On Sept. 2, 2014, the Indiana Supreme Court affirmed a trial court’s decision that the Indiana Department of Environmental Management (“IDEM”) did not violate Indiana’s State Implementation Plan (“SIP”) by excluding fuel ethanol plants from the “chemical process plant” category.1 The court held that the state’s revised interpretation of the definition of “chemical process plant” was reasonable and no formal amendment to the SIP need occur before issuing permits based on the new definition.

The Clean Air Act (“CAA”) requires states to submit a SIP — a detailed plan for enforcing and implementing National Ambient Air Quality Standards (“NAAQS”) — for EPA approval. Once approved, any modification to that plan must also pass EPA approval; therefore, existing SIPs control even in light of state proposed revisions.

The issue in this case stems from a 2007 EPA ruling that modified the “chemical process plant” definition. Prior to the EPA’s modification, a “chemical process plant,” while not defined by the CAA, was classified as a “major emitting facility,” which meant it warranted heightened scrutiny under the act’s Prevention of Significant Deterioration (“PSD”) program. This scrutiny includes counting both actual emissions and fugitive emissions toward the plant’s total emissions levels. The EPA ruling amended the manner in which the agency interpreted both the CAA and all supporting regulations to exclude fuel ethanol plants from the definition of “chemical process plant.”

Because IDEM consistently adhered to the EPA’s interpretation of the definition of “chemical process plant,” it took action when the EPA issued the final rule by immediately adopting and enforcing the new definition. In 2011, the Indiana General Assembly enacted legislation stating that, for purposes of Indiana’s SIP, fuel ethanol plants were excluded from the definition of “chemical process plants.” IDEM, however, never submitted a revised SIP for EPA approval. 

The Natural Resources Defense Council ("NRDC") filed a petition for administrative review of two permits that IDEM issued to fuel ethanol plants. The permits used the new definition, which meant the plants were not categorized as “chemical process plants” and would, therefore, escape the stricter PSD requirements. The NRDC raised two distinct arguments: (1) Revision of the Indiana SIP was necessary to use the new definition, and (2) The new interpretation is unreasonable and not legally permissible.

The court quickly disposed of NRDC’s arguments. First, it found no violation of Indiana’s SIP because, just like the CAA, it never defined “chemical process plants.” Indiana simply used the EPA’s interpretation. The court pointed to IDEM’s argument that “merely because IDEM and the EPA had a particular understanding of an undefined term at the time a SIP is approved does not render that understanding a de facto condition of approval.” NRDC argued that this new interpretation must follow the full proposal process, including federal review and comment proceedings before EPA approval. The court rejected this argument, pointing out that while Indiana’s SIP is valid and the legislature cannot overrule it, it “did not address the question of how fuel ethanol plants are classified, [so] it cannot control IDEM’s interpretation of that term.”

On the issue of legal permissibility, NRDC argued that such interpretations “would render federal Clean Air Act SIPs fundamentally indeterminate and fluid.” The court responded that “fluidity is precisely the point of such programs.” Rigid adherence to a single interpretation impedes IDEM’s ability to formulate policy and make rules that “fill any gap left, implicitly or explicitly” by the legislature. The court applied a plain meaning analysis to give effect to the EPA’s intention and held that the exclusion of fuel ethanol plants from the definition of “chemical process plant” was reasonable.

Although the decision was specific to Indiana, the impact may be widespread. Ethanol producers and state agencies throughout the Midwest celebrated the decision as a victory, seeing it as clarity on the issue of SIP interpretation. Additionally, the ruling dispelled concerns that a ruling in favor of the NRDC would have a negative impact on the industry in Indiana by driving plants to states that used the EPA interpretation. Now fuel ethanol plants can operate in Indiana without the extra costs and stricter air standards associated with PSD program compliance. By contrast, the NRDC called it a dangerous decision. It sees this decision as allowing state agencies to conveniently interpret federal law without undergoing any due process. The NRDC’s federal suit challenging the EPA’s fuel ethanol exclusion rule is currently pending in the U.S. Court of Appeals for the District of Columbia Circuit.