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How Energy Company Buyers Can Limit Environmental Liability Risk

Many energy companies may be driven into bankruptcy because of the COVID-19 pandemic. Third parties seeking to purchase those companies’ assets may be concerned about potential successor liability for the seller’s environmental obligations. This article highlights some steps that asset purchasers in bankruptcy can take to reduce the risk of such liability.

Successor liability exists under each of the major federal environmental laws. Four especially important statutes for energy companies are the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the Resource Conservation and Recovery Act, the Clean Water Act and the Clean Air Act.

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EPA Unveils Final Cooling Water Intake Structures Rule

On May 19, the U.S. Environmental Protection Agency (EPA) finalized its long-awaited rule under Section 316(b) of the Clean Water Act (CWA) imposing requirements for cooling water intake structures (CWIS) at power plants and manufacturing facilities in order to protect aquatic life.  The rule, on which EPA received input from the U.S. Fish and Wildlife Service and National Marine Fisheries Service, will become effective 60 days after its publication in the Federal Register.

EPA has stated that the withdrawal of large volumes of water from nearby water bodies by power plants and manufacturing facilities results in the removal of billions of aquatic organisms from these water bodies each year.  The main threats CWIS pose to these organisms are impingement (the entrapment of organisms against the outer part of a CWIS) and entrainment (drawing of the organisms into the cooling water system).

The final rule establishes requirements for the location, design, construction and capacity of CWIS at “existing” power generating facilities and manufacturing facilities that withdraw at least two million gallons of water per day from nearby water bodies and use at least 25 percent of that water exclusively for cooling.  The rule defines an “existing facility” as a facility “that commenced construction as described in 40 CFR 122.29(b)(4) on or before January 17, 2002 (or July 17, 2006 for an offshore oil and gas extraction facility) and any modification of, or any addition of a unit at such a facility.”  Section 122.29(b)(4) states that construction commences when the facility’s owner or operator has (1) begun to place, assemble or install facilities or equipment or has begun to conduct “[s]ite preparation work” (e.g., clearing or excavation activities), or (2) entered into a binding contract (other than option contracts, contracts that may be terminated or modified without substantial loss, and contracts for feasibility engineering or design studies) to purchase facilities or equipment it intends to use for its operations within a reasonable time period.  EPA estimates that the rule covers approximately 1,065 facilities – 544 power plants and 521 factories.

The final rule’s requirements will be implemented through National Pollutant Discharge Elimination System (NPDES) permits, and EPA stated that the requirements are based on the best technology available (BTA) for minimizing environmental impacts.  The rule establishes a baseline for protecting aquatic life from CWIS, but also allows for state permitting authorities to build in additional facility-specific safeguards.  The rule contains three major components:

  • Covered facilities must reduce impingement of aquatic life through one of seven options for meeting BTA requirements, including operation of a closed-cycle recirculating system, installation of an offshore velocity cap, or potentially using a modified traveling screen;
  • Facilities withdrawing at least 125 million gallons of water per day must conduct studies to assist permitting authorities, through a process involving public input, in determining any site-specific entrainment mortality controls that may be necessary; and
  • New units built at an existing facility to increase the facility’s generating capacity must reduce entrainment and impingement by either reducing actual intake [...]

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