U.S. Fifth Circuit Vacates EPA’s Disapproval of Texas' Flexible Permit Program

15 August 2012 Publication

In a split decision, a panel of the 5th U.S. Circuit Court of Appeals held on Monday that the U.S. Environmental Protection Agency's rejection of Texas' Flexible Permit program in 2010 violated the federal Clean Air Act. Texas v. EPA, No. 10-60614 (5th Cir. Aug. 13, 2012). According to the Court, EPA overstepped its bounds by relying on impermissible reasons for rejecting the Texas program. According to the majority opinion, which called EPA's rejection "sixteen years tardy," as long as Texas met the CAA's minimum standards, it "enjoy[s] a measure of discretion." For that reason, EPA's disapproval transgressed the CAA's delineated boundaries of the cooperative relationship between the federal government and states.

In November 1994, Texas Gov. Ann Richards submitted for EPA approval a proposed amendment to its State Implementation Plan that included the Flexible Permit program. The Program allowed facilities to obtain a Flexible Permit that contained aggregate facility-wide emission limits and allowed facilities to make internal changes without additional regulatory review if the aggregate limits were not violated. Although the Program had been in operation since 1994, EPA did not announce its disapproval of the Program until July 2010 – over a decade after EPA's statutory deadline to act. According to the Court, EPA's disapproval of the Program left Texas facilities holding Flexible Permits vulnerable to federal enforcement. The State of Texas and a variety of industry groups sought judicial review of EPA's action.

In justifying its disapproval, EPA asserted that Texas' Flexible Permit program: (1) might allow major sources to evade Major New Source Review; (2) contained provisions for monitoring, recordkeeping and reporting that conferred too much "discretion" on the TCEQ, and were "vague" and not "replicable," and (3) used a methodology for calculating emissions caps that lacked clarity and was not replicable.

The majority rejected all three of EPA's assertions. First, EPA objected that Texas had "no express regulation" clearly limiting the Program to Minor NSR and no regulation "clearly prohibiting" use of the Program to avoid Major NSR. The Court, however, concluded that it need not defer to EPA's interpretation of Texas law and held that the Program "affirmatively" requires compliance with Major NSR. Although the Court noted that EPA might prefer that the Program include an "express negative statement," the Court held that neither the CAA or EPA regulations allowed EPA to reject a SIP provision based on its drafting preference. Ultimately, the Court held that:

Because the administrative record reflects that the EPA's rejection is based, in essence, on the Agency's preference for a different drafting style, instead of the standards Congress provided in the CAA, the EPA's decision disturbs the cooperative federalism that the CAA envisions. A state's "broad responsibility regarding the means" to achieve better air quality would be hollow indeed if the state were not even responsible for its own sentence structure. Bethlehem Steel Corp., 742 F.2d at 1036

The Court similarly rejected EPA's rationale for rejecting the Program provisions relating to MMR and calculation of emission caps. Essentially, the Court held that EPA had not identified how these provisions violated any requirement of the CAA and stated that principles of "cooperative federalism" prohibited EPA from insisting on its preferred approach if the state provisions otherwise complied with federal statutory and regulatory requirements.

Judge Higginbotham vigorously dissented because, in his opinion, the Court was "not faithfully applying the deferential arbitrary and capricious standard." He felt that EPA had not erred in concluding that Texas law did not adequately establish that the Program applies only to Minor NSR. He did not believe that EPA was demanding a "particular sentence structure or style" but was merely using those instances as examples of state programs that pass muster so as to illustrate the agency's reasoning and provide examples that might guide the state in correcting the Program's deficiencies. Ultimately, he found EPA's conclusion was not "arbitrary and capricious" and concluded that EPA did not act in excess of its statutory authority.

So what does this opinion mean for Texas, EPA, and Texas industry? First, EPA still has the option to seek en banc review by the 5th Circuit or certiorari in the Supreme Court. Second, although the Court vacated disapproval of the Program and remanded to EPA, the existing Program presumably remains unapproved until EPA acts. As noted in the opinion, TCEQ has already revised its Program to explicitly prohibit violation of Major NSR and is working to revise other elements to which EPA objected. If TCEQ continues moving forward to find accommodation and agreement, EPA may approve the Program.

The next move in this drama belongs to EPA. Whatever that move may be, you should not falsely hope that this issue will simply go quietly into the night.

For more information regarding this and other environmental topics, including environmental litigation, please contact Francis E. Phillips (fphillips@gardere.com or 214.999.4803).

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