January 26, 2011

Regulatory Uncertainty and Structural Unemployment

Posted on January 26, 2011 by Kevin Finto

Almost every day we hear about the seemingly glacial pace of the current recovery and the unfortunate persistence of unemployment.  Some of the discourse has focused on regulatory uncertainty, more specifically, the numerous and amorphous dictates of health care and financial reform and whether they are a cause of structural unemployment.  Less often we hear similar concerns about EPA’s rule for green house gases. 

More pernicious to unemployment than these high profile government actions, however, are relatively small revisions to the law through agency actions on permits, orders and guidance, without the benefit of any rulemaking required by the Administrative Procedure Act (“APA”). This pattern of agency behavior creates not only uncertainty as to what the law is but also the perception, if not the real risk, that an agency might change the law at any time. This uncertainty inhibits the trust and confidence necessary for investment that create employment. A couple of recent examples illustrate this risk. 

Particulate Matter Regulation            

Particulate matter has been regulated under the Clean Air Act since its inception. Over time, the regulated form or portion of the particulate matter has changed as EPA has focused on fine particulate and its potential for respiratory damage. In 1985 EPA issued regulations establishing National Ambient Air Quality Standards for PM10 (particulate matter with an aerodynamic diameter less than 10 microns).  Over time, EPA developed techniques for measurement, control, monitoring and modeling of PM10. In 1997, EPA defined a new pollutant, PM2.5 (particulate matter with an aerodynamic diameter les than 2.5 microns) and a new NAAQS for it. EPA recognized, however, that agencies and the regulated community lacked the “necessary tools to calculate emissions of PM2.5 and related precursors and project ambient air quality impacts.” and authorized use of PM10 as a surrogate for PM2.5.  This policy was affirmed in rulemakings in 2005 and 2008(the latter established a transitional period through 2011 to direct regulation of PM2.5).             

A little over a year (and a change in Administrations) later, in the context of acting on a petition for an objection to a Title V permit for an individual power plant, EPA abruptly did an about face, declaring that “permit applicants and permitting authorities [must] determine whether PM10 is a reasonable surrogate for PM2.5 under the facts and circumstances of the specific permit at issue, and not proceed on a general presumption that PM10 is always a reasonable surrogate for PM2.5.” Remarkably, the Trimble Order provides no explanation whatsoever as to how the new “requirement” to conduct a case-by-case assessment overrides the transition rule for SIP-approved states established through notice and comment procedures in the PM2.5 NSR implementation rule. Moreover, the order fails to explain why the court opinions “that are properly read as limiting the use of PM10 as a surrogate” – all of which predated the 2008 PM2.5 NSR implementation rule  somehow have greater force and effect now than they did at the time the transition policy was established in the implementation rule.             

EPA has vigorously insisted on the reasonableness analysis prescribed in the Trimble Order, regulated entities have been forced to attempt to comply with it and state agencies have enforced it. Clearly, EPA’s statements have the requisite practical binding effect to bring them under the purview of the APA. More importantly, this previously unknown requirement for a reasonableness analysis is not a trivial one, especially for projects that are in the middle of permitting, engineering design, financing or even construction. Attention must be diverted from making the project a reality to figuring out how to comply with a new requirement. Like so many recent pronouncements, in Trimble County, EPA made a policy pronouncement but provided no tools to implement it. That is a recipe for regulatory uncertainty leading to structural unemployment.  

Prior Converted Croplands            

A more recent Corps decision regarding the treatment of prior converted croplands puts a finer point on the APA implications of rulemaking by permit, order or guidance. Under the Clean Water Act, a permit is required to discharge fill material to waters of the United States, including wetlands. In 1993, the Army Corps of Engineers, which administers the permit program issued a rule excluding prior converted croplands, i.e. lands that were drained to grow commodity crops prior to 1985, are not wetlands because they no longer exhibit the characteristics or serve the function of wetlands.   The only way for such lands to revert to Corps jurisdiction is for them to be abandoned as croplands and revert to their wetlands state. In July of 2009, the Jacksonville District Office of the Corps issued an “Issue Paper” in which it determined for the first time that prior converted cropland that is converted to non-agricultural uses are subject to Corps jurisdiction, regardless of there characteristics or function as wetlands. The Issue Paper, which was written in response to jurisdictional determinations for five limestone quarries, was sent to the Corps Headquarters for review and it was affirmed as agency policy. It was not, however, subject to notice and comment rulemaking.             

In a challenge brought by affected landowners, the United States District Court for the Southern District of Florida found that the Issue Paper was a rulemaking adopted without the required notice and comment under the APA and therefore was not valid.   The court explained that the rulemaking process was not a mere technicality because that procedure provided the agency with diverse public comment, accorded fairness to interested parties and allowed the development of record for judicial review. The Corps argued that the Issue Paper was a mere policy statement, but the court disagreed stating that it resulted in a shift in rules and a new binding norm regarding what the Corps considers wetlands from which district offices were not free to deviate in individual cases.              

Both Trimble County and New Hope Power Company reflect exactly the type of agency activity – the reversal of years of agency practice by a permit, order or guidance document and without a valid rulemaking – that creates regulatory uncertainty and structural unemployment. No matter how much private or stimulus money is thrown at it, no project can truly be “shovel ready” (i.e., fully designed, planned and financed) when there is no way to determine whether it complies with the law or whether the rules that apply to it will change while it is under construction. 

Tags: Air


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