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Service Oil, Inc. v. United States Environmental Protection Agency

December 28, 2009


Petition for Review of an Order of the Environmental Appeals Board.

The opinion of the court was delivered by: Loken, Chief Judge.

Submitted: May 13, 2009

Before LOKEN, Chief Judge, BYE, Circuit Judge, and MILLER,*fn1 District Judge.

Congress substantially amended the Clean Water Act in the Water Pollution Control Act Amendments of 1972, directing the Environmental Protection Agency (EPA) to adopt effluent limits for the discharge of various pollutants, and providing that "it is illegal for anyone to discharge pollutants into the Nation's waters except pursuant to a permit" that incorporates those effluent limits. City of Milwaukee v. Illinois & Mich., 451 U.S. 304, 311-12 (1981); see generally S. Rep. No. 92-414 (1972), reproduced in 1972 U.S.C.C.A.N. 3668, 3675-77, 3708-39. The Water Quality Act of 1987 expanded this regime by directing EPA to require permits for storm water discharges associated with industrial activity. See 33 U.S.C. § 1342(p)(2)-(4). In this administrative enforcement proceeding, EPA imposed a substantial monetary penalty on Service Oil, Inc., the owner of a construction site that did not timely obtain a storm water discharge permit. EPA based the amount of the penalty not on unlawful discharges, but on Service Oil's failure to comply with the agency's permit application regulations. Concluding that this is an expansion of EPA's remedial power not authorized by the governing statutes, we reverse and remand for redetermination of the penalty.


The Clean Water Act prohibits the discharge of any pollutant into navigable waters from a point source except in compliance with an NPDES*fn2 permit issued by EPA or by an authorized state agency. See 33 U.S.C. §§ 1311(a), 1342(a), 1362(12); Nat'l Wildlife Fed'n v. Consumers Power Co., 862 F.2d 580, 583 (6th Cir. 1988). EPA's regulations provide that one intending to discharge "storm water associated with industrial activity" must apply for an individual NPDES permit, or for coverage under a "promulgated storm water general permit." 40 C.F.R. § 122.26(c)(1). "Industrial activity" includes "[c]onstruction activity . . . except operations that result in the disturbance of less than five acres of total land area." 40 C.F.R. § 122.26(b)(14)(x). EPA's permit regulations provide that operators of facilities described in § 122.26(b)(14)(x) shall submit permit applications at least ninety days before the start of construction, or when required by an applicable general permit. 40 C.F.R. §§ 122.21(c)(1), 122.26(c). The North Dakota Department of Health, an authorized state agency, has issued a general permit applying to new and existing discharges of "storm water associated with construction activity." The general permit provides that, to obtain coverage, an operator "shall submit" a Notice of Intent and a Stormwater Pollution Prevention Plan thirty days prior to the start of construction.

In April 2002, Service Oil began construction of a Stamart Travel Plaza on more than five acres of land in Fargo, North Dakota. When construction began, the site became a "point source." See 33 U.S.C. § 1362(14). A point source lacking a permit is subject to the core Clean Water Act prohibition -- "the discharge of any pollutant by any person shall be unlawful." 33 U.S.C. § 1311(a). The parties stipulated that storm water contains "pollutants." See 33 U.S.C. § 1362(6). "Discharge of a pollutant" is "any addition of any pollutant to navigable waters from any point source." 33 U.S.C. § 1362(12). The site's storm water discharges flow through Fargo's storm sewer system into the Red River of the North, part of the navigable waters of the United States. See 33 U.S.C. § 1362(7); 40 C.F.R. § 122.2.

In October 2002, EPA and state Department of Health officials inspected thirteen construction sites in the Fargo area. Twelve, including Service Oil's Stamart site, lacked an NPDES permit or coverage under the Department of Health's general permit. Service Oil submitted a Notice of Intent to the Department and obtained coverage under its general permit. State officials closed their review in June 2004 without further action. EPA continued its review, ultimately concluding that Service Oil had not fully complied with the NPDES permit because it failed to conduct site inspections every seven days and after heavy storms and to record inspection results in a Site Inspection Record. This administrative enforcement action followed.

The Clean Water Act includes a variety of enforcement provisions found primarily in 33 U.S.C. § 1319. See generally Tull v. United States, 481 U.S. 412 (1987). Section 1319(g)(1) authorizes EPA to assess a civil monetary penalty if it "finds that any person has violated [33 U.S.C. §§] 1311, 1312, 1316, 1317, 1318, 1328, or 1345," or has violated a condition in an NPDES permit issued under § 1342. In this case, EPA's Complaint sought an $80,000 administrative penalty, alleging that Service Oil violated 33 U.S.C. §§ 1311(a) and 1342(p), and 40 C.F.R. § 122.26(c) by not obtaining a permit prior to commencing construction (Count 1), and by failing to comply with the permit's terms once issued (Count 2).

After Service Oil answered, EPA moved for accelerated decision (summary judgment). The ALJ denied summary judgment on Count 1, concluding that the failure to obtain an NPDES permit does not violate § 1311(a) absent proof of a discharge, and Service Oil disputed whether any discharge occurred after construction began but before it obtained coverage under the Department of Health's general permit. The ALJ noted that the regulations require a new storm water discharger to apply for a permit before construction, and therefore a statutory provision listed in 33 U.S.C. § 1319(g)(1) other than § 1311 "may provide a statutory basis for an enforcement action for failure to apply for a storm water permit as required by 40 C.F.R. § 122.26(c)." The ALJ granted summary judgment on Count 2 -- it was undisputed that Service Oil violated conditions of the general permit after obtaining coverage -- but denied summary judgment on the question of penalty.

EPA then amended Count 1 to allege that Service Oil's failure to apply for a storm water discharge permit before commencing construction violated 33 U.S.C. § 1318 and 40 C.F.R. § 122.21. Service Oil opposed the amendment, arguing that § 1318 does not apply to the agency's permit application regulations, thereby preserving this issue of law for judicial review. After a hearing, the ALJ concluded that § 1318's record-keeping requirements encompass agency regulations requiring the pre-construction submission of a completed permit application. As a violation of § 1318 is enforceable under § 1319(g)(1), the ALJ concluded that Service Oil is liable on Count 1 regardless of whether EPA proved that a discharge occurred prior to obtaining coverage under the general permit. After a lengthy review of conflicting expert testimony, the ALJ further found that "dirt, sediment and concrete, did flow off-site during construction" and "would have reached the Red River." Therefore, Service Oil also violated § 1311(a) by discharging pollutants without a permit.

Applying the penalty factors mandated by 33 U.S.C. § 1319(g)(3),*fn3 the ALJ assessed a $35,640 penalty for all violations. The ALJ began the penalty analysis by assessing Service Oil for the "rather nominal economic benefit" of $2700 it obtained from non-compliance (delayed and avoided compliance costs). The ALJ then increased the penalty to $27,000 based on Service Oil's "complete failure to apply for and obtain a NPDES permit prior to starting construction." The ALJ increased the $27,000 penalty by ten percent because Service Oil, "albeit however slightly, had certainly caused the Red River to become more impaired," and increased the penalty another twenty percent to reflect Service Oil's culpability. On appeal, the Environmental Appeals Board (EAB) affirmed the ALJ's § 1318 analysis and the penalty assessed, specifically upholding a ten-fold increase in the base economic benefit penalty because of Service Oil's "complete failure to apply for its storm water permit prior to starting construction." In re Service Oil, Inc., CWA Appeal No. 07-02, Final Decision & Order at pp. 34-35 (EAB July 23, 2008).

Service Oil petitions for review of the EAB's final agency action, renewing its argument that failure to apply for an NPDES permit prior to construction in the time prescribed by EPA's permit regulations does not violate § 1318 and therefore cannot be the basis of a civil monetary penalty under § 1319(g)(1). Service Oil concedes that it is subject to an administrative penalty for its minimal storm water discharges prior to obtaining coverage under the general permit, and for failing to conduct required site inspections after it obtained permit coverage. We review the penalty assessment for abuse of discretion. See 33 U.S.C. § 1319(g)(8). The amount of the penalty assessed, which must be determined in accordance with § 1319(g)(3), was based primarily on the failure to apply for a permit prior to starting construction, as required by the EPA regulations. If that failure was not a violation of § 1318, triggering liability for an administrative monetary penalty under § 1319(g)(1), the penalty was based upon an impermissible factor and must be reversed. See, e.g., Kelly v. EPA, 203 F.3d ...

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