Decommissioning

The reasons are several. The EPA has aggressively targeted coal plants, ratcheting down allowable emissions levels, requiring expensive pollution controls  and even compelling the substitution of gas-fired plants and renewables in its recently proposed section 111(d) “existing source rule.” New laws in California and elsewhere have restricted owner investment in coal plants. At the same time, fracking has lowered the cost and availability of natural gas, and renewables are emerging as alternate fuels. 

As coal plant owners look to decommission old coal plants, several considerations emerge.

Early Remediation

Shuttering a plant, surrendering permits and gaining regulatory approval is the start, but the process ends in cleanup. Most coal plants are in remote areas, where the temptation is to fence in the site and post a guard. Private owners often have that option, but it carries dangers. Many an industrial facility owner has deferred full decommissioning and paid 10 to 20 times more as remediation standards escalated, and regulators and economic development officials first grew frustrated and then aggressive in their efforts to restore a site or repurpose an area. 

Moreover, it is well known that asbestos, PCBs and underground storage tanks are hazards that require early abatement. But that was not the case 30 years ago. Will another 10 years make lead paint and fly ash remnants into environmental pariahs? Also, abandoned plants are prime targets against which neighboring landowners can instigate water and soil contamination litigation. 

Residual Liability Costs

Legacy coal plants are prime targets for plaintiffs’ lawyers looking for quick contingency fees. A plant under decommissioning consideration can attract a class action lawsuit that will tack a settlement onto already-steep shutdown costs. Common law claims for nuisance, trespass and negligence can mean costly litigation. Even when industry prevails after wrongful environmental litigation, it might take protracted litigation and appellate costs to do so (Georgia-Pacific Consumer Products vs. Ratner). 

In addition, the specter of Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) liability looms large over any company seeking to decommission an industrial site. Under this federal statute – also known as “Superfund” – any owner or operator of a plant can be held liable for future cleanup indefinitely – and at theoretically unlimited cost. 

There are two hedges to consider. One is lodging the site into a cooperative state/federal voluntary response program (VRP). VRP participants become eligible for protection from CERCLA liability upon successful program completion. Many states have entered into a CERCLA memoranda of agreement with the EPA to provide VRP relief. The other is pollution liability insurance protection. After decades of retrenchment, insurers such as AON, AIG and Chubb are among those offering more expansive products to provide exiting owners relief in the event of post-closure liability surprises. 

Demolition Options 

Depending on the market for scrap metal, taking down a coal-fired plant can yield substantial cost offset. Auxiliaries such as pumps, piping, boilers, ductwork and air pollution controls will require special handling. There are turnkey demolition solutions on the market. Commercial “factoring” vendors buy plants for scrap and may even assume future liability for a fee. Other buyers will take a facility outright. 

The rub is that neither transaction protects the seller against the government’s broad powers under CERCLA. Parties are free to contract for indemnification against CERCLA liability (Keywell Corp. vs. Weinstein). The EPA and state authorities can still reach back, however, and make the seller pay the costs of cleanup (Beazer East Inc. vs. Mead Corp.) The seller can recover such costs against the buyer if permitted by contract, but that assumes the buyer remains solvent. Precautionary legal solutions include letters of credit, escrows, holdbacks, performance bonds or insuring excess liability, as noted above. Essentially, the seller has a responsibility to perform extensive reverse due diligence to ensure its vendor or buyer can bear unexpected liabilities. 

Repurpose with Diligence

The trend is toward restoring brownfield sites for commercial purposes and then conveying them to new owners, subject to restrictive covenants that preclude certain riskier uses. This means parking lots may be permissible, but not playgrounds or daycare centers, and groundwater or surface disturbance may be forbidden. Model legislation enacted in many states fosters creative reuse. Once again, the cardinal rule ensuring the success of such a deal is to verify the buyer’s efficacy and credentials. 

The decommissioning of coal-fired power plants will accelerate in the next decade. Utilities and independent operators need to plan and take strategic steps to contain costs and prevent spiraling liabilities. Because government regulators can be both allies and adversaries in this process, it is wise to consult expert assistance sooner in the decommissioning process, rather than later.

The authors practice with McGuireWoods LLP in the firm’s Richmond, Va., office. Scott Oostdyk and Matt Fender specialize in environmental and energy litigation with a focus on power plant liabilities. Mike Woodard specializes in energy transactions including demolition and repurposing deals. For more information, visit www.mcguirewoods.com.

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