In City of Morgan Hill v. Bay Area Air Quality Management District, issued May 14, 2004, the First District California Court of Appeal upheld a decision by the Bay Area Quality Management District ("District") to issue a permit to Calpine Inc. for the construction of a power plant in San Jose. The City of Morgan Hill had argued that the District’s decision to allow construction of the power plant violated both federal and state law, but to no avail. Although many holdings in the case are based on federal and state law grounds that no longer apply, it nonetheless highlights the tremendous complications and potential pitfalls associated with the approval process for California energy projects, which involve an interconnected set of federal, state and regional agency approvals.

Background

In April 1999, Calpine sought a certificate from California Energy Resources Conservation and Development Commission ("Commission") to construct and operate the Metcalf Energy Center, a 600-megawatt natural gas-fired power plant in San Jose. In May 1999, Calpine also sought a "prevention of significant deterioration" ("PSD") permit from the District to establish that the power plant satisfied federal Clean Air Act standards intended to prevent significant deterioration of air quality. In October 2000, the Commission issued its final staff assessment ("FSA") of Calpine’s application for a power plant certificate. In May 2001, the District issued a PSD permit for the proposed power plant, relying on the FSA as the functional equivalent of an environmental impact report ("EIR").

In June 2001, the City of Morgan Hill filed an administrative appeal of the District’s decision to issue the PSD permit with the District’s Board, arguing that the decision to issue the PSD permit failed to comply with that California Environmental Quality Act ("CEQA") and District regulations implementing that statute. The City also filed an appeal with the federal Environmental Appeals Board ("EAB"). In August 2001, the EAB declined to review the District’s decision to issue the PSD permit, and specifically held that it had no jurisdiction to review the District’s decision for compliance with CEQA. The Ninth Circuit upheld the EAB’s decision.

In September 2001, the Commission granted a certificate to construct and operate the Metcalf Energy Center power plant. The Commission identified itself as the lead agency for purposes of CEQA, and stated that the documents associated with the certification process constituted the functional equivalent of an EIR. In December 2001, the District’s Board dismissed the City’s appeal, finding that it had no subject matter jurisdiction over any PSD permit issues because federal law required them to be resolved by the EAB, and to the extent state law issues were involved, that it had no authority to review, override or overturn conditions imposed on a project by the Commission.

In September 2002, the City petitioned for a writ of mandate in trial court, challenging the Board’s decision. The City sought to set aside the PSD permit on both federal and state law grounds. The Commission and Calpine demurred, and the trial court sustained the demurrers without leave to amend and dismissed the petition with prejudice and the Court of Appeal affirmed.

The Court of Appeal’s Rationale

The City’s first argument on appeal was that the District’s decision to issue a PSD permit to Calpine violated federal law. The PSD permit program is a federal program required by the Clean Air Act, and, at all relevant times, the District was acting under a formal delegation from the EPA to issue PSD permits pursuant to the Clean Air Act.1 The City’s argument was that the federal delegation agreement requires compliance with the District’s CEQA regulations, and since, according to the City, the District’s decision violated its own CEQA regulations, that decision also violated federal law. The Court of Appeal rejected this rather creative argument. The Court first pointed out that the delegation agreement itself specifically provides that the District’s decision to issue a PSD permit is subject to review only before the federal Environmental Appeals Board and the Ninth Circuit Court of Appeals. The Court also pointed that, when called on to review a PSD permit, the EAB will not assume jurisdiction over any state law claims. Furthermore, the EAB had specifically held that issues pertaining to CEQA are state law requirements separate from federal PSD review review. Moreover, the EAB had declined in this very case to consider the City’s CEQA claim, ruling that this involved matters within state court jurisdiction, and that decision was affirmed by the Ninth Circuit. The Court reasoned, therefore, that, contrary to the City’s argument, the federal delegation agreement did not require CEQA compliance.

The City’s second argument was state-law based, which the Court acknowledged it had jurisdiction to determine. The City’s argument was as follows: when the District is not the lead agency under CEQA, statewide CEQA guidelines and the District’s own regulations require it to issue a PSD only after the lead agency has issued its final approval. Here, the District issued its PSD permit in May 2001 – after the Commission had issued its FSA but before the Commission, acting as lead agency, had issued its certificate in September 2001. Hence, according to the City, the District had violated its own rules when it issued the PSD.

The Court acknowledged that "in other times, the City might prevail" with this argument. However, during the relevant timeframe, Executive Order No. D.-26-01 was in effect.2 Governor Gray Davis had issued this order in February 2001 – during the California energy crisis – pursuant to the state Emergency Services Act, and that order provided that any agency making a CEQA decision related to a proposed power plant should use the FSA prepared by Commission staff during its certification process, unless the Commission determined another document would be more appropriate. To the extent CEQA regulations were inconsistent with the Governor’s emergency order, the emergency order controlled. The City tried to get around this hurdle by arguing that the key environmental document remained the Commission’s certificate, but the Court rejected this argument, reasoning that the City’s argument would render the Governor’s emergency order a virtual nullity, the purpose of which was to alleviate the electricity shortage threatening California’s residential and commercial energy consumers.

Finally, the Court concluded that the District’s environmental review was sufficient. The exclusive power to certify a site for a new power plant resided in the Commission, and the Commission’s October 2000 FSA conducted as part of its certification process constituted the environmental document needed before the District could issue its May 2001 PSD permit. The Commission’s September 2001 certificate – which incorporated the earlier staff assessment – was the only CEQA approval that the project required. Since the Commission conducted the required environmental review of this project, the trial court properly dismissed the City’s petition for writ of mandate.

If you have any questions about City of Morgan Hill, or its potential implications for your company, please contact a member of Morrison & Foerster’s Energy Group or Land Use and Environmental Group.


Footnotes

1:The delegation agreement was rescinded on March 3, 2003.

2:Executive Order D-26-01 was in effect from February 8, 2001 through December 31, 2001.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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