the API, the Climate Registry, or those adopted by California.
• Reporting frequency--the agency is evaluating whether reports will be submitted annually or more frequently.
• Which gases must be measured and reported?--EPA appears to be leaning toward regulating all six greenhouse gases, including CO2, methane, and nitrous oxides.
• Verification--the agency is debating whether a third party must verify the emissions estimates.  As EPA is anticipating climate change legislation and carbon credit trading, EPA may require third-party verification in preparation for award of carbon allowances and a carbon credit trading market.

Thes rules will potentially impact a significant portion of industry and business and the US economy.  Numerous comments on the proposed rules are expected.  The final outcome will not be known until June of next year.  It is also possible that a new presidential administration will alter the approach proposed by the Bush Administration. 

In any event, these rules once proposed will have a significant effect on many businesses.  Companies with significant emissions may want to begin the process of identifying sources of greenhouse gas emissions and estimating those emissions in preparation of future reporting obligations, particulalry those with numerouls sources at numerous facilities.

Accounting Board Proposes Changes in How Environmental and Other Loss Contingencies Would Have to Be Reported

The way companies report contingent liabilities, in particular environmental liabilities, in their financial statements would undergo significant changes if a proposal by the Financial Accounting Standards Board goes into effect. 

On June 5, 2008, FASB released for public comment Proposed Statement of Financial Accounting Standards, Disclosure of Certain Loss Contingencies. The proposed standard would significantly expand the quantitative and qualitative disclosure requirements for loss contingencies under SFAS 5 and 141(R). In issuing the draft, FASB is responding to investors and other users of financial statements who are seeking additional information to assess the likelihood, timing, and amount of future cash flows associated with loss contingencies.  The proposed standard would be effective for fiscal years ending after December 15, 2008, and interim and annual periods in subsequent fiscal years.

Responses from interested parties wishing to comment on the proposed standard must be received in writing by August 8, 2008. Interested parties should submit their comments by email to [email protected], File Reference No. 1025-300.

Environmental managers, attorneys, chief financial officers, and accountants should pay attention to how FASB ultimately addresse this issue, and should submit comments if they want to express any concerns to FASB.