The California Supreme Court has issued an opinion determining that projects reviewed under the California Environmental Quality Act ("CEQA") cannot be approved through a Negative Declaration based on the absence of significant impacts when the proposed project is compared to a hypothetical maximum permitted capacity rather than existing physical conditions at the time of the commencement of the environmental review. Communities for a Better Environment v. South Coast Air Quality Mgmt. Dist., Case No. S161190, __ Cal.4th __ (March 15, 2010) ("CBE v. SCAQMD").

Background on CEQA

CEQA mandates that any "project" in California undergo environmental review to determine if the project may pose significant adverse environmental impacts. The first phase of environmental review is the Initial Study carried out by the lead agency. If, after conducting the Initial Study, the lead agency concludes that the project will not have a significant adverse effect on the environment, it may issue a Negative Declaration and approve the project. If, however, the lead agency determines that substantial evidence exists that supports a fair argument that the project may have significant adverse environmental effects, then the lead agency must undertake the lengthy, expensive and often contentious process of preparing an Environmental Impact Report ("EIR") before it may approve the project. In both the Initial Study and the EIR, a critical issue is the baseline against which the environmental impacts of the proposed project should be evaluated to determine if any adverse impacts are significant.

The Diesel Project at Issue in CBE v. SCAQMD

The CBE v. SCAQMD case concerned a project proposed by the ConocoPhillips Company ("ConocoPhillips") to install new equipment and modify existing equipment at its Wilmington, California petroleum refinery to enable it to produce ultra-low sulfur diesel fuel in response to a mandate by the State of California (the "Diesel Project"). In general, to construct new equipment that generates air emissions or to modify existing equipment that generates air emissions, a facility must first apply to the local air district for a "permit to construct." Once a permit to construct is issued, and the work is completed, the air district will issue a "permit to operate" the new or modified equipment. The application for a permit to construct can trigger CEQA review.

ConocoPhillips applied for permits to construct from the South Coast Air Quality Management District ("District") to install new equipment and to modify existing steam generating equipment at the refinery needed for the Diesel Project. The steam generating equipment at issue consisted of a cogeneration plant and four boilers that the refinery had previously constructed and which it operated under current permits to operate issued by the District. At the time ConocoPhillips applied for the permits to construct the Diesel Project, the refinery was operating the boilers well under the maximum operating capacity allowed by the permits to operate, and although operating capacity fluctuated over time, simultaneous operation of all four boilers at maximum capacity was considered by the court to be "not a realistic description of the existing conditions."

In the Initial Study for the Diesel Project, the District determined that the project would require substantially increased operation of the boilers to provide steam for the new refinery operations. However, the District concluded that any increased NOx emissions that would result from the increased boiler operation would not have a significant adverse environmental impact, and therefore would not require a full EIR analysis and potential mitigation under CEQA, because the boilers would not exceed the hypothetical maximum operating capacity under their permits. According to the Supreme Court, "the District treated any additional NOx emissions stemming from increased plant operations within previously permitted levels as part of the baseline measurement for environmental review, rather than as part of the proposed Diesel Project."

Based on this approach, the District determined that the increased NOx emissions properly attributable to the Diesel Project was below the threshold of significance and that the Diesel Project would therefore not have significant adverse environmental impacts. The District approved the Diesel Project on the basis of a Negative Declaration, and issued the permits to construct to ConocoPhillips. Citizens for a Better Environment and others challenged the District's approval.

Supreme Court's Decision

The Supreme Court rejected the District's use of the maximum permitted capacity of the boilers for the environmental baseline. It held that CEQA requires that the environmental impacts of a proposed project must be compared to the environmental conditions that exist at the time the CEQA analysis is commenced, not "the level of development or activity that could or should have been present according to a plan or regulation," and commented that the fact that refinery operations fluctuate over time "does not excuse the District from estimating the increase in NOx emissions, if any," from the increased boiler operations required by the Diesel Project. Although the court declined to prescribe a method for determining how fluctuating refinery operations should be measured for baseline purposes, it concluded that "the comparison must be between the existing physical conditions without the Diesel Project and conditions expected to be produced by the project. Without such a comparison, the EIR will not inform decision makers and the public of the project's significant environmental effects, as CEQA mandates."

Significantly, the court distinguished CBE v. SCAQMD from appellate decisions that ConocoPhillips and the District relied on to support the use of maximum allowable operational levels as the environmental baseline. The court distinguished those cases as concerning projects that involved modifications to existing projects that had already undergone CEQA review. Citing one example, the court observed that it would be appropriate to use the environmental impacts of an existing mine operating at maximum capacity allowed under a permit that had already undergone CEQA review as the baseline against which to compare the effects of a proposal to increase production from that mine. In contrast, the court noted that the Diesel Project concerned the installation of a new refinery process, which was treated by the District as a "new project," not the modification of an existing project. Because the Diesel Project required increased utilization of existing boilers, it was inconsistent with CEQA for the District to use the maximum permitted operating capacity of the boilers as the baseline against which to compare NOx emissions from the Diesel Project, rather than an estimate of the actual NOx emissions from the boilers under current operating conditions.

Conclusion

CBE v. SCAQMD provides important guidance on the application of CEQA to proposals for "new" projects at existing facilities. The Supreme Court finding that unrealistic, maximum permitted emissions levels from existing equipment cannot be deemed existing physical conditions for the "environmental baseline" must, however, be viewed in the context of its approval of Court of Appeals decisions that utilized maximum permitted operating levels as the environmental baseline for projects at existing facilities that were "modifications" of a previously analyzed project.

Farella Braun + Martel assists clients in getting speedy and appropriate CEQA review of their projects and advises on air permitting issues. For more information, please contact Farella environmental attorney Mathew Swain (mswain@fbm.com / 415.954.4464) or Buzz Hines (rhines@fbm.com / 415.954.4935).