Tuesday, November 17, 2009

Special Feature: Insurance and the Law -- Permitting a New Project in California

By: Sharon Rubalcava (As seen in the November issue of Pacific Maritime Magazine)

California has long had the reputation of being a difficult and costly place to do business, and nowhere is this more apparent than in the permitting of new industrial or commercial projects. The potential environmental impacts of such new projects are often the lightning rod that attracts public opposition. Local politicians may give speeches about the need for more jobs– especially green jobs– and the importance of a vibrant economy. However, all of that can go by the wayside when a public official must decide whether to vote “yes” on a proposed project if the perception is that it will impact the environment and if the public opposes the project on environmental grounds. Why is that, and what has brought us to this place?

Environmental Concerns
Anyone who watches late night television has heard the jokes about how horrible air quality is in Southern California, and it is true that certain areas of California have the worst air quality in the nation. However, air quality has been getting better for years and many areas attain all of the federal air quality standards with the exception of the standards for ozone and fine particulates. In the past, the poor air quality was often attributed to major industries such as power generation and refining, but now the greatest contributors of the pollutants that cause the federal standards to be exceeded come from the transportation sector. This includes cars, truck, railroads, airplanes and ships.

Clean, But Not Popular
Projects in California must comply with the most stringent environmental regulations in the country. A factory in California may require expensive control equipment for both emissions of air pollutants and water discharges that would not be required elsewhere. For example, a proposed new plant locating in an area that meets the federal ambient air quality standards– called an attainment area– might not be required to install pollution controls or even get an air quality permit unless its emissions would be greater than 100 to 250 tons per year depending on the type of facility. In contrast, new plants in the South Coast Air Quality Management District located in Southern California must permit any piece of equipment that emits or controls air pollutants unless specifically exempt from permitting requirements.

If equipment must obtain a written permit, then the permitting rules require installation of Best Available Control Technology or BACT if emissions will be over one pound per day. But it’s not enough just to install BACT. Any remaining emissions must be offset by the purchase of Emission Reduction Credits or ERCs. ERCs are in short supply and have become very costly. Some companies report that offset costs exceed the cost of the basic equipment. Also, in addition to the initial capital costs, such a facility will face increased operational costs, including monitoring, record keeping, and reporting costs to demonstrate compliance.

One would think that an area having the cleanest factories and industrial facilities in the country would support its local businesses. However, exactly the opposite is true. Most people, and in turn, most politicians have no idea of the requirements imposed on local businesses. In fact, due to community and environmental activists they are constantly hearing about plants spewing pollutants, trucks emitting a “witch’s brew” of toxic emissions, and rampant non-compliance with environmental rules. The local air districts and other environmental agencies accomplishments in regulating industrial facilities and enforcing their own regulations are often ignored.

California Environmental Quality Act Compliance
The California Environmental Quality Act or CEQA requires any public agency that approves or permits a project to determine whether the project will have an adverse impact on the environment. If impacts are determined to be potentially “significant”, as defined by CEQA, an Environmental Impact Report or EIR must be prepared describing those impacts, discussing alternatives to the project, and mitigating any adverse impacts found to be significant, if feasible. If such impacts cannot be avoided or mitigated, the agency must justify its decision to approve the project by balancing the benefits against the negative aspects. If the impacts are not found to be significant, a less detailed analysis called a Negative Declaration or Mitigated Negative Declaration can be prepared.

CEQA was adopted in 1970. Its requirements have changed over time as new interpreting regulations, called Guidelines, have been developed, and as court decisions have found EIRs or Negative Declarations to be inadequate. Where the Guidelines once suggested that EIRs be no longer than 100 pages, it is not unusual now for EIRs for major projects to be several thousand pages long.

The CEQA process was originally designed to produce informational documents that would inform the public about proposed projects and identity the adverse impacts so that they could be reduced or eliminated, but that process has morphed into something akin to a trial by ordeal. In preparing a draft EIR, the main permitting agency– called the lead agency– must meet with other governmental agencies that will have to permit the project to identify the potential impacts that must be analyzed. This is called scoping. The lead agency must try to anticipate all possible environmental impacts, thoroughly discuss those impacts, consider a reasonable range of alternatives to the project, and identify mitigation measures. Using this information, the lead agency then produces a draft EIR, which is circulated for public comment.

The CEQA public comment period is often where projects encounter the most challenges. This is the age of the internet, and project opponents know how to effectively stir up opposition to a project, and they know that delays can sometimes kill a project. Once a proposed project is announced, public opposition can be organized. Project opponents show up at public meetings to voice their opposition and they submit detailed written comments on draft EIRs.

Public opposition can cause the lead agency to slow down the review process, proceed more cautiously and delay projects in several different ways:
• Significant negative comments at scoping meetings can lead to hiring of additional consultants, more detailed analyzes, and reluctance to issue the draft document.
• Public comments on draft EIRs must be responded to in writing and extensive public comments can take months to answer.
• An overlooked or improperly analyzed issue can lead to recirculation of a draft EIR, usually resulting in a delay of months to years.
• Public agencies fear CEQA litigation and the expense of defending CEQA documents. Elected officials who must certify documents are concerned about losing votes if they sense significant opposition.
• Additional mitigations are often imposed in an attempt to appease the opposition, but frequently the opponents want nothing less than a denial of the project.
• Additional mitigations may impose significant costs with minimal or no benefit to the environment.
• Factors unrelated to a specific project can delay preparation of EIRs and project approval. A recent example of this is uncertainty in how to account for a project’s greenhouse gas emissions.

Project Success
Projects in California must be as “green” as possible to be approved. Trying to avoid environmental protections can destroy credibility and lead to project denial. What do forward thinking companies do? Here are some suggestions to consider:
• The CEQA process is a part of doing business in California and cannot be avoided or minimized.
• Assemble an experienced team familiar with CEQA and other permitting requirements, and work closely with the team to make sure all aspects of the project are thoroughly analyzed.
• Some agencies prepare their own CEQA documents. Make sure the agency knows and fully understands the proposed project, including key decisions made along the way especially with regard to economic viability. Consider preparing key analyzes for the agency to consider while it is preparing the draft EIR to make sure impacts are properly analyzed.
• Schedule frequent meetings with the agency and be sure to communicate project scheduling concerns and when approvals are needed.
• Public support is crucial. The opponents will make themselves heard but project supporters often assume they don’t need to be vocal. Identify community supporters and make sure they voice their support at key meetings and in comments on the draft EIR.
• Jobs are important. Make sure to quantify jobs associated with your project and make sure elected officials know if these are high paying jobs with benefits. Don’t forget to include other regional benefits including future taxes that will be paid.
• Environmental justice issues are very important in California. Consider the community in which a new plant is proposed. If such a community is already heavily impacted, consider other locations or meet with community members to gauge likely opposition.
• Unions are very active in opposing or supporting projects. Consider the role that unions will play when elected officials are asked to consider your proposed project.
• Don’t assume a project will be approved as proposed. Be prepared for additional, unexpected expenses and factor in likely delays. It is not unusual for significant projects to take many years to permit.

Projects continue to be permitted in California, but permitting will often be significantly more difficult than in other jurisdictions. In planning future projects, businesses must consider these challenges upfront and factor them into feasibility and future profitability analyzes.

Ms. Rubalcava is a partner in the Los Angeles office of Alston & Bird LLP. She advises clients planning major industrial development projects on compliance with the California Environmental Quality Act (CEQA) and National Environmental Policy Act (NEPA), with a particular emphasis on facilities with significant air and toxic emissions and water quality issues. Ms. Rubalcava’s projects include major infrastructure projects, power plants, solid waste disposal facilities, petroleum pipelines, gasoline refineries, marine terminals and manufacturing facilities.