The U.S. Supreme Court last week overturned a lower court’s ruling that Duke Energy Corp. did not violate clean air laws when it failed to obtain a permit before modernizing eight coal-fired power plants in North and South Carolina in a closely watched new source review (NSR) case.

In its unanimous opinion in Environmental Defense v. Duke Energy Corp., the Court vacated an earlier decision by the U.S. Court of Appeals for the Fourth Circuit in Duke’s favor. The high court agreed to hear the appeal nearly a year ago. Duke said it will continue to plead its case in the lower courts.

“This is yet another strike against the idea of running incumbent, cheap coal fleets as much as the economy would probably like it, and it’s probably another win for the environmental movement against coal-fired power generation,” Friedman, Billings, Ramsey & Co. Inc. analyst Kevin Book told NGI.

The Supreme Court’s opinion overturned rulings rendered unanimously by the U.S. District Court and the Fourth Circuit Court of Appeals that found an hourly emissions standard is appropriate when applying NSR standards. The lower courts ruled that work commonly done to maintain and increase the efficiency at Duke Energy’s Carolinas coal plants from 1988 to 1999 did not increase the plants’ hourly emissions — and therefore should not be subject to NSR review.

Justice David Souter wrote the court’s opinion and said the appeals court’s reading of Clean Air Act regulations “was inconsistent with their terms and effectively invalidated them.” The high court considered only whether an hourly emissions standard was appropriate to use when triggering NSR — and did not review what constitutes routine repair and replacement activities under NSR.

“We are disappointed the Supreme Court overturned the lower court rulings in our favor on this matter,” said Marc Manly, Duke Energy chief legal officer. “We continue to believe we have solid defenses against the government’s claims and will show in the lower courts that our power plant projects were not subject to NSR.”

The plant modifications made by Duke took place between 1988 and 2000 when the company replaced or redesigned tube assemblies at older coal-fired plants built prior to 1975. The changes extended the working life of the plants. The lawsuit was filed by the Clinton administration’s Justice Department in 2000. Before the Supreme Court the Bush Justice Department and environmentalists were on the same side urging that the appeals court ruling be overturned. However, the Bush administration also has proposed new rules that essentially embrace the argument put forth by Duke, allowing plant modifications to go forward without permitting as long as they don’t result in an increase in the hourly emissions rate.

Last Monday’s Supreme Court ruling on the NSR case was joined by another ruling, a 5-4 verdict against the Environmental Protection Agency’s (EPA) 2003 ruling that it did not have authority to regulate greenhouse gas emissions (see related story). The rulings, taken together, were seen by industry watchers as a shot in the arm for global warming/greenhouse gas legislation being considered by Congress.

“[W]e regard the new source review verdict as somewhat negative for coal and coal-fired utilities and somewhat positive for natural gas and stationary power filtration names…,” wrote Book in a research note last Monday. “The unanimous NSR outcome may also signal action on mercury (there are 11 lawsuits against the administration’s Clean Air Mercury Rule), which represents another potential catalyst for a deal on stationery emissions.”

Regardless of NSR litigation, Duke said its emissions have been substantially reduced through other Clean Air Act requirements and state clean air laws. The company has invested more than $1.5 billion to reduce nitrogen oxide emissions since 1998 and is investing nearly $3.5 billion more to further reduce nitrogen oxide and sulfur dioxide by 2010.

The Supreme Court case stemmed from an effort that began in 1999, when the EPA filed a number of enforcement actions across the industry and reinterpreted NSR rules to eliminate a trigger as to what constitutes a “major modification” at a power plant. The EPA contended that NSR can be triggered by what many in the industry consider to be “routine maintenance” activities. This issue is still yet to be resolved and is likely heading to the Supreme Court as well, Book told NGI.

“It’s all the same question no matter how you frame the details,” Book said. “And the question is do we look at our incumbent coal-fired fleet as something that we should preserve for the economic benefit conferred for as long as possible, or do we look at our incumbent coal-fired fleet as something that we should remediate for environmental reasons as soon as possible. And in your classic economy-versus-the-environment balance, the environment is winning.”

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