Energy Finance Report

Corporate Sustainability Efforts on Upswing

Posted by Leigh Ratino on 8/16/17 5:36 PM

Despite the new administration’s efforts to rollback Obama Era environmental regulations, most businesses in the U.S. are maintaining their commitments to sustainability. According to Lucid’s 2017 Sustainability Outlook Report, only 5% of private companies surveyed expect to decrease their commitment to sustainability programs in 2017, while 74% expect no change and 21% expect an increase in their commitments. Growing concern about climate change have presented companies with the opportunity to lead the way by increasing their sustainability efforts. Major companies are taking the threat of climate change more seriously, and already are developing solutions to reduce their greenhouse gas (GHG) emissions.

Opportunities abound for U.S. businesses to get involved in corporate sustainability. For those businesses that are up to the challenge, the MIT Sloan Management Review’s 2017 Research Report offers eight evidence-based factors to consider. First, articulate a practical sustainability vision and ambition that lays the foundation for new business practices. Second, identify and prioritize material issues to focus resources. For example, following its Environmental Sustainability Plan’s goal "to provide clean, fuel-efficient and dependable power for our customers with the least environmental impact possible,” Cummins Inc. recently decided to expand a wind farm in northern Indiana by adding an additional 75 megawatts of capability.

Third, embed sustainability organizationally through cross-functional teams, clear targets, and key performance indicators. As noted in the Journal of Accountancy, it is important that the chief financial officer (CFO) be part of and buy into the sustainability initiatives in order to facilitate an integrated company perspective. Fourth, innovate on multiple dimensions of your business model. Nestlé, for example, recently began placing “How2Recycle” labels on its half-liter bottles manufactured in North America. This activity is in line with the company’s sustainability target to “find a compelling and simple way to educate and encourage all Americans to recycle the bottle.” Not only does Nestlé’s How2Recycle project encourage recycling plastic bottles, but it also instructs consumers to empty and replace caps on bottles, resulting in fewer caps ending up in our waterways and oceans.

Fifth, develop a clear business case, and sixth, get the board of directors on board. Sustainability, while beneficial to the environment, also can be a business driver. As pointed out by the Journal of Accountancy, sustainability-related risks – extreme weather events, water crises, and climate change – are business risks. Furthermore, corporate sustainability have been proven to result in economic efficiency. For example, Unilever found that its “Sustainable Living” brands have grown 50% faster than the rest of its business because of consumer demand for sustainable products.

Seventh, communicate a sustainability value-creation story to your shareholders. Eighth, collaborate with a variety of stakeholders to drive strategic change. For example, 62 percent of Exxon Mobil Corporation’s shareholders recently voted for a resolution that requires the company to annually disclose how it will be affected by global efforts to mitigate the effects of climate change. Similarly, Occidental Petroleum Corp.’s shareholders recently approved a proposal requiring the company to report on climate change impacts to business.

Although President Trump has denied the impact of human activity on climate change and is actively seeking to resurrect the fossil fuel sector, nonetheless, it appears that U.S. businesses are maintaining their commitments to sustainability.

Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Climate change, Trump Administration, Corporate Sustainability, Sustainability

The New Administration’s Efforts to Deconstruct the Obama Climate Initiatives

Posted by Jeffrey Karp on 8/11/17 2:22 PM

President Trump is spearheading a government-wide roll back of Obama Era climate initiatives. The president and his EPA Administrator, Scott Pruitt, have delivered a one-two punch.  They both have denied the impact of human activity on climate change, while seeking to resurrect the moribund fossil fuel sector.  In March 2017, the President issued a wide-ranging “Energy Independence” Executive Order requiring review and reconsideration of any rule that might burden development of domestic energy sources, particularly oil, gas, coal and nuclear energy. After much drama, in June 2017, President Trump fulfilled a campaign promise to withdraw the United States from the Paris Climate Accord (“Accord”).  Moreover, in seeking to implement the new Administration’s energy independence strategy, government departments and agencies are pursuing delay or repeal of regulations aimed at curbing greenhouse gas (“GHG’) emissions, most notably EPA’s targeting for elimination the Clean Power Plan rule (“CPP”).

Under the Accord, the United States had pledged to reduce its greenhouse gas emissions 26-28% below 2005 levels by 2025, and to contribute up to $3 billion in aid to an international fund that helps the world’s poorest nations mitigate the effects of climate change.  It was expected that one of the President’s first acts following the inauguration would be to withdraw the country from the Accord.  On the campaign trail, Mr. Trump had not minced words about his view of the Accord, and his belief that climate change was a hoax.  Nonetheless, the President delayed his decision, while considering the views of many who advocated that the United States remain in the Accord, including several of his advisors, former Vice President Gore, the leaders of the G-7 nations, state governors and corporate executives.  President Trump, however, announced on June 2, 2017 the country’s withdrawal from the Accord, declaring the overarching need to protect United States workers and businesses from intrusive environmental restrictions, and negative impacts on economic growth.  In response to the President’s decision, a coalition of states, companies, and institutions have pledged to fulfill the United State’s emissions reduction commitment.

The withdrawal from the Accord appears unlikely to affect ongoing domestic efforts to reduce GHG emissions.  Currently, 29 states and the District of Columbia have enacted renewable portfolio standards (RPS) to increase the amount of electricity generated from renewable energy sources.  Since the beginning of 2016, seven states have even increased their commitments for additional wind and solar-generated power. 

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Furthermore, according to an EPA report, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2015 (April 15, 2017), GHG emissions have decreased in all major economic sectors since 2005.

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Between 2005 and 2015, GHG emissions decreased by roughly 20% in the electricity sector, 10% in the transportation sector, 4% in the industry sector, and 0.7% in the agriculture sector.

In addition to negating the impact of global warming, the Trump administration seeks to resuscitate the fossil fuel sector by removing regulatory impediments to growth.  As noted, on March 28, 2017, President Trump issued an EO that instructed EPA to reconsider the CPP and “as soon as practicable, suspend, revise or rescind” the rule.  Promulgated in 2015 under the Clean Air Act, the CPP is expected to facilitate a reduction in carbon dioxide emissions from the utility power sector by 32 percent below 2005 levels by 2030.  However, the rule has been tied up in litigation.  Shortly after promulgation, the Supreme Court stayed the CPP’s implementation.  A ruling on the CPP’s validity is awaited from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”)  following an en banc hearing in September 2016.  In the meantime, on April 4, 2017, EPA issued a notice of intent to review the CPP, while seeking to delay the D.C. Circuit’s impending decision on the rule’s validity.  On April 28, 2017, the court denied the EPA’s request to indefinitely delay the litigation while the Agency reconsiders the need for the CPP.  Instead, the D.C. Circuit agreed to hold the litigation in abeyance for 60 days, and ordered the parties to submit briefs addressing whether the court should continue to delay its decision or dismiss the litigation and remand the rule to the EPA.  After reviewing the parties’ briefs, on August 8, 2017, the court ordered that the cases remain in abeyance for an additional 60 days, and that EPA submit status reports in 30-day intervals. 

More recently, EPA attempted unsuccessfully to secure a lengthy delay in implementing another Obama Era emissions reduction regulation.  That rule requires that oil and gas companies fix methane leaks and upgrade equipment at extraction sites.  Siding with the NGOs, who challenged EPA’s announced two year delay, the D.C. Circuit ruled that EPA lacked authority under the Clean Air Act to stay the regulation while the Agency reconsiders it.  On August 10, 2017, the D.C. Circuit rejected industry groups and states’ request to reconsider the ruling.

Moreover, the President’s Energy Independence EO lifts the moratorium on leasing federal land for coal mining, and instructs the Department of Interior (“DOI”) to consider rescinding the 2015 regulation of hydraulic fracturing on federal and tribal lands.  In June 2016, a Wyoming federal judge struck down the rule, which subsequently was appealed to the Tenth Circuit.  DOI’s Bureau of Land Management (“BLM”) has requested the Tenth Circuit to stay the litigation while it reviews the need for the regulation.  On July 25, 2017, BLM published a proposal in the Federal Register to rescind the 2015 regulation, asserting that it  needlessly burdens industry with unjustified compliance costs.  The Tenth Circuit has yet to rule on BLM’s stay request.

To further assist the domestic energy sector, President Trump’s Energy Independence EO also seeks to ease permitting of fossil fuel energy projects.  In particular, the EO rescinds an Obama Era directive that federal agencies performing National Environmental Policy Act (“NEPA”) project reviews must consider GHG and climate change impacts.  Shortly after taking office, President Trump approved the permits for the TransCanada Corp’s Keystone XL pipeline and the Dakota Access pipeline.  In response, the Standing Rock Sioux Tribe and other Native American tribes challenged issuance of the final permit to complete construction of the Dakota Access pipeline in the U.S. District Court for the District of Columbia.  On June 14, 2017, the court ruled that aspects of the Army Corps of Engineers’ (Corps) environmental assessment were inadequate, and ordered the Corps to conduct further  review.  But, the court refused to grant the plaintiffs’ requested injunctive relief to halt oil pumping operations pending the Corps performance of further environmental review, which is expected to be completed by the end of the year.

Despite President Trump’s efforts to provide a “leg up” to the fossil fuel sector, it seems doubtful that the decline in coal-fired power generation will be reversed for several reasons. First, coal is not competitive with lower-priced and widely-available natural gas.  Second, the cost of developing renewable energy resources continues to drop.  Third, state RPS programs and corporate commitments to reduce greenhouse gas emissions continue to drive the growth of the renewables market.  Fourth, carbon emissions from power plants have fallen by 5% during each of the last two years, which is largely due to the switch by the utility sector, coal’s largest customer, to natural gas and renewables.  Currently, coal’s market share is in the low 30% range, and is unlikely to increase despite the new administration’s efforts to revitalize the industry.

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Furthermore, withdrawal from the Paris Climate Accord is unlikely to have short-term impacts in the United States.  Carbon dioxide emissions from United States’ energy sources are expected to hit a 25-year low in 2017, and to continue to decrease.  Thus, it appears that the train already has left the station regarding  the overriding support by many corporations and states for the increased development of renewable energy resources, and the ongoing conservation and sustainability measures to further reduce greenhouse gas emissions.  In light of the foregoing developments, it seems that market forces, not President Trump’s EO or government agencies’ efforts, will dictate the fate of the fossil fuel industry.

Jeffrey Karp is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: clean power plan, Climate change, Trump Administration, Energy Independence Executive Order, Paris Climate Accord

Advanced Approaches to Stormwater Runoff Management Through Green Infrastructure

Posted by Jerry Muys on 8/4/17 11:24 AM

Green infrastructure refers to, among other things, the utilization of sustainable forestry and agriculture as elements of a cost-effective compliance strategy for meeting the National Pollutant Discharge Elimination System (“NPDES”) permitting requirements, as authorized by the Clean Air Act (“CWA”), and its state counterparts. Natural systems and processes such as constructed wetlands and phytoremediation have long been used as tools for meeting NPDES discharge standards; however, the advent of the Environmental Protection Agency’s (“EPA’s”) more rigorous “Phase II” stormwater management requirements has spurred renewed interest in such systems among a new and more expansive set of permittees.

Stormwater discharges first became subject to NPDES permitting requirements as a result of the 1987 amendments to the CWA. “Phase I” of the program began in 1990, and applied only to large and medium municipal separate storm sewer systems and 11 industrial categories, including construction sites disturbing five acres of land or more.  In March 2003, Phase II of the program began, applying to a much broader set of municipal sewers and construction sites including those disturbing as little as one acre of land.  Phase II also expanded certain exemptions that were originally available under Phase I.

EPA has authorized the NPDES stormwater program to 46 states, with EPA largely relegated to an oversight capacity. Because states with delegated programs may impose stormwater management requirements more stringent than those promulgated by EPA, a number of states, led by California, have established Phase II requirements significantly more rigorous than EPA’s rules. 

For example, California requires Phase II stormwater permits for wide-ranging categories of facilities that meet certain broad criteria, including industrial facilities that fall within almost every conceivable Standard Industrial Classification (“SIC”) code. Requirements typically include the preparation of a Storm Water Pollution Prevention Plan, the implementation of best management practices (including technology-driven environmental cleanup obligations), and training, sampling and reporting obligations.

Most states have elected to impose the Phase II requirements through issuance of general permits that apply to categories of facilities rather than to specific facilities and employ benchmark compliance targets rather than definitive cleanup standards. However, it appears that a number of states have begun moving toward the establishment of specific numeric action levels governing the extent of response measures required in the event of permit exceedances, and some have even begun to incorporate Total Maximum Daily Loads (“TMDLs”) into their permit obligations.  

A decision to include green infrastructure as part of a stormwater discharge compliance program should not be made without first conferring with regulators and conducting a preliminary desktop evaluation to determine whether the permitted facility is well-suited for such an approach. If the answer is in the affirmative, the next step is to prepare a working document identifying the essential project scope and associated deliverables.  This should include, as determined necessary, the performance of an initial pilot study to establish proof of concept and the conduct of a “pre-design” study to evaluate the range of costs and feasibility of the project.

Subject to the outcome of the initial pilot study and the pre-design study, the next step is the preparation of a “pre-development agreement” setting forth in more detail the project work scope and cost projections, including calculations that would allow the project sponsor to quantify the likely avoided operating and/or regulatory costs resulting from incorporating green infrastructure components into the project. Upon completion of the work scope and cost projections, a legally-binding “master development agreement” should be negotiated among interested parties, addressing the financing, design, construction, and operation and maintenance requirements of the proposed project.

At critical junctures during the preparation of the various project documents referenced above, the project sponsor will need to consult with counsel if only for the limited purposes of performing the legal aspects of any necessary project due diligence and regulatory analysis. Finally, it is prudent to involve counsel in any negotiations with relevant government agencies and other stakeholders leading up to the preparation of a binding legal document, particularly in light of the fact that the project will almost certainly diverge from the standard regulatory approaches employed by the regulators.

There are several states currently using green infrastructure as the means to comply with stormwater discharge requirements. For example, pilot projects in the Anacostia River Watershed in Maryland have utilized infiltration and bio-retention best management practices to manage urban runoff.  In Seattle, Washington, streets have been redesigned to include more trees and shrubs, reflecting natural draining patterns.  In Portland, Oregon, stormwater curb extensions were added to residential streets, allowing stormwater to flow into the bioswales to be filtered.  Lastly, Chicago, Illinois has been using several low impact development practices, such as rain gardens, wetland rehabilitation, permeable alleys, and rooftop gardens.

Jerry Muys is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Green Infrastructure, Stormwater Runoff Management, National Pollutant Discharge Elimination System, Clean Water Act

Considerations for Participants in the Expanding Market for Compensatory Mitigation Credits

Posted by Jerry Muys on 8/1/17 12:36 PM

In a recent blog post, we described the basic statutory and regulatory framework supporting the increasing popularity of mitigation banking.  In this update, we offer some additional observations for property owners and other sponsors who may wish to develop a mitigation bank, and identify some of the risks associated with that undertaking.

As described in our previous post, a mitigation bank is a wetland, stream or other aquatic or habitat resource area that has been restored, established, enhanced (or in certain circumstances) preserved for the purpose of providing compensation for unavoidable impacts to aquatic resources resulting from development.  The person or entity that establishes a mitigation bank and undertakes the restoration activities is sometimes referred to as a “mitigation banker” or “bank sponsor.”  Bank sponsors can generate “compensatory mitigation credits,” which can be sold to developers whose permits under Section 404 of the Clean Water Act (and similar federal and state regulatory authorities) impose mitigation obligations.  We have outlined below the basic steps that a sponsor seeking to establish a mitigation bank would need to follow to generate marketable credits. 

The first step in the process of establishing a mitigation bank is to identify and, if necessary, purchase a suitable project site.  Candidate properties should be limited to those that offer the greatest likelihood that they can be restored or enhanced at a cost that corresponds favorably with the likely value of the credits to be generated.  Factors relevant in assessing the ecological suitability of a potential project site include the soil characteristics of the site, landscape features of the surrounding watershed or habitat area, and reasonably foreseeable effects the project might have on the surrounding ecosystems.

In addition, because regulatory obligations generally require that the mitigation occur within the same watershed or habitat area in which the ecological damage occurred, a prospective sponsor should also consider the amount and nature of development taking place and expected to take place within the subject watershed or habitat area.  This assessment can assist the sponsor in selecting the optimal project site and restoration plan.

Once the sponsor decides to move forward with a restoration project at a particular location, a prospectus and mitigation plan must be submitted to a regulatory body known as the “Interagency Review Team” (“IRT”); this is a group of federal, tribal, state, and local regulatory and resource agency representatives who historically have been headed by the local district engineer for the Army Corps of Engineers.  These initial submissions serve to document the key aspects of the proposed project, and also provide the primary source of information for the public during the public comment period (which begins within 30 days of the IRT’s receipt of the prospectus and continues for an additional 30 days).

The prospectus should provide a summary of information concerning the proposed bank, as well as more specific information pertaining to its establishment and operation, long-term management strategies, and the bank’s proposed service area.  The prospectus should also address the technical feasibility of the restoration project.

The mitigation plan must provide a description of the nature of the project to be undertaken (i.e., restoration, establishment, enhancement, or preservation), documentation of the needs of the local watershed or habitat area, and a description of the factors considered during the site selection process.  The mitigation plan should also identify the number of compensatory mitigation credits to be issued by the bank upon completion of the project.

Following regulatory review of the prospectus, a draft banking instrument must be prepared that conforms with the terms of the prospectus.  It should describe the physical and legal characteristics of the mitigation bank as well as the protocols pursuant to which the bank will be established and operated.  In addition, the banking instrument identifies the number of credits to be issued in connection with the mitigation bank, provides a description of the protocols governing management of the bank, and includes a long-term operation and maintenance plan for the site.

The draft banking instrument is subject to review by the appropriate regulatory authorities (depending on whether the project is a watershed or habitat restoration).  The review process typically includes some evaluation of the economic viability of the proposed project.  Upon completion of the review process, the draft banking instrument is subject to a 30-day comment period, following which the sponsor may be required to make additional revisions to the document.  

Once the sponsor has addressed any remaining concerns regarding the terms of the draft banking instrument, it may submit the final version of the instrument, together with supporting documentation detailing any changes from the draft, to the regulatory authorities for approval.  Only after this documentation has been submitted and approved may the sponsor begin selling credits into the mitigation banking market.

Although the potential financial and ecological benefits of establishing a mitigation bank are well-documented, there is some uncertainty associated with the endeavor.  Like any major construction project, there is always the risk of substantial cost overruns due to delays in the regulatory review process or other unforeseen circumstances.  There can also be uncertainty resulting from variability over time in the market value of the compensatory mitigation credits to be generated. 

Some of the risks inherent in restoration projects can be addressed through a thoughtful and comprehensive due diligence effort at the outset.  For example, because the existence of conflicting property rights (for example, preexisting easements) can pose an obstacle to the timely and cost-effective completion of a restoration project, a thorough title search should be performed during the early stages of the project.  In addition, because of the variability in the value of the compensatory mitigation credits to be generated by the project, early consideration of possible hedging strategies might be prudent.

Jerry Muys is a partner, Patrick Mulpeter is a summer associate, and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Compensatory Mitigation, Mitigation Banking, Compensatory Mitigation Credits

The New Administration’s Deregulatory Agenda and its Impact on Environmental & Energy Policy

Posted by Jeffrey Karp on 7/28/17 8:24 AM

As seen in the first six months of President Trump’s Administration, the country is on a rollercoaster ride.  There is much uncertainty regarding the implementation of new policies and the status of existing programs throughout the government.  Nowhere is this sentiment more evident than in the environmental and energy arenas.  President Trump is quickly trying to undo the Obama Administration’s programs through executive orders seeking to roll back regulations; the appointment of faithful supporters of deregulatory agenda to key positions; significant budget cuts that substantially reduce agencies’ head counts and defund targeted programs; and the helping hand of a Republican-controlled Congress.

However, achieving this desired goal is easier said than done.  President Trump’s objectives may be tempered by legal, procedural and resource constraints, bureaucratic resistance combined with delays in filling key agency decisions, and higher priority domestic agenda items and world events.  This article will examine what already has occurred and what may be in store on significant issues involving energy and the environment.  It also will highlight aspects of the Trump Administration’s deregulatory efforts and the proposed budgetary impacts.

Out of the gate, the new administration has pursued an aggressive deregulatory agenda. President Trump’s operative goal is to “deconstruct the administrative state.”  His administration is building on campaign rhetoric to “roll back” “economy-choking regulations,” and implementing his campaign promise to “Drain the Swamp” by reining in and shrinking the federal bureaucracy.  For example, in January 2017, President Trump issued the “2-for-1” Executive Order (EO) on Reducing Regulation and Controlling Regulatory Costs, which specifies that agencies must repeal two existing regulations for every new significant regulatory action.  The EO further requires cost balancing between new and repealed regulations and a net cost of zero for any new regulations.  In response, Non-Governmental Organizations (NGOs) and others, led by the Natural Resources Defense Council (NRDC), are challenging the validity of the EO in the U.S. District Court for the District of Columbia, arguing that the executive order is “arbitrary, capricious, an abuse of discretion, and not in accordance with law.”  In April 2017, the Department of Justice filed a motion to dismiss the complaint on the President’s behalf, and the NGOs moved for summary judgment in May.  Attorneys General from 14 states filed a brief in support of the EO.  The case is in limbo, as the court has not yet ruled on the parties’ motions.

In February 2017, President Trump issued another EO, on Enforcing the Regulatory Reform Agenda, which requires designation of regulatory reform officers and task forces in all agencies and departments.  Each task force must identify “all regulations that are unnecessary, burdensome and harmful to the economy.”  In addition to internal deliberations, the task forces have asked stakeholders to help identify troublesome regulations.  For example, the Commerce Department sought public comment on government regulations interfering with domestic manufacturing.  Of the 168 comments submitted, 79 called out the EPA, the majority of which cited the Clean Air Act (CAA) and Clean Water Act (CWA).

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President Trump is particularly focused on curtailing EPA programs from the Obama Administration’s regulatory agenda.  For example, the EO on Enforcing the Regulatory Reform Agenda requires EPA to review, and either rescind or revise, the Clean Water Rule promulgated by the Obama Administration in 2015 under the CWA.  The CWA regulates discharge of pollutants to “navigable waters,” defined as waters of the United States (WOTUS).  The 2015 WOTUS Rule was issued by EPA and the Army Corps of Engineers (Corps) after a series of court decisions failed to adequately clarify the EPA’s jurisdictional scope.  The 2015 WOTUS Rule created quite a controversy because it applies to streams serving as tributaries to navigable waters, as well as wetlands adjacent to traditional navigable waters or interstate waters.  For the rule to apply, the wetlands and tributaries must be “relatively permanent.”  Under prior court decisions, this means such water bodies could be “intermittent.”  The Sixth Circuit stayed the 2015 WOTUS Rule soon after its promulgation.  Therefore, it was never implemented or enforced.  On January 13, 2017, the U.S. Supreme Court agreed to resolve the jurisdictional dispute over whether a district court or a court of appeals should decide the rule’s validity.

On March 6, 2017, EPA’s “Notice of Intent to Review and Rescind or Revise the Clean Water Rule” was published in the Federal Register.  In Senate testimony delivered on June 27, 2017, EPA Administrator Scott Pruitt stated that the agencies intend to revoke the 2015 WOTUS Rule, contending that the rule has created substantial uncertainty for farmers, ranchers, and landowners because they cannot tell whether their streams or dry creeks are “relatively permanent.”  Pruitt further stated that the rule inhibits development because landowners face substantial civil penalties if they incorrectly assess the rule’s coverage and the property is determined to be subject to federal jurisdiction.  

Revising or revoking rules is not a perfunctory or simple process. The agency that promulgated the rule must follow the same Administrative Procedure Act (APA) notice and comment procedures to rescind or change it.  Thus, an agency cannot simply revoke a rule and subsequently replace it to satisfy the policies of a new administration.  Rather, an agency first must create an Administrative Record (AR) that supports revoking an existing rule, and then the agency must conduct a separate rulemaking proceeding to promulgate a new revised rule.  Ultimately, the AR must justify a different outcome than the record upon which the existing rule was issued.  This same process must be followed for each rule that an agency desires to abolish or revise.

On June 27, 2017, EPA and the Corps announced a plan to replace the 2015 WOTUS Rule in two steps: 1) repeal the stayed Obama-era rule, and 2) commence a second rulemaking to replace it.  However, on July 12, 2017, a House subcommittee approved an energy and water spending bill that would allow EPA and the Corps to withdraw the 2015 WOTUS Rule “without regard to any provision of statute or regulation that establishes a requirement for such withdrawal.”  Essentially, if the bill is passed, the agencies could bypass the APA procedures, including the public notice and comment period, and repeal the 2015 WOTUS Rule.  The House is expected to vote on the bill in the next few weeks.  The Senate Appropriations Committee’s version of the energy and water bill does not include language allowing the Trump Administration to bypass APA procedures.  Thus, a reconciliation of the bills likely will be necessary.

The Administration’s effort to eradicate Obama Era environmental regulations is further complicated because many rules presently are tied up in court proceedings awaiting oral argument or court rulings.  The EPA sought to stay challenges to such rules while the new administration reconsiders their scope and breadth.  In several cases in which oral arguments have not been heard yet, the requested relief was granted.  However, the agency’s strategy was foiled in the case challenging the Clean Power Plan, the most contentious of the Obama Era rules.  In that case, an en banc ruling is pending in the D.C. Circuit.  On April 28, 2017, rather than grant EPA’s request for an indefinite stay, the court agreed only to hold the litigation in abeyance for 60 days, while ordering the parties to file briefs addressing whether the case should remain on hold, or whether the court should close it and remand the rule to EPA for disposition.  On May 15, 2017, both parties submitted their briefs.  The motions are pending.

President Trump also is seeking to use the budget process to pursue his deregulatory goals.  The Administration’s 2018 proposed budget, sent to Congress on May 23, 2017, would reduce EPA’s funding by nearly one-third, eliminate thousands of jobs, and scrap dozens of existing programs.  The budget proposal would increase funding in a select few areas — for water and air rulemaking, and the TSCA-Chemical risk review and reduction program; however, it is expected that much of the additional TSCA funding would be offset by a “pay to play” scheme under which the companies requesting such reviews would be required to pay for them.  On the other hand, government wide programs that address climate change and global warming would be obliterated.  The Integrated Risk Information System (IRIS) program, which assesses the health risk of toxic chemicals, is specifically targeted for termination.  The Science Advisory Board is recommended for an 85% cut, and EPA’s categorical grants to states to operate and enforce delegated programs are slated for a 45% reduction.  The Chesapeake Bay and Great Lakes initiatives would be eliminated, as would programs supporting energy efficiency and R&D, and loan guarantees for clean energy technologies.  Nevertheless, Congress has the final say over President Trump’s budget proposals, and it remains to be seen whether there is sufficient support for his substantial proposed budget cuts.

We anticipate a steady stream of lawsuits will be filed by NGOs and, perhaps, some activist states challenging the Trump Administration’s deregulatory actions.  We also expect an uptick in “citizens suits” seeking to enforce environmental laws and regulations due to EPA’s diminished role as the “cop on the beat.”  Further, the impact of President Trump’s budget proposal largely will depend on the willingness of the Republican majority in Congress to eliminate or reduce funding for programs with traditional bi-partisan support.

Jeffrey Karp is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Energy Policy, Environmental Policy, Trump Administration, Deregulatory Agenda, Executive Orders

Water Infrastructure: The Current State of Funding and Considerations for Private Investors

Posted by Jerry Muys on 7/6/17 11:00 AM

Almost a decade ago, EPA estimated the needed investment in our domestic water and wastewater infrastructure at approximately $105 billion; today it is estimated at over $600 billion. There is no indication thus far that the new administration is committed to reversing the rapid decay of our water infrastructure, or addressing the massive backlog of needed improvements.

In the face of diminishing government resources, water utilities over the past decade or so have aggressively moved to develop independent revenue streams to shore up their bottom lines. Most successful among these efforts have been the investments by wastewater facilities in new technologies which use sewage sludge bio-solids as a feedstock for the generation of electricity. This development is particularly noteworthy in light of the fact that the water utility sector is among the highest consumers of electricity, accounting for approximately 4% of energy use in the U.S. and as high as 20% in some states, such as California.

Although new technologies hold substantial potential benefits for water utilities both in terms of financial returns and in achieving sustainability goals, they increasingly cannot be undertaken without an initial infusion of private investment. However, this need for private capital has run headlong into long-standing negative public perceptions regarding the “privatization” of water assets. This dynamic became abundantly apparent when the new administration recently floated the idea of selling the Washington Aqueduct as a means of funding other infrastructure projects.

With the new administration’s infrastructure initiative likely to focus on transportation, water utilities almost certainly will confront continuing funding shortfalls as they encounter increasing regulatory compliance and operational challenges. In the face of this enormous and growing demand for capital, why haven’t private investors been willing to move beyond their historical antipathy toward the public water sector and provide the funding necessary to keep it afloat? As one might imagine, the answer to that question is multi-faceted.

Investments in the water sector, no matter how much they might be in demand, historically have not offered the types of returns that are routinely generated by other types of “cleantech” investments. The cumbersome and disparate structure of the water sector, with its multitude of small, municipally-owned systems, is ill-equipped to efficiently and effectively employ large infusions of new capital and to generate returns commensurate with that investment. For those private financiers who are up to the challenge of investing in the water infrastructure sector, we have offered below some considerations that you should enter into your calculus.

Typically the initial step in formulating a water infrastructure investment strategy is to establish a list of potential target jurisdictions, presumably limited to states and cities with legal, political, and economic frameworks favorable to private investment in infrastructure. For example, before deciding to include any particular municipality on your list, take a look at the 30 or so states that have enacted legislation to authorize or facilitate public-private partnerships. You should also look at the history of privatization efforts in your target jurisdictions, including the degree of support for such efforts from local political leaders, water facility managers, labor unions, citizens groups and the general public.

The candidate list can then be winnowed down to conform to the investment strategy that you have adopted. For example, your business model might include a standardized project type such as a 10-200 million gallons per day wastewater treatment plant upgrade with biogas-driven combined heat and power at a defined equity investment range such as $20-100M. Within those constraints, priority locations can then be assessed and selected.

Following the selection of an initial target, the investment team can then begin the process of developing a specific plan to further define the elements of the project and identify the preferred technology and financing model. As part of this process, the development team should also find and reach out to potential stakeholders, such as local governmental representatives and community groups, to seek their input on the conceptual framework for the transaction.

Emerging from this process should be a conceptual plan that addresses the threshold ownership and structural issues (e.g. concession agreements v. equity interests). It may also include a pre-negotiated contractual and financing model to support the project.

Finally, upon completion of the conceptual plan, it is customary to initiate a local political and public education campaign to publicize the benefits of the project and to hopefully generate broad-based community support for the project in advance of any necessary governmental approvals. If the hoped-for support does not come to fruition, most prudent investors will reassess and perhaps re-focus their efforts on another municipality.

Jerry Muys is a partner, Leigh Ratino is a law clerk, and Paul Tetenbaum is a summer intern with Boston-based law firm Sullivan & Worcester LLP.

Topics: Private Investment, Water Sector, Water Infrastructure, Wastewater Infrastructure, Water Utilities

Renewables Can Play a Big Role in Puerto Rico's Fresh Start

Posted by Jeffrey Karp on 6/27/17 11:23 AM

This article originally appeared on Recharge.

Just two years ago, the future seemed promising for renewable energy development in Puerto Rico. Much of the groundwork was established, numerous developers had entered into Power Purchase Agreements (PPAs) with the state-owned utility, PREPA, and discussions were ongoing with funding sources.

However, decades of fiscal irresponsibility and bad deals finally caught up with Puerto Rico, leading to a terrible debt crisis. The government defaulted on bonds, sales taxes escalated to 11% (higher than any mainland state), and businesses began fleeing the island.

The generous incentives that initially had attracted development dried up. For the last couple of years, energy investment has been at a virtual standstill, with the exception of Oriana Energy’s solar plant that commenced operations in May 2017.

Despite these setbacks, and with the Commonwealth’s [government's] bankruptcy filing in May 2017, the Puerto Rican government now has a second chance to regain its financial footing, and the development of renewable energy may play an integral part in accomplishing such a task.

In 2010, the Commonwealth enacted Renewable Energy Portfolio Standards (REPS) that required 12% of the island’s electricity to come from renewable sources by 2015 and 20% by 2035. Following the enactment of the REPS, utility PREPA entered into dozens of PPAs with renewable energy developers agreeing to purchase the power to be generated. By the end of 2015, Puerto Rico had 318MW of renewables in place, according to latest available data from the International Renewable Energy Agency.

However, as Puerto Rico became mired in its debt crisis, developers were unable to secure financing as investors grew fearful of funding long-term energy deals with PREPA. Adding to the uncertainty, due to PREPA’s financial woes, the utility serially renegotiated the terms of developers’ PPAs, which only served to make investors more jittery about financing the underlying renewable energy projects. Eventually, most of the agreements expired before the power plants could be financed or built.

Despite its financial travails, Puerto Rico’s commitment to renewable energy has not waned. In June 2016, Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The legislation, intended to provide Puerto Rico with a pathway out of its debt crisis and establish a baseline for fiscal responsibility, also established the framework within which investment may occur. In providing a blueprint for interested investors, PROMESA also reaffirmed Puerto Rico’s commitment to renewable energy.

Recognizing that PREPA was incapable of shouldering the burden of energy development entirely on its own, PROMESA emphasized the need for public-private partnerships that shifted the initial funding burden to private investors. In April 2017, a P3 Summit was held to encourage developers and investors to collaborate with the Commonwealth on a wide variety of infrastructure projects, including energy, water, waste management, and transportation. The presentation on the energy sector reaffirmed Puerto Rico’s commitment to achieving the REPS of 20% renewable energy by 2035.

In setting the stage for infrastructure investment, PROMESA created an Oversight Board, which has authority over revitalization and infrastructure development. Importantly, the Oversight Board may “fast-track” projects deemed “critical,” such as projects that reduce the Commonwealth’s reliance on oil and diversify its energy sources. Moreover, the Oversight Board gives priority to privately-funded projects.

Following PREPA’s recent settlement with its bondholders, we understand the utility is ready to reengage with developers to amend PPAs that have been in limbo for several years. Many of these developers already have performed much of the engineering for these renewable energy projects. Once PREPA amends the extant PPAs, the underlying projects would qualify as “existing projects,” which would enable the Oversight Board to prioritize them.

In light of these recent fiscal and regulatory developments, investors again are inquiring about “shovel ready” renewable energy projects that require funding. Investors also may have gained a level of comfort having seen Oriana Energy successfully reengage in Puerto Rico. Since May 2017, the company is operating the largest solar plant in the Caribbean at 58MW, the power from which PREPA is purchasing pursuant to a renegotiated PPA.

Puerto Rico appears primed for renewed interest by energy investors. For several years, investors have been unwilling to accept the risks inherent in financing long-term energy projects in which PREPA is the counterparty. More recently, these concerns have shown signs of abating as PREPA has successfully engaged with its bondholders, and the Oversight Board created by the PROMESA legislation appears to have imposed an acceptable level of fiscal discipline on the Commonwealth.

With solar energy on the cusp of coming to Puerto Rico, the question is which financiers will enter the market soon enough to bathe in the sunlight.

Jeffrey Karp is a partner in the Washington, D.C. office of Sullivan & Worcester LLP and leader of the firm’s Environment, Energy & Natural Resources practice group. Zachary Altman, an associate, and Paul Tetenbaum, an intern at the firm, were co-authors of this article.

Topics: Energy Finance, Renewable Energy, Energy Investment, Puerto Rico, Power Purchase Agreements, Renewable Energy Portfolio Standards

Biofuel Mandates Escape Current EPA Scrutiny

Posted by Jerry Muys on 6/21/17 2:16 PM

The Renewable Fuel Standard (RFS) is a regulatory program administered by EPA that requires petroleum-based transportation fuel sold in the U.S. to contain a minimum volume of various categories of biofuels. The program’s mandates are subject to a statutory waiver provision that may be exercised by EPA in the event that market conditions present an obstacle to meeting the minimum volumes. With the new administration’s continuing scrutiny of EPA’s numerous regulatory programs, there has been a great deal of uncertainty regarding the likely fate of the RFS Program.

Under the RFS program, biofuel must be blended into transportation fuel in increasing amounts each year, capping out at 36 billion gallons by 2022. Compliance with the blending obligations are imposed on petroleum importers and refiners, known as “obligated parties.” The annual amounts of the various categories of biofuels that must be blended are referred to as Renewable Volume Obligations (RVOs). Obligated parties can comply with the RFS program by either blending the requisite volume of renewable fuel into their transportation fuel or purchasing credits designated as Renewable Identification Numbers (RINs) to meet the RVO.

Although the Clean Air Act sets forth annual volumetric targets for certain biofuels, EPA is required to establish enforceable RVOs through a formal rule-making process. Separate quotas and blending requirements are determined for cellulosic biofuels, biomass-based diesel, advanced biofuels, and total renewable fuels. Refiners and importers must either blend the requisite amount of each of the four categories of biofuels, or acquire the necessary amount of RINs for each of the categories. Parties that purchase or sell RINs are required to enter the transaction information into the EPA Moderated Transaction System.

Initial uncertainty over the fate of the program began in 2015, when EPA exercised its statutory waiver authority for the first time and set an RVO lower than the benchmarks established by Congress. Litigation ensued, and many in the biofuel industry argued that EPA had abused its waiver authority by setting an RVO lower than the statutory minimums. As of the current date, the litigation remains unresolved.

In November of 2016, EPA set an RVO of 19.28 billion gallons of total biofuel for 2017; this was an increase from the 18.11 billion gallon figure adopted for 2016, but still below the statutory standard of 24 billion gallons. However, renewed uncertainty arose in January of 2017, when President Trump ordered a temporary freeze and review of thirty EPA regulations that had been issued between the time of the U.S. election and his inauguration, including the 2017-18 RVOs.  

To the industry’s relief, the regulatory freeze expired without the new administration making changes to the 2017-18 RVOs, and immediately thereafter RIN prices spiked for a period of time. However, overall RIN prices have dropped 19 percent since President Trump’s election, reflecting continued uncertainty about the future of the program.

Though the new administration did not revise the current RVOs, it is entertaining a policy initiative by Carl Icahn (an investor in the petroleum sector who also serves as a special adviser to President Trump) to shift responsibility for meeting RVO requirements away from refiners and importers to blenders and others in the chain of commerce. A ruling by EPA on the Icahn initiative may be several months away. The public comment period on the Icahn-backed measure ended February 22.

Despite uncertainties regarding the future of biofuel mandates in the U.S. and elsewhere, advancements within the industry continue to occur. The liquid biofuels industry now employs more than 1.7 million people globally, and recent technological developments have expanded the range of biofuel applications.

It has been reported that Cool Planet Energy Systems developed a technology that converts farm waste, wood chips, and nut shells into liquid jet fuel. The company has secured investments from three major oil companies, in addition to a $91 million grant from the Department of Agriculture, and is continuing to refine its process with the hopes that it will become a viable supplement or replacement for traditional jet fuel.

The U.S. Navy has also taken an active interest for a number of years in utilizing greater quantities of biofuel in order to reduce its dependency on fossil fuels. During the Obama Administration, the Navy conducted several training exercises in which a large number of the ships and planes participated using a fuel blend that was 10% biofuel. Those efforts appear to be continuing.

More significantly, on June 19, Exxon Mobil Corp. and Synthetic Genomics Inc. announced a possible breakthrough in biofuel technologies. Their scientists reportedly discovered a way to double the fatty lipids in algae, bringing them a step closer to being able to use algae as a biofuel feedstock, a potentially more sustainable alternative to the feedstocks currently utilized.

Jerry Muys is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Biofuels, Renewable Fuel Standard, Cellulosic biofuel, Biomass-based diesel, Renewable Volume Obligation, Advanced biofuel, Renewable Fuel, Renewable Identification Number

Monetizing Vacant Land Through Mitigation Banking

Posted by Jerry Muys on 6/13/17 3:14 PM

A mitigation bank is a wetland, stream, or other habitat area that has been restored, established, enhanced, or (in certain circumstances) preserved for the purpose of providing compensation for unavoidable impacts to such natural resources. When a corporation or other entity undertakes these activities, it can generate “compensatory mitigation credits” (“CMCs”), which in recent years have significantly increased in value. Corporations and other owners of brownfield or dormant/underutilized properties are increasingly using these lands to create mitigation banks in order to generate CMCs that can be sold into the mitigation market.

Mitigation banking originated under Section 404 of the Clean Water Act and similar state statutes intended to protect wetlands and streams. Developers of projects which involve the discharge of dredged or fill materials into wetlands, streams, or other waters of the United States are required to obtain a permit from the U.S. Army Corps of Engineers (Corps) or an approved state, and must avoid and minimize negative environmental impacts to the extent feasible. When negative impacts are unavoidable, compensatory mitigation is required to offset the impacts on aquatic resources. The Corps or an approved state authority determines the necessary quantity and method of compensatory mitigation, which can be performed by the permittee, a third party under contract to the permittee, or through the purchase of CMCs from a mitigation bank.

Mitigation banking is completed off-site, meaning it is performed within the same watershed as the site of the impacts but not at the same location. Banks are regulated by Interagency Review Teams (IRTs), which are chaired by the district engineer or a designated representative and include federal, tribal, state, and/or resource agency representatives. The person or entity that establishes a mitigation bank and undertakes the restoration activities is sometimes referred to as a “mitigation banker” or “bank sponsor.”

In order to generate CMCs, the mitigation banker must first negotiate a written agreement with the IRT that provides for the long-term funding and management of the bank, as well as the design, construction, monitoring, ecological success, and long-term protection of the bank site. The agreement also identifies the number of credits available for sale and requires the use of ecological assessment techniques to certify that those credits provide the required ecological functions. See EPA Mitigation Banking Factsheet.

Federal policy favors the use of mitigation banks and CMCs to offset the negative environmental impacts of development for a number of reasons. Since mitigation banking is performed prior to development, there is less uncertainty about whether environmental impacts will be effectively offset. In addition, mitigation banking allows for the use of scientific expertise and financial resources that are not always available when mitigation is performed directly by the developer. Mitigation banking also tends to be more cost-effective and to allow for shorter permit processing times.

In 2008, the Corps and EPA adopted regulations that made mitigation banking the preferred method for both wetland restoration and compensation for wetland losses. Due to the success of mitigation banking, the concept was expanded to offset losses of endangered species and associated habitat; known as “conservation banks,” they are under the jurisdiction of the U.S. Fish and Wildlife Service and the National Marine Fisheries Service. Today, there are more than 1,200 mitigation banks in the U.S., and the market value of all CMCs exceeds $100 billion.

Jerry Muys is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Compensatory Mitigation, Mitigation Banking, Compensatory Mitigation Credits, Wetlands

Converting Environmental Liabilities to Assets: Repurposing Inactive and Abandoned Mine and Mineral Processing Sites

Posted by Jerry Muys on 6/6/17 2:36 PM

Under the Brownfields Law of 2002, EPA and other federal agencies have established a variety of programs focused on promoting and funding the repurposing of abandoned mine lands (AMLs), broadly defined as lands, waters, and watersheds in close proximity to where extraction, beneficiation, or processing of ores and minerals has occurred. Among the most promising of these initiatives is EPA’s Re-Powering America Program, pursuant to which EPA has prioritized the development of renewable energy projects on brownfield properties such as AMLs.  

The Department of Energy’s National Renewable Energy Laboratory (NREL) has significantly contributed to the success of the Re-Powering America Program. As part of its initial characterization of sites on EPA’s brownfields inventory, NREL collects data sufficient to determine the renewable energy potential of each site. To date, NREL has screened over 80,000 sites for their development potential as solar, wind, biomass, and geothermal facilities.

Hard-rock mine sites, in particular, offer a number of distinct opportunities for renewable energy development. For example, they tend to be large in size, and thus can provide sufficient capacity for the installation of a large-scale wind farm or solar array in one location and are often near existing infrastructure, including roads and utilities. In addition, hard-rock mine sites can serve as excellent locations for wind farms because they are often situated in mountainous areas that receive consistent wind flow. 

Development of inactive coal properties can be more challenging, due in part to the remediation and procedural requirements of the Surface Mining Control and Reclamation Act. However, the Act also offers a potential funding source for site redevelopment under its AML Reclamation Fund, a benefit not available with respect to the hard-rock mine sites.

In addition to the foregoing, there is an array of emerging technologies that can enable value extraction and new reclamation approaches based on engineered natural systems or “green infrastructure.” For example, energy recovery from wastewater at mine sites can be a cost-effective option due to the often remote locations of such sites. In addition, residuals from wastewater treatment can be used as a soil amendment to add organic matter and nutrients to the soil to create a fertile soil profile with a reestablished microbial community, invertebrates, and plants. This approach can be used to help meet Clean Water Act stormwater discharge requirements as well as regulatory limitations on direct discharge to surface waters.

The use of green infrastructure can create a revenue generating ecosystem that will help offset the cost of mine remediation. At mine sites with substantial vacant land, sustainable forestry can be used to help manage stormwater as well as generate carbon credits recognized to varying degrees under both the California and Regional Greenhouse Gas Initiative frameworks. Furthermore, engineered wetlands can help address acid mine drainage and other contaminated flows from abandoned mines and potentially serve as a secondary revenue source through the generation of water quality trading credits under the Clean Water Act.

Historically, a significant obstacle to the redevelopment of AML has been the lack of funding available to characterize and remediate these sites. This gap in funding can be reduced by incorporating renewable energy and/or green infrastructure into the mine remediation plan. The installation of a solar array during or following mine reclamation can provide an energy source to power the remediation effort or create a revenue stream to offset the cost of remediation. A similar approach can be utilized through the use of green infrastructure.

In its proposed 2018 budget, the Trump administration has requested $28.0 billion for the Department of Energy “to make key investments to support its missions in nuclear security, basic scientific research, energy innovation and security, and environmental cleanup." Of this total, $6.5 billion is designated specifically for environmental management to address “high-risk contamination facilities that are not in the current project inventory.” However, within this proposed budget, the EPA would receive $5.655 billion in funding, a 30% decrease from the enacted 2017 budget. This reduction in EPA funding may have adverse effects on the Re-Powering America program.

Jerry Muys is a partner and Paul Tetenbaum is a summer intern with Boston-based law firm Sullivan & Worcester LLP.

Topics: Environmental Liabilities, Renewable Energy Development, Green Infrastructure, Abandoned Mine Land, Repurposing Mine Land

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