In issuing Phase II regulations under the Clean Water Act (CWA) for power plant cooling water intakes, U.S. EPA found that it would cost too much to require recirculation systems or extensive fish protection. The Second Circuit’s recent Riverkeeper, Inc. v. EPA decision may change that for 540 power plants. “This is a case about fish and other aquatic organisms,” says the Second Circuit as the first sentence of Riverkeeper, Inc. v United States EPA, –- F.3d –-, 2007 WL 184658 (2d Cir. 2007) (Riverkeeper II). Not surprisingly after such a lead-in, the Second Circuit found that the United States Environmental Protection Agency (EPA) acted impermissibly when it issued regulations under Section 316(b) the Clean Water Act (CWA) covering cooling water intake structures for large, existing power plants – the “Phase II” rules. The Court remanded those regulations back to EPA for further action. The remanded Phase II rules currently affect approximately 540 existing large electric power plants nationwide, and any changes may impact the rates electrical users pay for power. In addition, any changes to the Phase II rules also may impact the Phase III regulations issued June 16, 2006, under which EPA declined to impose new cooling water intake structure requirements on industrial manufacturing facilities. The CWA Section 316(b) Phase II rules, promulgated July 9, 2004, are intended to reduce the entrapment (“impinging”) of fish and shellfish against shielding grills and screens of power plant cooling water intake vents, and the inclusion and subsequent death of smaller aquatic organisms (“entrainment”) within that intake water. Power plants draw large quantities of river-, lake- and sea-water into their cooling water systems, and so can impinge and entrain hundreds of thousands of aquatic organisms. Section 316(b) itself specifies that any regulatory point source standards for cooling water intake structures “shall require that the location, design, construction, and capacity of cooling water intake structures reflect the best technology available for minimizing adverse environmental impact [BTA].” EPA’s July 9, 2004, Phase II rules allow power plants to achieve BTA performance standards under several pathways, including adoption of closed-cycle recirculating systems, satisfaction of specified national performance standards, or implementation of habitat restoration requirements. The performance standards pathway creates a wide range of compliance alternatives to reduce fish and shellfish impingement mortality and entrainment. The restoration requirements, in turn, allow compliance with BTA by restocking fish or shellfish or improving marine habitat around the power plant so long as meeting the applicable performance standards through technologies is “less feasible, less cost-effective or less environmentally desirable” than satisfying the standards via restoration. See 40 C.F.R. §125.94, et seq. Finally, the rules allow for site-specific compliance alternatives if a power plant demonstrates that its compliance costs under the national performance standards would be significantly greater than: 1) the costs considered by EPA (a “cost-cost variance”); or 2) the benefits of complying with the standards (a “cost-benefit variance”). _ _ _ _ & _ _ _ In rejecting EPA’s Phase II rules, the Second Circuit focused in large part on EPA’s decision to include cost benefit factors in its analyses. The Second Circuit rejected this approach, and found that the only role to be played by cost in establishing BTA is whether the cost of a given technology could be reasonably borne by the industry[,] and not the relation between that technology’s cost and the benefit it achieves. 2007 WL 184658, at *8. The Court also concluded that the language of section 316(b) itself plainly indicates that facilities must adopt the best technology available and that cost-benefit analysis cannot be justified in light of Congress’s directive. Id. at *9 (emphasis in original). Under the Second Circuit’s reading of Section 316(a), only after EPA identifies the “best” control technology available for use at an “optimally operating” plant can EPA consider cost-effectiveness to decide if a less-expensive technology can achieve essentially the same result as the optimal technology. Id. at *10. Because the Court found the administrative record unclear as to how EPA selected the suite of technologies it defined as performance standards for BTA, the Court instructed that on remand, EPA must either give a reasoned explanation of how its regulatory BTA technologies suite satisfies the statutory requirement that cooling water intake structures reflect the “best” technology available, or issue a new determination of BTA which satisfies this statutory requirement. The Court also directed that EPA could not: 1) set performance standards to reduce “adverse impacts” on fish and other aquatic organisms as a wide range of percentages without also requiring that each regulated power plant achieve the greatest possible reductions in adverse impacts for that plant; 2) allow compliance via restoration of fish or habitat, because Section 316(a) specifically requires minimizing adverse impacts on the front end, not restoring aquatic resources on the back end; 3) authorize site-specific cost-cost variances from the performance standards without proper notice-and-comment rulemaking; or 4) authorize cost-benefit variances from the standards at all. EPA’s response to the Riverkeeper II decision will take many months to develop and, depending on the changes after remand, may again be subject to challenge. In the meantime, industry may want to watch for a separate challenge to EPA’s decision not to add a new layer of Phase III regulations under Section 316(a) to cooling water intake structures for large manufacturing facilities. EPA opted to leave cooling water intake technology controls for such structures to case-by-case NPDES permit determinations and state NPDES permit writers. Electric utilities also will want to follow the progress of the remanded rules because, according to EPA’s now-prohibited cost-benefit analysis, imposing recirculation technologies or equivalent performance standards on power plants will cost at least three times as much as the failed BTA performance standard pathways. Finally, this cost issue also may have consequences for consumers generally because electric utilities will include any increased costs in their electricity rate base.