In the
United States Court of Appeals
For the Seventh Circuit
Nos. 09-3344, 09-3350, 09-3351
U NITED S TATES OF A MERICA,
Plaintiff-Appellee/
Cross-Appellant,
and
S TATE OF N EW Y ORK, et al.,
Plaintiffs-Intervenors-Appellees/
Cross-Appellants,
v.
C INERGY C ORPORATION, et al.,
Defendants-Appellants/
Cross-Appellees.
Appeals from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 1:99-CV-1693—Larry J. McKinney, Judge.
A RGUED S EPTEMBER 20, 2010—D ECIDED O CTOBER 12, 2010
2 Nos. 09-3344, 09-3350, 09-3351
Before E ASTERBROOK, Chief Judge, and P OSNER and
R OVNER, Circuit Judges.
P OSNER, Circuit Judge. More than a decade ago the
Environmental Protection Agency brought this suit
against affiliated owners (we’ll pretend they’re a single
entity, Cinergy) of a number of coal-fired electric power
plants in the Midwest. The suit claims that Cinergy
violated section 165(a) of the Clean Air Act, 42 U.S.C.
§ 7475(a), by modifying a number of the plants without
first obtaining from the agency a permit that the
agency contends was required by a regulation, 40 C.F.R.
§ 52.21(a)(2)(iii), because the modifications were “major”
and would produce increases in emissions of nitrogen
oxide and sulfur dioxide. No matter, Cinergy argued;
the regulation does not require a permit for modifica-
tions unless they will increase the hourly rate at which
a plant can emit pollutants, even if they will increase
the plant’s annual emissions by enabling the plant to be
operated for more hours during the year. The district
judge rejected Cinergy’s interpretation. Without the
required permit, Cinergy was liable for increased pollu-
tion caused by the modifications, and faced the prospect
of an injunction that would require it to shut down the
plants, plus civil penalties of $25,000 for each day that it
had violated the permit requirement. 42 U.S.C. §§ 7413(a),
(b), (d)(1); United States v. AM General Corp., 34 F.3d
472, 473-75 (7th Cir. 1994).
Cinergy took an interlocutory appeal under 28 U.S.C.
§ 1292(b) from the judge’s ruling on the hourly-
capacity versus actual-emissions interpretation of the
Nos. 09-3344, 09-3350, 09-3351 3
regulation. We affirmed the district court, agreeing that
the regulation required application of the actual-
emissions standard. United States v. Cinergy Corp., 458
F.3d 705 (7th Cir. 2006). One point in our opinion is
worth repeating because it bears on an issue in the
present appeals. Cinergy’s hourly-capacity interpretation
would if adopted give a company that had a choice be-
tween making a physical modification that would
increase the hourly emissions rate and one that would
enable an increase in the number of hours of operation
an incentive to make the latter modification even if that
would produce a higher annual level of emissions. For
that modification would elude the permit requirement
and thus shelter the company from liability for the in-
creased emissions. It would also distort the choice
between rebuilding an old plant and replacing it with a
new one. The Clean Air Act treats old plants more
leniently than new ones because it is expensive to retrofit
a plant with pollution-control equipment. Wisconsin
Elec. Power Co. v. Reilly, 893 F.2d 901, 909 (7th Cir. 1990).
But there is an expectation that old plants will wear
out and be replaced by new ones that will thus be
subject to the more stringent pollution controls that the
Act imposes on new plants. A spur to replacing an old
plant is that aging produces more frequent breakdowns
and so reduces a plant’s hours of operation and hence its
output unless the owner invests in continuous, and
cumulatively costly, replacement of worn-out parts to
keep the plant going. Cinergy’s interpretation would if
adopted have given the company an artificial incentive
instead to renovate its old plants, and by so doing
increase their hours of operation, rather than to replace
4 Nos. 09-3344, 09-3350, 09-3351
the plants even if replacing them would cost less. For by
renovating the plants rather than replacing them, the
company could increase their output without having
to invest in measures for preventing the enhanced
output from generating increased pollution.
After we decided the interlocutory appeal, the case
resumed in the district court and went to trial before
a jury—although a case of such complexity, rife with
technical issues, is not an ideal one for a jury to decide.
The jury’s verdict was mixed. Fourteen modification
projects at three plants were at issue; the jury found
liability with respect to four of the projects, all at
Cinergy’s plant in Wabash, Indiana, and all undertaken
between 1989 and 1992. These modifications, the jury
found, had been likely to increase the plant’s annual
emissions of sulphur dioxide and nitrogen oxide and
therefore Cinergy should have sought a permit. (Actually
the jury’s finding is limited to three of the generating
units at the Wabash plant, but for simplicity we’ll treat
the plant as the unit of analysis.)
Cinergy argues that so far as sulphur dioxide is con-
cerned, no permit was required because the modifica-
tions did not increase the plants’ hourly-rate capacity
to produce electricity and therefore, as a byproduct,
sulphur dioxide. It points out that under Indiana’s plan
for implementing the Clean Air Act that was in effect
when the plants were modified and that the EPA had
approved, hourly capacity rather than annual emissions
determined whether a permit was required for a modi-
fication. Air Pollution Control Board of the State of Indi-
Nos. 09-3344, 09-3350, 09-3351 5
ana, Codification of Air Pollution Control Board Regulations,
325 Ind. Admin. Code §§ 1.1-1, 2.1 (1980); U.S. Environ-
mental Protection Agency, Approval and Promulgation of
Implementation Plans: Indiana State, 47 Fed. Reg. 6621-01
(Feb. 16, 1982). It is true that even before the EPA
approved the plan, Indiana amended it to conform the
definition of “modification” to the actual-emissions
standard that later we upheld in our first (2006) opinion.
325 Ind. Admin. Code 2-3-1(l), (o) (1981). But it did not
submit an amended plan, with the critical change, to
the EPA for many years. When it finally did, see 326
Ind. Admin. Code 2-3-1 (1994), the EPA promptly ap-
proved it. Approval and Promulgation of a New Source
Review Implementation Plan; Indiana, 59 Fed. Reg. 51,108-01
(Oct. 7, 1994). The modifications at issue in the first
appeal postdated that approval. The present appeals,
however, concern modifications made several years
earlier and therefore governed by the state plan that
the EPA had approved in 1982.
Section 43 of that plan defined “modification,” so far
as bears on this case, as “an addition to an existing
facility or any physical change, or change in the method
of operation of any facility which increases the poten-
tial . . . emissions . . . of any pollutant that could be
emitted from the facility.” 325 Ind. Admin. Code § 1.1-1,
p. 5 (1980). Cinergy contends that “increases the
potential . . . emissions . . . that could be emitted from the
facility” means increases the hourly rate at which the
plant can, by generating more electricity, emit more
pollution: a measure of capacity. That is the natural
6 Nos. 09-3344, 09-3350, 09-3351
interpretation, the key words being “could be.” To read
them as modifying “pollutant” (“any pollutant which
could be emitted from the facility”) would not make
sense because reference to increased emissions presup-
poses that the plant already emits the pollutant in question.
And whether Cinergy’s interpretation is correct or not,
the EPA does not argue that section 43 can be read to
define a modification as a change that increases only
annual emissions. Rather, it argues that read as Cinergy
reads it section 43 is unlawful because the statute and
implementing regulation (as we said in our first opin-
ion) define modification in terms of increasing actual
emissions rather than hourly capacity. The agency adds
that, bowing to the D.C. Circuit’s decision in Alabama
Power Co. v. Costle, 636 F.2d 323, 400 (D.C. Cir. 1979), it had
made clear, even before section 43 was adopted and ap-
proved by it as part of its approval of Indiana’s plan, that
the statute and regulation required use of the actual-
emissions standard. Requirements for Preparation, Adoption,
and Submittal of Implementation Plans; Approval and Promul-
gation of Implementation Plans, 45 Fed. Reg. 52676, 52700
(Aug. 7, 1980). And it had noted that Indiana had
agreed (in the 1981 amendment to its plan, noted above)
to update its definitions to conform to the EPA’s new
interpretation and that the EPA had said it would
“rulemake on these revised [state] regulations . . . upon
their submittal.” Approval and Promulgation of Implementa-
tion Plans: Indiana, 46 Fed. Reg. 54,941-01, 59,942 (Nov. 5,
1981). So, says the EPA, Cinergy was “on notice” that
section 43 did not mean what it said.
Nos. 09-3344, 09-3350, 09-3351 7
The district court bought this argument. But it’s untena-
ble. The Clean Air Act does not authorize the imposi-
tion of sanctions for conduct that complies with a State
Implementation Plan that the EPA has approved. See 42
U.S.C. § 7413(a)(1). The EPA approved Indiana’s plan
with exceptions that did not include Section 43,
thinking that Indiana would submit a revised plan which
the EPA would then approve. Which is what hap-
pened—only it took 12 years.
So what was Cinergy “on notice” of? It was on notice
that a straightforward reading of section 43 permitted the
company without fear of sanctions to make modifica-
tions without a permit as long as they would not increase
a plant’s potential generating capacity, even if it would
increase its annual output by enabling it to be operated
for more hours without having to be shut down for
repairs and component replacements. Cinergy was also
on notice that section 43 would be replaced by the “actual
emissions” standard, which the EPA would then
approve as part of an amended state plan and with
which Cinergy would have to comply with respect to
any modifications it made after that approval took effect,
which did not happen however until 1994; and it was the
plan approved in 1994 that we considered in the first
appeal. What Cinergy was not on notice of was that the
EPA would treat approval of section 43 as rejection of it.
The agency’s frustration is understandable. It embraced
the actual-emissions standard, which for the reasons
explained in our previous opinion and repeated earlier
in this one makes better economic sense, before sec-
8 Nos. 09-3344, 09-3350, 09-3351
tion 43 was presented for its approval. It should have
disapproved it; it didn’t; but it can’t impose the good
standard on a plant that implemented the bad when
the bad one was authorized by a state implementa-
tion plan that the EPA had approved. The blunder was
unfortunate but the agency must live with it.
The judgment of the district court must therefore be
reversed so far as the sulphur dioxide emissions are
concerned. With respect to the emissions of nitrogen
oxide, the parties agree that the actual-emissions
standard controls, and the only question we need
answer is whether the district court was right to allow
the EPA’s expert witnesses to testify that the modifica-
tions made would result in an increase in annual
emissions beyond what the state implementation plan
permitted. (“Would,” not “did,” because the permit
must be obtained before the modification is made, and so
the effect on emissions is a prediction rather than an
observation.) The district judge held a pretrial hearing
on whether to allow their testimony, and then issued a
two-sentence order saying they could testify, as they did.
Cinergy throws sand in our eyes by making trivial
objections to the judge’s ruling, such as that the experts
met with the EPA’s staff to discuss their testimony and
receive suggestions (as if that weren’t routine and proper)
and that the experts’ methodology was not “peer re-
viewed” (they are not academics). The two experts—one
a physicist (Richard Rosen), the other an engineer
(Robert Koppe)—have the requisite training and experi-
ence to estimate the effect of modifying an electric
Nos. 09-3344, 09-3350, 09-3351 9
power plant on the amount of electricity generated by it.
And once the effect on the amount generated is deter-
mined, predicting the amount of pollution that will
result from the increased generation is straightforward.
The main problem with the proposed testimony was
that the formula that the two experts proposed to use
for their forecast was one designed for use with base-
load electric generating plants. Because the demand
for electricity varies with the day, the time of day, the
season, the weather, and other changeable conditions,
and because Cinergy did not have the means to store
energy from its generating stations, Cinergy like
most electric power companies needed not only enough
generating capacity to meet the average foreseeable
demand but also standby capacity so that it could vary
its output with demand and thus avoid generating elec-
tricity for which there was no market.
Optimizing output is usually achieved by operating at
full capacity the plants that are cheapest to operate, to
supply the baseload (the minimum required at all
times), and by using the plants that are more costly to
operate to meet surges in demand. “Utilities operate
power generation equipment in three general ways:
baseload, cycling, and peaking. Baseload equipment is
operated virtually continuously; such operation results
in a low cost per kilowatt hour. Cycling equipment is
operated on a regular or fairly regular basis, but not
continuously, because of its higher per kilowatt hour cost.
For example, such equipment might be needed daily
during hours of high demand and then shut down at
10 Nos. 09-3344, 09-3350, 09-3351
night. Peaking equipment is generally used only during
hours of maximum demand.” Babcock & Wilcox Co. v.
United Technologies Corp., 435 F. Supp. 1249, 1256 (N.D.
Ohio 1977); see also Northern Indiana Public Service Co. v.
Colorado Westmoreland, Inc., 667 F. Supp. 613, 629 (N.D.
Ind. 1987); Stephen Breyer & Paul MacAvoy, Energy
Regulation by the Federal Power Commission 91 (Brookings
Institution 1974). So, for example, “plants that provide
peaking power during times of high demand are built
to minimize capital investment, and high operating
costs are accepted because these plants have low utiliza-
tion.” Arnold W. Reitze, Jr., “Electric Power in a Carbon
Constrained World,” 34 William & Mary Environmental L.
& Policy Rev. 821, 850-51 (2010). In this way total costs
are minimized.
Cinergy’s Wabash plant is old; old plants are more
costly to operate than new ones; the Wabash plant is
therefore operated as a cycling rather than a baseload
plant and so does not operate at full capacity. There can
be no presumption that an increase in its annual capacity
would result in a proportionately equal increase in its
output. Suppose a modification increased the plant’s
annual electrical generating capacity by 10 percent, but
because of limited predicted use of standby capacity the
output of the modified plant was unlikely to increase
at all (just not to fall), and therefore its emission of pollut-
ants was unlikely to increase. In contrast, if a baseload
plant is modified to enable it to produce more electricity,
there is a presumption that it will produce at the higher
rate enabled by the modification, because baseload plants
Nos. 09-3344, 09-3350, 09-3351 11
are designed to be run at or near full capacity. K.D. Lee &
D.A. McCutchan, “What Is the Worth of Baseload Avail-
ability?,” 26 Engineering Economist 137, 138 (1981).
And there’s the rub. The formula that the EPA’s
experts used predicts that the effect of the modifications
on generation would be proportionately equal to the
increase in annual capacity. If capacity increased by 10
percent, generation would increase by 10 percent. The
formula doesn’t work for a cycling facility. Other
methods are used for predicting increased generation
from increased standby capacity, but they are not the
methods used by the EPA’s experts. Their evidence
should not have been admitted.
In fairness to the district judge, we note that Cinergy
didn’t argue this point to him with any clarity; this is
a common pitfall in a scattershot approach to litigation.
The point isn’t even clear in Cinergy’s appeal briefs.
Cinergy did, however, at least mention the point in the
district court and in its briefs and oral argument in this
court, and the government doesn’t argue that it has
been forfeited. Cinergy had attached to its motion in the
district court to exclude the testimony of the govern-
ment’s experts the report of its own expert, which
criticizes the application of the proportionate-equality
model to a “low utilization,” which is to say a non-
baseload, plant. The report correctly identified the
Wabash plant as being a low-utilization plant and stated
“that the new utilization factor statistic that [the gov-
ernment’s experts] create for these low load factor
units . . . has no place in generation planning models or
12 Nos. 09-3344, 09-3350, 09-3351
calculations . . . . If Dr. Rosen’s [one of the government’s
experts] analysis was correct, replacing these [parts]
would mean a 75% increase in generation at this unit
alone. Experience tells me that cannot be the case, given
the load factor and dispatch ranking of this unit.”
Without expert testimony to support an estimate of
actual emissions caused by the modifications, the gov-
ernment cannot prevail with respect to the charge of
nitrogen oxide pollution; for the government doesn’t
contest Cinergy’s claim that if the testimony of the gov-
ernment’s experts should have been excluded, Cinergy
is entitled to judgment. Earlier we said that the govern-
ment cannot prevail with respect to the plant’s emissions
of sulphur dioxide. Therefore the judgment must be
reversed with instructions to enter judgment for Cinergy.
The parties have made other arguments, but they are
either too feeble to merit discussion (such as the govern-
ment’s argument that we decided the present ap-
peal, without knowing it, in our previous opinion) or
academic in light of our analysis. Also academic is
the government’s cross-appeal, which challenges a
ruling by the district judge on the statute of limitations
applicable to the government’s claim of civil penalties.
The cross-appeal is therefore dismissed, while the judg-
ment in the government’s favor is, as we said,
R EVERSED.
10-12-10