Ohio Environmental Law Blog : Ohio Environmental Lawyer & Attorney : Joseph Koncelik : Frantz Ward Law Firm : Environmental Regulation, Land Use, Compliance : Cleveland, Ohio

Are you performing a Voluntary Action Program Clean Up?

Are you cleaning up contamination for a release from a petroleum underground storage tank (BUSTR)?

If you answered yes to either of these questions you may qualify for a significant federal tax incentive which allows you to deduct the clean up costs incurred this year as well as years past. Under the tax incentive, certain environmental cleanup costs at targeted sites may be fully deducted by eligible taxpayers in the year in which they are incurred, rather than having to be capitalized and spread over a period of years.  

What types of expenses could be deductible?

• Site assessment and investigation;
• Site monitoring;
• Cleanup costs;
• Operation and maintenance costs;
• State voluntary cleanup program oversight fees; and
• Removal of demolition debris.

Amended Returns to Capture Costs Spent in Previous Years

Even if you incurred such expenses in years past, but failed to take advantage of the tax incentive you may still be entitled to the deduction.   The excerpt below is from the U.S. EPA tax guide describing the potential to amend prior year returns:

"The Brownfields Tax Incentive is not frequently used, despite its great potential to support property cleanup and reuse. A key reason for the limited use of the incentive may be uncertainty over its availability over an extended period of time. The tax provision has never had long-term authorization and Congress allowed the provision to lapse five times since it was first introduced in 1997. However, retroactive reauthorizations allowed coverage to be available throughout the entire time period from the incentive’s introduction in 1997 until today. In December 2010, the incentive was reauthorized for two years and is retroactive to January 1, 2010. The incentive will remain in effect through December 31, 2011.

Site owners may want to consult their state program or a tax attorney to determine activities that may be considered qualified expenditures. If a taxpayer decides to claim the incentive in future years because cleanup was completed during one of the periods in which the incentive’s authority lapsed, an amended tax return can be filed up to three years after the original return was filed. An amended tax return must be filed within two years if a refund is sought.

Requirements to Qualify for the Tax Incentive

1. Ownership- The property must be owned by the taxpayer incurring the eligible cleanup expenses, and be used in a trade or business or for the production of income.
2. Contamination- Hazardous substances or petroleum contamination must be present or potentially present on the property.
3. Brownfield Property- Taxpayers must obtain a statement from a designated state agency (typically, the state’s environmental agency overseeing the state’s voluntary cleanup program (VCP)) that confirms the site is a brownfield and therefore eligible for the tax incentive. Participation in a state VCP satisfies this requirement.  In Ohio, the VCP is known as the Voluntary Action Program (VAP).

U.S. EPA Resources on Available Federal Tax Incentives

The federal tax incentive for clean up of brownfield properties is not the only tax incentive that may be available for brownfield redevelopment projects.  U.S. EPA has released its 2011 Tax Guide which summarizes a variety of tax incentives for various brownfield and renewable energy projects.  Possible tax incentives include:

• Brownfield Expensing Tax Incentive:
• New Markets Tax Credits
• Low Income Housing Tax Credit
• Historic Rehabilitation Tax Credit:
• Energy Efficiency Tax Credits:
• Renewable Energy Tax Credits

U.S. EPA Brownfield's Tax Incentive Web Page also contains additional resources which describe various tax incentives for brownfield clean up and revitalization.

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Today, the U.S. Supreme Court released their opinion in AEP v. Connecticut  in which the Court held that the Clean Air Act ("CAA") and the EPA actions on regulating greenhouse gas emissions displaced any federal common-law right to seek greenhouse gas emission reductions.  The suit was filed by Eastern States and non-profit land groups against coal-fired power plants in an attempt to have court order emission reductions. Businesses were deeply concerned that if the Court allowed the nuisance case to proceed, the courts would be flooded with climate change litigation.

Legal Ruling

The States had argued their nuisance claims were not displaced because EPA had not yet established final emission standards.  The Court stated the displacement test is simply "whether the statute speaks directly to the question at issue." In other words, if the statute give authority to act that is enough to displace federal common law.

The Court noted that in  Massachusetts v. EPA it had previously held:

• Emissions of carbon dioxide qualify as air pollution subject to the CAA. 
• CAA Section 111 gives authority to EPA to list categories of stationary sources that cause or contribute significantly to air pollution that "endangers public health and welfare"  (categories would include coal-fired power plants)
• Once a category is listed under Section 111, EPA must establish performance standards for new or modified sources within that category
• CAA also will require regulation of existing sources in the category
• If EPA fails to act in setting standards, States and private parties may petition for a rulemaking on the matter, and EPA’s response will be reviewable in federal court.

For these reasons, the Court held it was clear the CAA "speaks directly" to the emission of carbon dioxide from the defendant's coal-fired power plants.

Implications of Today's Ruling

1. Prevents "Flood" of Federal Nuisance Claims- Obviously today's ruling is very good news for those who feared the courts could be flooded with climate change litigation under federal common law. 
2. Possible State Nuisance Claims-  The Court notes that the issue before them was limited to actions under federal nuisance, it does not address nuisance claims based upon state law.  The Supreme Court sent the case back to the Second Circuit to determine if state nuisance claims are pre-empted by the CAA.  This leaves open a huge issue that could likely result in yet another Supreme Court ruling.
3. EPA v. Courts-  In its opinion the Supreme Court stated its preference for EPA to decide appropriate emission reductions, not the courts.   The Court said EPA, with all its expertise, is in a better position to balance competing interests and establish standards. 
4. Tacit Endorsement of EPA Regulatory Authority- The key battle right now are EPA's regulatory actions to move forward with emission standards for greenhouse gases.  Some have asserted EPA's actions demonstrate the Agency is "out of control."  The Supreme Court's decision makes clear, once again, EPA has the authority to regulate greenhouse gases.  Also, the Court notes repeatedly, if EPA fails to act in establishing those standards it can be compelled to act by private parties. 

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On Monday, EPA announced it was delaying its proposed rules that would apply greenhouse gas emission standards to power plants. EPA said it would push the proposal back from July to September to allow more time to consider comments. EPA still expects to finalize the rule by May 2012.  

Its no secret that EPA regulations have been the focus of intense scrutiny due to the costs and the potential impacts on the country's struggling economic recovery.  Over the last several months EPA has delayed rule after rule.  The delays include:

• Greenhouse gas rules for power plants (NSPS)
• Industrial/Commercial boiler rule (MACT)
• Ozone Federal Air Quality Standards (NAAQS)
• Fine Particle Air Quality Standards (NAAQS)

Each time EPA delays one of the major rules, it claims the delay is to consider more information or to allow for more public comment.  Yet the frequency of the announced delays coupled with the timing suggests the Obama Administration is concerned with protecting the fragile economic recovery or it is simply responding to intense political pressure.

Debate Pitting Economy Versus the Environment Intensifies

EPA's regulatory actions are under intense pressure on Capitol Hill.  Republicans and some conservative Democrats have targeted the EPA rules, in particular those that impact power plants due to their potential to raise energy prices or de-rail the recovery. 

While the announced delays may temporarily reduce the pressure on the Agency, in reality the delays have done nothing to cool down the rhetoric used on both sides.  For example, Lisa Jackson testified before the Senate and disparaged lobbyists who had advocated against the new EPA rules:

“While Americans across the country suffer from this pollution, special interests who are trying to gut long-standing public health protections are now going so far as to claim that these pollutants aren't even harmful. These myths are being perpetrated by some of the same lobbyists who have in the past testified before Congress about the importance of reducing mercury and particulate matter. Now on behalf of their clients, they're saying the exact opposite.”

On the other side, AEP highlighted potential impacts to the economy last week by announcing the potential closure of a number of power plants and huge new compliance costs if the EPA rules moved forward.  AEP said it would retire nearly 6,000 megawatts (MW) of coal-fueled power generation and switch to natural gas at many of its plants at an estimated cost of $6 billion to $8 billion by the end of the decade.This from a Press Release issued by AEP:

"We have worked for months to develop a compliance plan that will mitigate the impact of these rules for our customers and preserve jobs, but because of the unrealistic compliance timelines in the EPA proposals, we will have to prematurely shut down nearly 25 percent of our current coal-fueled generating capacity, cut hundreds of good power plant jobs, and invest billions of dollars in capital to retire, retrofit and replace coal-fueled power plants. The sudden increase in electricity rates and impacts on state economies will be significant at a time when people and states are still struggling,” said Michael G. Morris, AEP chairman and chief executive officer.

EPA Delays Are Simply a Pyrrhic Victory

Each time EPA announces a delay, the Agency claims it will take a second look at its proposals.  Yet, EPA seems very unlikely to make any fundamental changes.  While some may view the announced delays as victories, it is only so long before either the rules will be released by EPA or  EPA will be compelled by the courts to act. 

A popular political strategy has been to attack the science behind EPA's proposals in hopes of deflecting the proposal entirely.  This "all or nothing" approach is unlikely to ultimately succeed given the 60 votes needed in the Senate to make changes to the statutes that shape the rules. 

Rather than challenge the science in hopes of avoiding regulations altogether, it would be good to see meaningful policy discussion around the regulatory approach behind these major proposals:

1. Ozone and Fine Particle-  Time frames for compliance need to be reasonable and should be properly coordinated with existing federal rules that will drive down emissions.  Also, as our air gets cleaner, improvements become more difficult.  Do we cross a threshold where costs should be part of the equation in setting standards? 
2. Greenhouse gas-  Application of the New Source Review program to greenhouse gas emissions is a recipe for disaster.  While Cap and Trade became a dirty word, it offered a far more flexible approach than command and control regulations.
3. Commercial/Industrial Boilers-  EPA's method for establishing the standards was based upon cherry picking the best emission rates for each individual pollutant from units across the country.  A real effort needs to be made at looking at what is realistically achievable.

Unfortunately, meaningful discussion seems unlikely in today's political environment. 

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Hydraulic fracking provides the opportunity to tap into massive natural gas reserves which is located deep beneath the earth.  In Ohio and Pennsylvania, Marcellus and Utica Shale is sedimentary rock which contains huge quantities of natural gas.

Hydraulic fracking uses water injected at high pressure to break up the rock allowing the gas to be released into wells.  The process uses large amounts of water.  One well may use up to three to eight million gallons of water in about a week. 

Most of the water stays deep underground, but around 10% resurfaces and is called flowback water.  Regulators consider flowback water wastewater from an industrial operation because the water contains total dissolved solids (TDS), salts and metals/oils used to aid in the fracking process.

Disposal of the flowback water has been hotly debated in Pennsylvania where massive quantities of the water have been generated.  Pennsylvania Department of Environmental Protection (Pennsylvania DEP) estimates 235 million gallons of flowback water was generated in 2010.

Methods for Disposal of Flowback Water

The primary method of disposal of flowback water in Pennsylvania was through publicly owned sewage treatment plans (POTWs).  However, concerns emerged that POTWs could only dilute the water, not treat it prior to discharge to streams and rivers. 

Pennsylvania passed regulations establishing effluent standards for treatment of flowback water.  However, the regulations exempted existing loads and only kicked in if a treatment facility was expanding.  Pressure mounted on DEP to regulate disposal of all flowback water.

Industry Voluntarily Ceases Use of POTWs in Pennsylvania

Last week, Pennsylvania DEP announced that the oil/gas industry voluntarily agreed to stop the practice of shipping flowback water to POTWs.  The DEP announcement from last Thursday was covered in Pennlive.com:

Environmental Protection Secretary Michael Krancer told officials in a meeting in Washington, D.C., on Thursday that drilling wastewater is no longer being discharged to rivers or streams in Pennsylvania without full treatment.

DEP spokeswoman Katy Gresh said the agency has not yet confirmed full compliance with Krancer’s request that drillers voluntarily stop taking the wastewater to such facilities.

But she said it has confirmed that “We’ve gone from millions and millions of gallons being discharged to virtually none.”

After the announcement, its seems clear Pennsylvania is moving toward use of dedicated treatment facilities that can treat the brine and materials in flowback water.  Approximately 25 of these facilities are slated to open. 

Debate over Disposal of Flowback Water Shifts to Ohio

Perhaps seeing the debate unfold in Pennsylvania, Ohio regulators decided they needed to tackle the issue over disposal of flowback water.  In part, the issue was brought to a head by a company, Patriot Energy Partners, who had built and operated a pretreatment center connected to the City of Warren's POTW.  The company also was in process to build and operate facilities in Steubenville and East Liverpool.

On May 16th Ohio EPA issued a letter to the Ohio Department of Natural Resources clarifying regulatory authority over the disposal of flowback water.  In part, the letter was issued to clear up a debate between the Agencies as to who had regulatory authority since ODNR regulates oil & gas drilling and Ohio EPA regulates POTWs through NPDES permits.

The letter set forth the Agencies regulatory determination on several key issues:

• ODNR has regulatory authority over the disposal of flowback water (letter uses the term "brine")
• POTWs will not be allowed to accept flowback water for disposal (the City of Warren permit will not be renewed)
• Current Ohio law (R.C. 1509.22) only allows disposal of flow back water by the following methods:
  • deep well injection into underground formations
  • road surface application
  • catchall: other approved methods by ODNR

For practical purposes, deep well injection will likely be the primary method of disposal in Ohio unless its shown that dedicated treatment facilities are a cheaper disposal option.  Its interesting to note that Pennsylvania has only one commercial deep well and Ohio has approximately 150 wells that may be capable of disposing of flowback water.

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Competing bills have been introduced to the Ohio Legislature which are designed to implement the Great Lakes Compact.  The Compact was passed by the other States that border the Great Lakes.  Its fundamental purpose was to establish a new regulatory structure over water withdraws from the Great Lakes.  

In 2008, Ohio passed H.B. 416, by which Ohio officially became part of the Compact.  After all states passed endorsements of the Compact, it was approved by Congress.  While the Compact set up the regional structure for regulation of water withdraws, the nuts and bolts of the program were left to States through implementation legislation. 

If a State fails to pass its own implementation legislation, then the Compact has provisions that automatically become applicable in the State. Ohio wants to avoid the automatic standards and is moving forward now with implementation legislation.

Some of the key issues decided in the Ohio's implementing legislation include:

• What size withdrawal from Lake Erie or its tributaries will require a permit?
• What industries or types of withdrawals should be entirely exempt from the water withdrawal regulatory process?
• If the size of the withdraw triggers the need for a permit, what is the standards for determining issuance of the permit.  Principally, will the withdraw have adverse impacts?
• Are tributaries meant to be protected under the Compact or was the goal to protect the lakes themselves?

One legislative proposal is being supported by industry and the other is being pushed by environmental groups.  The proposals take vastly different views of the purpose the Great Lakes Compact.

Reasons for Passage of Compact at the Center of Ohio Debate

The seeds for passage of the Compact were laid in 1998 when Nova Group, a Canadian company, saw an opportunity to meet the growing fresh water needs of Asia and received a permit to export 158 million gallons per year of water from Lake Superior. The permit was eventually retracted.

However, the Nova proposal coupled with the growing scarcity of water in the western states raised fears the Great Lakes, which holds 20% of the world's fresh water, would drained by exports to areas in need of fresh water.  The Compact was seen as a means to create a new legal structure to prevent unregulated exports out of the basin. 

As the Compact was developed it added water conservation measures to the mix, including allowing States to regulate withdraws by any business within their boundaries.  The question remained as to how much regulation local businesses who were not exporting water should be subject o under the Compact.  The Compact left that debate up to the individual states who were provided flexibility to shape their own programs.

In Ohio, the debate has become a classic example of economy versus environment.    At its core, the debate centers on whether an enhanced water conservation and regulatory program is needed.

H.B. 231 Sponsored by Rep. Wachtmann (Companion Bill in Senate Sponsor- Sen. Grendell)

H.B. 231 Great Lakes Compact Implementation Legislation is supported by a variety of industry groups (Ohio Chamber, Ohio Manufacturers Association, Ohio Farm Bureau, etc.).  In addition, the Kasich Administration has testified in support of the Legislation. 

Key provisions in H.B. 231:

1. Trigger thresholds for permit-  As outlined in a recent Dispatch article, the bill would set some of the highest trigger thresholds of any of the States who passed the Compact.  Withdraws from Lake Erie trigger a permit at 5 million gallons per day (gpd).  The lowest trigger is for small high quality streams, with a withdrawal requiring a permit at 300,000 gpd. Michigan has triggers of 2 mgd for lake withdrawals and 100,000 gpd from streams.  Pennsylvania and New York require permits at 100,000 gpd no matter the location of the withdrawal.
2. Adverse Impacts-  Under the Compact, a permit cannot be issued if it results in adverse impacts.  Under the bill, only impacts to Lake Erie can be considered and not potential impacts to a stream where the withdrawal occurs.  As to lake impacts, the bill defines adverse impacts in the negative- anything at below 90 mgd from the Lake or 45 mgd from groundwater is presumed not to cause an impact.(Note:  the bill uses the term "annual mean runoff" but those figures can be converted roughly to the mgd figures noted above) 90 mgd is a very large withdrawal, there may be only one current user with that large of withdraw.

Key perspectives shaping the legislation:

• Avoid Creating New Regulations that Do Not Address a Real Problem-   Groups supporting H.B. 231 note the lack of examples where businesses who withdrawal for industrial or agricultural purposes are having a negative ecological impact on the Great Lakes as direct result of that withdrawal.  They argue implementing legislation should focus Compact requirements on preventing exports of water to other states outside the Great Lakes or to other countries.
• Avoid Creating Additional Regulatory Hurdles for Economic Development-  The implementing legislation establishes a major new environmental regulatory program that could complicate business expansions or prevent new facilities from being built in the Great Lakes region.  If Ohio has less regulation it could put the State at a competitive advantage to attracting new business.

 H.B. 257 Sponsored by Rep. Murray (Companion Bill in Senate- Sponsor Sen. Skindell)

A competing bill H.B. 257, was introduced which is supported by environmental groups and offers a stark alternative to H.S. 231. 

Key Provisions:

1. Trigger Thresholds-  At the high end, for Lake withdraws the bill sets a trigger level of 2.5 mgd.  The other trigger levels are based on size of the stream and go as low as 10,000 gpd.  These triggers would be close to those enacted by other states, but would be more restrictive for high quality streams.
2. Adverse Impacts-  The bill defers to rulemaking the standards for determining adverse impacts.  However, the rule's definition of "adverse impact" would have to be based on a science based assessment that includes an analysis of whether stream flows would be protective of aquatic life.  Furthermore, impacts to streams would be considered.

Key perspectives shaping the legislation:

• Passage of Compact Included Water Conservation-  Those supporting a more restrictive regulatory program argue that water conservation programs and regulation of local withdraws were part of the bargain in passing the Compact.  They argue Congress, with members of states outside the Great Lakes states, wanted to see requirements regulating "local withdraws." That was the bargain struck for there to be broad support of the Compact in Congress.
• Streams Need Protection from Impacts from Withdrawals-  Environmental groups argue that large withdraws that go beyond a stream or rivers capacity can harm the ecological quality of those streams.  Therefore, Ohio should go beyond protecting just the lake itself and include the rivers and streams that feed Lake Erie.

Editorials across Ohio Newspapers have focused on comparing the standards in H.B. 231 to neighboring states.   

Toledo Blade Editorial on Great Lakes Compact

Cleveland Plain Dealer Editorial on Great Lakes Compact

Akron Beacon Journal Editorial on Great Lakes Compact

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Back on January 18th President Obama issued Executive Order 13563 requiring federal agencies to consider the impacts of new regulations and to perform a self assessment of existing regulations.  For existing regulations, the President requested the agencies perform an analysis to determine whether rules are "outmoded, ineffective, insufficient, or excessively burdensome." 

After performing self-examinations, each agency was ordered to do the following:

"Within 120 days of the date of this order, each agency shall develop
and submit to the Office of Information and Regulatory Affairs a preliminary
plan,..to determine whether any such regulations should be modified, streamlined, expanded, or repealed so as to make the agency’s regulatory program more effective or less burdensome in achieving the regulatory objectives." (emphasis added)

On May 24th, U.S. EPA issued its preliminary plan, titled "Improving Our Regulations:  A Preliminary Plan for Periodic Retrospective Reviews of Existing Regulations."   EPAs preliminary plan falls way short of the goals articulated in the President's Order. 

Specifically, the preliminary plan calls for very little review of existing regulations to determine if they should be modified or repealed.  In fact, the EPA's plan in some cases calls for new regulations, including:

• SSO Blending Rule
• MACT Rules to "reduce emissions through the use of technologies and practices to achieve multiple benefits"

In other cases, EPA calls for additional rules to "clarify" or "streamline" requirements.  Often efforts to clarify simply mean additional regulations increasing complexity:

• Water Quality standards- EPA intends to clarify antidegredation and  variance provisions, among other requirements;
• Clean Air Act Title V-  streamline by use of electronic filings

What is missing from EPA's proposal is an acknowledgment that some key regulatory programs should be reviewed to determine if there is simply a more efficient and effective way to achieve the same goals.  Or, whether some regulations are outdated.

EPA Should Listen to the Business Community in Developing its Plan

The President's Order only gave U.S. EPA 120 days to develop a preliminary plan.  That did not leave much time for public input prior to development of the plan.  The EPA's plan is open for public comment until June 27th.  Click here to an EPA link to comment on the plan

Because EPA has already developed its plan pursuant to the Order its much harder to make wholesale changes to plan that is already in writing.  More than likely, EPA will tweak the existing plan some based on the comments it receives.

However, by simply packaging some existing tweaks to rules and policies as its regulatory analysis EPA is simply playing around the edges.  EPA is missing a golden opportunity to look at fundamentally overhauling its more complex and controversial rules.  While I believe there are multiple examples of regulations that deserve a complete overhaul, I think one particular program serves as a shining example: 

New Source Review-  The NSR program is highly complex.   It also involves far too much subjectivity.  Courts have reached vastly different conclusions regarding whether NSR was triggered in cases involving very similar projects and fact patterns.  To make matters worse, NSR has recently been applied to greenhouse gases which raises dramatically the impact of the program.  Perhaps no EPA program symbolizes more the frustration of the regulated community and is in serious need of review/overhaul.

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The State has announced the latest modifications to the Clean Ohio Assistance Fund (COAF) policies which provides up to $300,000 for Phase II environmental assessments and up to $750,000 for brownfield clean up.  The State released its COAF policy update last month.

Unlike the Clean Ohio Revitalization Fund (CORF), COAF grants are given out on a rolling basis as long as the State had money during the funding cycle. COAF has traditionally been used to obtain funding for Phase II assessments on brownfields.  The use of the COAF for clean up has been less frequent due to limited funding available and the larger clean up grants available under CORF (up to $3 million). 

The changes to the COAF program this time include:

Asbestos- 

The policy now explicitly states that abatement of asbestos are eligible clean up costs.  See, 3.06

Matching Funds- 

For the first time, the State is requiring a 10% match for use of COAF for clean up grants.  This means for a max clean up grant, the applicant will need to supply $75,000 toward clean up. While its understandable the State wants to see the applicant have some "skin in the game,"  the no-match component of COAF was one element that made it more attractive than CORF. 

Another issue is that the policy says the match must be spent by the "project approval date."  The policies don't define this term, but it would appear to be the date the Controlling Board approves the issuance of the grant.  This timing seems odd in that applicants would need to spend the 10% before they knew for sure they were getting the grant.

Jobs Commitment-

Perhaps even a larger change than the 10% match, is the requirement that COAF clean ups for industrial or commercial use must generate or retain at least 10 jobs.  See 6.09  Not every project has a job component at the get go. 

The State previously recognized that some brownfields may not have redevelopment committed but are located in prime locations for future development.  This is why for the CORF the State created the "Redevelopment Ready Track."  Perhaps the limited amount of COAF clean up funds available is driving the State to use the money only for projects that have a job component.

No Longer a "First Come/First Serve" Program-

In the e-mail to interested parties providing notice of the changes to the COAF policies, the Ohio Department of Development also stated the following:

"During the month of July, cleanup applications will be reviewed and approved based on project merits rather than a first come/first serve basis."

While the indication is projects will be evaluated on their merits, there were no other changes to the policies which shed light as to how they will be evaluated on their merits.  Unlike the CORF application process there is no defined scoring methodology for projects.  This statement from ODOD can probably only be interpreted to mean the Director retains discretion to reject your clean up project as not worthy of COAF funding. 

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