John L. Peterson, Butte, Mont., for Montana Power Co.
Bruce J. Terris, Washington D. C. (argued), Larry G. Gutterridge, Dept. of Justice, Washington, D. C., for E. P. A.
Appeals from the United States District Court for the District of Montana.
On Petition to Review a Decision of the Environmental
Protection Agency.
Before MERRILL and WRIGHT, Circuit Judges, and SWEIGERT, District Judge.
EUGENE A. WRIGHT, Circuit Judge:
These consolidated cases are classic examples of the difficulties inherent in interpreting the Clean Air Act, as amended, 42 U.S.C.A. Secs. 7401, et seq. (West Supp.1978). At issue is whether Montana Power and others 'commenced construction', under the Clean Air Act and Environmental Protection Agency (EPA) regulations, of two 750 megawatt coal-fired electric generating plants at Colstrip, Montana (Colstrip Units 3 & 4) before a grandfathering cutoff date. If so, the units are exempt from preconstruction review and permitting procedures for the 'prevention of significant deterioration' of air qualify (PSD review and permitting).
Number 77-2253 and 77-2521 are appeals by the EPA and intervenors Northern Plains Resource Council and the Northern Cheyenne Tribe (collectively called the Tribe) from the district court's declaratory judgment that Colstrip Units 3 & 4 had 'commenced construction' before June 1, 1975, within the meaning of EPA's then effective regulations and therefore were grandfathered from PSD review and permitting. Number 78-1140 is a petition by Montana Power to review the EPA's determination that, despite the district court's holding, the 1977 amendments to the Clean Air Act (1977 Amendments) subject Colstrip Units 3 & 4 to PSD review and permitting under a new and stricter definition of 'commenced construction.'
We have jurisdiction over the appeals by EPA and the Tribe under
28 U.S.C. Sec
. 1291 and over Montana Power's petition under Sec. 307(b)(1) of the Clean Air Act. We reverse the judgment of the district court and affirm the EPA's determination.
I.
BACKGROUND
A. The PSD Regulations.
The EPA promulgated regulations under the Clean Air Act, effective on January 6, 1975, to prevent the significant deterioration of air quality.
40 C.F.R. 52.21 (1975). The purpose of the regulations was to restrict the increase in levels of particulate matter and sulfur dioxide in areas with air cleaner than that required by the national ambient air quality standards. Three classes of clean air areas were designated, in which differing additional amounts of these two pollutants would be allowed over levels existing on the baseline date. Increases exceeding the specified limits were prohibited.
Enforcement of the restrictions was provided through preconstruction review and permitting of specified stationary pollution sources that included electric coal-burning power plants like Colstrip Units 3 & 4. If the EPA suspected a violation of the applicable class increments would occur, it refused the source a permit and prohibited construction.
The regulations contained a grandfather clause, excluding from PSD review and permitting those sources that 'commenced construction or modification prior to June 1, 1975.' Id. at 52.21(d)(1). 'Construction' was defined as 'fabrication, erection or installation of a stationary source.' Id. at 52.21(b)(6). More important here is the definition of 'commenced', which means that
an owner or operator has undertaken a continuous program of construction or modification or that an owner or operator has entered into a contractual obligation to undertake and complete, within a reasonable time, a continuous program of construction or modification.
Id. at 52.21(b)(7).
If a source could establish it should be grandfathered, it might avoid additional expensive pollution control efforts. In some cases, exemption from PSD review and permitting might be the only way a source could be built in a particular location even if best available pollution control technology were used.
Before June 1, 1975, Montana Power had taken some significant preliminary steps for the construction of Colstrip Units 3 & 4. Plans for Units 1 & 2, being built in the same area planned for Units 3 & 4, included excess capacity for common facilities such as a surge pond, water intake structures, and power transmission lines to serve all four plants.
The company arranged for an environmental analysis of the Colstrip project in early 1973. It applied for a state construction permit in June under the Montana Major Facility Siting Act, Mont.Rev.Codes Ann. Sec. 70-801 et seq. (Supp.1977), and executed several contracts. Due to delay in processing the permit application, Montana Power entered into no other major contracts after October 1974. The Siting Act permit was finally granted in July 1976.
In September 1975, the administrator of EPA's Region VIII informed Montana Power that its plans to build Colstrip Units 3 & 4 might be subject to PSD review and permitting, and requested more information about the project. The company responded in February 1976 and petitioned the EPA for a ruling on the applicability of the PSD regulations.
B. The Strelow Memoranda.
In evaluating Montana Power's request for exemption from PSD review and permitting, Region VIII's administrator relied upon two memoranda written by Roger Strelow, then EPA's Assistant Administrator for Air and Waste Management, which interpreted the phrase 'commenced construction'.
The first memorandum, dated December 18, 1975, provided in relevant part:
[T]he term 'commencement of construction' . . . refers to on-site construction. Ordinarily therefore only significant and continuous site preparation work such as major clearing or excavation or placement, assembly, or installation of unique facilities or equipment at the site should be considered a 'program of construction or modification' for purposes of Sec. 52.21(b)(7). However each case must be reviewed on its own facts.
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There may also be situations where, although actual on-site work has not commenced or been contracted for, the source is so irrevocably committed to a particular site that it should be considered as having commenced construction. Such situations could include sources which are only a few days or weeks from commencing on-site construction or sources which have contracted for or constructed unique site specific facilities or equipment which are not yet being installed on-site. Such situation will be rare but may be taken into account in determining whether the source is in effectively the same position as if it had commenced on-site construction.
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Finally, 40 CFR Sec. 52.21(b)(7) states that an owner or operator has commenced construction not only when he has undertaken a continuous program of construction or modification himself but also when he has entered into a 'contractual obligation to undertake and complete, within a reasonable time, a continuous program of construction or modification'. The question of whether a contract represents a 'contractual obligation' will depend upon the unavoidable loss that would be suffered by a source if it is required to cancel such contract. . . . [W]here the contract may be cancelled or modified at an insubstantial loss to the plant operator, the proposed source should not be allowed to escape review under these regulations. The determination of whether a source will suffer a substantial loss if the contract were terminated and therefore whether there is, in fact a 'contractual obligation', must be made on a case-by-case basis as there are no general guidelines that would cover all situations. [Emphasis added.]
The second memorandum of April 21, 1976, clarified what was necessary for a contractual obligation to qualify a source for exemption from PSD review and permitting:
[A]s a general rule, for one to qualify for the contractual exemption, he must have contracted for continuous on-site construction work. The discussion [on the 'contractual obligation' exemption in] my December 18 memo is not intended to provide exceptions to this general rule. That discussion relates to situations in which even though a 'contract' for onsite work were executed prior to June 1975, the 'contract' might still not qualify the source for an exemption [because the source would experience no substantial loss].
Accordingly, the mere fact that a source had contracted for the fabrication of a piece of equipment prior to June 1975 (i. e., placing an order for a boiler) would not ordinarily exempt the source. Only if a non-site-work contract could fit within the 'irrevocably committed' exception . . . would it qualify the source for an exemption from review. As my memo indicates, such situations should be 'rare.'
The second memorandum also stated that the absence of a state construction permit should be a 'relevant factor' in determining whether a source should be exempt from PSD review and permitting because it was irrevocably committed to a specific site.
Thus, using the Strelow Memoranda to interpret its regulations, the EPA would grandfather a source from PSD review and permitting only if, by June 1, 1975, the source had: (1) actually begun a continuous program of on-site construction; (2a) contracted for a continuous program of on-site construction which could not be terminated without substantial loss; or (2b) contracted for construction not amounting to a continuous program of on-site construction, but which nevertheless irrevocably committed the source to a specific site.C. Applicability of the PSD Regulations.
Region VIII's administrator advised Montana Power on February 26, 1976, of the EPA's decision that Colstrip Units 3 & 4 were subject to PSD review and permitting. A following letter in May affirmed that decision and gave the reasons. In EPA's view, before June 1, 1975, Montana Power: (1) had not begun actual on-site construction; (2) had not received the necessary state preconstruction permits; and (3) had not demonstrated an irrevocable commitment to a specific site, partly because it would suffer no substantial loss from the termination of its contractual obligations.
The EPA based its conclusion that the company would suffer no substantial loss on a ratio of unavoidable losses to total project cost. It found that contract payments and cancellation charges amounting to $8.7 million were clearly 'contractual obligations' for the construction of Units 3 & 4 and that another $13.6 million was arguably in this category. It rejected claims totaling an additional $106.5 million. Using a total project cost of $790 million, the EPA calculated that the company's contractual obligations constituted 2.8 percent of the project's cost and concluded that this sum was not substantial.
Montana Power sought judicial review of the EPA's final determination. In January 1977, the court granted the company declaratory, but not injunctive, relief, holding that it had commenced construction of Colstrip Units 3 & 4 before June 1, 1975, and was therefore exempt from PSD review and permitting. Montana Power v. EPA, 429 F.Supp. 683 (D.Mont.1977).
In reaching its holding, the court concluded that the EPA's determination was arbitrary and capricious because the agency recently had exempted two other electric generating plants not as far advanced as Colstrip Units 3 & 4. Id. at 699-701. It also concluded that, although the use of a ratio in determining substantiality of loss is itself not necessarily arbitrary and capricious, its application here was because of the huge sum of money, in absolute terms, already committed to the units' construction. Id. at 701.D. 1977 Amendments.
While the district court's judgment was on appeal, Congress passed the 1977 Amendments, effective August 7, 1977. These provided for the first time explicit statutory authority for the prevention of significant deterioration of air quality, a subject previously covered only in EPA's regulations.
The amendments generally preserved the structure of the PSD regulations. But, among other modifications, the amendments enacted a stricter definition of 'commenced':
(2)(A) the term 'commenced' as applied to construction of a major emitting facility means that the owned or operator has obtained all necessary preconstruction approvals or permits required by Federal, State, or local air pollution emissions and air quality laws or regulations and either has (i) begun, or caused to begin, a continuous program of physical on-site construction of the facility or (ii) entered into binding agreements or contractual obligations, which cannot be canceled or modified without substantial loss to the owner or operator, to undertake a program of construction of the facility to be completed within a reasonable time.
(B) The term 'necessary preconstruction approvals or permits' means those permits or approvals, required by the permitting authority as a precondition to undertaking any activity under clauses (i) or (ii) of subparagraph (A) of this paragraph.
Clean Air Act Sec. 169(2).
Although the definition in the amendments is substantially different on its face from the definition in the regulations, it is generally consistent with the interpretation of the regulation definition in the Strelow Memoranda. A significant difference is that the possession of necessary preconstruction permits, only a 'relevant factor' in determining if a source had commenced construction under the regulations, is required for such a determination under the 1977 Amendments.
The transition from the regulatory to the statutory scheme is outlined in Sec. 168. Section 168(a) provides that, until a state's implementation plan is revised to comform to the Act's new PSD procedures, the preamendment regulations will remain in effect for that area, except as provided in subsection (b).
Section 168(b) also provides that, in the case of a source which commenced construction--under the new definition of Sec. 168(a)--after June 1, 1975, and before the effective date of the 1977 Amendments on August 7, 1977, PSD review and permitting 'shall be in accordance with the regulations for the prevention of significant deterioration in effect prior to the enactment of the Clean Air Act Amendments of 1977.'
On November 3, 1977, EPA amended its PSD regulations to reflect the immediately effective changes required by the 1977 Amendments, including the Sec. 169(2) definition of 'commence.' 42 Fed.Reg. 57,459 (1977). It also proposed amendments to the regulations, to take effect later, which would incorporate the other changes enacted by Congress. 42 Fed.Reg. 57,47 1, 57,479 (1977).
The proposed regulation amendments would 'greatly expand the coverage of the EPA's current regulations and generally impose more stringent requirements for pollution sources seeking to construct or modify in clean air areas.' 42 Fed.Reg. 57,479 (1977). A source would not be subject to the new PSD regulations if it had obtained a final PSD permit by March 1, 1978, and commenced construction before December 1, 1978. Id. at 57,481. Somewhat behind schedule, the EPA published its final amendments to the PSD regulations on June 19, 1978, conforming the regulations to the remaining requirements of the 1977 Amendments. 43 Fed.Reg. 26,388 (1978).
The EPA issued a final determination on November 29, 1977, that Colstrip Units 3 & 4 had not timely commenced construction under Sec. 169(2) of the Clean Air Act because Montana Power had not received all necessary preconstruction approvals or permits. The agency therefore found the plants were subject to PSD review and permitting under the 1977 Amendments. 42 Fed.Reg. 60,784 (1977).
Montana Power petitioned this court for review of EPA's determination and, without prejudice to its contentions on appeal, continued its efforts to obtain a PSD permit for Units 3 & 4. On June 12, 1978, EPA denied the company's application because it determined the units would violate the Class I pollution increments applicable to the Northern Cheyenne Reservation.II.
ISSUES
We face two issues:
(1) whether the district court erred in reversing EPA's determination that Colstrip Units 3 & 4 were subject to PSD review and permitting under the regulations because construction had not commenced before June 1, 1975; and
(2) whether the EPA erred in concluding Montana Power had not commenced construction of the units under Sec. 169(2), thus subjecting them to PSD review and permitting under the 1977 Amendments.
III.
WHETHER CONSTRUCTION COMMENCED UNDER THE REGULATIONS
The district court focused on EPA's application of a 'substantial loss test', read into the regulations by the Strelow Memoranda, in holding the agency's refusal to exempt Colstrip Units 3 & 4 from PSD review and permitting to be arbitrary and capricious. Although the EPA cited other reasons for its refusal, also challenged by Montana Power here, we need not reach those questions because of our disposition of the substantial loss issue.
A. Degree of Deference.
A reviewing court may set aside an agency action that is arbitrary, capricious, or an abuse of discretion.
5 U.S.C. Sec
. 706(2)(A) (1976). When making this determination, the court ordinarily must give agency interpretations of its regulations upon which the action is based the degree of deference described in Udall v. Tallman,
380 U.S. 1, 85 S.Ct. 792, 13 L.Ed.2d 616 (1965):
When faced with a problem of statutory construction, this Court shows great deference to the interpretation given the statute by the officers or agency charged with its administration. . . . When the construction of an administrative regulation rather than a statute is in issue, deference is even more clearly in order.
Id. at 16, 85 S.Ct. at 801 (emphasis added). Accord, Burglin v. Morton,
527 F.2d 486, 490 (9th Cir. 1975), cert. denied,
425 U.S. 973 , 96 S.Ct. 2171, 48 L.Ed.2d 796 (1976); Brubaker v. Morton,
500 F.2d 200, 202 (9th Cir. 1974). See also Red Lion Broadcasting Co. v. FCC,
395 U.S. 367, 381, 89 S.Ct. 1794, 23 L.Ed.2d 371 (1969).
The district judge recognized that it is not the court's province to substitute its judgment for that of the agency to which is committed the interpretation of a statute or regulations. 429 F.Supp. at 695, 697. See Citizens to Preserve Overton Park, Inc. v. Volpe,
401 U.S. 402, 416, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971); Ethyl Corp. v. EPA, 176 U.S.App.D.C. 373, 405-409,
541 F.2d 1, 33-37, cert. denied,
426 U.S. 941 , 96 S.Ct. 2663, 49 L.Ed.2d 394 (1976); Sierra Club v. EPA, 176 U.S.App.D.C. 335, 344,
540 F.2d 1114, 1123 (1976), vacated and remanded
434 U.S. 809 , 98 S.Ct. 40, 54 L.Ed.2d 66 (1977) (in light of 1977 Amendments); Frommhagen v. Klein,
456 F.2d 1391, 1393 (9th Cir. 1972). The court concluded, however, that
when an analysis of an agency's activities involves a question concerning the meaning of a statutory term, the application of a statutory term to facts, or an agency interpretation of a statute, then the breadth fo judicial review is much wider.
429 F.Supp. at 695. It also found that the Strelow Memoranda were merely intraagency, non-public guidelines to interpret the PSD regulations and, as such, were not entitled to the usual degree of deference.
We are aware that a court reviewing an agency action 'must consider whether the decision was based on a consideration of the relevant factors' and that the 'inquiry into the facts is to be searching and careful.' Citizens to Preserve Overton Park, 401 U.S. at 416, 91 S.Ct. at 824. But, 'the ultimate standard of review is a narrow one' and the objective of the inquiry is to determine 'whether there has been a clear error of judgment' by the agency. Id. See also Bone v. Hibernia Bank,
493 F.2d 135, 139-40 (9th Cir. 1974); Hughes Air Corp. v. CAB,
482 F.2d 143, 145-46 (9th Cir. 1973); United States v. Whelan,
463 F.2d 1093, 1094 (9th Cir. 1972).
Unlike the district court, we do not believe the standard set forth in Tallman allows the courts any broader grant of review when an agency determination 'concern[s] the meaning of a statutory term', as long as the agency does not exceed its own statutory authorization. Here, the EPA was not interpreting a statute, but rather its own regulations, which is entitled under Tallman to even more deference.
Similarly, even though we agree with the district court that the Strelow Memoranda 'were merely intra-agency, non-public guidelines', we are unpersuaded they should be given any less than normal deference as long as they are a reasonable interpretation of the PSD regulations.
While we express no opinion about the other parts of the Strelow Memoranda, we conclude that a 'substantial loss test' is reasonable to determine if an owner 'has entered into a contractual obligation to undertake and complete, within a reasonable time, a continuous program of construction or modification.'
We agree with the Tribe that, if the Memoranda alter the meaning of the regulation at all in this respect, it is to liberalize the regulation's requirements. Thus, if a source executes contracts that could not be cancelled or modified without substantial loss, indicating an irrevocable commitment to a specific site, it would be unnecessary under the EPA's interpretation for the contractual commitment to be either continuous or inclusive of completion.
It is not enough, however, to note that the district court applied an incorrect standard of deference to the Strelow Memoranda. Nor is it sufficient for us to conclude that passing a substantial loss test is a reasonable prerequisite to being grandfathered under the irrevocable commitment exception to PSD review and permitting. Applying the proper degree of deference, we still must decide if the substantial loss test, as applied here to Colstrip Units 3 & 4, was arbitrary or capricious.B. Prior Decisions.
Before the EPA's final determination in May 1976 refusing to grandfather Colstrip Units 3 & 4, the agency exempted two other power plants in arguably similar contractual positions. The apparent inconsistency in interpreting the regulations clearly influenced the district court.
In May 1975 the Region X administrator notified Portland General Electric (PGE) that its plant at Boardman, Oregon was exempt from PSD review and permitting. The finding that PGE had obligated itself to complete within a reasonable time a continuous program of construction was based on a contract to purchase a turbine generator.
After the first Strelow Memorandum was issued, the Region VIII administrator ruled in March 1976 that Pacific Power and Light Company's Jim Bridger Unit 4 was 'irrevocably committed' to its site as of June 1, 1975, because it had been designed to share facilities with existing units at that location and had executed contracts involving $5.4 million in cancellation charges. The plant was grandfathered from PSD review and permitting.
Montana Power argues that before June 1, 1975, it had contracted for a turbine generator for each plant, designed Units 3 & 4 to share facilities with Units 1 & 2 then under construction, and entered into contracts that could not be cancelled without penalties of $8.7 million. It contends it was further committed to a program of construction than were the two companies building the grandfathered power plants and that Units 3 & 4 therefore were entitled to exemption from PSD review and permitting.
Although the EPA and the Tribe attempt to distinguish the other two rulings on their facts, we may assume for our purposes that Montana Power's contractual commitment to construct Colstrip Units 3 & 4 was at least as advanced as, if not greater than, those for the Boardman and Bridger plants. We may also assume, as the district court found, that the prior decisions were consistent with the regulations and that the Strelow Memoranda demonstrated a change in policy. The question remains, however, what significance these apparently inconsistent determinations should have when evaluating the EPA's refusal to exempt Units 3 & 4.
The district court concluded that since the EPA 'ha[d] switched horses in midstream', the policies implicit in the earlier two decisions, rather than in the Strelow Memoranda, should have been used to evaluate Montana Power's request for PSD exemption. 429 F.2d at 700-01. Although admitting that the EPA is not absolutely bound by its prior rulings, Montana Power argues that a definite shift in the interpretation of the regulations occurred, entitling the agency's determination that Units 3 & 4 had not met the exemption prerequisites to little deference.
Both the district court and Montana Power misconstrue the scope of judicial review of agency action. Even if the action involves a new interpretation of a regulation, the traditional standard of deference announced in Tallman applies:
The scope of our review of an administrative order wherein a new principle is announced and applied is no different from that which pertains to ordinary administrative action. The wisdom of the principle adopted is none of our concern. See Board of Trade [of Kansas City, Mo.] v. United States, 314 U.S. 534, 548 [62 S.Ct. 366, 373, 86 L.Ed. 432.] Our duty is at an end when it becomes evident that the Commission's action is based upon substantial evidence and is consistent with the authority granted by Congress. See National Broadcasting Co. v. United States, 319 U.S. 190, 224 [63 S.Ct. 997, 1013, 87 L.Ed. 1344.]
SEC v. Chenery Corp.,
332 U.S. 194, 207, 67 S.Ct. 1575, 1582, 91 L.Ed. 1995 (1947).
The agency is not absolutely bound by its prior determinations, but rather may adjust its policies and rulings in light of experience:
'Cumulative experience' begets understanding and insight by which judgments . . . are validated or qualified or invalidated. The constant process of trial and error, on a wider and fuller scale than a single adversary litigation permits, differentiates perhaps more than anything else the administrative from the judicial process.
NLRB v. Seven-Up Bottling Co.,
344 U.S. 344, 349, 73 S.Ct. 287, 290, 97 L.Ed. 377 (1953). Accord, NLRB v. Weingarten,
420 U.S. 251, 264-66, 95 S.Ct. 959, 43 L.Ed.2d 171 (1975); FCC v. WOKO, Inc.,
329 U.S. 223, 228, 67 S.Ct. 213, 91 L.Ed. 204 (1946); Santos v. INS,
375 F.2d 262, 265 (9th Cir. 1967).
The Boardman decision was made before either of the Strelow Memoranda was issued. It did not represent a settled agency policy. The EPA has since admitted it mistakenly exempted that plant from PSD review and permitting on the basis of a turbine generator contract.
In light of our limited scope of review and the prerogative of the agency to evolve the interpretation of its regulations, we cannot say the agency was bound by that decision or improperly disregarded it in ruling on Colstrip Units 3 & 4 once national guidelines in the Strelow Memoranda had been issued. Nor can we say that the Colstrip decision is entitled to any less deference because of the Boardman plant ruling.
The Bridger plant was exempted from PSD review and permitting under the 'irrevocable commitment' exception explained in the first Strelow Memorandum. But the decision came prior to the second Memorandum that clarified the kind of contracts necessary for a sufficient contractual commitment to exist and emphasized that the situations in which a plant could be irrevocably committed to a site should be 'rare.'In view of this clarification and the power of the agency to reasonably depart from prior rulings in light of experience, we are unable to conclude with the district court that this ruling necessarily 'show[s] that an agreement to purchase a turbine generator, the sharing of on-site facilities such as a water system and a transmission system, and contracts for major components amount[s] to a commencement of construction within the meaning of
40 C.F.R. 52.21(b)(7).' 429 F.Supp. at 696. The EPA is free to make reasonable changes in the interpretation of its regulations and in the application of the regulations to specific cases.
We realize that Montana Power was first notified it was subject to PSD review and permitting on February 26, 1976, prior to the decision exempting the Bridger plant. But the letter that explained the basis of the agency's ruling was not sent until May, after the second Strelow Memorandum was issued.
Whether the agency was mistaken in its application of the first Strelow Memorandum to the Bridger plant, or it found a new and different rationale in the second Memorandum for refusing to exempt Colstrip Units 3 & 4, makes no difference. Providing the EPA does not single out the Colstrip plants for discriminatory treatment under a peculiarly harsh interpretation of its regulations and the Strelow Memoranda, we cannot say in the absence of any other evidence alleged to show arbitrary or capricious agency action that EPA was bound by its Bridger decision or that the Colstrip ruling is entitled to any less than normal deference. Cases cited to the contrary by Montana Power are either consistent with this conclusion or are distinguishable.
We agree with the district court in a factually similar case that, under the circumstances here, it does not matter that the EPA 'switched horses in midstream' as long as it 'was astraddle a good horse when it reached the other side.' Gulf Power Co. v. EPA, PCA No. 77-0477 (N.D.Fla. May 2, 1978).
C. Use of a Ratio.
The district court allowed that some concept of substantiality of unavoidable loss is reasonable in determining if a source's contractual commitment is the functional equivalent of having commenced actual construction. But the court found that, under this fact situation, use of a ratio of unavoidable loss to total project cost to determine substantiality was improper:
The ratio itself is not arbitrary or capricious. Its application can be. The function of the ratio is to establish a proper balance between entrepreneurial risks and social and economic utility. . . . [W]ith those cases that have not commenced on-site construction but have gone past the intracorporate planning stage . . ., what the agency must do is reach the equilibrium point between investor risk and irrevocable external commitments that amount to a continuing program of construction, a program based not on speculation but upon a welldesigned construction plan.
429 F.Supp. at 701. The court concluded that the 'assumption that 'substantial' must be measured in relative rather than absolute terms . . . results in a capricious application of the policy designed to strike a balance between investor risk and social utility.' Id. Although Montana Power apparently agrees that the Strelow Memoranda properly read into the regulations a 'substantial loss test', it argues that nothing in the memoranda justified use of a ratio to determine substantiality in its case. It concedes that, despite the lack of reference in the memoranda, a ratio might be the fairest way to measure substantial loss for smaller projects, but argues that a ratio works an injustice on larger projects in which the stakes are higher. It contends that its unavoidable loss exceeding $22.3 million as of June 1, 1975, was clearly substantial in absolute terms.
Had we such an option, we might as a matter of policy define 'substantial loss' to include significant cancellation or modification costs, in absolute terms, that only constitute a small percentage of the total anticipated cost of a large project such as Colstrip Units 3 & 4. In light of the deference we must accord the EPA's interpretation of its own regulations, however, we do not have that option.
The EPA could reasonably conclude that the developers of a large power plant were not 'irrevocably committed' to the project at a given site unless their investment had reached a specific percentage of the total cost, regardless of the amount already expended. Here, $22.3 million is clearly a significant sum, but it was only 2.8% of the total cost, a relatively modest investment in terms of the overall project.
The EPA is not required to view the substantiality of loss from the stockholder's perspective, which might include sums significantly smaller than that committed by Montana Power here. It may use a more objective standard such as a ratio. It does not matter that the EPA apparently failed to use a ratio in the Boardman and Bridger plant decisions. As we have discussed, an agency may make reasonable changes in the interpretation of its regulations in light of experience.
Neither the district court nor Montana Power suggested a formula by which substantiality of loss could be measured by a ratio on some projects, particularly on smaller ones, but by the absolute amount of unavoidable loss for larger power plants such as Colstrip Units 3 & 4. Nor was it practical for them to have done so. The determination of substantiality of loss for exemption from PSD review and permitting must be made on a case-by-case basis and is properly consigned to the sound discretion of the EPA.
Even if the EPA's objective in determining substantiality of loss was to 'strike a balance between investor risk and social utility,' we cannot say that the agency showed a 'clear error of judgment,' Citizens to Preserve Overton Park, 401 U.S. at 416, 91 S.Ct. 814, in using a ratio of unavoidable loss and total project cost to strike the balance. The district court merely substituted its judgment for that of the agency. As the Supreme Court noted in another context, the agency's 'interpretation may not be the only one permitted by the language of the [regulations], but it is quite clearly a reasonable interpretation; courts must therefore respect it.' Tallman, 380 U.S. at 4, 85 S.Ct. at 795.
D. Notice and Hearing.
The district court interpreted the alleged policy changes effected by the Strelow Memoranda to be an exercise of EPA's rulemaking function. Because the memoranda were issued without notice or hearing, it found them to be adopted improperly.
We conclude, however, that the memoranda were merely 'interpretive rules' under
5 U.S.C. Sec
. 553(b)(3)(A) (1976), and that rulemaking procedures were unnecessary.
IV.
WHETHER CONSTRUCTION COMMENCED UNDER THE 1977 AMENDMENTS
Although we have determined that Colstrip Units 3 & 4 are subject to PSD review and permitting under the pre-amendment regulations, we still face the question of how the 1977 Amendments affect the project.
No party discussed adequately the interrelationship of the pre- and post-1977 Amendment PSD review and permitting schemes. The EPA and the Tribe imply they would be 'satisfied' if Units 3 & 4 are subject to review under either scheme. In light of changes in the regulations after the 1977 Amendments, however, which could make more difficult securing a PSD permit for the units, we consider Montana Power's petition for review of the EPA's determination that it had not commenced construction under the 1977 Amendments before August 7, 1977.
A. Refining the Issue.
The new definition of 'commence' in the 1977 Amendments generally follows the Strelow Memoranda interpretation of the pre-amendment regulatory definition, with one significant distinction.
As with the Memoranda interpretation, an owner or operator must either begin 'a continuous program of physical on-site construction' or enter into contractual obligations, 'which cannot be canceled or modified without substantial loss . . ., to undertake a program of construction of the facility to be completed within a reasonable time.' Clean Air Act Sec. 169(2)(A).
The difference is that, whether a source 'has obtained all necessary preconstruction approvals or permits required by Federal, State or local air pollution emissions and air quality laws or regulations,' id., is no longer merely a 'relevant factor' in determining if a source is irrevocably committed to its site, but rather is a prerequisite to satisfying the definition of 'commence' irrespective of how the source claims its exemption.
Section 168 bridges the gap between the regulatory and statutory definitions of 'commence.' It provides that if a source meets the statutory definition between June 1, 1975, and August 7, 1977, 'the review and permitting of such facility shall be in accordance with' the pre-amendment PSD review and permitting procedures in the regulations.
Thus, three time periods are relevant under the 1977 Amendments to determine the effect of PSD review and permitting on a given source. If the source 'commenced construction,' as defined in the statute:
(1) before June 1, 1975, it is exempt from PSD review and permitting under the 1977 Amendments;
(2) between June 1, 1975, and August 7, 1977, it is subject to PSD review and permitting under the pre-amendment regulations; and
(3) after August 7, 1977, or not at all, it could be subject to stricter PSD review and permitting under the PSD regulations amended to conform to the 1977 Amendments.
There is no question that Montana Power did not commence construction, under the statutory definition, before June 1, 1975. It concedes it began no on-site construction before that date and we determined above that, under the EPA's acceptable interpretation, the company would sustain no substantial loss if it had been forced to cancel or modify its contractual obligations as of that time.
Montana Power argues that, even if it had not commenced construction under the statutory definition before June 1, 1975, it did so before August 7, 1977. It maintains that the language in Sec. 168, specifying that sources commencing construction in this interim shall be reviewed 'in accordance with' the regulations in effect before the 1977 Amendments, preserves the Colstrip Units' grandfather status as established by the district court. Since we reverse the district court, we need not reach this issue.
Montana Power is at least subject to PSD review and permitting under the preamendment regulations. Even if it commenced construction under the statutory definition before August 7, 1977, the same PSD requirements would apply. The issue then becomes whether it failed to commence construction before August 7, 1977. If so, Colstrip Units 3 & 4 might be subject to the stricter PSD review and permitting procedures in the regulations amended to conform to the 1977 Amendments.
B. Necessary Preconstruction Approvals or Permits.
After prevailing in the district court, Montana Power began land clearing at the Colstrip site in June 1977. It asserts these operations began a 'program of physical on-site construction' that would have been continuous but for the EPA's order to halt construction in September. It also argues that its unavoidable loss as of August 7, 1977, had grown to $78.5 million and that this sum was clearly substantial, even using the EPA's ratio approach.
Establishing only that on-site construction had begun or that its unavoidable loss would be substantial is insufficient to meet the definition of 'commence' in the 1977 Amendments. It is also necessary to demonstrate a source has all necessary preconstruction approvals or permits prior to the cut-off date.
Montana Power obtained a permit in June 1976 under the Montana Major Facility Siting Act, Mont.Rev.Codes Ann. Sec. 70-801 et seq. It did not receive a permit from the state's Department of Health and Environmental Sciences, under the Montana Clean Air Act, Mont.Rev.Codes Ann. Sec. 69-3911 (Supp. 1977), until January 1978.
The company argues that it needed neither permit to satisfy the definition of 'commence' in the 1977 Amendments. Alternatively, if any permits were required, it asserts the only one necessary was the one received under the Siting Act, issued before the effective date of the 1977 Amendments.
Because of the way we decide the approvals or permits issue, we do not reach Montana Power's representations about on-site construction begun or substantial loss incurred before August 7, 1977.
1. Section 169(2)(B)
Montana Power argues that Sec. 169(2)(B) makes clear it needed no preconstruction permits to satisfy the definition of 'commence' in the 1977 Amendments.
Referring to the immediately preceding subsection, Sec. 169(2)(A), which defines 'commence' as having 'all necessary preconstruction approvals or permits' and either (i) having begun on-site construction or (ii) having entered into sufficient contractual obligations, Sec. 169(2)(B) provides:
The term 'necessary preconstruction approvals or permits' means those permits or approvals, required by the permitting authority as a precondition to undertaking any activity under clauses (i) or (ii) of subparagraph (A) of this paragraph.
The use of the disjunctive 'or' in connection with the plural 'clauses' creates a significant problem of interpretation.
Montana Power emphasizes the disjunctive 'or' and argues that the phrase 'any activity under clauses (i) or (ii)' is the grammatical equivalent of 'any activity under clause (i) or any activity under clause (ii).' It says that a source must have preconstruction permits necessary for either on-site construction or entering into contractual obligations, but not both. Since the contractual obligations on which it relies for its PSD exemption claim required no approval from any permitting authority before their execution, the company argues it satisfied the definition of 'commence' in Sec. 169(2)(A).
The EPA emphasizes the plural 'clauses' and contends the phrase 'any activity under clauses (i) or (ii)' means 'any activity mentioned in either clause.' It argues that the company needed all permits necessary for contracting and for on-site construction. Since it had no permit under the Montana Clean Air Act before August 7, 1977, it could not have commenced construction under Sec. 169(2)(A).
The disputed phrase is ambiguous and could be given either interpretation, another example of poor drafting requiring judicial deciphering. Unfortunately, the legislative history is equally confused.
The definition of 'commence' in the 1977 Amendments, as reported out of committee, did not define 'necessary preconstruction approvals or permits.' During Senate debate on the measure, Senator Henry M. Jackson proposed an amendment:
[T]he term 'necessary preconstruction approvals or permits' means those permits or approvals, if any, required as a precondition to undertaking any activity relied upon by an owner or operator to satisfy the requirements in clauses (i) or (ii) . . ..
123 Cong.Rec. at S9455 (daily ed., June 10, 1977) (emphasis added). The emphasized words were deleted later by a House and Senate Conference Committee.
Montana Power argues that Senator Jackson's explanation of the amendment on the Senate floor confirms its interpretation. It contends a contrary interpretation, as that offered by the EPA, might moot the appeal from the district court, something that Congress seemingly tried to avoid. Since the Conference Committee, in reporting out the altered version of Senator Jackson's amendment, declared there had been only 'a slight modification of the 'commenced construction' definition,' H.R.Rep. No. 95-564, 95th Cong., 1st Sess. 153 (1977), U.S.Code Cong. & Admin.News 1977, p. 1533, the company says the original intent of Jackson's amendment was preserved. That intent allegedly was to permit a source that had relied only on its contractual commitments for its PSD exemption claim to satisfy the permit requirement automatically because it needed no permits just to execute contracts.
The EPA responds that, even if Montana Power correctly read Senator Jackson's intent in offering the amendment, Congress did not agree. It cites the Senate Report describing the purpose of the definition of 'commence,' a comment by Senator Jackson as an introduction to his amendment, and remarks of Senator Muskie, to show a congressional intent that a source needed all preconstruction permits, notably those necessary for on-site construction, to satisfy the definition of 'commence' in Sec. 169(2)(A). It reminds us that the version that emerged from the Conference Committee removed any possibility of a different interpretation.
Although conceding that Congress wanted to preserve the issues in the district court case, the EPA also quotes remarks by the chief sponsor of the 1977 Amendments in the House that the Conference Committee intended to create no special exception for Colstrip Units 3 & 4= which the EPA contends would result by using Montana Power's interpretation of the Jackson amendment.
The EPA finally argues Senator Jackson held the mistaken idea that, when he proposed his amendment, Montana Power had all necessary permits for on-site construction. This is consistent, the agency contends, with his comment that Montana Power 'ha[d] completedly complied with the law' and that his amendment would 'not prejudice the litigation that is pending' in the district court.
The legislative history is rife with inconsistencies, and the explanations of the parties attempting to rationalize it to correspond with their different interpretations are often strained. When conflicting, inconclusive views form the greater part of the legislative history, we are left with divining the 'intent' of Congress from the overall purpose of the statute in question.
One of the declared purposes of the Clean Air Act is 'to protect and enhance the quality of the Nation's air resources so as to promote the public health and welfare and the productive capacity of its population.' Clean Air Act Sec. 101(b)(1). PSD review and permitting is the only method of enforcing the allowable pollution increments applicable to sources such as Colstrip Units 3 & 4. Exemptions claimed from PSD review and permitting therefore must be so examined as not to contravene the basic policy of the Act.
Section 169(2)(A) requires a source seeking to satisfy the definition of commence to obtain 'all necessary preconstruction approvals or permits required by Federal, State, or local air pollution emissions and air quality laws or regulations' (emphasis added). On its face, this language admits of no exceptions.
The kind of permits specified is also important. By requiring 'preconstruction approvals or permits,' the language of the statute implies that the kinds of permits required are those necessary to begin construction. This does not coincide with Montana Power's understanding that it did not need any construction permits to satisfy the definition of 'commence' because it relied only upon its contractual obligations to claim a PSD exemption, and no permits are necessary to enter contract.
All parties agree that the Sec. 169(2) definition of 'commence' is stricter than the pre-amendment regulatory definition. Yet, when the regulatory definition is viewed in light of the Strelow Memoranda, there is but one important distinction that could make the statutory definition stricter. As interpreted by the Memoranda, the regulatory definition made possession of necessary preconstruction permits only a 'relevant factor' in determining if a source was irrevocably committed to a specific site. In Sec. 169(2)(A)-(B), possession of required permits is mandatory to satisfy the definition of commence. This casts doubt on any interpretation of the statute that would weaken the definition of 'commence' and allow a source to satisfy it easily.
Montana Power suggests a definition of Sec. 169(2)(A)-(B) that would allow a source to 'commence construction' merely by entering into contractual commitments. Under this interpretation a source could begin construction illegally, lacking the necessary permits, but satisfy the definition of 'commence' as long as it relied solely on its contractual obligations in claiming PSD exemption. This is hardly a 'stricter definition' than that in the regulations, and we doubt Congress intended such a result.
Senator Jackson may have intended in his proposed amendment to allow Colstrip Units 3 & 4 to satisfy the permit requirement under Sec. 169(2)(A) merely on the basis of its contractual commitments. But so interpreted, the amendment appears to be special ligislation the primary purpose of which is to benefit Montana Power. Absent a clearer showing, we are unwilling to ascribe this intent to Congress. If Congress had wanted the Jackson amendment to protect the Colstrip Units against the possible adverse effects of the 1977 Amendments, it could easily have so stated. It did not.
2. Requirements of the Montana Clean Air Act
Even if the phrase 'necessary preconstruction approvals or permits' in Sec. 169(2)(A)-(B) is interpreted to mean those permits necessary for actual on-site construction, Montana Power argues it obtained the only permit required before the effective date of the 1977 Amendments.
The company received approval under the Montana Major Facility Siting Act, Mont.Rev.Codes Ann. Secs. 70-801 et seq., in July 1976. It received no permit under the state Clean Air Act, Mont.Rev.Codes Ann. Secs. 69-3906 et seq., until January 1978. It asserts that the state Clean Air Act permit is not required under Sec. 169(2)(A)-(B), and that it sought one only to avoid protracted litigation as to its necessity. The EPA contends that permits under both the Siting Act and the state Clean Air Act are 'necessary preconstruction approvals or permits.'
The state Clean Air Act was enacted in 1967. With its regulations, it is part of the state's implementation plan under the federal Clean Air Act. While a parent organization administers the plan generally, the Board of Health and Environmental Sciences controls the permitting of all new sources of air pollution:
The board may by rule prohibit the construction, installation, alteration, or use of a machine, equipment, device, or facility which it finds may directly or indirectly cause or contribute to air pollution . . ., unless a permit therefor has been obtained.
Mont.Rev.Codes Ann. Sec. 69-3911. The regulations require two permits, one for construction and one for operation or use. Mont.Admin.Code Secs. 16-2.14(1)-S1400(1)-(9), (11).
The Major Facility Siting Act, enacted in 1973, specifically governs 'the construction of additional power or energy conversion facilities' and is meant 'to ensure that the location, construction and operation of power and energy conversion facilities will produce minimal adverse effects on the environment.' Mont.Rev.Codes Ann. Sec. 70-802. Before a facility may be constructed or operated, it must obtain a 'certificate of environmental compatibility and public need,' the equivalent of a permit. Id. at Sec. 70-804.
The Board of Natural Resources and Conservation controls the issuance of permits under the Siting Act. It may not grant one unless it determines
that duly authorized state air and water quality agencies have certified that the proposed facility will not violate state and federally established standards and implementation plans . . ..
Id. at Sec. 70-810(1)(h). The relevant agency is the Board of Health, which is responsible for issuing a permit under the state Clean Air Act.
Section 70-817 of the Siting Act provides that, once a permit under the act has been granted,
[n]otwithstanding any other law, no state or regional agency, or municipality or other local government, may require any approval, consent permit, certificate, or other condition for the construction, operation, or maintenance of a facility authorized by a certificate issued pursuant to this chapter; except that the state air and water quality agency or agencies shall retain authority which they have or may be granted to determine compliance of the proposed facility with state and federal standards and implementation plans for air and water quality and to enforce those standards . . .. (Emphasis added.)
Montana Power argues that findings of the Board of Health in certifying a source to the Board of Natural Resources under the Siting Act duplicate those it must make under the state Clean Air Act. Since the Siting Act deals specifically with new energy sources and is, comprehensive to the exclusion of other state statutes, the company argues that the certification by the Board of Health that was necessary to obtain its Siting Act permit constitutes permission to construct under the state Clean Air Act as well.
The company reads narrowly the exception to Sec. 70-817, which protects the authority of state air quality agencies like the Board of Health 'to determine compliance of the proposed facility with state and federal standards.' Instead of interpreting the exception as ensuring the Board of Health's power to issue construction permits, which might detract from the comprehensive scheme of the Siting Act, Montana Power argues that the exception only preserves the Board's power to grant use permits, for which there is no analogue in the Siting Act. Since a use permit is issued only after a source is constructed, it cannot be a preconstruction approval or permit required by the definition of 'commence' in Sec. 169(2)(A).
This understanding of the relationship between the state Clean Air Act and the Siting Act is strained, at best. The language of Sec. 70-817 preserving the authority of the Board of Health is not limited to issuing use permits. It allows the Board 'to determine compliance of the proposed facility' with applicable standards. Use permits granted after a facility is built cannot be for a 'proposed' facility.
Whether construction permits required under the state Clean Air Act and Siting Act are duplicative is not our concern. That is a matter for the Montanalegislature. Section 169(2)(A)-(B) requires a source to obtain 'those permits or approvals . . . required by the permitting authority,' in this case the State of Montana and its agencies. Since Montana Power did not have both a state Clean Air Act permit and a Siting Act permit before August 7, 1977, it did not commence construction under the definition in the 1977 Amendments.
IV.
CONCLUSION
Montana Power did not commence construction of Colstrip Units 3 & 4, as that term is defined in the pre-amendment regulations, before June 1, 1975. Nor did it commence construction under Sec. 169(2)(A) of the 1977 Amendments before August 7, 1977. The units therefore are subject to PSD review and permitting as outlined in the amended Clean Air Act and the applicable regulations.
The district judgment in Nos. 77-2253 and 77-2521 is REVERSED and the EPA's determination in No. 78-1140 is AFFIRMED.
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