In a lengthy, partially published opinion filed November 21, 2017, the Fifth District Court of Appeal addressed four CEQA challenges asserted by plaintiffs and appellants (“AIR”) to the sufficiency of Kern County’s 2014 Final EIR for Real Parties’ (“Alon Energy”) project to modify an existing Bakersfield oil refinery.  Association of Irritated Residents v. Kern County Board of Supervisors, et al. (Alon USA Energy, Inc., et al., Real Parties in Interest) (2017) ___ Cal.App.5th _____.   The proposed modification would allow the refinery, which has existed and operated at the site through various ownerships since 1932, to unload two unit trains (104 cars) of crude oil (150,000 barrels) per day.  The trains would carry potentially more volatile crude oil (i.e., likely to explode in a rail accident) transported from the Bakken formation in North Dakota.  The refinery would process 70,000 barrels of crude oil per day, its currently authorized maximum level, and pipe the balance of the unloaded crude to other refineries to be processed.

Addressing AIR’s four CEQA challenges to the project EIR, the Court held: (1) that use of a 2007 “existing conditions” baseline was supported by substantial evidence and complied with CEQA, in light of the refinery’s current entitlements and history of fluctuating operations; (2) in an issue of first impression, that the project’s compliance with California’s GHG cap-and-trade program supported County’s conclusion pursuant to CEQA Guidelines § 15064.4(b)(3) that its GHG emissions would have a less-than-significant environmental impact; (3) in an unpublished portion of the opinion (which thus won’t be further discussed in this post), that a factual error in describing federal railroad safety data caused the EIR to underestimate by fivefold the risk of a release of transported hazardous materials from a train accident; and (4) that the EIR erroneously concluded federal law preempted CEQA review (i.e., analysis and disclosure) of certain of the project’s reasonably foreseeable indirect environmental effects associated with off-site rail activities.  The Court therefore reversed and remanded with directions to the trial court to enter a new order granting AIR’s writ petition and issuing a writ compelling County to set aside its EIR certification and project approval, and to bring the EIR into compliance with CEQA before taking further action relying on it.

The Baseline Issue

The refinery had operated for over 80 years in some capacity, and had undergone numerous CEQA-reviewed upgrades and modifications.  Its level of refining operations had fluctuated over time, particularly in recent years.  It temporarily shut down due to its then-owner’s bankruptcy in 2008; resumed refining operations at a reduced level under Alon USA’s new ownership in 2011; and later suspended refining operations when another refinery that supplied it ceased operations, although it still continued to manage inventory, blend and market fuels, and serve as a terminal for crude oil and finished petroleum projects.

In light of the refinery’s long operating history, and the fact that it currently remains authorized to process 70,000 barrels of crude oil daily, the County chose a 2007 baseline – a year when it processed about 60,000 barrels daily – as most realistically reflecting “existing conditions” for purposes of measuring the upgrade project’s air pollution emissions impacts.  AIR argued that use of a 2007 baseline understated impacts, and that under CEQA Guidelines § 15125(a) the EIR should have used a 2013 baseline because that was the year the Notice of Preparation (“NOP”) was published, and that event “normally” marks the point in time when the baseline is measured.

The Court rejected AIR’s arguments, following the California Supreme Court’s decision in Communities For a Better Environment v. South Coast Air Quality Management District (2010) 48 Cal.4th 310 (“CBE”), which discussed “the appropriate baseline for a project involving modification to a petroleum refinery.”  The Supreme Court in that case rejected a lead agency’s attempt to use maximum permitted (but factually hypothetical) operating conditions as the environmental baseline against which to measure the project’s impacts.  In “address[ing] the problem of defining an existing conditions baseline in circumstances where the existing conditions themselves change or fluctuate over time,” CBE stated that: “A temporary lull or spike in operations that happens to occur at the time environmental review for a new project begins should not depress or elevate the baseline.”  (Quoting CBE, at 328.)  Notwithstanding Guidelines § 15125(a)’s provision that the baseline is normally the existing conditions when the NOP is published, or when environmental review commences, the Supreme Court made clear that neither CEQA nor the Guidelines “mandates a uniform, inflexible rule for determination of the existing conditions baseline.  Rather, an agency enjoys the discretion to decide, in the first instance, exactly how the existing physical conditions without the project can most realistically be measured, subject to review, as with all CEQA factual determinations, for support by substantial evidence.”  (Quoting CBE, at 328.)

Applying these legal principles, the Court of Appeal held that the Draft EIR’s choice of 2007, the last full year of refinery operations, as most realistically representing “existing refinery operations” for CEQA baseline purposes was supported by substantial evidence.  First, substantial evidence supported the conclusion that an operating refinery currently exists.  Despite the 2008 bankruptcy shutdown, the refinery had processed crude oil and other hydrocarbons prior to the shutdown, and thereafter resumed hydrocarbon processing in 2011.  Existing and effective entitlements currently allow it to process 70,000 barrels per day, and crude oil processing could begin again without the project.  Moreover, the EIR showed refinery operations were subject to prior CEQA reviews.

Second, selection of the 2007 level of operations as the baseline was also supported by substantial evidence.  It reflected actual (not maximum permitted but factually hypothetical) operations, and was a reasonable and conservative representation of actual operations when crude oil was being refined – its 60,000-barrel production figure being slightly less than the overall average of the many years for which relevant data was provided in the EIR.

The Court noted its analysis was “compatible with North County Advocates v. City of Carlsbad (2015) 241 Cal.App.4th 94, a case addressing the appropriate baseline for the traffic analysis performed [for a] . . . proposed [shopping center] renovation[ ]” project, which “treated a large retail store as being fully occupied, even though it was vacated in 2006 and had been only periodically occupied since.”  (My post on the City of Carlsbad case can be found here.)  The Court also rejected AIR’s argument that any deviation from a baseline consisting of existing conditions at the time the NOP is published must be supported by a showing in the EIR that analysis under such a “normal baseline” would be “misleading or without informational value.”  In making this argument, AIR incorrectly relied on an overbroad reading of the Supreme Court’s decision in Neighbors for Smart Rail v. Exposition Metro Line Construction Authority (2013) 57 Cal.4th 439 (my post on which can be found here).  But the more rigorous judicial scrutiny discussed in Neighbors For Smart Rail applies only to baselines solely using hypothetical future conditions, and “do[es] not apply to an agency’s decision about how to measure existing conditions when the activity creating those conditions has fluctuated.”  The latter determination represents “a choice that is a factual finding reviewed under the substantial evidence standard.”  (Citing CBE, at 328.)

The GHG Emissions/Cap-And-Trade Compliance Issue

CEQA Guidelines § 15064.4 sets forth a nonexclusive list of factors a lead agency should consider in assessing the significance of a project’s GHG emissions impacts.  Among these is “[t]he extent to which the project complies with regulations or requirements adopted to implement a statewide, regional, or local plan for the reduction or mitigation of greenhouse gas emissions.”  Rejecting AIR’s criticisms of the EIR’s GHG analysis, the Court concluded that analysis properly relied on the project’s compliance with California’s cap-and-trade program in determining its GHG emissions impacts were less than significant.  The Court held that the cap-and-trade program constitutes “regulations . . . adopted to implement a statewide . . . plan for the reduction or mitigation of [GHG] emissions” within the meaning of § 15064.4(b)(3).

The Court provided relevant background information on the cap-and-trade program, which is one of the California Air Resources Board’s (“CARB”) numerous strategies pursued under AB 32 for reducing GHG emissions.  In essence, cap-and-trade applies an aggregate GHG emissions allowance “budget” for covered entities (such as refineries and electrical distribution utilities) and provides a market-based trading mechanism for “compliance instruments,” which consist of either “allowances” or “offsets” issued by CARB or an external trading system linked to California’s program.  An “allowance” is a limited, tradeable authorization to emit up to one metric ton of CO2 equivalent, while an “offset credit” is a CARB-issued tradable compliance instrument representing an actual, verifiable and enforceable permanent GHG emission reduction of one metric ton of CO2e.  Capped facilities must surrender GHG emissions compliance instruments equal to their emissions at the end of each 3-year compliance period, and the program is expected to reduce GHG emissions from capped facilities over these periods by 75 million metric tons per year below baseline conditions, or an 18% reduction from statewide 1990 emissions.

Not counting non-permitted sources, and excluding emissions from main line rail transportation activities, the County’s EIR calculated the project would emit 88,248.9 metric tons of CO2e per year.  After accounting for project cap-and-trade offsets, displaced truck trips from Bay Area refineries, on-site rail’s compliance with biomass-based diesel fuel requirements, and cap-and-trade offsets of electric utility GHG emissions, the EIR concluded project GHG emissions would be a net negative 488.9 metric tons of CO2e per year – a reduction of over 100%.  If mainline rail activities were counted, total GHG emissions would be 137,886.9 metric tons of CO2e per year, creating a slight – though, per the EIR, still insignificant – increase.

While County did not develop any quantitative threshold, it presumed a project’s GHG emissions impacts would be less than significant if it contributed to a net decrease in GHG emissions and was consistent with CARB’s climate change scoping plan and cap-and-trade program as well as the regional Air District’s 2012 draft guidance.  Applying these standards, the EIR found the project’s GHG impacts less than significant with or without including emissions from off-site, mainline rail activities.

AIR argued this conclusion was erroneous and the EIR’s discussion misleading because cap-and-trade program compliance does not actually reduce a project’s GHG emissions due to its allowances, which authorize emissions.  Rejecting these simplistic arguments, the Court held, in addressing a question of first impression, that an EIR in considering the significance of a project’s GHG emissions may decrease the volume of its estimated total emissions to reflect the use of compliance instruments (allowances and offset credits) under the cap-and-trade program.  Here, the EIR’s GHG disclosures were adequate, and not misleading or deceptive, under a “standard of objective reasonableness,” such that “an objectively reasonable person” reading its narrative and tables “would understand the references to reductions and offsets did not mean fewer molecules of [GHG] are being emitted by the project” but, rather, “that the project’s [GHG] emissions would comply with the cap-and-trade program because those emissions would be counterbalanced by the surrender of compliance instruments.”  While the EIR could have used the words “reduction” and “offset” with more precision, CEQA does not require perfection in an EIR and neither the decision makers nor the public would be better informed about the consequences of the project’s cap-and-trade program compliance if a writ were issued requiring its rewording.

Further, as a matter of law, determining GHG emissions impacts would be less-than-significant based on their volume after applying cap-and-trade compliance instruments was permissible under CEQA Guidelines § 15064.4.  The cap-and-trade program is set forth in regulations (Cal. Code Regs., tit. 17,  §§ 95801-96022) to implement a statewide GHG reduction or mitigation plan, and is not subject to the Guidelines’ criteria for other types of requirements (i.e., to reduce an individual project’s incremental GHG contribution).  Guideline § 15064.4(b)(3) authorized the County to determine a project’s GHG impacts to be less than significant based on its compliance with the statewide cap-and-trade program, and this conclusion was supported by recent Supreme Court precedent emphasizing the global nature of the climate change problem and the irrelevance of the particular physical location where GHG emissions occur.  (See, Center for Biological Diversity v. California Department of Fish and Wildlife (2015) 62 Cal.4th 204, my post on which can be found here).  Expanding on this theme to emphasize that in this context program compliance was an efficiency metric that was superior to simply measuring an individual project’s impacts, the Court of Appeal explained:

“The idea underlying the cap-and-trade program is not that capped facilities relying on allowances will decrease their [GHG] emissions and help the state achieve its target, but that the limited allocation and use of allowances means that they are not available for use elsewhere, which affects California’s refining industry as a whole.  Specifically, the use or expenditure of allowances will diminish the supply of allowances, which will cause their price to rise and incentivize investment in technologies and equipment that reduce [GHG] emissions.  Consequently, the overall (i.e., cumulative) impact of the cap-and-trade program cannot be judged by whether a particular project uses allowances, offset credits, or reduces its emissions.  Rather, the significance of the cumulative impact should be assessed based on the program as a whole.  Under the cap-and-trade program, the allowances issued for each compliance period decrease and this decrease provides the mechanism for meeting the targets for reduced [GHG] emissions in California.  Based on this industry-wide perspective, we conclude it is appropriate for a lead agency to conclude a project’s compliance with the cap-and-trade program provides a sufficient basis for determining the impact of the project’s [GHG] emissions will be less than significant.”

The Court further concluded, with respect to GHG issues, that its interpretation and application of § 15064.4(b)(3) was consistent with the Air District’s guidance.  It also held that the EIR’s challenged analysis of displaced truck trips was supported by substantial evidence (not merely speculative), and in any event was unnecessary to the County’s significance conclusion (which could properly have rested solely on the project’s cap-and-trade compliance), thus rendering any error alleged by AIR non-prejudicial in any event.

The Federal Preemption/Off-Site Rail Impacts Issue

The final issue addressed in the published part of the Court’s opinion was whether federal law – specifically the Interstate Commerce Commission Termination Act of 1995 (“ICCTA”; 49 U.S.C. § 10101 et seq.) and the Surface Transportation Board’s (“STB”) exclusive jurisdiction over rail carrier transportation and facilities – preempted CEQA review of the reasonably foreseeable indirect environmental impacts of the off-site mainline rail operations that would deliver crude oil to the refinery.  While AIR conceded that ICCTA may preempt County’s ability to impose certain mitigation measures to address those operations, the parties disagreed about whether CEQA disclosure and analysis of those operations was preempted.  Relying on the Supreme Court’s recent decision in Friends of Eel River v. North Coast Railroad Authority (2017) 3 Cal.5th 677 (my post on which can be found here), the Court explained that there are two types of relevant preemption: (1) categorical (i.e., facial) preemption of state actions and regulations, which encompasses both (a) any form of state or local permitting or preclearance that by its nature could be used to deny a rail carrier’s ability to conduct some part of its operations, and (b) any regulation of matters directly regulated by the STB; and (2) as applied preemption, which depends on the degree of interference the action or regulation has on railroad operations, i.e., whether it would have the effect of foreclosing or unduly restricting a railroad’s operations or otherwise unreasonably burdening interstate commerce.

Applying the federal preemption principles discussed in Friends of Eel River, the Court held that in the context present here – a refinery project serviced by a rail carrier – “the development of information pursuant to CEQA is not preempted categorically, but is subject to the rules for as-applied preemption.”  Its bifurcated analysis of federal preemption separately addressed (1) CEQA’s informational requirements, and (2) CEQA’s requirements relating to adoption of mitigation measures.  As to the first category, it held the EIR legally erred in its conclusion that ICCTA preempts CEQA review in terms of disclosure and analysis of “the project’s reasonably foreseeable indirect physical changes to the environment caused by the movement of unit trains to and from the project site.”  According to the Court, such an analysis of the effects of mainline operations would not impose permitting or preclearance requirements on rail carrier deliveries of crude oil to the project site, could not be used to deny the carrier the ability to conduct such operations, and would not control or influence matters directly regulated under federal law.  Per the Court: “The words set down in an EIR would have no actual effect on the actions taken by a rail carrier or how or when those actions were taken.”

The Court did “conclude some mitigation measures that address the environmental impacts of mainline rail operations may be preempted by federal law” and, hence, legally infeasible.  Due to the case’s procedural posture, it declined “to provide a definitive statement about which mitigation measures will or will not be preempted,” stating that whether a particular measure would unreasonably burden or interfere with rail transportation “requires a factual assessment” which the County should make on remand using the preemption tests discussed in its opinion.

Conclusions and Implications

The published opinion’s baseline issue discussion contributes to the legal literature on this issue and provides helpful guidance to lead agencies and project proponents where the project proposes modifications to an existing industrial facility with a history of fluctuating operations and environmental impacts.  Its GHG discussion resolves an important issue of first impression by holding that a project’s compliance with the cap-and-trade program is a sufficient basis to conclude its individual incremental contribution to cumulative global GHG emissions and climate change impacts is not cumulatively considerable and therefore less than significant.  Finally, its federal law preemption discussion highlights an evolving area of law addressing the limits of CEQA when applied to private projects involving aspects of rail transportation.

With respect to the last issue, the implications of the Court’s conceptual uncoupling of an EIR’s impact analysis from its mitigation formulation are unclear and somewhat concerning. The Court’s opinion obviously fails to state any “bright line” rule, which may be too much to ask given the complex and indeterminate nature of the applicable preemption rules.  But, in any event, it also seems the opinion in this respect does little, if anything, to increase certainty in this area of the law and may thus serve to encourage further litigation over the adequacy of EIR mainline rail impacts analyses – analyses that would appear to amount to useless and academic exercises if the lead agency lacks ability to mitigate any disclosed impacts due to federal preemption.  The Court’s “it’s only words on paper” rationale seems a bit thin and questionable, particularly when (1) those “words” are intended (or required) to analyze and disclose impacts the lead agency may be powerless to mitigate, (2) the absence of, or an arguable flaw in, those “words” may potentially prevent or significantly delay certification of an EIR and approval of a project, which may, in turn, hamper federally regulated mainline rail operations, and (3) “[t]he purpose of CEQA is not to generate paper, but to compel government at all levels to make decisions with environmental consequences in mind.”  (Citizens of Goleta Valley v. Board of Supervisors (1990) 52 Cal.3d 553, 564.)

In my view, clearer and more practical CEQA preemption rules are needed, in the rail transportation context or, perhaps, at least some judicial recognition that a complete delinking of an EIR’s analysis/disclosure and mitigation functions has the potential to lead to troubling and unintended results.  It bears watching to see where future CEQA plaintiffs take the guidance on federal preemption provided by the Fifth District’s opinion here.

 

Questions? Please contact Arthur F. Coon of Miller Starr Regalia. Miller Starr Regalia has had a well-established reputation as a leading real estate law firm for more than fifty years. For nearly all that time, the firm also has written Miller & Starr, California Real Estate 4th, a 12-volume treatise on California real estate law. “The Book” is the most widely used and judicially recognized real estate treatise in California and is cited by practicing attorneys and courts throughout the state. The firm has expertise in all real property matters, including full-service litigation and dispute resolution services, transactions, acquisitions, dispositions, leasing, financing, common interest development, construction, management, eminent domain and inverse condemnation, title insurance, environmental law and land use. For more information, visit www.msrlegal.com.