On December 23, 2009, the Pennsylvania Supreme Court issued a decision in PPL Generation v. Commonwealth of Pennsylvania. The state Supreme Court upheld the lower court’s determination that the Pennsylvania Mercury Rule (“PA Mercury Rule”) was unlawful, invalid and unenforceable. The lower court case was decided January 30, 2009 (No. 446 M.D. 2008, Commonwealth Court of Pennsylvania), and a discussion of that decision can be found here.

The Pennsylvania Supreme Court’s decision in favor of PPL Generation puts an end to state efforts to specially regulate mercury emissions from electric generating units (“EGUs”) in Pennsylvania, at least until such a time as the USEPA promulgates new federal mercury regulations, or until enabling legislation is passed in Pennsylvania authorizing the adoption of mercury regulations. Thus, EGUs in Pennsylvania will not be required to comply with the state mercury rule’s limits on mercury, which were to become effective January 1, 2010.

The PA Mercury Rule was published after the passage of two federal rules, one of which removed EGUs from the Clean Air Act (“CAA”) section 112 list of mercury pollution sources (the “Delisting Rule”) and the other that regulated EGUs under section 111 of the CAA (Clean Air Mercury Rule “CAMR”). In order to regulate sources or categories of sources, EPA must add them to the section 112 list. EPA had previously listed EGUs under the section 112 list for mercury, and the Delisting Rule removed EGUs from the list. The Delisting Rule was declared unlawful and vacated in New Jersey v. EPA, 517 F.3d 574 (D.C. Cir. 2008). Once the Delisting Rule was declared invalid, the court found that the CAMR no longer had a legal basis and it was also vacated.

In the Commonwealth Court decision, Judge Pellegrini found that that since the Delisting Rule and CAMR were void ab initio, the EGUs must have been deemed to have always been listed pursuant to the CAA section 112 list. Since the Pennsylvania Air Pollution Control Act (“APCA”) specifically prohibits the state’s Environmental Quality Board from regulating sources or categories listed under section 112, the Board had no authority to promulgate the PA Mercury Rule. The Supreme Court upheld this determination, rejecting the commonwealth’s arguments in favor of retaining the rule.

The commonwealth made several procedural and preliminary arguments. They argued that PPL Generation had waived its right to challenge the PA Mercury Rule because it did not appeal it when originally published. The Supreme Court rejected this argument, finding that this case was predicated on the New Jersey decision, not on the rule passage. The court also rejected arguments regarding procedural irregularities and reasonableness, since those were not the issues evaluated in the lower court rule. Finally the court rejected an assertion that the Board had the authority to promulgate the PA Mercury Rule pursuant to its general authority, since that argument ignored the specific limitation prohibiting the Board from passing the rule.

The Supreme Court also rejected the commonwealth's substantive arguments. The commonwealth argued that at the time it passed the mercury rule, it had the authority to do so. It asserted that subsequent changes in federal law should not affect the validity of the Board’s actions, because to do so would invite extreme regulatory uncertainty. The court found that in this case, “recognition of the inevitable effect of a federal court’s invalidation of a federal regulation does not presage so much uncertainty that the Board will be prevented from properly exercising its regulatory function.” The commonwealth also argued that the New Jersey decision did not specifically invalidate state regulations predicated on the Delisting Rule, and argued that the Commonwealth Court should not give the New Jersey decision retroactive effect. The Supreme Court determined that it could not ignore the effects of a federal decision upon the power of the states to act consistent with the federal Supremacy Clause, observing: “[t]he notion that a state regulation adopted in the interregnum, but which would have future effect, can stand outside the scheme by virtue of some grandfathering principle is unworkable in a federal system.”

On the issue of pre-enforcement review, the state Supreme Court’s decision also made it quite clear that it still considers the 1984 decision in Arsenal Coal Company v. DER, 477 A.2d 1333 to be good law. The Commonwealth had argued that PPL Generation was not entitled to pre-enforcement review of the PA Mercury Rule, as it had an adequate administrative remedy available. The court found that the regulation would have a “direct and immediate” effect on the industry, and that in accordance with Arsenal Coal, a pre-enforcement review of the validity of the regulation was appropriate.

The Pennsylvania Supreme Court’s ruling in this case is significant in several different ways. First, it clearly supports the argument that the validity of an environmental regulation may be challenged outside of an administrative case before the Environmental Hearing Board. For significant regulations that have a “direct and immediate” effect, this presents the opportunity to avoid the delay and piecemeal approach of litigating through the administrative tribunal. Second, the court recognized that environmental regulation in Pennsylvania is inextricably linked to the larger federal regulatory structure. Significant decisions on federal regulations, which potentially affect state regulations, cannot be ignored.

Reed Smith participated in the Pennsylvania case, both in the commonwealth case and in the appeal, through the filing of an amicus brief on behalf of two utility clients.