In the latest case centering on the review of an Environmental Protection Agency (EPA) disapproval of a Texas State Implementation Plan (SIP) revision, on August 13, 2012, the Fifth Circuit Court of Appeals overturned EPA's disapproval of certain revisions that Texas made to its SIP in the 1990s. The Court's 2-1 decision in State of Texas, et al. v. EPA (No. 10-60614) vacated EPA's final rule disapproving Texas's Flexible Permit Program and remanded the Flexible Permit Program back to EPA for further consideration.

The Future of Flexible Permitting in Texas

As explained in more detail below, the Fifth Circuit sent a clear signal to EPA that the agency's administrative record lacked sufficient grounds on which to disapprove Texas's Flexible Permit Program, but the Court's decision only vacated the disapproval and remanded consideration of the Flexible Permit Program back to the EPA. As a result, even though the Fifth Circuit may have foreclosed EPA's ability to disapprove the Flexible Permit Program on remand, the Court's decision alone does not render the Flexible Permit Program an approved part of the Texas SIP. Moreover, before acting on remand, EPA may ask the full bench of Fifth Circuit justices to review the three-justice panel's decision, or may seek review of the decision by the United States Supreme Court. Most interested in EPA's actions will be the Texas facilities that operated under a flexible permit and were threatened with EPA enforcement action for doing so, especially the relatively few remaining facilities that still hold flexible permits, the majority of which are engaged in a process to convert their flexible permits into SIP-approved permits, a process commonly referred to as "de-flexing."

During the extended period between 1994, when the Texas Commission on Environmental Quality (TCEQ, then known as the Texas Natural Resource Conservation Commission or TNRCC) submitted its Flexible Permit Program to EPA as a SIP revision, and 2010, when EPA disapproved the SIP revision, many Texas facilities operated pursuant to permits issued by TCEQ under the Flexible Permit Program. In 2007, years before EPA disapproved the Flexible Permit Program, EPA began sending letters to these facilities informing them that, in EPA's view, permits issued under the Flexible Permit Program do not necessarily reflect federally-applicable requirements, to clarify that, according to EPA, these facilities "are obligated to comply with the federal requirements," and to threaten enforcement action "for failure to effect changes to the source in accordance with approved SIP procedures." Also, in the months leading up to EPA's disapproval, EPA began objecting to numerous Title V permitting actions on the basis that flexible permits had been improperly incorporated into Title V permits. These developments caused numerous facilities to begin the process of "de-flexing" their flexible permits, even during the pendency of Texas's challenge to EPA's 2010 disapproval.

As a result, many of the Texas facilities that were once authorized by flexible permits now no longer hold flexible permits, although, according to TCEQ, 42 facilities are still in the midst of the "de-flex" process, with another six facilities having never initiated the process. Whether these facilities continue with or initiate the "de-flex" process may depend on EPA's response to the Court's decision.

The History of Texas's Flexible Permit Program and SIP Submittal

Texas's Flexible Permit Program was established by TCEQ in 1994 in an effort to incentivize grandfathered facilities not subject to air permitting requirements to voluntarily enter into Texas's air permitting program and to bring greater efficiency to the Texas air permitting process. Under the Flexible Permit Program, a facility can obtain an air permit that allows it to undertake certain physical and operational changes without additional permitting review as long as the changes do not cause emissions to exceed emissions caps specified in the permit. Significantly, because the flexible permit emissions caps are established by adding the emissions for each permitted facility based on the application of best available control technology, the Flexible Permit Program resulted in grandfathered facilities voluntarily installing emissions controls and limiting their emissions through the use of flexible permits.

As part of the federal Clean Air Act's cooperative federalism scheme, by which EPA is responsible for setting National Ambient Air Quality Standards (NAAQS) to ensure increased public health and overall air quality and States are then responsible for formulating and administering a SIP outlining a pollution control strategy for achieving NAAQS, in 1994 Texas submitted its Flexible Permit Program to EPA as a revision to its SIP and as a new feature of the state's New Source Review program. In total, Texas issued 140 flexible permits before EPA's formal disapproval of the Flexible Permit Program. Although the federal Clean Air Act requires that EPA approve or disapprove a SIP revision within 18 months of its submission, EPA did not act to disapprove Texas's Flexible Permit Program until May 2010—more than 15 years after its submission. In July 2010, the State of Texas and various industry groups filed petitions for review of EPA's disapproval with the Fifth Circuit Court of Appeals.

The Court's Ruling

The Fifth Circuit held that the grounds relied upon by EPA in disapproving Texas's Flexible Permit Program were without basis in the Clean Air Act or its implementing regulations.EPA asserted numerous arguments in support of its challenged disapproval, all of which were rejected by the Fifth Circuit. In particular, EPA set forth three primary grounds to support its disapproval of the Flexible Permit Program: 

  1. EPA expressed concern that the lack of an explicit statement in the Flexible Permit Program regulations limiting its use to minor New Source Review might allow sources to evade major New Source Review requirements. The Court rejected this out of hand because the Texas Flexible Permit Program affirmatively requires compliance with nonattainment New Source Review and Prevention of Significant Deterioration review requirements and, therefore, does not allow sources to evade major New Source Review. Additionally, the Court reminded EPA that its preference that Texas use a particular drafting style "disturbs the cooperative federalism that the CAA envisions," because 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."
  2. EPA took the position that the regulations implementing the Flexible Permit Program contained inadequate monitoring, recordkeeping, and reporting (MRR) provisions and violated EPA policy because the regulations gave case-by-case discretion to the TCEQ Executive Director. Again chiding the EPA, the Court held that "EPA's task in reviewing a SIP revision is to determine whether the revision would interfere with attaining NAAQS or another applicable requirement of the CAA," and the degree of discretion conferred on the Executive Director "cannot sustain the EPA's rejection of the MRR requirements," especially in light of the fact that the EPA had previously approved nearly identical requirements in Texas and other state minor New Source Review provisions. And in response to EPA's contention that it has a policy to disfavor case-by-case director discretion provisions, the Fifth Circuit noted that EPA's recent approval of a Georgia SIP provision that permitted the director to exempt minor sources from MRR requirements entirely "give[s] the appearance that the EPA invented this policy for the sole purpose of disapproving Texas's proposal."
  3. EPA took the position that the methodology for calculating emissions caps is not sufficiently clear and replicable, making it difficult to hold permit holders accountable for complying with a flexible permit's emissions caps. Finding that "[t]he CAA does not make the replicability the EPA desires a standard for disapproving a SIP revision," the Court held that EPA exceeded the scope of the CAA.