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March 19, 2018 |
FERC Takes Aim at Income Tax Over Recovery in Pipelines’ Regulated Rates

Click for PDF Last week, on March 15, 2018, the Federal Energy Regulatory Commission (FERC) issued a number of orders aimed at addressing potential over-recovery of income tax in pipelines’ regulated rates.  First, in the wake of a loss in the D.C. Circuit, FERC reversed course on its long-standing policy of allowing master limited partnerships (MLPs) to include an income-tax allowance in their cost-of-service rates.  Second, FERC announced various initiatives to address potential over-recovery of taxes through cost-of-service rates that may result from the reduction in the corporate tax rate from 35% to 21%.  Although the markets initially reacted quite negatively, the actual impact will not be immediate and will vary considerably from company to company. Indeed, many companies have already announced that the FERC orders will not have a material impact on their revenue. Reversal of Income Tax Policy for MLPs[1] In the wake of the unfavorable United Airlines v. FERC[2] decision, the FERC reversed its long-standing policy of allowing MLPs to include an income-tax allowance in their cost-of-service rates.  FERC issued a policy statement that found such an allowance results in an impermissible double-recovery of costs in combination with the discounted cash flow (DCF) methodology for calculating return on equity.  FERC concluded that because the DCF methodology used to calculate the return necessary to attract capital is done on a pre-tax basis, investors’ tax liability is already reflected in calculated return on equity.  Thus, FERC concluded that any allowance for income tax with respect to an MLP would result in double-recovery of those costs. A few important points to keep in mind regarding the impact of this policy change: This only impacts FERC cost-of-service rates: Oil Pipelines: For oil pipelines, market-based rates and settlement rates will be unaffected.  With respect to indexed rates, there is no automatic immediate impact.  FERC will, however, address this issue in the next reassessment of the index in 2020. Gas Pipelines:  For interstate gas pipelines negotiated rates, market-based rates, and settlement rates are not affected.  Discount rates could be impacted, but only to the extent recourse rates are reduced below the discount-rate level as a result of the implementation of this policy. The policy statement does not actually change any pipeline’s rates. Oil Pipelines:  For oil pipelines, it announces a new policy that the pipelines may no longer include an income tax allowance in their cost of service on the annual Form 6 reporting.  Once this cost-of-service data is made publically available, it certainly could lead to FERC or shippers filing a complaint pursuant to Section 13(1) of the Interstate Commerce Act to reduce rates.  In addition, FERC intends to address the impact of the tax reduction in the five year review of the oil pipeline index in 2020.  Thus, in theory, FERC could require a reduction in rates for any pipelines whose rates are set at the ceiling by setting a negative index at that time. Gas Pipelines:  For gas pipelines, FERC is proposing a one-time reporting requirement to obtain data about the impact of this policy and the reduction in the corporate tax rate on each pipeline’s cost of service as discussed in more detail below.  Again, once this cost-of-service data is made public, FERC or shippers could initiate a proceeding to reduce rates pursuant to Section 5 of the Natural Gas Act.  This result is not automatic, however. The policy statement did not decide whether other non-pass through entities (e.g., limited partnerships, LLCs, etc.) would also no longer be permitted to recover a tax allowance in their rates.  Instead, FERC deferred those issues to consideration in future rate proceedings, but made clear that the issue of double-recovery would need to be addressed in those instances.  FERC’s Order on Remand in the United Airlines case[3] seems to leave little room for FERC to reach a contrary finding or other pass-through entities, as FERC reasoned that “MLPs and similar pass-through entities do not incur income tax at the entity level” and therefore the ROE offered under the DCF methodology must be sufficient to cover the investor’s tax liability. Notice of Proposed Rulemaking on Federal Income Tax Rate Reductions for Gas Pipelines[4] FERC issued a notice of proposed rulemaking that seeks require natural gas pipelines to do a one-time informational filing of an “abbreviated cost and revenue study” to provide information to allow FERC to determine whether gas pipelines are over-recovering for taxes in light of the reduction in the corporate tax rate.  FERC proposed to use the same form that FERC has attached to its orders initiating Section 5 rate investigations in recent years for this informational filing.  FERC then proposes several options to address over-recoveries, including some intended to encourage pipelines to voluntarily reduce rates: Limited Section 4 Filings:  Although FERC typically does not allow pipelines to file a limited rate case to adjust individual components of rates, FERC proposed to allow pipelines to file a limited Section 4 rate case to reduce their rates by the percentage reduction in the cost of service from the decrease in the federal corporate income tax rate and the elimination of the income tax allowance for MLPs. File a Statement Explaining Why an Adjustment is Not Necessary:  If a pipeline’s reduction in cost of service from the tax cuts and elimination of income tax allowance are offset by increases in costs elsewhere or if the pipeline is overall not recovering its cost of service despite the tax decease, a pipeline can file a statement explaining why no decrease in rates is appropriate despite the income tax reduction. Commit to File a General Section 4 Rate Case (or an Uncontested Settlement):  In lieu of a limited Section 4 rate case, pipelines can commit to file a general Section 4 rate case and indicate an approximate time-frame for making such a filing.  FERC proposes that if a pipeline commits to make such a filing by December 31, 2018, FERC will not initiate a Section 5 investigation of the pipeline’s rates prior to that time. File the Information Required and Do Nothing Else:  FERC, in a somewhat disingenuous acknowledgement that it cannot legally force pipelines to file a Section 4 rate case, notes that a pipeline may simply file the required information with FERC, take no further action, and wait to see if FERC initiates a Section 5 investigation.  FERC proposes, however, to open a rate proceeding docket for each filing and issue a public notice inviting interventions and protests on the filing.  FERC will then decide whether to initiate a Section 5 proceeding based on the public comments and protests.  In sum, these procedures are strikingly similar to requiring a Section 4 rate filing. With respect to intrastate Hinshaw and Section 311 pipelines, FERC found that its existing policies are generally sufficient to address potential over-recovery resulting from the Tax Cuts and Jobs Act.  However, FERC does propose to require that if a pipeline adjusts its state-jurisdictional rates as a result of the Act, then the pipeline must file a new rate election within 30 days after the reduced intrastate rate becomes effective. Notice of Inquiry Regarding the Effect of Tax Cuts and Jobs Act[5] Finally, FERC opened an inquiry to solicit comments on the impacts of other aspects of tax reform on jurisdictional rates, such as the treatment of accumulated deferred income taxes and the new 100% bonus depreciation regime which applies to oil pipelines.  In this regard, FERC is particularly interested how to treat accumulated deferred income tax going forward in light of the reduction in future tax liability.  FERC is soliciting comments on various topics related to ADIT, including: How to ensure rate base continues to be treated in a manner similar to that prior to the Tax Cuts and Jobs Act until excess and deficient ADIT is fully settled. Whether and how adjustments should be made so that rate base may be appropriately adjusted by excess and deficient ADIT. How tax allowance or expense in cost of service will be implemented to reflect the amortization of excess and deficient plant-based ADIT. FERC is also soliciting comments on the effect of the bonus depreciation change under the Tax Cuts and Jobs Act, which increases the bonus depreciation allowance from 50% to 100% for qualified property placed into service after September 1, 2017 and before January 1, 2023. Comments are due 60 days after publication of the notice in Federal Register.    [1]   Revised Policy Statement on Treatment of Income Taxes, 162 FERC ¶ 61,227 (2018).    [2]   827 F.3d 122 (D.C. Cir. 2016).    [3]   SFPP, L.P., 162 FERC ¶ 61,228 at P 22 (2018).    [4]   Interstate and Intrastate Natural Gas Pipelines; Rate Changes Relating to Federal Income Tax Rate, 162 FERC ¶ 61,226 (2018).    [5]   Inquiry Regarding the Effect of the Tax Cuts and Jobs Act on Commission Jurisdictional Rates, 162 FERC ¶ 61,223 (2018). Gibson Dunn’s Energy, Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following: William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com) Ruth M. Porter – Washington, D.C. (+1 202-887-3666, rporter@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 1, 2018 |
Joint Venture Traps to Avoid

Houston partners Gerry Spedale and Hillary Holmes are the authors of “Joint Venture Traps to Avoid,” [PDF] published in Midstream Business in March 2018.

March 7, 2018 |
Intra-EU Investment Treaties: Is It Time to Restructure Your Investment?

Click for PDF Yesterday, the Court of Justice of the European Union (CJEU) issued its much awaited ruling on the compatibility of intra-EU bilateral investment treaties (BITs) with EU law, in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia.[1] The CJEU determined that arbitration provisions found in BITs concluded between EU Member States are incompatible with EU law.  Adopting the policy views expressed by the European Commission in recent years, the CJEU’s decision goes against the Advisory Opinion of the Attorney General Wathelet issued in September 2017[2], who had advised that there is no incompatibility with EU law.  The decision also goes against a long line of decisions from international arbitration tribunals rejecting the suggestion that EU law precludes the jurisdiction of such arbitral tribunals. The decision itself is surprisingly light in terms of its reasoning and leaves many questions unanswered.  For example, it is not clear how the CJEU ruling will impact pending disputes against EU Member States under intra-EU BITs.  It also appears to suggest that arbitration under the Energy Charter Treaty may be unaffected. However, the ruling no doubt will have consequences for the protection of foreign investments within the EU going forward.  Investors will not be able to commence arbitration proceedings under BITs between EU Member States.  Thus, in order to maximize protection from potential adverse government actions, investors from EU Member States with investments in other EU Member States should seriously consider restructuring their investments in order to ensure that they can take advantage of investment treaty protections. Background to the Dispute The question of compatibility of intra-EU BITs with EU law was brought before the CJEU following a request for preliminary ruling by the German Federal Court of Justice (Bundesgerichtshof) (BGH) in 2016.[3]  The BGH referred the issue to the CJEU in the context of a challenge to an arbitral award rendered under the Netherlands and Slovakia BIT of 1991 in Achmea B.V. (formerly known as Eureko B.V.) v. Slovakia in December 2012.  The Slovak Republic was seeking to set aside the UNCITRAL award before the Frankfurt courts (Frankfurt was the seat of arbitration).  The arbitral tribunal had awarded the claimant, Achmea, EUR 22.1 million plus interest and costs. The Slovakia argued inter alia that the BIT was incompatible with EU law based on certain provisions of the Treaty of the Functioning of the European Union (TFEU) and that the EU courts had exclusive jurisdiction over Achmea’s claims.  The first instance court in Frankfurt initially dismissed Slovakia’s application to have the award set aside.  Slovakia subsequently appealed to the BGH, following which BGH referred the questions on incompatibility to the CJEU, while enunciating its view that the BIT was in fact compatible with EU law. Although not binding on the CJEU, the EU Advocate General (AG) also weighed in the discussion with an Advisory Opinion in September 2017 in which he opined that intra-EU BITs are indeed compatible with EU law.  The AG expressly disagreed with the European Commission’s position (which had intervened and filed written submissions in a number of intra-EU BIT arbitrations[4]) that intra-EU BITs are incompatible with EU law.[5] CJEU’s Decision The BGH’s opinion and the AG’s Advisory Opinion, however, did not sway the CJEU.  In fact, the CJEU ruled that the arbitration clause featured in the Netherlands and Slovakia BIT of 1991 has an adverse effect on the autonomy of EU law and was therefore incompatible.  The Court opined that the BIT established a mechanism for settling disputes between an investor and a Member State by an arbitral tribunal which falls outside the judicial system of the EU and thus did not ensure the full effectiveness of EU law should the dispute in question require the interpretation or application of EU law. Implications of the CJEU Decision Currently, there are more than 190 BITs between EU Member States still in force and the CJEU’s ruling today will therefore have ramifications for the future of investment protection within the EU.  Although it remains to be seen how future investment treaty tribunals will interpret the CJEU’s ruling, they may consider that they lack jurisdiction when asked to hear disputes brought by European investors against EU Member States under intra-EU BITs in light of this ruling.  At the very least, any EU national court that is asked to assist in arbitration proceedings seated in EU Member States or hear recognition/enforcement applications for investment treaty awards under intra-EU BITs would need to consider the CJEU’s ruling.  What this decision means for arbitrations taking place outside the EU or under the self-contained regime of the ICSID Convention rules, however, is unclear. From the face of the decision, it appears that the CJEU left open the question as to whether its findings would apply to the provisions of multilateral treaties, such as the Energy Charter Treaty (ECT), to which the EU itself is a Party.   In particular, the CJEU appeared to distinguish between agreements only signed between two EU Member States and those signed by the EU itself (such as the ECT).  To date, all ECT tribunals that have considered jurisdictional objections based on EU law have rejected such arguments.[6] What Should Investors Consider Doing in Light of the Decision? In light of today’s ruling, it would be wise for EU based investors with investments in other EU Member States to consider restructuring their investments to ensure that their corporate structure includes at least one entity outside the EU in a country that has a BIT with the relevant EU Member State.  As has been consistently confirmed by investment treaty tribunals, re-structuring of investments before a dispute arises with a view to maximizing investment treaty protections is a legitimate business goal.  By undertaking such a restructuring, investors will ensure that they have additional remedies should they face adverse government actions against their investments.    [1]   The ruling can be accessed at curia.europa.eu.    [2]   Opinion of Advocate General Wathelet, Case C-284/16, Slowakische Republik v Achmea BV, 19 September 2017, available at: <http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:62016CC0284&from=EN>.    [3]   See the press release No. 81/2016 dated 10 May 2016, in which the BGH announced that it requested a preliminary ruling from the CJEU, available at <http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=pm&Datum=2016&Sort=3&nr=74606&pos=2&anz=83>.    [4]   For example, in Eastern Sugar v. Czech Republic, SCC Case No. 088/2004; AES v. Hungary, ICSID Case No. ARB/07/22; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19; Charanne v. Spain, SCC Case No. V062/2012; Isolux v. Spain, SCC Case V2013/153; Blusun v. Italy, ICSID Case No. ARB/14/3; Novenergia v Spain, SCC Case No. 2015/063; in enforcement proceedings in Micula v Romania No. 15-3109-cv (2d Cir.).    [5]   In the recent years, the Commission has been increasing pressure on arbitral tribunals hearing disputes under intra-EU BITs to decline jurisdiction and also on EU Member States.  In 2015, for example, it initiated infringement proceedings against five EU Member States (Austria, the Netherlands, Romania, Slovakia and Sweden) and requested them to terminate their intra-EU BITs, see press release dated 18 June 2015 available at: <http://europa.eu/rapid/press-release_IP-15-5198_en.htm>.  In late November 2017, the European Commission’s Competition Office has indicated that any compensation to be paid by EU Member States to foreign investors following successful investment treaty claims would constitute state aid requiring approval from the Commission: see report dated 10 November 2017 available at: <http://ec.europa.eu/competition/state_aid/cases/258770/258770_1945237_333_2.pdf>.    [6]   See for example Charanne B.V. and Construction Investments S.A.R.L. v. Spain, SCC No. 062/2012; RREEF v. Spain, ICSID Case No. ARB/13/30; Eiser Infrastructure v. Spain, ICSID Case No. ARB/13/36; Blusun v. Italy, ICSID Case No. ARB/14/3; Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s International Arbitration practice group, or the following: Cyrus Benson – London (+44 (0) 20 7071 4239, cbenson@gibsondunn.com) Penny Madden – London (+44 (0) 20 7071 4226, pmadden@gibsondunn.com) Jeffrey Sullivan – London (+44 (0) 20 7071 4231, jeffrey.sullivan@gibsondunn.com) Rahim Moloo – New York (+1 212-351-2413, rmoloo@gibsondunn.com) Ceyda Knoebel – London (+44 (0)20 7071 4243, cknoebel@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 1, 2018 |
Drilling Down on DrillCos

Houston partner Michael Darden is the author of “Drilling Down on DrillCos,” [PDF] published by Oil & Gas Investor in March 2018.

February 23, 2018 |
EPA In The Trump Era: The DOJ’s 3rd-Party Payment Policy

Washington, D.C. partner Raymond B. Ludwiszewski is the author of “EPA In The Trump Era: The DOJ’s 3rd-Party Payment Policy,” [PDF] published by Law360 on February 23, 2018.

January 22, 2018 |
2017 Year-End Environmental Update for the Oil & Gas Industry

Click for PDF With the beginning of a new presidential administration, 2017 was a year of notable transition in key areas of environmental law and policy.  Not surprisingly, few sectors experienced that transition more than the oil and gas sector.  At the signing of his Executive Order on Promoting Energy Independence and Economic Growth, President Trump announced in March that we are seeing the “start of a new era in American energy and production.” New regulatory activity in 2017 was heavily directed towards reconsideration of previously promulgated regulations and policies, with an emphasis on those impacting greenhouse gases (i.e., CO2 and methane).  In addition to climate-related actions—at both the federal and state levels—2017 saw other key developments in areas of site remediation, water pollution, permitting, and leasing that will impact conventional and unconventional oil and gas exploration in the coming year.  Other cases addressed important cross-cutting litigation issues concerning evidentiary standards, jurisdiction, and defenses.  On the transactional side, we saw strong merger and acquisition activity through the third quarter of 2017. We are pleased to report on these and other major developments in the environmental field that particularly impacted the energy industry.  Below are snapshots of important climate change developments, other regulatory and policy developments, enforcement initiatives, and other notable litigation and business trends that impacted the sector in 2017.  More detailed information is available by clicking on the appropriate links to the full report, which appears below the summaries, and which contains analyses of additional cases and developments that may impact your business. We are happy to discuss these and other developments, and their implications for your business – today and in the future.  Thank you, and we hope you have another successful year in 2018. Climate Change and Greenhouse Gases – Regulatory Actions, Notable Cases, and Governance Trends When President Trump assumed office in January 2017, the Justice Department was defending challenges to some of the most central regulatory actions undertaken by the previous administration to address greenhouse gas emissions.  EPA’s Clean Power Plan, its implementation having been stayed by the Supreme Court pending judicial review, was awaiting a decision by the D.C. Circuit following an en banc oral argument in September 2016.  EPA and DOI rules to address methane emissions from certain oil and gas sources were also in the midst of litigation, with looming compliance deadlines.  On March 28, 2017, President Trump – accompanied by the Vice President, the Secretaries of Energy and Interior, and the EPA Administrator – signed the Executive Order on Energy Independence, thereby officially launching a broad review of these and other regulations and policies impacting America’s energy sector.  The Justice Department immediately filed a notice of the Executive Order with the D.C. Circuit, announcing the initiation of a review of the Clean Power Plan, and seeking abeyance of the litigation, and EPA and DOI began to take steps to reconsider prior carbon dioxide and methane emission regulations, and to further delay certain pertinent regulatory compliance deadlines during the period of reconsideration. Clean Power Plan Repeal – On October 16, 2017, EPA published a proposed rule to repeal the Clean Power Plan on the grounds that it exceeded EPA’s statutory authority under a proposed change in the Agency’s interpretation of Section 111 of the Clean Air Act.  The key legal interpretation at issue concerned the authority of EPA to issues emissions guidelines that contemplate covered sources taking actions “beyond the fenceline” of their facilities to meet governing emissions reduction standards.  The public comment period was extended until January 16, 2018 (and is further expected to be extended until April 26, 2018), and EPA recently announced its intention to schedule additional “listening sessions” in San Francisco, CA, Gillette, WY, and Kansas City, MO. Clean Power Plan Replacement – On December 18, 2017, EPA published an Advanced Notice of Proposed Rulemaking (“ANPRM”) to solicit information from the public as EPA considers whether or not to propose a future rule setting emission guidelines to limit greenhouse gases from existing electric utility generating units.  Specifically, EPA solicits comment on the roles, responsibilities, and limitations of the federal government, state governments, and regulated entities in developing any Clean Power Plan replacement rule, and also on the appropriate scope of such a rule and associated technologies and approaches.  EPA is accepting public comments on the ANPRM until February 26, 2018. Methane:  EPA and DOI Rule Reconsiderations and Implementation Delays – On March 2, 2017, EPA withdrew its Information Collection Request previously issued to owners and operators in the oil and gas industry seeking information on equipment and emissions at existing oil and gas operations.  In April, EPA announced it would reconsider certain fugitive emissions requirements in its final rule (issues in August 2016) setting emissions standards for new, reconstructed, and modified oil and gas operation sources, and after unsuccessfully seeking a temporary stay of the rule during reconsideration, it formally proposed a two-year stay of the new source performance standards.  Similarly, on October 5, 2017, DOI proposed to delay until January 2019 certain requirements in its 2016 rule addressing flaring and venting at oil and gas operations. Changes to Regulatory Economic Analysis of Carbon/Methane Rules –  Pursuant to Executive Order 12866, issued by President Clinton in 1993, federal agencies are to assess the costs and benefits of significant proposed rules.  President Obama created the Interagency Working Group on the Social Cost of Carbon in part to provide a reasoned economic basis for the assessment of costs or benefits associated with rulemakings designed to address greenhouse gases.  President Trump disbanded that Working Group in 2017, and agencies such as EPA and DOI made significant changes in the manner in which they calculated the Social Cost of Carbon (and also the Social Cost of Methane).  The result of these economic methodology changes – including using an increased discount rate, limiting assessment of “co-benefits,” and considering only costs based on effects within the United States – impacts the analysis and presentation of the costs and benefits of any subsequent proposed rules addressing carbon or methane emissions. U.S. Withdrawal from Paris Agreement – On June 1, 2017, President Trump announced that the U.S. would withdraw from the Paris Agreement, though it remains a signatory to the U.N. Framework Convention on Climate Change.  Under the terms of the Paris Agreement, however, parties may not formally provide valid notice of withdrawal until November 4, 2019 (three years after the Agreement entered into force), and may not subsequently withdraw until November 4, 2020 (coincidentally the day after the next U.S. Presidential election).  Following the President’s announcement, several initiatives were launched to coordinate state, local, and private sector actions to address climate change, including the formation of a Climate Mayors group (nearly 400 mayors, co-chaired by the Mayors of Los Angeles, Houston, Boston, and Knoxville), and America’s Pledge (co-chaired by Michael Bloomberg and California Governor Brown). Climate Change Lawsuits and State Attorney General Investigations – 2017 saw a dramatic rise in the number of lawsuits filed in state and federal courts, as well as in foreign jurisdictions, to address alleged injuries relating to climate change.  In July 2017, the Counties of Marin and San Mateo, and the City of Imperial Beach, filed separate suits in California state courts against thirty-seven fossil-fuel companies, claiming that defendants were liable for injuries allegedly related to climate change and sea level rise.  San Francisco and Oakland filed similar complaints against a smaller group of large fossil-fuel companies.  Recently, on January 9, 2018, New York City filed a similar lawsuit.  These cases are on the heels of an earlier lawsuit filed by an Oregon-based group called Our Children’s Trust against the U.S. government, under a public trust doctrine, seeking broad greenhouse gas restrictions nationwide.  The district court in Oregon denied the U.S. government’s motion to dismiss, and the Ninth Circuit heard oral argument on December 11, 2017 on the government’s petition for a writ of mandamus.  International judicial fora are also increasingly seeing climate change-related lawsuits, with actions having been filed in the Netherlands, Norway, Switzerland, India, and New Zealand, among other countries. State and Local Legislative Activities – In July 2017, the California legislature took action to extend the state’s cap-and-trade program (AB 32) from January 1, 2021 through December 31, 2030.  Other states, and notably many cities (the Climate Mayors, for example, maintain a compendium of municipal actions undertaken in response to climate change), have taken additional steps in 2017 to address climate change mitigation. Climate-Related Disclosures and Investor/Shareholder Resolutions and Trends – 2017 saw a significant increase in shareholder proposals focused on environmental issues, with the largest group pertaining to climate change.  For the first time, three such climate change proposals seeking, among other things, detailed climate-risk analyses and exposure data, received majority support.  Significantly, in March 2017, BlackRock announced in its 2017-2018 engagement priorities that it is focusing on companies’ approaches to adapting to and mitigating climate risks.  Vanguard also updated its proxy voting guidelines in 2017 to focus on increased scrutiny of the merits of environmental and climate-related proposals. Other Regulatory and Litigation Developments The past year also saw a number of significant cases and regulatory developments in other areas that could impact the oil and gas sector this year and beyond.  Courts continued to scrutinize challenged regulations, at the federal and state levels, and private parties brought a variety of litigation claims involving pipeline spills, infrastructure and plant expansions, endangered species, oil and gas drilling, and more.  In addition, several potential litigation trends emerged in 2017, and the Trump administration may also be moving to significantly reassess its approach to the permitting of new sources under the Clean Air Act. Here are some of the highlights: Renewable Fuel Standards – On July 28, 2017, the D.C. Circuit issued an opinion overturning EPA’s interpretation of certain waiver authorities in the Renewable Fuel Standard program.  In an effort to justify its departure from statutorily mandated renewable fuel volumes, EPA sought to use demand-side constraints to support a waiver based on “inadequate domestic supply.”  The court vacated EPA’s decision to reduce total RFS volume requirements for 2016, and remanded to the Agency for consideration in light of the opinion.  On November 30, 2017, EPA also finalized volume requirements for renewable fuels in 2018 (petitions to review that rule have already been filed with the D.C. Circuit).  The Tenth Circuit also struck down EPA’s prior denial of a small refinery exemption petition submitted by a Wyoming refinery based upon economic hardship. Natural Gas Exports – The D.C. Circuit rejected claims brought by environmental groups, who challenged the Department of Energy’s Environmental Impact Statement recommending the approval of an application to export natural gas to various non-free trade countries.  The court found the Department’s environmental assessment to be adequate, finding that a more detailed examination of the relationship between increased export and domestic pricing was not required. Opening Areas for New Energy Exploration – On January 4, 2018, Secretary Zinke announced an expansion of the Outer Continental Shelf oil and gas leasing program, through a Draft Proposed Program for 2019-2024 that includes forty-seven potential lease sales in twenty-five of the twenty-six planning areas.  Public meetings will be scheduled, and comments accepted, prior to DOI issuing a Proposed Program and Draft Programmatic EIS.  Within days of this announcement, however, Secretary Zinke removed the coastline of Florida from consideration for future offshore drilling.  In addition, the final tax-reform package signed into law by President Trump in December 2017, known as the Tax Cuts and Jobs Act, opened non-wilderness 1002 Area of the Alaska National Wildlife Refuge (“ANWR”) for oil exploration. FERC Required to Consider Downstream Emissions Projections of Pipeline – FERC had previously approved the construction and operation of the Southeast Market Pipelines Project, which was projected to carry over one billion cubic feet of natural gas to destinations in the Southeast.  Upon challenge under the National Environmental Policy Act, on August 22, 2017, the D.C. Circuit held that FERC should have estimated and considered power plant carbon emissions that would foreseeably result from the natural gas distribution from the pipeline project.  FERC subsequently issued a Supplemental EIS on September 27, 2017. County Ordered to Consider Risk of Hazardous Material Release in Refinery Expansion – Kern County, California approved a proposal to expand a refinery by increasing rail facilities to better accommodate increased Bakken crude deliveries.  A California appeals court held that the Environmental Impact Report issued pursuant to CEQA failed to adequately estimate risks of hazardous materials release, and remanded the case for further proceedings. U.S. Government Found to be Liable for Cleanup as “Owner” of Contaminated Property – The Tenth Circuit found that the U.S. is liable under CERCLA as an “owner” of a contaminated mining site on federal land.  The court rejected the government’s arguments that it lacked certain indicia of ownership and control. Waters of the United States:  No Solution on the Horizon – Since the Supreme Court’s decision in Rapanos, the jurisdictional extent of the Clean Water Act has been unclear.  On June 29, 2015, following public notice and comment, the Agencies published a final rule defining the scope of the phrase “waters of the United States.”  Thirty-one States and a number of other parties sought judicial review of the rule in various district and circuit courts.  Ultimately, on October 9, 2015, the Sixth Circuit stayed the 2015 Clean Water Rule nationwide.  On January 13, 2017, the U.S. Supreme Court granted certiorari on the question of whether the court of appeals has original jurisdiction to review challenges to the 2015 Clean Water Rule. On February 28, 2017, President Trump issued an Executive Order entitled “Restoring the Rule of Law, Federalism, and Economic Growth by Reviewing the ‘Waters of the United States’ Rule.”  In accordance with the Executive Order, the EPA and the Corps of Engineers proposed a rule to rescind the 2015 Clean Water Rule on June 27, 2017.  On November 16, 2017, the Agencies proposed to amend the effective date of the 2015 Clean Water Rule, proposing that the 2015 Clean Water Rule would not go into effect until two years after the proposal was finalized and published in the Federal Register. In addition to the uncertainty caused by changing regulatory landscape, many courts are now addressing issues of alleged groundwater contamination, and theories of Clean Water Act (“CWA”) liability.  In Virginia, one federal court found CWA liability arising from purported arsenic discharges from coal ash, and a finding of a sufficient hydrological connection between groundwater and surface water.  In South Carolina, the district court held that contamination from a leaking pipeline that migrated through soil and groundwater into a wetland constituted non-point source pollution not covered by the CWA. Anticipated Agency Reassessment of Clean Air Act’s New Source Review Program – As part of the Trump administration’s efforts to reduce regulatory burdens, EPA and the Department of Commerce each identified comprehensive New Source Review (“NSR”) reform as a priority.  In October 2017, EPA announced that it would convene an NSR Task Force to identify opportunities for streamlining permitting processes, or pursuing regulatory or policy change to increase flexibilities and decrease certain burdens.  On December 7, 2017, as part of this overall effort, Administrator Pruitt announced a change in EPA’s NSR policy, ensuring that the Agency would rely more upon a company’s assessment and explanations concerning potential to emit when determining NSR applicability. Recovery of Remediation Costs at Unused Power Sites.  The Supreme Court of Ohio affirmed the Ohio Public Utilities Commission’s decision to permit recovery of remediation costs at retired manufactured gas plants through rate adjustments. Federal Courts Continue to Draw Jurisdictional Lines over Domestic Energy Production.  The U.S. District Court of the District of Oklahoma rejected Sierra Club’s citizen suit alleging that natural gas companies caused earthquakes in the state.  Sierra Club sought a variety of injunctive relief to limit exploration activities.  The district court declined to exercise jurisdiction, and dismissed the case noting that Oklahoma agencies were empowered to address the issues, not federal courts.  In another case, the Fourth Circuit also sided with a state’s right to regulate mining—supporting Virginia’s right to ban uranium mining despite the Atomic Energy Act’s preemptive scope. Fifth Circuit Limits the Scope of the Oil Pollution Act’s Third-Party Defense.  The Fifth Circuit found that a party may not assert the Oil Pollution Act’s third-party defense where a discharge was caused in connection with a contractual relationship that relates to the act or omission “in the sense that the third party’s acts and omissions would not have occurred but for the contractual relationship.”  This decision limits the availability of the third-party defense under the OPA. No Duty for Oil Companies to Protect State Board from Increased Flood Protection Costs.  Several parishes in Louisiana have sued oil and gas developers, alleging that damage to the coast caused by drilling and canal dredging contributed to the loss of coastal wetlands.  The wetlands form a hurricane buffer for New Orleans and the authority argued their loss meant more work and expense in protecting and maintaining levees.  In 2015, a federal lawsuit filed against ninety-seven companies by the a levee board was dismissed by the U.S. District Court of Louisiana.  This year, that dismissal was upheld by the Fifth Circuit, which found that neither federal nor Louisiana law created a duty to protect the parishes from coastal erosion.  The Supreme Court declined to hear plaintiff’s appeal.  Time will tell whether the Fifth Circuit’s decision will influence the various other related state court cases that remain pending. Tort Litigation: Significant Case Updates – 2017 saw several developments in the civil litigation matters brought by plaintiffs against oil and gas companies.  These include: The Eighth Circuit affirmed a district court’s denial of class certification because plaintiffs could not show that common questions of law or fact were present in their claim that Exxon had failed to properly maintain its pipeline in violation of property easements. In a fracking dispute, the Eighth Circuit overturned a district court decision excluding plaintiff’s expert report and granting the company’s motion for summary judgment.  On appeal, the Eighth Circuit reversed, finding the district court abused its discretion by excluding plaintiffs’ expert, and that the plaintiff had submitted enough facts to enable a reasonable jury to find that waste had migrated under plaintiffs’ property. A Mississippi Court of Appeals found that the operation of a gas pipeline is not an ultrahazardous activity that supports a strict liability finding.  The court noted that the transportation of liquid propane is highly regulated, that propane is commonly used in homes and industries, and is generally “of great value to commerce and local, regional, and nationwide communities.” The U.S. District Court for the Northern District of Oklahoma found that the operation of an oil refinery and tank farm could constitute an ultrahazardous activity.  In this case, a landowner brought suit against the former operators of a refinery that once existed on land plaintiffs now occupy.  Though the court dismissed claims for negligence per se and fraud, it declined to dismiss Plaintiffs’ strict liability claim, finding that “allegations that the Operational Defendants failed to exercise due care are not mutually exclusive with a claim of strict liability” based on ultrahazardous activity. Several federal cases also provided additional guidance on the admissibility of expert testimony.  The Eighth Circuit appears to have lowered the bar for scientific reliability, finding that a “crude and imperfect” expert report on fate and transport issues should have been admitted by the district court.  Despite obvious flaws, the court found the report “was scientifically valid, could properly be applied to the facts of this case, and, therefore, was reliable enough to assist the trier of fact.”  On the other hand, the Sixth Circuit affirmed the exclusion of a toxicology expert because he had failed to proffer “actual proof” to support his opinion.  Finally, in the Middle District of Alabama, the district court excluded plaintiff’s experts because they did not offer supportable opinions regarding medical causation, and had no proof that any plaintiff was exposed to a specific dose of an emission.  The court excluded the opinions because they failed to meet the Eleventh Circuit’s clear McClain standard, which states that “the individual must have been exposed to a sufficient amount of the substance in question to elicit the health effect in question.” National Enforcement Initiatives EPA’s National Enforcement Initiatives Focusing on Air and Energy Extraction – EPA selects National Enforcement Initiatives every three years, and recently has focused on energy extraction activities, including flaring and venting, and reducing hazardous air pollutants.  Though recent reports suggested a downturn in the number of enforcement actions undertaken by EPA in 2017 – with approximately 1900 enforcement actions commenced nationally – it is expected that enforcement activity in 2018 will likely increase as investigations mature and enforcement priorities are set by the Agency leadership.  Indeed, for most of 2017, the relevant EPA offices were led by career officials in acting capacities.  With the Senate confirmation of William Wehrum to lead EPA’s Office of Air and Radiation (confirmed on November 9, 2017), Susan Bodine to lead EPA’s Office of Enforcement and Compliance Assurance (confirmed on December 7, 2017), David Ross to lead EPA’s Office of Water, and Matthew Leopold to be EPA’s General Counsel (both confirmed on December 14, 2017), EPA’s political leadership in areas most likely to drive enforcement affecting the oil and gas industry are now in place.  President Trump’s nominee to lead the Justice Department’s Environment & Natural Resources Division, Jeffrey Clarke, has not yet been confirmed, and that Division continues to be led by Acting Assistant Attorney General Jeffrey Wood. The 2017 Energy Mergers and Acquisition Roundup Oil and Gas Sector M&A Activity Strong in 2017 – The global oil and gas industry had approximately $137 billion in M&A activity in the first half of 2017, representing a significant increase relative to the prior year.  Key strengths appear to be activity in the upstream sector, though the midstream segment saw several significant deals in 2017 as well.  Power and utilities M&A activity, on the other hand, posted lower numbers in general than the prior year, though infrastructure transactions appear poised to drive M&A activity in 2018. More detailed analyses of these and related topics follow. Climate Change and Greenhouse Gases – Regulatory Actions, Notable Cases, and Governance Trends Over the past year, efforts to address climate change have risen to the forefront of domestic and international jurisdictions alike.  These efforts, however, have not been limited to legislative action.  Rather, both state and private actors have been the targets of climate change-related litigation and investigations around the world.  It remains to be seen how effective these efforts will be, but it is clear plaintiffs and investigative bodies are continuing to pursue novel claims relating to climate change. EPA’s Clean Power Plan – Repeal Proposal and Potential Replacement Options On October 23, 2015, EPA finalized a rule pursuant to Section 111 of the Clean Air Act, referred to as the “Clean Power Plan,” which set guidelines for carbon dioxide (CO2) emissions from existing fossil fuel-fired power plants.[1]  The Agency stated that the Clean Power Plan was intended to “lead to significant reductions in CO2 emissions [by 2030], result in cleaner generation from the existing power plant fleet, and support continued investments by the industry in cleaner power generation to ensure reliable, affordable electricity now and into the future.”[2] Twenty-seven states and a variety of other parties challenged the Clean Power Plan, seeking review of the rule by the United States Court of Appeals for the District of Columbia Circuit.[3]  In February 2016, the United States Supreme Court stayed the implementation of the Clean Power Plan rule pending the resolution of that legal challenge.[4] On March 28, 2017, while that action remained pending before the D.C. Circuit, President Trump signed his Executive Order on Energy Independence, directing EPA to review and, if appropriate, “publish for notice and comment proposed rules suspending, revising, or rescinding” the Clean Power Plan.[5]  In April, in light of the Trump administration’s decision to review the Clean Power Plan, the D.C. Circuit held the litigation in abeyance, requiring periodic status reports from the government.[6]  The D.C. Circuit has extended the stay of litigation several times since, and EPA’s most recent status report to the court submitted on January 10, 2018 requested that the court continue to hold the case in abeyance pending conclusion of ongoing related rulemakings. On October 16, 2017, EPA formally proposed to repeal the Clean Power Plan.[7]  In the proposed rule, EPA articulated a revised interpretation of the Clean Air Act (“CAA”) provision upon which the Clean Power Plan is based, proposing that CAA section 111(a)(1) should be construed to mean that emission reduction measures “must be based on a physical or operational change to a building, structure, facility, or installation at that source, rather than measures that the source’s owner or operator can implement on behalf of the source at another location.”[8]  Under such an interpretation, the EPA determined that the Clean Power Plan “exceeds the EPA’s statutory authority and would be repealed.”[9]  The comment period on the proposed rule has been extended until January 16, 2018, and EPA is reportedly considering a further extension of the comment period until April 26, 2018. In Clean Power Plan repeal proposal, EPA did not offer any alternative to the existing framework, noting that “[t]he EPA has not determined the scope of any potential rule under CAA section 111(d) to regulate greenhouse gas (“GHG”) emissions from existing EGUs, and, if it will issue such a rule, when it will do so and what form that rule will take.”[10]  On December 18, 2017, EPA issued an Advance Notice of Proposed Rulemaking (“ANPRM”) to solicit information from the public about a potential Clean Power Plan replacement rulemaking.  EPA specifically sought comment on several topics relating to the roles and responsibilities of the State and EPA in regulating GHGs from existing power plants, and the Agency’s interpretation of Clean Air Act Section 111(a)(1) as limiting applicable emission measures to those that can be applied to or at a stationary source, at the source-specific level.  EPA is accepting public comments on the ANPRM until February 26, 2018. In spite of the EPA’s recent actions in proposing to repeal the Clean Power Plan and to solicit comment on possible options for replacing the regulation, a number of states have proceeded with implementing the requirements of the plan locally, even though it is yet to go into effect nationally.  California, for example, published its compliance plan for the Clean Power Plan on August 5, 2016, and it released the final version of that plan in July 2017.[11]  Separately, fifteen states—California, Colorado, Connecticut, Delaware, Hawaii, Massachusetts, Minnesota, New York, North Carolina, Oregon, Puerto Rico, Rhode Island, Vermont, Virginia, and Washington—formed the United States Climate Alliance and reaffirmed their “commit[ment] to meeting the Clean Power Plan targets.”[12] 2017:  Methane Regulation Update EPA – New Source Performance Standards The EPA’s Methane Rule (new source performance standards under the Clean Air Act), went into effect on August 2, 2016, and required regulated entities to monitor their sources for certain fugitive emissions of methane, and to provide EPA with a monitoring report identifying those leaks by June 3, 2017.  40 C.F.R. § 60.5397a(f). On April 18, 2017, EPA announced that it would reconsider its “fugitive emissions monitoring requirements” and issued an administrative stay of the compliance date for those requirements.  Letter from E. Scott Pruitt to Howard J. Feldman, Shannon S. Broome, James D. Elliott, & Matt Hite, Convening a Proceeding for Reconsideration, at 2 (Apr. 18, 2017). On June 5, 2017, EPA published a notice of reconsideration and partial stay in the Federal Register, staying the implementation of parts of the Methane Rule for ninety days pending reconsideration.  82 Fed. Reg. at 25,731–32.  The notice specified that it went into effect on June 2, 2017, before the effective day of the regulation, even though the notice itself was published after the regulation’s effective date.  Id. In response to this action, environmental groups filed an emergency motion in the United States Court of Appeals, District of Columbia Circuit arguing that the concerns and issues raised by EPA as necessitating the stay, had or could have been previously considered in the regular comment period for the proposed rule.  EPA and industry groups argued that the stay was lawful. The thrust of EPA’s rationale for the reconsideration and the stay was that industry groups didn’t have the proper time and opportunity to comment on the proposed rule.  But on July 3, 2017, the court ruled against EPA and the industry and explained that “[t]he administrative record . . . makes clear that industry groups had ample opportunity to comment on all four issues on which EPA granted reconsideration, and indeed, that in several instances the agency incorporated those comments directly into the final rule.”  Clean Air Council v. Pruitt, 862 F.3d 1, 14 (D.C. Cir. 2017).  And therefore, “EPA’s decision to impose a stay, in other words, was ‘arbitrary, capricious, [and] . . . in excess of [its] . . . statutory . . . authority.'”  Id.  After a brief reprieve from this ruling, the court essentially reaffirmed its July 5, 2017 ruling on July 31, 2017, thereby paving the way for the EPA’s methane regulations to take effect and a petition for rehearing was denied. To address the impending compliance deadlines in the rule, on June 16, 2017 EPA proposed to extend its stay for two years, thereby allowing EPA to reconsider the entire rule more broadly.  82 Fed. Reg. 27,645 (June 16, 2017).  The D.C. court that was considering the temporary stay was clear that its ruling on the unlawfulness of that action did not in any way limit “EPA’s authority to reconsider the final rule and to proceed with its June 16 NPRM.”  Clean Air Council, 862 F.3d at 14.  On November 1, 2017, EPA issued a Notice of Data Availability for its proposed methane rule stay, including additional information relative to perceived rule implementation challenges (i.e., possibility of a phase-in period), and new cost analysis.  This rule has not yet been finalized. While the Methane Rule addressed emissions from new sources, EPA had previously issued an Information Collection Request to existing sources that could be used in any subsequent regulation of those sources.  On March 2, 2017, following several States’ requests, EPA withdrew the ICR based, in part, upon a further assessment of its anticipated costs. BLM – Flaring and Venting On November 18, 2016, BLM issued the Waste Prevention, Production Subject to Royalties, and Resource Conservation Rule (the “Rule”).  See 81 Fed. Reg. 83,008.  The rule sought to reduce natural gas waste and focused on venting and flaring of natural gas.  Id.  The Rule’s effective date was January 17, 2017. Id.  After the publication of the rule, industry groups filed suit to stop its implementation, but those suits were ultimately denied and the rule was allowed to take effect.  See Wyoming v. United States Dep’t of the Interior, No. 2:16-CV-0280-SWS, 2017 WL 161428, at *12 (D. Wyo. Jan. 16, 2017) On June 15, 2017, BLM issued a notice that it was postponing certain trigger dates in the rule.  See Waste Prevention, Production Subject to Royalties, and Resource Conservation; Postponement of Certain Compliance Dates, 82 Fed. Reg. 27,430.  The affected compliance deadlines are not until January 17, 2018.  Id. In July 2017, the State of California, the State of New Mexico, and seventeen conservation and tribal groups filed suit alleging that the decision by BLM to delay the implementation of the methane rules was unlawful.  State v. United States Bureau of Land Mgmt., No. 17-CV-03804-EDL, 2017 WL 4416409, at *3 (N.D. Cal. Oct. 4, 2017).  Plaintiffs in the lawsuit contended that the BLM essentially had not properly considered the impact of the postponement of the rule.  Id.  And on October 4, 2017 the court ruled that “[b]ecause of the complete failure to consider the foregone benefits of compliance, Defendants have failed to” show that “justice so requires” the postponement of the rule.  Id. at *13.  Therefore, the court ultimately vacated the postponement of the rule allowing the rule to move forward and take effect in 2018.  Id. at *14. On October 5, 2017, BLM published an NPRM to delay the implementation of the BLM methane rule Waste Prevention, Production Subject to Royalties, and Resource Conservation; Delay and Suspension of Certain Requirements, 82 Fed. Reg. 46458.  The rule proposes “to temporarily suspend or delay certain requirements contained in the 2016 final rule until January 17, 2019” so the BLM can review “the 2016 final rule” in order to avoid costs on operators.  Id. Additionally, on December 8, 2017, the BLM filed a notice of appeal of the Northern District of California’s October ruling. EPA and DOT – Reexamining Tailpipe Emissions Rules In August 2017, EPA and the Department of Transportation (“DOT”) opened a public comment period on the reconsideration of the January 2017 Final Determination for greenhouse gas emissions standards for cars and light trucks for model years (“MY”) 2022-2025.  Separately, the EPA is also taking comment on whether the MY 2021 standards are appropriate. EPA regulations require the EPA to determine whether or not existing standards for model years remain appropriate under section 202(a) of the Clean Air Act.  President Trump first announced in March 2017 that he was directing the EPA to review its car and light-duty truck tailpipe emissions standards for MY 2022 through 2025, and his administration later indicated its intent to reopen the matter of the standards for MY 2021.  California, thirteen other states, and Washington, D.C. have already adopted stringent tailpipe standards through 2025, as authorized by provisions of the federal Clean Air Act.  If, in an attempt to avoid a national patchwork of fuel efficiency regulations, the EPA attacks this authority after relaxing fuel efficiency standards for MY 2021 through 2025, California and like-minded states will almost certainly sue the agency. In addition, EPA and DOT announced in August 2017 formal steps to begin reconsidering the greenhouse gas pollution and fuel economy standards of large trucks, focused on the standards for freight trailers.  The standards set by the Obama administration for medium- and heavy-duty vehicles for MY 2021-2027 closed a regulatory loophole for new large truck components known as trailers and gliders (in essence, truck frames with old engines), applying heavy-duty vehicle standards to these truck components for the first time.  The compliance deadline had been set for the beginning of 2018.  However, in response to industry concerns that EPA lacked the requisite authority under the Clean Air Act to regulate the trailer and glider sectors, EPA announced it would be reexamining this tailpipe emissions rule. The EPA’s Shifting Regulatory Cost-Benefit Analysis The standard rulemaking procedure of EPA and other federal regulatory agencies typically includes an analysis of the potential economic costs and benefits resulting from the promulgation of a new rule.  In 2017, EPA altered its formula for conducting this cost-benefit analysis, shifting the perceived value of certain areas of environmental regulation, particularly measures designed to address climate change.  An example of this change is the EPA’s updated estimate of the social cost of carbon (“SCC”). The SCC is meant to be a comprehensive estimate of economic damage caused by climate change, and served as a metric for assigning a monetary value to regulatory efforts designed to limit carbon emissions.  A lower SCC can diminish the estimated benefits of regulations that reduce carbon emissions, thereby impacting any ultimate cost-benefit analysis pertaining to a regulatory proposal. In 2009, the Obama administration created the Interagency Working Group on the Social Cost of Carbon, assigning the working group the complex task of quantifying a cost relative to a ton of carbon dioxide emitted to the atmosphere.  EPA, prior to 2017, used the working group’s most recent central estimate— $45 dollars per ton (adjusted for inflation) in 2020—in its regulatory economic analysis of the Clean Power Plan. In March 2017, President Trump issued an Executive Order which disbanded the working group and stated that the group’s reports and findings would “be withdrawn as no longer representative of governmental policy.”  The Executive Order directed agencies to instead comply with a 2003 OMB guidance on regulatory impact analysis which emphasized focusing on the benefits and costs that accrue to citizens and residents of the United States when valuing changes in greenhouse gas emissions, as distinct from including global benefits and costs in the calculus. The initial impact of the Executive Order was felt in October, when EPA proposed to repeal the CPP.  The proposal explains the consequences of such a repeal, and estimates the cost of one ton of emissions of carbon dioxide to be between $1 and $6 in the year 2020, a reduction of 87% to 97% from the figure used by the Obama administration. Three principal factors drove the drastic divergence between the SCC calculations of the two presidential administrations: Abandoning the Global Perspective.  Climate change, to a greater extent than any other environmental issue, is a phenomenon wherein domestic activity within an individual nation can cause significant environmental impacts on a global scale.  Nevertheless, as the EPA spokesman remarked in October, the agency’s CPP repeal proposal “presents a scenario looking specifically at domestic climate impacts.”  Whereas President Obama’s EPA took a global approach to calculating the SCC, considering costs stemming from developments abroad, President Trump’s EPA is now calculating the cost of carbon only based on effects within the United States.  This policy has decreased the updated SCC figure relative to calculations that incorporated global costs. Modifying the Accounting of Co-Benefits.  The EPA no longer counts a portion of the health benefits that the Obama administration predicted would arise as side effects of reducing carbon emissions.  President Obama’s EPA accounted for the fact that levels of sulfur dioxide, nitrogen dioxide and particulate matter would decline along with greenhouse gases as a result of the CPP.  In contrast, EPA now does not count the benefits of any such reductions if the pollutants are already below levels the agency has deemed safe in other regulatory standards.  For example, with regard to particulate matter, the agency’s new cost-benefit analysis assumes there is no more risk to human health below the levels currently required by the National Ambient Air Quality Standards, which is 12 micrograms per cubic meter of fine particles (PM2.5). Increased Discount Rates.  When economists determine the present value of costs or benefits that will be realized in the future, their standard practice is to discount the future costs or benefits by a certain rate.  In the context of climate change regulation, this “discount rate” conceptually represents the opportunity cost of spending society’s dollars on mitigating climate change (rather than what those resources may have otherwise been invested in).  Increasing the discount rate effectively reduces the estimated cost of emitting carbon, since many of the costs of climate change appear in the distant future.  The standard Obama-era practice was to apply a 2.5, 3, and 5% annual discount rate in the climate change context.  In the CPP repeal proposal, however, EPA considered 3% and 7% annual discount rates for the SCC.  Given the decades over which the discount rate is applied in this context, employing the 7% rate in particular applies substantial downward pressure on the SCC, reducing the value of the avoided costs that result from regulating carbon output. These methodological changes have had a similar impact on EPA’s social cost of methane metric.  The agency recently set an interim social cost of methane at $55 per metric ton in 2020, over twenty-five times less than the estimate of the Obama administration.  Similar to its treatment of carbon emissions, in doing so EPA only considered the domestic cost of methane emissions and employed higher discount rates in its calculation. It is likely that these changes to the economic analysis for carbon and methane limits will be subject to judicial scrutiny in the context of any challenge to future Clean Power Plan repeal and/or replacement rulemakings. California & New York:  Climate Change Cases In July 2017, the Counties of Marin and San Mateo and the City of Imperial Beach filed separate lawsuits against thirty-seven fossil-fuel companies, claiming that the companies were liable under various theories of California tort law, including public nuisance, private nuisance, strict liability, negligence, and trespass, for injuries related to climate change and sea level rise.[13]  Two additional cities—San Francisco and Oakland—filed similar complaints against five fossil-fuel companies on September 19, but asserted only causes of action for public nuisance, also based on climate change and sea level rise.[14]  The defendants have removed all of these actions to U.S. District Court for the Northern District of California.  The plaintiffs in the actions have filed motions to remand, and briefing on those motions is proceeding.  Recently, the County of Santa Cruz, the City of Santa Cruz, and the City of New York filed similar lawsuits.[15] Oregon:  Juliana v. United States In August 2015, twenty-one individuals aged 8-19, certain environmental organizations, and former NASA climate scientist James Hansen, filed an action against the United States and multiple agencies and officials in federal court in Oregon.[16]  The Juliana case is one of several similar cases brought by an Oregon-based advocacy group called Our Children’s Trust.  The plaintiffs claim that the government’s failure to curb emissions has caused damaging effects relating to climate change, in violation of the plaintiffs’ constitutional rights to life, liberty, and property.  They seek an injunction and measures to restrict emissions under the “public trust” doctrine, arguing that the government has a duty to preserve certain natural resources in trust for future generations.  The government sought dismissal of the case, arguing that the public trust doctrine does not apply to the federal government.  After the district court denied the motions to dismiss, the federal government filed a petition for a writ of mandamus with the Ninth Circuit, which stayed the district court litigation in July, pending resolution of the mandamus petition.  The Ninth Circuit held oral argument on December 11 and the matter has been submitted. Conservation Law Foundation Lawsuits The Boston-based Conservation Law Foundation (“CLF”) sued Exxon in September 2016, for failure to consider climate change impacts in its plans under federal environmental statutes.[17]  The court subsequently granted in part and denied in part Exxon’s motion to dismiss, holding that CLF did not have standing to sue for alleged injuries from future sea level rise or increased storms and flooding, but that the group did have standing to challenge actions that could cause pollution in the near future.  CLF filed an amended complaint on October 20, 2017.  A similar lawsuit was filed in federal court in Rhode Island in August 2017 against Royal Dutch Shell.[18]  CLF filed an amended complaint on October 25. Other Civil Lawsuits In September 2017, Stanford University professor Mark Jacobson filed a defamation lawsuit against the National Academy of Sciences and an independent researcher, Dr. Christopher Clack, who challenged Professor Jacobson’s methods and results in asserting that 10% of U.S. energy needs could be met with renewables.  The plaintiff seeks $10 million in damages based on allegations that Dr. Clack and the journal knowingly published false and misleading statements regarding his work. Exxon has been subject to two class action lawsuits relating to climate change.  In November 2016, a putative securities fraud class action against Exxon was filed in the Northern District of Texas, based on allegedly false statements about the value of its reserves.[19]  The same month, a group of former Exxon employees filed a putative class action against Exxon under the Employee Retirement Income Security Act, alleging that Exxon executives breached their fiduciary duties by investing in Exxon stock whose value they knew or should have known was artificially inflated due to business risks associated with climate change.[20] State Attorney General Investigations of Exxon Mobil Corp. On November 4, 2015, the New York Attorney General (“NYAG”) served Exxon with a subpoena under the State’s Martin Act, which generally prohibits deception related to the sale of securities.[21]  NYAG reportedly sought documents dating back to 1977 relating to whether Exxon misled the public and investors about the possible risks of climate change, in light of the company’s historical scientific research in that area.[22]  NYAG has since shifted its focus to whether Exxon adequately wrote down the value of its assets in view of the decline of oil prices and the potential impact of current and future regulation of greenhouse gases.[23]  Most recently, NYAG has focused on how the company applies its internal proxy cost of carbon to investment decisions, arguing that how the company applies that cost internally is inconsistent with public representations about it.[24] On March 29, 2016, a group of Democratic seventeen state attorneys general held a press conference to announce their intention to investigate potential deception relating to climate change in the fossil fuel industry.[25]  Around that same time, several state attorneys general, including Massachusetts,[26] California,[27] and the U.S. Virgin Islands,[28] announced that they were opening investigations into Exxon. ExxonMobil has challenged the subpoenas issued to the company in several different fora.  It filed suit in state and federal courts in Texas, alleging that the investigations were an abuse of process, violated ExxonMobil’s rights under the U.S. and Texas Constitutions, and constituted viewpoint discrimination.[29]  ExxonMobil also filed suit in Massachusetts state court, where the state Supreme Judicial Court heard oral argument in December 2017.[30]  While ExxonMobil has been producing documents to NYAG, it also continues to challenge the scope of the subpoena in New York state court.[31]  Most recently, ExxonMobil was denied leave to appeal a decision requiring the production of documents from its auditor,[32] and ExxonMobil was also ordered to produce certain employees, including the employee of a Canadian subsidiary, for depositions.[33] Legislative Activity On July 17, 2017, the California legislature passed Assembly Bill (“AB”) 398[34] to extend the state’s cap-and-trade program (AB 32) from January 1, 2021 through December 31, 2030.  AB 398 was passed in conjunction with AB 617,[35] which directs the development of a Community Air Protection Program. International Activity While U.S. judicial and legislative activity on climate change is the primary focus of this update, the area has also seen significant recent developments in the international arena.  Chief among these developments is the pursuit of cases abroad that are similar to the Juliana case in the United States, and which seek to force governmental regulation of greenhouse gas emissions.  The most notable of these cases is the Urgenda case in the Netherlands; the plaintiffs in June 2015 obtained a decision ordering the government to take more action to reduce greenhouse gas emissions in the country.[36]  The government has appealed the result, but a decision is still pending.  Following the success of the Urgenda case, a number of similar actions seeking to force government regulation have been filed in other countries, such as India,[37] Switzerland,[38] New Zealand,[39] and Norway.[40]  Additionally, infrastructure and construction projects and new power plants have been challenged in Austria[41] and South Africa[42] on the basis that they would increase emissions and contribute to climate change. International climate change cases have also been filed against corporations.  In Germany, for example, an action was filed in December 2015 against the German energy firm RWE by a Peruvian farmer.[43]  And in the Philippines, a petition against forty-seven fossil fuel companies was filed by Greenpeace Southeast Asia and other organizations with the Philippines Human Rights Commission.[44]  Similarly, a group of more than one hundred citizen groups and nineteen communities filed a complaint in the Philippines against the World Bank’s International Finance Corporation for allegedly fueling climate change through its investments in a Philippine bank.[45]  Finally, in Australia, in August 2017, shareholders filed suit against Commonwealth Bank of Australia for failing to acknowledge the risks of climate change in its business,[46] but voluntarily dismissed the case the next month after the Bank acknowledged climate change risks in its annual report.[47] 2017 Proxy Season – Climate Change Shareholder/Governance As in 2016, shareholder proposals focused on environmental issues were popular during the 2017 proxy season.  The largest group of environmental proposals submitted during the 2017 proxy season related to climate change, with sixty-nine such proposals submitted in 2017 compared to sixty-three in 2016.  Shareholder proposals focused on climate change were submitted not just to oil and gas companies, but also to companies in the financial services and technology industries.  Institutional Shareholder Services (“ISS”), a leading proxy advisory firm, recommended that shareholders vote “for” twenty-three of the twenty-eight proposals (or 82.1%) voted on in 2017 and “for” twenty-seven of the thirty-seven proposals (or 73.0%) of the proposals voted on in 2016. In 2017, there was an unprecedented level of shareholder support for environmental proposals, with three climate change proposals receiving majority support and climate change proposals averaging support of 32.6% of votes cast.  This compares to one climate change proposal receiving majority support in 2016 and climate change proposals averaging support of 24.2% of votes cast. Each of the three climate change proposals that passed requested the company to prepare a report on the impact of climate change policies, including an analysis of the impacts of commitments to limit global temperature change to two degrees Celsius: At Occidental Petroleum Corp., the proposal received support of 67.3% of votes cast by the company’s shareholders. PPL Corp., a utility holding company, received the proposal from the New York State Common Retirement Fund, and it received support of 56.8% of votes cast by the company’s shareholders, including CalPERS and other pension funds. At Exxon Mobil, the proposal received support from about 62.1% of votes cast by the company’s shareholders. These votes reflect the new willingness of institutional investors to support environmental proposals and the effect of increased pressure from their clients to influence companies on environmental issues.  In addition, the same proposal was submitted to eighteen other companies and voted on at ten companies, where it averaged 45.6% of votes cast. While various factors contributed to the success of the three climate change proposals that received majority support in 2017, several prominent institutional investors issued update guidance that may have influenced shareholder support. In March 2017, BlackRock announced in its 2017-2018 engagement priorities that it expects boards to have “demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk,” and that where it has concerns that a board is not “dealing with a material risk appropriately,” it may signal that concern through its vote.  Vanguard also updated its proxy voting guidelines in 2017 to provide that it would evaluate each environmental proposal on the merits and may support those proposals with a demonstrable link to long-term shareholder value. Additionally, ISS and Glass Lewis, the two most prominent proxy advisory firms, issued their updated 2018 voting guidelines.  ISS clarified that, when evaluating climate change shareholder proposals, it will now assess a company’s disclosure of its process for identifying, measuring and managing climate change risks.  Glass Lewis indicated that while it is generally supportive of the disclosure recommendations developed by The Task Force on Climate-Related Financial Disclosure, Glass Lewis will evaluate climate change proposals on a case-by-case basis. The Task Force on Climate-Related Financial Disclosures released its Final Recommendations Report on Climate-Related Financial Disclosures in June 2017.  The report offers recommendations to companies concerning the type of financial disclosures that best enable the markets to measure and respond to climate change. In addition, the Sustainability Accounting Standards Board (“SASB”) has extended the public comment period for its Sustainability Reporting Guidelines (the “SASB Guidelines”) through January 31, 2018.  The SASB Guidelines address important sustainability topics, including greenhouse gas emissions, and offer companies guidance on suitable metrics and disclosure practices.  On December 6, 2017, SASB announced that it would create sector advisory boards to provide feedback on and inform its codified standards and released its annual State of Disclosure report in December. Other Regulatory and Litigation Developments Renewable Fuel Standard Rule On July 28, 2017, the D.C. Circuit issued an opinion overturning EPA’s interpretation of certain waiver authorities in the Renewable Fuel Standard program.[48]  In an effort to justify its departure from statutorily mandated renewable fuel volumes, EPA sought to use demand-side constraints to support a waiver based on “inadequate domestic supply.”  The court vacated EPA’s decision to reduce total RFS volume requirements for 2016, and remanded to the Agency for consideration in light of the opinion.  The Court found that the waver “does not allow EPA to consider the volume of renewable fuel that is available to ultimate consumers or the demand-side constraints that affect the consumption of renewable fuel by consumers.” In November 2017, the EPA signed the final annual volume rule setting cellulosic, advanced and total renewable fuel obligations for 2018, and biomass-based diesel obligations for 2019.  The EPA set the 2018 cellulosic requirement at 288 million gallons, about 10 million gallons higher than for 2017.  In setting the levels for advanced and total renewable fuel, the EPA exercised its “cellulosic” waiver authority, which authorizes the agency to reduce advanced and total renewable fuel by an equal or lesser amount as the agency reduces the cellulosic requirement in relation to the default volume requirement in the RFS statute.  Having reduced the cellulosic requirement by 6.712 billion gallons relative to the 2018 statutory level of 7 billion gallons, the EPA reduced the 2018 statutory requirements for advanced and total renewable fuels by this same amount.  The result is an advanced requirement of 4.29 billion gallons and a total renewable fuel requirement of 19.29 billion gallons—each of these levels about 10 million gallons higher than in 2017.  The EPA set the 2019 requirement for biomass-based diesel at 2.1 billion gallons, the same level as it required for 2018. This is the first time that the EPA has reduced advanced and total renewable volumes by the full amount by which it reduced the cellulosic requirement.  That is, in prior years the EPA has reduced advanced and total volumes by a lesser amount, effectively allowing non-cellulosic advanced fuels to fill part of the gap left by lower cellulosic production.  But the EPA has chosen not to do that for 2018, based on its assessment that the greenhouse gas reduction and other benefits of higher standards are limited relative to the potential increased costs. Separately, the Tenth Circuit also struck down EPA’s prior denial of a small refinery exemption petition submitted by a Wyoming refinery based upon economic hardship.[49]  In a 2005 amendment to the Clean Air Act, Congress required oil refineries to increase use of renewable fuels.  Noting the impact this rule might have on small refineries, Congress permitted the EPA to make case-by-case exceptions for refineries suffering a “disproportionate economic hardship.”  According to the EPA, to fall within that safe harbor a refinery must show that compliance with the renewable-fuel mandate would threaten the refinery’s “ongoing future viability.”  In 2013, a small Wyoming oil refinery petitioned the EPA for a renewable-fuel mandate exemption.  The EPA denied the petition, finding that the refinery “appeared to be profitable enough to pay the cost of the [ ] Program.”  The refinery appealed.  The Tenth Circuit held that the EPA’s interpretation conflicted with the Clean Air Act’s plain language because, “[a]s a matter of common sense, an experience that causes hardship is less burdensome than an experience that threatens one’s [viability].”  The EPA’s interpretation also ignored the word “disproportionate,” which “inherently requires a comparative evaluation.”  The EPA also impermissibly focused on a single criterion—the refinery’s ongoing viability—to the exclusion of all other relevant factors.  The court thus vacated the EPA’s denial and remanded the case to the agency for further proceedings. Natural Gas Exports to “Non-Free Trade Countries” Freeport LNG Expansion requested permission from the Department of Energy to export natural gas to various non-free trade countries.  The DOE granted the application and issued an Environmental Impact Statement (“EIS”) that “disclosed the various ways shale gas production might impact the water, air, and land resources surrounding production activities.”  Plaintiffs alleged that the EIS failed to “specifically project where or to what extent the impacts of increased production might occur in response to any particular amount of exports.”  Environmental groups argued this rendered the statement inadequate.  In rejecting the environmental groups’ arguments, the D.C. Circuit held that DOE’s EIS need not quantify precisely how increased exports might affect domestic natural gas production because, given the pace of technological innovation, any causal connection between increased exports and ramped-up production was not reasonably foreseeable; and, DOE could not accurately assess where the gas would be produced, or predict locale-specific environmental impacts.[50]  In addition, the court held that DOE need not evaluate whether increased exports might raise domestic prices, leading the power sector to switch from gas to coal generation.  This case removed a major hurdle to the export of natural gas to non-free trade countries. Expanding Energy Exploration to U.S. Coastal Waters & ANWR On January 4, 2018, the Trump administration announced its intention to allow new offshore oil and gas drilling in nearly all U.S. coastal waters, opening access to leases off California for the first time in decades and opening more than a billion acres in the Arctic and along the Eastern Seaboard.  Consistent with his administration’s 2017-2022 offshore drilling plan, President Obama had blocked drilling on about 94% of the outer continental shelf, banning new oil and gas drilling in federal waters in the Atlantic and Arctic oceans weeks before leaving office.  However, in April 2017, President Trump signed an Executive Order requiring the Interior Department to reconsider President Obama’s five-year plan. The department’s new draft National Outer Continental Shelf Oil and Gas Leasing Program for 2019-2024 would render over 90% of the outer continental shelf’s total acreage available to drillers for leasing, a national record.[51]  The Interior Department would open twenty-five of twenty-six regions of the outer continental shelf, leaving only the North Aleutian Basin—which President George Bush protected in an executive order—exempted from drilling, and Interior officials said they intended to hold forty-seven lease sales between 2019 and 2024, including nineteen off the coast of Alaska and twelve in the Gulf of Mexico.  Seven areas offered for new drilling would be in Pacific waters off of California, where drilling has been off limits since a 1969 oil spill near Santa Barbara.  Finalizing the Interior department’s new offshore drilling plan could take as long as eighteen months, according to experts.  Comments on the plan are due by March 9, 2018.  Challenges to the plan are expected in courts and Congress. The final tax-reform package signed into law by President Trump in December 2017, known as the Tax Cuts and Jobs Act, opened non-wilderness 1002 Area of the Alaska National Wildlife Refuge (“ANWR”) for oil exploration.  The legislation lifts an almost forty-year old ban on prospecting for oil and natural gas in the refuge’s coastal plain, which for decades has been one of the highest-profile battlegrounds in the debate between oil and gas production advocates and conservationists.  Despite the lifting of the ban, the region is unlikely to be a hotbed of interest for the oil and gas industry, at least for the time being.  Given the inhospitable conditions in Alaska, oil would have to sell at about $70 a barrel to make most of it economical to recover.  Oil prices have hovered around $55 a barrel for the past year, recently peaking at $63. FERC Required to Make Additional Environmental Impact Findings on Southeast Market Pipelines Project On February 2, 2016, FERC approved the construction and operation of the Southeast Market Pipelines Project, comprising three new interstate natural gas pipelines in the southeastern United States, which was projected to be completed in 2021 and able to carry over one billion cubic feet of natural gas.  Environmental groups and landowners sought a stay of construction, which was denied by FERC.  They then petitioned the D.C. Circuit for review, arguing that FERC’s environmental impact statement “failed to adequately consider the project’s contribution to greenhouse-gas emissions and its impact on low-income and minority communities . . . that Sabal Trail’s service rates were based on an invalid methodology, . . . that FERC used an insufficiently transparent process to approve the pipeline certificates,” and that there were failures of oversight. The Court found that “the EIS acknowledged and considered the substance of all the concerns” of the environmental groups, and explained why the proposed alternatives “would do more harm than good.”[52]  Nonetheless, it explained that National Environmental Policy Act of 1969 required an EIS to discuss all “reasonably foreseeable” environmental consequences, which were deemed to include the possibility that power plants would burn gas, generating carbon dioxide, which once in the atmosphere would contribute to the greenhouse effect and climate change.  The court thus concluded that “FERC should have estimated the amount of power-plant carbon emissions that the pipelines will make possible” and that it “should have . . . given a quantitative estimate of the downstream greenhouse emissions that will result[.]”  The Court remanded the case to FERC to prepare a new EIS.  The Supplemental EIS was issued on September 28, 2017, and comments were due on November 20, 2017. [53] Court Orders County to Consider Risk of Release of Hazardous Materials in Refinery Expansion Project Alon USA proposed the “Alon Bakersfield Refinery Crude Flexibility Project” to the County of Kern, California for the purpose of “allow[ing] flexibility for [an] existing refinery [located near Bakersfield] to process a variety of crude oils on-site.”  The project expanded the train facilities in order to “increase the plant’s potential to receive crude oil from the Bakken formation in northwestern North Dakota,” which is more volatile and likely to explode in the event of a rail incident than other crude oils.  The County approved the project and certified an environmental impact report (“EIR”).  Plaintiff environmental groups challenged the approval, arguing that certifying the EIR violated the California Environmental Quality Act (“CEQA”) because the EIR “(1) erroneously used the refinery’s operational volume from 2007 as the baseline; (2) incorrectly relied upon the refinery’s participation in California’s cap-and-trade program to conclude the project’s greenhouse gas emissions would be less than significant; and (3) underestimated the project’s rail transport impacts[.]”  The court found that the EIR’s baseline choice complied with the CEQA and that the EIR’s discussion of greenhouse gases contained no error.  But it rejected an approval and remanded for further consideration because the EIR underestimated the risk of release of hazardous materials during rail transportation.[54] Tenth Circuit Finds United States Liable for Cleanup on Federal Property The Tenth Circuit held that the United States is an “owner,” and therefore a “potentially responsible party” under CERCLA, because it possessed legal title to relevant portions of a Superfund site at the time hazardous substances were deposited.[55]  The case arose from a Superfund site near Questa, New Mexico.  Chevron—which had long operated a mine on the site—sued the United States and asked for a declaration that the government is strictly liable as an owner for its share of the cleanup costs.  The United States argued that although it held “bare legal title” to the property, it lacked other indicia of ownership.  Relying on the dictionary definition of “owner,” the Tenth Circuit held that “[f]or purposes of CERCLA . . . an owner includes the legal title holder of contaminated land.”  This decision makes it easier for those identified as potentially responsible parties to show that the United States itself is a potentially responsible party with respect to mining and other energy development projects located on federal property. Clean Water Rule and the Definition of “Waters of the United States” In 1972, Congress enacted the Clean Water Act (“CWA”) “to restore and maintain the chemical, physical and biological integrity of the Nation’s waters.”  To help achieve that purpose, the CWA prohibits the discharge of any pollutants to “navigable waters.”  The CWA provides that “[t]he term ‘navigable waters’ means the waters of the United States, including the territorial seas.” The CWA is administered by both the Environmental Protection Agency (“EPA”) and the U.S. Army Corps of Engineers (together with the EPA, the “Agencies”).  During the 1980s, the Agencies adopted substantially similar definitions of “waters of the United States,” which included:  waters used for interstate or foreign commerce; all interstate waters and wetlands; intrastate lakes, rivers, streams, wetlands natural ponds, etc., the use of which could affect interstate commerce or foreign commerce; tributaries of, and wetlands adjacent to, these identified bodies of water.[56] In Rapanos v. United States, a four-Justice plurality opinion, authored by Justice Scalia, interpreted the term “waters of the United States” as covering “relatively permanent, standing or continuously flowing bodies of water” that are connected to traditional navigable waters as well as wetlands with “continuous surface connection” to such bodies of water.[57]  Justice Kennedy concurred with the plurality judgment, but in his view, waters and wetlands should be covered by the CWA when they have a “‘significant nexus’ to waters that are or were navigable in fact or that could reasonably be so made.”  This meant that wetlands had to “significantly affect the chemical, physical, and biological integrity” of other covered waters more readily understood as “navigable” in order to warrant protection.  In contrast, “when wetlands’ effects of water quality are speculative or insubstantial, they fall outside the zone fairly encompassed by the statutory term ‘navigable waters.'”  Although the dissenting Justices would have affirmed the court of appeals’ application of the Agencies’ regulations, they concluded that the term “waters of the United States” encompasses all tributaries and wetlands that satisfy “either the plurality’s [standard] or Justice Kennedy’s.” In 2008, after the Rapanos decision, the Agencies issued joint guidance to address waters at issue in that decision, and indicated that “waters of the United States” included traditional navigable waters and their adjacent wetlands, relatively permanent waters and wetlands that abut them, and water with a significant nexus to a traditional navigable water.  After issuance of this guidance, Members of Congress, developers, farmers, state and local governments, environmental organizations, energy companies and other parties asked the Agencies to replace the guidance with a regulation that would provide certainty and clarity on the scope of waters protected by the CWA. On June 29, 2015, following public notice and comment, the Agencies published a final rule defining the scope of the phrase “waters of the United States” (the “2015 Clean Water Rule”).  Thirty-one States and a number of other parties sought judicial review of the 2015 Clean Water Rule in various district and circuit courts.  Ultimately, on October 9, 2015, the Sixth Circuit stayed the 2015 Clean Water Rule nationwide to restore the “pre-Rule regime, pending judicial review.”[58]  Pursuant to that order, the Agencies implemented the CWA pursuant to the regulatory regime that preceded the 2015 Clean Water Rule. On January 13, 2017, the U.S. Supreme Court granted certiorari on the question of whether the Court of Appeals has original jurisdiction to review challenges to the 2015 Clean Water Rule The Sixth Circuit subsequently granted petitioners’ motion to hold in abeyance the briefing schedule in the litigation challenging the 2015 Clean Water Rule pending the Supreme Court decision on jurisdiction. On February 28, 2017, President Trump issued an Executive Order entitled “Restoring the Rule of Law, Federalism, and Economic Growth by Reviewing the ‘Waters of the United States’ Rule.”  The stated policy of the Order was to “ensure that the Nation’s navigable waters are kept free from pollution, while at the same time promoting economic growth, minimizing regulatory uncertainty, and showing due regard for the roles of the Congress and the States under the Constitution.”  The Order further directed the Agencies to review the 2015 Rule for consistency with this policy, to issue a proposed rule rescinding or revising the 2015 Rule, and to consider interpreting the term “navigable waters” in a manner consistent with Justice Scalia’s plurality opinion in Rapanos. On June 27, 2017, the Agencies proposed a rule to rescind the 2015 Clean Water Rule and re-codify in the Code of Federal Regulations (“CFR”) the regulatory text that preceded the 2015 Clean Water Rule and that the Agencies are currently implementing under the court stay, informed by applicable guidance documents and consistent with Rapanos.  The proposed rule retains exclusions from the definition of “waters of the United States” for prior converted cropland and waste treatment systems.  This rulemaking was the first step in a two-step response to the February 28, 2017 Executive Order, intended to ensure certainty as the scope of CWA jurisdiction on an interim basis as the Agencies proceeded to engage in the second step, namely, the development of a new definition of “waters of the United States” taking into consideration the principles that Justice Scalia outlined in the Rapanos plurality decision. On November 16, 2017, the Agencies proposed to amend the effective date of the 2015 Clean Water Rule.  In order to give the Agencies more time to reconsider the definition of “waters of the United States,” the Agencies proposed that the 2015 Clean Water Rule would not go into effect until two years after the proposal was finalized and published in the Federal Register. Courts Continue to Disagree Whether Discharges into Groundwater Run Afoul of Clean Water Act On one side of the issue, the District of South Carolina ruled that an oil pipeline leak that contaminated soil and groundwater did not violate the Clean Water Act.[59]  The case arose from the discharge of petroleum into the soil.  The fuel migrated through the earth to nearby wetlands; it also directly polluted groundwater that was hydrologically connected to a nearby watershed.  The court first held that “[t]he migration of pollutants through soil and groundwater is nonpoint source pollution,” and thus outside the purview of the CWA.  It also held that the CWA did not prohibit discharges into groundwater, given that the CWA only regulated discharges into the “navigable waters” of the United States.  Because the statute referred to “groundwater” and “navigable waters” as separate concepts, the court reasoned that Congress considered them to be distinct. On the other side, the Eastern District of Virginia found that releases to groundwater are point sources governed by the CWA.[60]  The defendant stored coal ash in a storage pond and landfill.  Runoff from the disposal sites deposited arsenic in nearby groundwater.  The court held that the defendant violated the CWA by discharging arsenic into the groundwater.  The court first explained that Congress’s goal of “protect[ing] the water quality of the nation’s surface water” would be thwarted if companies could discharge pollutants directly into hydrologically connected groundwater.  It further noted the EPA’s “longstanding view that the CWA covers discharges of pollutants to groundwater that flow to surface waters through a direct hydrological connection.”  The court then found that the coal ash piles qualified as a “point source,” reasoning that the defendant had intentionally concentrated the coal ash and its constituent pollutants in one location. Anticipated New Source Review (“NSR”) Program Reform Over the past year, the U.S. Environmental Protection Agency’s New Source Review program[61] has been identified as one of several regulatory programs targeted for reform by the Trump Administration.  On January 24, 2017, President Trump signed a Presidential Memorandum on Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing.[62]  That memorandum directed the Secretary of Commerce to solicit input from industry stakeholders “concerning the impact of Federal regulations on domestic manufacturing” and to develop a proposal “setting forth a plan to streamline Federal permitting processes for domestic manufacturing and to reduce regulatory burdens affecting domestic manufacturers.”[63]  Two months later, the President also issued Executive Order 13,783, “Promoting Energy Independence and Economic Growth,” which directed federal agencies to conduct a review of existing regulations, guidance, and other agency actions “that potentially burden the development or use of domestically produced energy resources.”[64] On October 6, 2017, in response to the Presidential Memorandum, the U.S. Department of Commerce published its report, entitled “Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing.”[65]  The report identified the NSR program as a “Priority Area for Reform,” and it outlined ten potential changes to the program to address concerns raised by industry.[66]  Those changes are: Enforce the one-year turnaround time on NSR and PSD permit applications; Reduce statute of limitations on challenges or appeals to one year; Allow non-emitting construction activities to commence prior to receiving a permit; Consider options to revise the definition of Routine Maintenance, Repair & Replacement (“RMRR”) to provide more flexibility; Promote and facilitate use of flexible permitting mechanisms; Develop opportunities to streamline NSR applicability determinations and/or to reduce the number of facilities and projects that may be subject to NSR; Issue guidance on modeling concurrent with promulgation of revised NAAQs, to ensure timely clarification on modeling required as part of an NSR application; Consider opportunities to “grandfather” NSR applications following revision of an NAAQS; Consider opportunities to emphasize key aspects of the Best Available Control Technology (“BACT”) analysis including, but not limited to, expectations regarding technology determinations; and Consider opportunities to expand the purchasing offsets outside of the local areas as well as other offset-related revisions which would provide increased flexibility and burden reduction.[67] The Report set a deadline of December 31, 2017, for regulatory reform task forces to deliver to the President an action plan to address the regulatory burden and permitting reform issues highlighted in the report.[68] On October 25, 2017, in response to the Presidential Memorandum and to Executive Order 13,783, EPA published its own report examining the potential burden imposed by agency oversight and regulations on the domestic energy industry.[69]  The report identified comprehensive NSR reform as one of four key initiatives designed to “further the goal of reducing unnecessary burdens on the development and use of domestic energy resources.”[70]  EPA acknowledged a variety of concerns expressed in comments by industry, including the length and complexity of the NSR permitting process, the high application and construction costs, and the availability and costs of emissions offsets in nonattainment areas, all of which could risk discouraging new construction projects and slowing domestic energy resource growth.[71] In an effort to address those concerns, EPA identified several opportunities for improving the NSR process, including streamlining the application and permitting process, reviewing burdens created by the emissions offsets structure, improving the federal-state relationship, and clarifying the means by which a facility currently classified as a major source can become an area source.[72]  In order to “achieve meaningful NSR reform,” the agency stated that EPA Administrator Scott Pruitt intends to convene an NSR Reform Task Force in the coming months.[73] On December 7, 2017, as part of the administration’s efforts to overhaul the NSR program, Administrator Pruitt signed a memorandum announcing a major change in the EPA’s NSR policy.  Specifically, the agency indicated that it will defer to a company’s assessment of whether the NSR permitting requirements apply to one of its facilities, rather than using the agency’s own projections of a facility’s potential future emissions to determine applicability as it has done historically.[74]  While the memorandum states that it “is not final agency action,” and instead “merely clarifies the EPA’s current understanding” of NSR regulations,[75] the new policy could nevertheless have significant implications on the NSR permitting process. As the events of the past year have made clear, the Trump administration and the EPA under Administrator Pruitt are gearing up to make significant changes to a number of regulatory regimes impacting domestic industrial interests, with a particular focus on the NSR program.[76]  While such initiatives will undoubtedly remain popular with industry and advocacy groups, NSR reform will face significant legal challenges, as such efforts have been the target of protracted litigation in the past,[77] and serious reform will require substantial administrative and legislative action before any changes can be implemented. Recovery of Remediation Costs at Unused Power Sites Duke Energy’s predecessors in interest operated two manufactured gas plants near downtown Cincinnati until 1928 and 1963, which now contain hazardous substances.  As the current owner or operator of these facilities, Duke is liable for remediation under CERCLA, and sought to recover remediation costs.  In response, several consumer and industry groups argued that Duke could not recover remediation costs because the sites were no longer “used and useful” in rendering utilities services.  The Supreme Court of Ohio affirmed the Public Utilities Commission’s decision allowing recovery, finding that “because Duke is seeking to recover costs—and not its capital investment in the plants’ property and facilities—the commission correctly refused to apply the used-and-useful standard.”[78] Federal Courts Continue to Draw Jurisdictional Lines over Domestic Energy Production The United States District Court for the District of Oklahoma dismissed the Sierra Club’s citizen suit alleging that defendants’ fracking activities had increased the number and severity of earthquakes in Oklahoma.[79]  Sierra Club sought declaratory and injunctive relief requiring natural gas companies to (1) reduce the amount of waste injected into the ground, (2) reinforce oil pipelines, underground storage tanks, and other vulnerable structures, and (3) establish an independent earthquake monitoring unit.  The court declined to exercise jurisdiction based on the Burford Abstention and Primary Jurisdiction doctrines.  Both doctrines aim to prevent federal courts from meddling with complex state administrative processes.  The court noted that federal and state laws tasked the Oklahoma Corporation Commission (“OCC”) with enforcing fracking regulations.  The court stressed that federal judicial intervention would undercut the state’s efforts to establish a coherent earthquake-mitigation policy.  It emphasized that the OCC enjoyed a degree of flexibility and technical expertise that the court “could not hope to match.”  And the court expressed disquiet that it was being asked not to adjudicate a discrete regulatory violation, but rather to micromanage the entire industry. On Feb. 17, 2017, the Fourth Circuit decided Virginia Uranium v. John Warren, upholding a lower court decision that approved a Virginia law banning uranium mining despite the Atomic Energy Act’s preemptive scope.[80]  The Atomic Energy Act regulates nearly every aspect of the uranium fuel cycle.  It requires any person to obtain a license from the Nuclear Regulatory Commission and comply with its safety regulations if they wish to “transfer or receive in interstate commerce, manufacture, produce, transfer, acquire, own, possess, import or export” any radioactive “byproduct material”—which includes “the tailings or wastes produced by the extraction or concentration of uranium.”[81] The U.S. Supreme Court previously held in Pacific Gas that the AEA occupies the field of radiological safety of uranium production, including the wastes generated from uranium mining.  States can regulate non-safety aspects of nuclear power production, but not safety regulations.[82] The majority opinion in Virginia Uranium avoided the application of field preemption by ruling that the AEA does address traditional mining on non-federal lands.  The AEA expressly covers in-situ mining and mining on federal lands, but it is silent on traditional mining on private lands (save for the regulation of mining waste).  Thus, Virginia’s ban on such activity, even though the commonwealth conceded that it was concerned only with the safety of the mining activity, survived the preemption analysis.  The court also found that the ban on mining did not conflict with the AEA’s express purpose of encouraging national uranium development, citing the fact that 90% of enrichment activities in the United States consisted of recycled and foreign-obtained uranium.  Judge William Byrd Traxler disagreed with the opinion and wrote a lengthy and detailed dissent.  He found Virginia’s admission that it was prohibiting mining due to safety concerns fatal under the Pacific Gas framework.  Citing a number of previous circuit opinions that broadly interpreted AEA preemption over radiological safety issues, he argued that the state ban was both field and conflict preempted.  Virginia Uranium filed certiorari petition, and the Supreme Court has requested the opinion of the Solicitor General.[83] Fifth Circuit Limits the Scope of the Oil Pollution Act’s Third-Party Defense The Oil Pollution Act (“OPA”), which was enacted in 1990 in response to the Exxon Valdez spill, was “intended to streamline federal law so as to provide quick and efficient cleanup of oil spills, compensate victims of such spills, and internalize the costs of spills within the petroleum industry.”[84]  The OPA creates a strict-liability regime for certain “responsible parties,” and also provides several complete defenses to liability. The Fifth Circuit recently analyzed one of those defenses, which provides that a party is not liable if the discharge at issue was “caused solely by … an act or omission by a third party, other than an employee or agent of the responsible party or a third party whose act or omission occurs in connection with any contractual relationship with the responsible party.”  33 U.S.C. § 2703(a)(3).[85]  In United States v. American Commercial Lines, L.L.C., the Fifth Circuit held that a party could not assert the OPA’s third-party defense where a discharge was caused by a third-party contractor because the relevant “act or omission” occurred “in connection with” their contractual relationship.  Rejecting the Second Circuit’s interpretation of similar language in CERCLA, the Fifth Circuit held that an “act or omission” is “in connection with” a contractual relationship where they “relate to the contractual relationship in the sense that the third party’s acts and omissions would not have occurred but for that contractual relationship.”  The Fifth Circuit’s recent decision has not yet been embraced by any other court, but it remains to be seen whether it will affect the defenses available not just to the transporters of oil, as was the case in American Commercial Lines, but also to companies engaged in the exploration and production of oil, to which the OPA also applies. No Duty for Oil Companies to Protect State Board from Increased Flood Protection Costs The Board of Commissioners of the Southeast Louisiana Flood Protection Authority–East filed a lawsuit in Louisiana state court against ninety-seven companies involved in oil exploration off the southern coast of the United States, alleging that these activities caused infrastructural and ecological damage to coastal lands, which increased the risk of flooding.  Although the Board sought recovery solely under state law, each cause of action turned on whether the companies violated duties imposed by federal law—the Rivers and Harbors Act, the Clean Water Act, and the Coastal Zone Management Act.  The district court denied the Board’s motion to remand, but dismissed the action for failure to state a claim upon which relief could be granted.  The Fifth Circuit affirmed on appeal, concluding that “neither federal law nor Louisiana law creates a duty that binds Defendants to protect the Board from increased flood protection costs that arise out of the coastal erosion allegedly caused by Defendants’ dredging activities.”[86]  The Supreme Court declined to hear plaintiff’s appeal.  Time will tell whether the Fifth Circuit’s decision influenced the various state court cases that remain pending.  Further, this case may serve to stymie attempts to predicate state law tort claims on violations of federal environmental statutes. Tort Litigation:  Case Updates Exxon Beats Class Action over Maintenance of Oil Pipeline Exxon operated an 850 mile pipeline that ran from Texas to Illinois, which, in accordance with a series of easements, traversed dozens of parcels of private property.  The property owners brought a class action claiming that Exxon violated the easements by failing to maintain the pipeline, thereby damaging plaintiffs’ properties.  The Eighth Circuit affirmed the district court’s denial of class certification, holding that the plaintiffs failed to show that common questions of law or fact predominated over issues affecting only individual members.[87]  The court reasoned that the pipeline impacted each property differently, and that each parcel’s individualized attributes complicated class-wide resolution.  The court also upheld the dismissal of the named-plaintiffs’ claims, reasoning that Arkansas law imposed no affirmative duty of maintenance or repair. Court Sides with Landowner and Allows Fracking Case to Proceed Against Gas Company Southwestern Energy Co. (“SWE”) disposed of fracking waste through a well it drilled on land neighboring the plaintiffs’ property.  Plaintiffs sued for trespass and unjust enrichment.  Due to the lack of evidence of surface contamination and the cost of drilling to obtain a sample or creating a computer model, plaintiffs relied on expert testimony regarding the radial flow of the fracking waste.  The district court ruled the expert report inadmissible, and granted SWE’s motion for summary judgment.  On appeal, the Eighth Circuit reversed, finding the district court abused its discretion by excluding plaintiffs’ expert, and that the following facts, while thin, could enable a reasonable jury to find that the waste migrated under plaintiffs’ property:  (1) an SWE representative stated that the area under plaintiffs’ property would be filled up by the waste injected in the well; (2) SWE tried to lease a well on plaintiffs’ ground first; (3) the close proximity of the SWE well to plaintiffs’ property line; and (4) a large volume of waste was injected into a small leased area.[88] Pipeline Operators Not Strictly Liable for Injuries Caused by Pipeline Explosion In 2007, a gas pipeline rupture near Carmichael, Mississippi, resulting in an explosion that damaged property more than a mile away.  The property owner sued Dixie Pipeline, Co., the operator of the pipeline, and argued that it was strictly liable for damages caused by the explosion.  The Mississippi Court of Appeals held that the operation of a gas pipeline failed to constitute an ultrahazardous activity, which would support strict liability.[89]  The court noted that the transportation of liquid propane is highly regulated, that propane is commonly used in homes and industries, and is generally “of great value to commerce and local, regional, and nationwide communities.”  Based on these factors, the court held that pipeline operators are not strictly liable for injuries caused by pipeline explosions. Strict Liability for Ultrahazardous Activity Claim Moves Forward Against Oil Refinery Operators Plaintiffs allege that BP, p.l.c. (“BP”), Marathon Oil Corporation, Marathon Petroleum Corporation, and Kinder Morgan, Inc. (collectively, the “Operational Defendants”) “formerly operated an oil refinery and ‘tank farm’ on plaintiffs’ property and that they abandoned such refinery ‘without assuring their operations had not and would not affect the environment or the persons and property’ and ‘covered up and buried refinery products and chemicals’ without notice to Plaintiffs.”  The plaintiffs were advised by the Oklahoma Department of Environmental Quality on July 3, 2013 that continuing to live on the property could jeopardize their health and safety.  On June 24, 2015, plaintiffs filed suit against the Operational Defendants, alleging negligence, nuisance, unjust enrichment, strict liability, and fraud.  Although the court dismissed claims for negligence per se and fraud, it declined to dismiss Plaintiffs’ strict liability claim, finding that “allegations that the Operational Defendants failed to exercise due care are not mutually exclusive with a claim of strict liability” based on ultrahazardous activity.[90] Medical Causation Evidentiary Requirements The Eighth Circuit may have lowered the bar for the type of evidence experts can rely on and present in their reports.  In this case, property owners alleged a fracking company had trespassed on and contaminated their property by disposing of fracking waste near their property.  Plaintiffs did not produce any evidence of surface contamination on their property, but they relied in part on an expert to calculate the expected radial flow of the fracking waste.  The district court excluded the expert, finding that the expert’s report was “not based on sufficient facts or data” and “contained many simplifying assumptions[,]” among other “methodological problems.”  Despite this, the Eighth Circuit held that the expert report was relevant and that the expert was qualified, even though the report “may be crude and imperfect[,]” as none of the issues identified by the district court “make it so unreliable that it should be excluded.”  The court found the report “was scientifically valid, could properly be applied to the facts of this case, and, therefore, was reliable enough to assist the trier of fact.”[91] The Sixth Circuit, however, held that a district court had properly excluded a toxicology expert’s testimony as unreliable.[92]  Plaintiffs who lived near defendant’s steel mill brought suit alleging their health will suffer due to elevated levels of manganese found on their properties.  Manganese is a chemical that has many industrial metal alloy uses, and defendant had previously entered into a settlement with the Ohio Environmental Protective Agency with respect to alleged violations of emission regulations.  Plaintiffs relied in part on testimony from a toxicology expert to establish the alleged damages to plaintiffs’ properties.  The district court held the expert’s opinion was inadmissible because he had failed to test his hypotheses in a “timely and reliable manner or to validate [his] hypotheses by reference to generally accepted scientific principles[.]”  The expert’s opinion was “conclusory” and his assertions were “too broad, general, and vague to be helpful to the trier of fact.”  On appeal, the Sixth Circuit affirmed the district court’s holding, noting that the expert had failed to proffer “actual proof” to support his opinion. In a recent mass tort action, the U.S. District Court for the Middle District of Alabama granted summary judgment in favor of defendant International Paper Company (“IP”), for whom Gibson Dunn served as lead counsel, on substantially all of the tort claims asserted by more than 300 plaintiffs.[93]  In that case, 322 individual plaintiffs alleged that air emissions from an IP pulp and paper mill in Prattville, Alabama caused or exacerbated dozens of diseases and various forms of property damage.  The plaintiffs asserted causes of action for negligence, wantonness, nuisance, trespass, abnormally dangerous activity, and fraudulent suppression.  On May 24, 2017, the court granted IP’s motions for summary judgment in their entirety and excluded nearly all of plaintiffs’ expert opinions.  As this case involved a substance that the medical community did not generally recognize both its toxicity and its cause of the alleged injury, the court conducted a more extensive Daubert analysis of plaintiffs’ causation experts.  In its analysis, the court found that plaintiffs’ experts did not purport to offer opinions regarding medical causation, or that any plaintiff was exposed to a specific dose of an emission, and therefore failed to meet the Eleventh Circuit’s McClain standard, which states that “the individual must have been exposed to a sufficient amount of the substance in question to elicit the health effect in question.”  McClain v. Metabolife Intern., Inc., 401 F.3d 1233, 1242 (11th Cir. 2005).  As a result, plaintiffs’ experts could not testify regarding the potential health effects of the emissions. National Enforcement Initiatives National Enforcement Initiatives (“NEI”) are EPA programs that seek to address widespread non-compliance with U.S. environmental laws on an industry-by-industry basis.  For each NEI program, EPA will identify what it believes are common areas of non-compliance in a given industry and then it will publish that list of common violations, so the industry is on notice of best practices in relation to the regulations that EPA believes are being violated.  EPA thereafter will focus resources on identifying instances of industry participants violating the identified environmental laws.  The result of this widespread enforcement effort, typically, is that a number companies of the given industry will settle enforcement actions with EPA by way of a consent decree, which may give the agency greater oversight or enforcement power and require the company to upgrade systems and pay civil penalties. EPA selects NEI every three years—the last period beginning with the fiscal year starting on October 1, 2016.  Presently, there are eight NEI, roughly grouped under the following four categories:  Air, Energy Extraction, Hazardous Chemicals, and Water.  In this update we focus on four NEI falling under the first two of the above-listed categories.  Specifically, we address NEI with particular relevance to the oil and gas industry and with updates associated with program maturity, changes in scope, or recent enforcement activity. The NEI addressed below are (i) Ensuring Energy Extraction Activities Comply with Environmental Laws (“Energy Extraction”), (ii) Refining and Flaring,[94] and (iii) Cutting Hazardous Air Pollutants (“Hazardous Air Pollutants (HAPs)”). 1.     Energy Extraction In 2015, EPA released a compliance alert aimed at advising oil and gas companies as to “whether their vapor control systems were properly designed, sized, operated, and maintained such that emissions from storage vessels may be controlled in compliance with applicable federal and state regulations.”[95]  A key concern expressed by EPA was that many oil and gas extraction operators did not employ the requisite emission control design or technology which was necessary to capture Volatile Organic Chemical (“VOC”) vapors that were prone to escape the storage vessels in predominate use by those companies.  Specifically, under a combination of federal laws—such as the New Source Performance Standards for Crude Oil and Natural Gas Production, Transmission and Distribution—and federally enforceable State Implementation Plans, operators with the potential to emit greater than six tons of VOCs per year are required to reduce such emissions by at least 95 %. The following two factors were listed as the primary points of failure by the industry participants in not complying with their obligation to reduce VOCs:  (i) inadequate design and sizing of vapor control systems, and (ii) inadequate vapor control system operation and maintenance practices.  EPA then offered the following guidance to help operators comply with the law: Reduce liquid pressure prior to transferring the liquid to atmospheric storage vessels; Increase size of piping used for vent lines (and capacity of control device if necessary); Prevent liquid collection in vent lines; Eliminate any unintentional natural gas carry-through Ensure proper maintenance and set points for pressure relief valves; and Minimize emissions from thief hatches. At the time of this 2015 Compliance Alert, EPA announced a settlement that it had reached with Noble Energy Company for violating the applicable environmental laws concerning storage vessels and VOCs.  As part of that settlement, Noble Energy committed to the following: Upgrading, monitoring, and maintaining effective vapor control systems; Third-party audits; Evaluating pressure relief devices; Installing pressure monitors on vapor control systems; and Installing tank truck loadout control systems. EPA’s press release for the Noble Energy settlement estimated that these controls cost the company $60 million (in addition to approximately $10 million in costs associated with civil penalties, mitigation, and supplemental environmental projects required by the settlement). In addition, to the Noble Energy settlement, the EPA reached a tentative settlement agreement with Oklahoma-based Devon Energy late in the Obama administration.  The agreement was to include a requirement for Devon Energy to undertake a mitigation project and a supplemental environmental project in addition to paying a six-figure fine for allegedly emitting more than eighty tons of VOCs per year.  However, shortly after Administrator Pruitt entered office, Devon Energy announced that it would no longer agree to the previously drafted terms of the settlement.  EPA has not publicly commented on this matter and the case is yet to be resolved. Notwithstanding Devon Energy’s experience, which tends to indicate that the Trump administration will not pursue enforcement under this NEI aggressively, at least one company has finalized a settlement under this NEI in 2017.  PDC Energy recently finalized a settlement agreement, which included a $1.7 million civil penalty and required the company to spend $18 million on upgraded systems and compliance monitoring.  It is likely that this enforcement action and settlement was largely negotiated prior to Administrator Pruitt’s tenure at EPA.  For that reason, it will be informative to see what cases are initiated during Administrator Pruitt’s tenure as EPA Administrator. 2.     Refining and Flaring Initiatives Refining and Flaring Initiatives are two distinct NEI historically aimed at petroleum refineries.  In the last several years, however, EPA has recently expanded the Flaring NEI to pursue enforcement against chemical manufacturing facilities (primarily associated with refining processes).  The aim of both NEIs is to reduce nitrogen oxides and sulfur dioxides emissions from a variety of process units such as cat crackers, heaters, boilers, and flares. EPA has settled enforcement actions with thirty-seven companies based on the petroleum refining and flaring NEI, and those companies represent collectively more than 95% of the petroleum refining capacity in the United States.  In total EPA has collected more than $116 million in civil penalties and required the performance of more than $116 in supplemental environmental projects.  The settling companies have also committed to investing more than $7 billion in control technologies. These NEIs are winding down, as many of the industry participants are already under consent decrees due to prior enforcement actions.  That said, additional enforcement under this NEI is anticipated in two respects.  First, a number of petroleum refineries with historical Refining Initiative settlements may be separately subject to enforcement under the Flaring Initiative for their hydrocarbon flares (particularly if those flares do not have flare gas recovery).  Second, chemical manufacturing facilities associated with the oil and gas sector – such as olefin manufacturing – may see enforcement activity under the Flaring Initiative.  For example, in October 2017, EPA settled claims against Exxon Mobil for flaring at five chemical manufacturing facilities.  The settlement included a $2.5 million fine and injunctive relief worth more than $310 million. 3.     Hazardous Air Pollutants (“HAPs”) In 2016, EPA announced its new NEI for the fiscal years 2017 – 2019.  Among those NEI, was the program aimed at cutting HAPs, also known as air toxics.  In reality, this program is not entirely new.  Instead, it expands EPA’s existing and ongoing efforts to reduce air toxic emissions from high-emission industries, such as petroleum refining and chemical manufacturing. The HAP NEI for 2017 – 2019 goes beyond the petroleum refinery industry and was specifically expanded to target additional sources of pollution.  The NEI will now seek to curb emissions from operators of large product storage tanks as well as hazardous waste generator, treatment, storage and disposal facilities.  EPA’s focus with these facilities will be addressing violations related to leak detection and repair requirement for storage tanks, and hazardous waste tanks and related equipment.  There have not been any major enforcement actions settled under this expanded initiative.  Time will tell if the Pruitt EPA follows through forcefully on this Obama-era program. 4.     Water Enforcement About a year has passed since one of EPA’s new National Enforcement Initiatives for fiscal years 2017 – 2019—Keeping Industrial Pollutants Out of the Nation’s Waters (“KIPONW” or “Initiative”)—formally took effect.  This new Initiative signaled EPA’s commitment to increased enforcement of the National Pollutant Discharge Elimination System (“NPDES”) of the Clean Water Act (“CWA”) in certain industrial sectors.  However, one year later, EPA’s published statistics on NPDES permit violations and enforcement actions do not indicate an uptick in activity. The NPDES constitutes the fundamental regulatory framework for implementing the CWA’s prohibition against unpermitted discharge of pollutants from point sources into streams, rivers, lakes, and other waters of the United States.  Facilities seeking to discharge pollutants into waters covered by the CWA may apply for an individual permit or seek coverage under an existing general permit.  Such permits typically limit the amount of pollutants that may be discharged, mandate treatment of effluent, and require the facility to monitor its discharges and report exceedances of the permit limits.  Violations of the permit may trigger enforcement actions by EPA or authorized state regulatory agencies. Every three years, the EPA selects National Enforcement Initiatives (“NEIs”) “in order to focus federal resources on the most important environmental problems where noncompliance is a factor and where federal enforcement attention can make a difference.”  NEIs “are in addition to EPA’s core enforcement work.” On September 15, 2015, EPA opened the public comment period on several NEIs.  The Notice for the KIPONW Initiative identifies nutrient and metal pollution as particular concerns, and asserts that “[c]ertain industrial sectors contribute a disproportionate amount of the pollution over discharge limits.”  It singles out “[m]ining, chemical manufacturing, food processing and primary metals manufacturing” as “top sectors that have many violations and are responsible for contributing to surface water pollution and putting our drinking water at risk.”  The Notice claims that “[a] number of facilities in the top sectors discharge pollution in excess of their permit limits.” The Notice further explains that the Initiative would “allow for a national approach” for companies with facilities in multiple states and “would support a consistent national strategy to achieve compliance across industry sectors.”  Since authorized state agencies are largely responsible for implementing the NPDES, this focus on developing a “national approach” or “national strategy” may indicate EPA’s intent to assume a more direct role in monitoring and enforcing compliance with discharge limits, at least in the targeted industrial sectors. Public comments on KIPONW were few and mostly negative.  The American Chemistry Council took issue with EPA’s failure to support its claim that the chemical industry is one of the “industrial sectors [that] contribute a disproportionate amount of the pollution over discharge limits.”  The American Petroleum Institute also criticized the absence of data to document the alleged pollution problem and further questioned how a “national approach” would accomplish more than the NPDES permit program already does. EPA’s February 2016 news release announcing adoption of the Initiative was also brief and offered scant additional information.  It explained that EPA’s focus on the chosen industrial sectors was “driven by water pollution data,” and that the Initiative would “build compliance with Clean Water Act discharge permits and cut illegal pollution discharges.” EPA’s generic descriptions of the Initiative provide little insight into how EPA enforcement will change.  But, one year later, we are able to analyze the EPA’s data on permit violations and enforcement actions.  The data do not appear to be consistent with a noticeable increase in enforcement, either generally or in the targeted industries.  Overall, the numbers of formal and informal enforcement actions across the entire NPDES program were slightly lower in 2017 compared to previous years.  Median monetary penalties also fell in 2017.  At the same time, non-compliance rates climbed to their highest levels since 2013. A similar picture emerges from the industry-specific data.  Judicial and administrative federal enforcement cases in the “Metal Mining” sector fell from ten in 2015, to five in 2016, and down to just one in 2017.  Federal enforcement cases also dropped in the “Primary Metal Industries” sector, and remained flat in the “Chemicals and Allied Products” and “Food and Kindred Products” sectors.  The number of on-site inspections at permitted facilities within these sectors during FY 2017 also remained roughly at or below the inspection rates of previous years.  Meanwhile, permit violations in 2017 were clearly elevated over 2016 and 2015 in all four sectors.  For example, Metal Mining went from about 800 violations in each of 2015 and 2016 to over 1,000 in 2017.  There were also more than 1,000 violations during 2017 in the Chemicals and Allied Products sector compared to 814 violations in 2016 and 651 violations in 2015.  Because violations rose, a decreased need for enforcement cannot explain flat or falling enforcement indicators in 2017. In sum, the data we reviewed suggest that the KIPONW Initiative has not been a major priority in FY 2017.  This may reflect changes at EPA under the current administration, or it may show that criticism of the NEI’s lack of data support and vaguely defined goals was well-founded.  That said, there are many ways to parse the compliance and enforcement data.  EPA may also have taken a more surgical approach to implementing the Initiative that has not produced an appreciable change in the national statistics.  It remains to be seen whether EPA will increase enforcement in the future. The 2017 Energy Mergers and Acquisition Roundup Energy M&A activity in 2017 has been a tale of two sectors.  Activity has been generally been strong through the third quarter of 2017 in the oil and gas sector, whereas power and utilities M&A has experienced a downturn after a hot 2016.  Below we highlight this year’s significant M&A trends in these sectors, and take a glimpse at the outlook for energy M&A activity in 2018. Oil & Gas 2017 has brought forth vigorous M&A activity in the oil and gas sector, particularly in the first quarter and in the upstream segment.  The global oil and gas industry witnessed $137 billion in M&A activity in the first half of 2017—a significant bump up from the $87 billion deal flow in the first half of 2016—and oil and gas dealmakers remained cautiously optimistic through the third quarter of the year.[96]  Dealmakers have been encouraged by higher commodity prices and signs of an oil and gas market recovery, with the fossil fuel friendly disposition of the Trump administration also likely bolstering M&A activity in the United States. Here are the headline developments from this year. Asset Deal Popularity.  Asset-based deals have been harnessed to refocus and reinforce portfolio positions to form a stronger platform from which to prosper during the expected market recovery.  This global trend was particularly prevalent in the Permian Basin and the rest of North America in the first half of the year, with the Permian experiencing a shift of focus from securing entry positions to focusing on add-ons that enhance development opportunities.[97] Permian Dominance in the U.S.  As of September 2017, 86% of the year’s U.S. oil and gas deals were in the Permian Basin.  The region saw twenty deals in 1Q17 with a total value of  approximately $21.4 billion and another eleven deals in 2Q17 totaling approximately $4.5 billion.  Most of the deals fell in the $500 million to $1 billion range.[98]  In one of the highest value Permian transactions of the year, ExxonMobil paid $5.6 billion for acreage positions of BOPCO (the Permian holdings of the Bass family) totaling 275,000 leased acres, facilitating the expansion of its presence in this growth area for onshore oil production.[99] Although capital investments in the Permian Basin are likely to continue to rise over the next several years, strong deal activity in the region in the first half of the year pushed prices and valuations, making other, less active basins, such as the Bakken, more attractive to investors, and dealmakers consequently looked beyond the Permian with greater frequency heading into the third quarter.[100] The Eagle Ford saw the second highest number of deals in 1Q17 with five deals totaling $7 billion, while the Marcellus region saw the second highest number of deals in 2Q17 with a total value of $10.2 billion.  In November 2017, EQT Corporation completed the acquisition of Rice Energy for approximately $6.7 billion, the highest valued Marcellus transaction and one of the most prominent oil and gas deals of the year.  The deal makes EQT the largest producer of natural gas in the United States and the leading player in the Marcellus/Utica region.[101] Upstream Strength.  This year has seen a predominance of upstream deals, which have been boosted by crude oil price levels.  The upstream segment had a 60% share of U.S. deal volume and a 50% share of deal value in 1Q17, and a 56% share of deal volume and a 54% share of deal value in 2Q17.[102]  Globally, by mid-year, the value of upstream deals had already reached approximately 69% of the total value of upstream deals in all of 2016,[103] and the upstream segment, particularly shale deals, remained a major contributor to deal-making activity in the U.S. through 3Q17.[104] The downstream segment has also maintained a healthy pace of deal activity in the U.S., as global deal values in the first half of 2017 reached 47% of those for all of 2016.[105] The U.S. downstream segment then experienced its strongest third quarter since 2014 as more major producing national oil companies aimed to secure improved access to downstream refined products markets.[106] Midstream M&A, on the other hand, has slowed to a trickle as concerns over the indebtedness of midstream companies mount in the investor community.[107]  However, it is largely in this space that mega deals (deals over $1 billion) have continued to transpire—four of the seven mega deals in the third quarter were in the midstream segment.[108] Other Late Developments.  While value across U.S. deals decreased in the third quarter, down 36% since the last quarter and 58% year-over-year, to $23.61 billion, there were fifty-three announced deals, an increase on both a sequential and year-over-year basis, demonstrating that investors remained interested in the sector.  M&A activity in 3Q17 was defined by smaller, add-on acquisitions.  Mega deals continued the downward slide they began in the first quarter of 2017; the seven announced in the third quarter were worth $11.74 billion, the lowest share of total deal value and volume since the second quarter of 2016.[109] Elsewhere, in Canada, the third quarter witnessed a realignment of holdings in the Canadian oil sands, with the exit of some international majors, leaving more of this play in the hands of Canadian operators.[110] Looking to 2018, domestic drivers of deal activity, such the prospect of increased interest rates, and global drivers, such as sustained higher commodity prices, may continue to spur oil and gas M&A activity forward in the U.S., even as the buzz over a friendlier regulatory environment begins to fade.  However, if the oil market stabilization and recovery process seems to drag for longer than previously anticipated, risk and uncertainty may dampen a further upturn in transactions. Power & Utilities 2016 saw the highest level of M&A activity in power and utilities sector in the past several years, with a total deal value of $126 billion, and M&A activity in 2017 has struggled to keep pace.[111]  Infrastructure transactions have driven deal flow and corporate deals have driven deal value in what has been a cooler year for M&A in this sector, in terms of both deal volume and value and the prevalence of mega deals.[112] U.S. M&A activity was stronger in 1Q17 than in 4Q16, but was down significantly compared with the first quarter of 2016.  Overall, there were fewer mega deals, both quarter-to-quarter and year-over-year.  Most of the deal flow in the first quarter sprang from transmission and distribution assets.  Deal value during the quarter was driven by large corporate deals, which accounted for $9.1 billion or 71% of total deal value, with most of that value stemming from AltaGas’s proposed $6.6 billion acquisition of WGL Holdings.  Canadian companies were hungry for U.S. investment opportunities, with inbound deals representing $7.2 billion or 56% of total deal value in the first quarter.[113] Despite the early slowdown, executives were expressing a record level of interest in pursuing M&A deals, and while deal volume generally slid throughout the year, the third quarter witnessed an uptick in deal value and the volume of mega deals.  Total North American deal value in 3Q17 was the highest quarterly deal value since 4Q17.  With four mega deals, total deal value was $44.9 billion, compared to $6.5 billion in 2Q17 and $78.1 billion in 3Q16.  The largest announced deal was the Sempra Energy agreement to acquire Energy Future Holdings Corp. for $18.8 billion.[114] Utility transactions such as Sempra’s and corporate deals once again drove deal value in the third quarter, with corporate deals accounting for $41.8 billion or 93% of total deal value.  Strategic buyers also generated the largest share of deal value, consistent with prior quarters, while strategic and financial buyers split deal volume.  Inbound deals from Canadian investors were down from earlier in the year, totaling $5.4 billion in deal value.  Finally, renewable deal activity was limited to 1% of total deal value.[115] In North America, infrastructure transactions will likely continue to drive M&A activity in 2018, as gas-fired generation and renewable resources play an increasingly prominent role in the region’s energy mix.  In addition, with the decades-long industry trend of consolidation set to continue, small and mid-cap utilities will remain potential acquisition targets.[116]  Many larger utilities may shift from buying small companies toward engaging in mergers of equals, due to the extent to which they have leveraged their balance sheets and regulatory concerns surrounding such leverage.  Such a shift would likely decrease individual deal value, but boost deal volume.[117]  A compression in deal value may also be expected going forward as the prospect of additional interest rate increases loom, although dealmakers will continue to remain interested in regulated yields for as long as the current low interest rate environment persists.[118] [1] Final Rule, Carbon Pollution Emission Guidelines for Existing Stationary Sources:  Electric Utility Generating Units, 80 Fed. Reg. 64,662, 64,663 (Oct. 23, 2015) (Clean Power Plan). [2] Id. at 64,663–64. [3] West Virginia v. EPA, Doc. No. 1,673,071, No. 15-1363 (D.C. Cir. Apr. 28, 2017). [4] West Virginia v. EPA, 136 S. Ct. 1000, 194 L. Ed. 2d 17 (2016). [5] Exec. Order No. 13,783, 82 Fed. Reg. 16,093, 16,095 (Mar. 28, 2017). [6] West Virginia v. EPA, Doc. No. 1,673,071, No. 15-1363 (D.C. Cir. Apr. 28, 2017). [7] Proposed Rule, Repeal of Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, 82 Fed. Reg. 48,035-02 (Oct. 16, 2017). [8] Id. at 48,039. [9] Id. at 48,036. [10] Id. at 48,036. [11] California Air Resources Board, “California’s Proposed Compliance Plan for the Federal Clean Power Plan” (July 26, 2017), https://www.arb.ca.gov/cc/powerplants/meetings/07272017/final-proposed-plan.pdf. [12] U.S. Climate Alliance, “Statement on EPA Repeal of Clean Power Plan” (Oct. 9, 2017). [13] County of San Mateo v. Chevron Corp. et al., Case No. 3:17-cv-4929 (N.D. Cal.); City of Imperial Beach v. Chevron Corp. et al., Case No. 3:17-cv-4934 (N.D. Cal.); County of Marin v. Chevron Corp. et al., Case No. 3:17-cv-4935 (N.D. Cal.). [14] City Attorney of Oakland v. BP p.l.c. et al., Case No. 3:17-cv-06011 (N.D. Cal.); City Attorney of San Francisco v. BP p.l.c. et al., Case No. 3:17-cv-06012 (N.D. Cal.). [15] County of Santa Cruz v. Chevron Corp., et al., 17-cv-03242 (Santa Cruz Cty. Sup. Ct. filed Dec. 20, 2017); City of Santa Cruz v. Chevron Corp., et al., 17-cv-03243 (Santa Cruz Cty. Sup. Ct. filed Dec. 20, 2017); City of New York v. BP P.L.C., et al., 1:18-cv-182 (S.D.N.Y. filed Jan. 9, 2018). [16] Juliana v. United States, Case No. 15-cv-1517-TC (D. Or.). [17] Conservation Law Foundation, Inc. v. Exxon Corp., et al., Case No. 16-11590 (D. Mass.). [18] Conservation Law Foundation, Inc. v. Shell Oil Prods. US, et al., Case No. 17-cv-00396 (D.R.I.). [19] Ramirez, et al. v. Exxon Mobil Corp., et al., Case No. 16-cv-3111 (N.D. Tex.). [20] Attia, et al. v. Exxon Mobil Corp., et al., Case No. 16-cv-3484 (S.D. Tex.). [21] Exxon Mobil Investigated for Possible Climate Change Lies by New York Attorney General, N.Y. Times (Nov. 5, 2017). [22] The NYAG investigation followed two pieces of investigative journalism on Exxon’s historical record on climate change.  Exxon: The Road Not Taken, Inside Climate News (Sept. 2016); What Exxon Knew About the Earth’s Melting Arctic, L.A. Times (Oct. 9, 2015). [23] Exxon Mobil Fraud Inquiry Said to Focus More on Future Than Past, N.Y. Times (Aug. 19, 2016); New York Attorney General Alleges Exxon Misled Investors on Climate, Wall St. J. (June 2, 2017).  The SEC also reportedly investigated Exxon’s reserves accounting practices.  Bradley Olson & Aruna Viswanatha, SEC Investigating Exxon on Valuing of Assets, Accounting Practices, Wall St. J. (Sept. 20, 2016). [24] Exxon Emissions Costs Accounting ‘May Be a Sham,’ New York State Says, N.Y. Times (June 2, 2017). [25] Climate Fraud Investigation of Exxon Draws Attention of 17 Attorneys General, Inside Climate News (Mar. 30, 2016).  Attorneys General from the following states and territories participated in the “coalition”:  CA, CT, DC, IL, IA, ME, MD, MA, MN, NM, NY, OR, RI, VA, VT, WA, and the USVI. [26] The Massachusetts AG issued a subpoena to Exxon on April 19, 2016.  AGO’s Exxon Investigation, Attorney General of Massachusetts (last accessed Dec. 7, 2016), http://bit.ly/2hgivy7. [27] The California Attorney General at the time (now Senator Kamala Harris) announced in January 2016 that her office was opening an investigation into Exxon, but it does not appear that a subpoena was ever issued.  California investigating whether Exxon Mobil lied about climate change, The Hill (Jan. 20, 2016); In Climate Fraud Case Against Exxon, Many Waiting for California’s Big Move, Climate Liability News (Sept. 18, 2017). [28] The USVI AG, working with plaintiffs’ firm Cohen Milstein, subpoenaed Exxon in March 2016 under the territory’s anti-racketeering laws.  Exxon challenged the subpoena in Texas federal court, and the AG later withdrew it.  U.S. Virgin Islands to withdraw subpoena in climate probe into Exxon, Reuters (June 29, 2016). [29] Exxon filed an action against NYAG in federal court, and after the Massachusetts AG issued its subpoena, Exxon added it to the action.  The NYAG/Massachusetts action was transferred to the U.S. District Court for the Southern District of New York in March 2017, where it is still pending.  Exxon Mobil Corp. v. Schneiderman, No. 17-cv-2301 (S.D.N.Y.); Texas judge kicks Exxon climate lawsuit to New York court, Reuters (Mar. 29, 2017).  Exxon filed suit against the USVI in Texas state court, which was dismissed after the USVI AG agreed to withdraw its subpoena.  U.S. Virgin Islands to withdraw subpoena in climate probe into Exxon, Reuters (June 29, 2016); Exxon Mobil Corp. v. Walker, No. 017-284890-16 (Tarrant Cnty. Ct.). [30] Exxon takes climate-change probe fight to Massachusetts top court, Reuters (Dec. 5, 2017). [31] People of the State of New York v. Pricewaterhouse Coopers LLP, No. 451962-2016 (N.Y. Sup. Ct.); see also [32] Top NY Court Won’t Take Up Exxon Climate Subpoena Appeal, Law360 (Sept. 12, 2017). [33] Judge OKs Deposition of Tar Sands Employee in Exxon Climate Fraud Probe, Inside Climate News (June 16, 2017). [34] Assem. Bill No. 398 (2017-2018 Reg. Sess.). [35] Assem. Bill No. 617 (2017-2018 Reg. Sess.). [36] Urgenda Foundation v. The Netherlands (Ministry of Infrastructure and the Environment) Hague DC C/09/456689/HA 2A 13-1396 (Chamber for Commercial Affairs, 24 June 2015); Decision and Summary available at http://bit.ly/1N9DivW. [37] Ridhima Pandey v. Union of India & Central Pollution Control Board, OA No. 187/2017 (Nat’l Green Trib. Mar. 2017), http://bit.ly/2nYxDXR. [38] Verein KlimaSeniorinnen Schweiz (Senior Women for Climate Protection) v. Federal Council (Nov. 25, 2016), http://bit.ly/2BQo4Nk.  In May 2017, the Swiss government rejected the complaint, noting that parliament, and not the courts, is responsible for setting climate policy.  Environment Ministry Snubs ‘Climate Complaint,’ SwissInfo (May 17, 2017), http://bit.ly/2BW6yYG. [39] Climate Case:  The Student vs the Minister, New Zealand Herald, http://bit.ly/2qP0ptZ.  The case was dismissed in November 2017 as moot because the recently elected government has updated the country’s emissions targets. [40] Writ of Summons, Greenpeace Nordic Assoc. & Natur Og Ungdum (Nature & Youth) v. Norway, Case No. 16-166674TVI-OTIR/06 (Oslo Dist. Ct. Oct. 18, 2016), http://bit.ly/2jaASds.  On January 4, 2018, the district court in Oslo dismissed plaintiff’s claims. [41] Climate Change Concerns Prompt Court to Block Vienna Airport Expansion, Inside Climate News (Feb. 15, 2017), https://insideclimatenews.org/news/14022017/climate-change-vienna-airport-paris-climate-agreement-james-hansen. [42] Victory in SA’s First Climate Change Case, Earthlife Africa (Mar. 8, 2017), http://earthlife.org.za/2017/03/08/victory-in-sas-first-climate-change-case/. [43] Press Release, Germanwatch, Historic Breakthrough with Global Impact in “Climate Lawsuit” (Nov. 30, 2017), https://germanwatch.org/en/14795.  The case was initially dismissed, but in November 2017, the higher regional court in Hamm ruled that the case can move to the evidentiary stages. [44] Notice, In re Nat’l Inquiry on the Impact of Climate Change on the Human Rights of the Filipino People and the Responsibility therefor, if any, of the “Carbon Majors,“ No. CHR-NI-2016-0001 (Philippines Comm’n on Human Rights Oct. 18, 2017), http://www.greenpeace.org/seasia/ph/PageFiles/735291/Notice_on_preliminary_conference_of_parties/Notice.pdf. [45] Complaint Concerning IFC Investments in and Financing to RCBC (Oct. 11, 2017), https://www.inclusivedevelopment.net/wp-content/uploads/2017/10/Letter-of-Complaint-to-CAO_Phillippines-Coal-final.pdf. [46] Concise Statement, Guy Abrahams v. Commonwealth Bank of Australia, VID879/2017 (Fed. Ct. Victoria, Aug. 8, 2017), https://www.envirojustice.org.au/sites/default/files/files/170807%20Concise%20Statement%20(as%20filed).pdf. [47] Gareth Hutchens, Commonwealth Bank Shareholders Drop Suit over Nondisclosure of Climate Risks, The Guardian (Sept. 21, 2017), https://www.theguardian.com/australia-news/2017/sep/21/commonwealth-bank-shareholders-drop-suit-over-non-disclosure-of-climate-risks. [48] Americans for Clean Energy v. EPA, 864 F.3d 691 (D.C. Cir. 2017). [49] Sinclair Wyo. Ref. Co. v. EPA, 874 F.3d 1159 (10th Cir. 2017). [50] Sierra Club v. DOE, 867 F.3d 189 (D.C. Cir. 2017). [51] https://www.boem.gov/NP-Draft-Proposed-Program-2019-2024. [52] Sierra Club v. FERC, 867 F.3d 1357 (D.C. Cir. 2017). [53] https://www.ferc.gov/industries/gas/enviro/eis/2017/09-27-17-DEIS/supplemental-DEIS.pdf. [54] Ass’n of Irritated Residents v. Kern Cty. Bd. of Supervisors, No. F073892, 2017 WL 5590096 (Cal. Ct. App. Nov. 21, 2017). [55] Chevron Mining Inc. v. United States, 863 F.3d 1261 (10th Cir. 2017). [56] See 51 FR 41206, Nov. 13, 1986, amending 33 CFR 328.3; 53 FR 20764, June 6, 1988, amending 40 CFR 232.2). [57] 547 U.S. 715 (2006). [58] In re U.S. Dep’t of Def. and U.S. Envtl. Protection Agency Final Rule: Clean Water Rule, No. 15-3751 (lead), slip op. at 6. [59] Upstate Forever v. Kinder Morgan Energy Partners, 252 F. Supp. 3d 488 (D.S.C. 2017). [60] Sierra Club v. Va. Elec. & Power Co., 247 F. Supp. 3d 753 (E.D. Va. 2017). [61] The NSR program is a preconstruction permitting program that aims to ensure that air quality is protected when stationary sources of air pollution are newly built or modified.  See U.S. EPA, New Source Review (NSR) Permitting, https://www.epa.gov/nsr.  NSR permits specifying the extent of construction allowed under the permit, and also imposes limitations on emissions from the source and the frequency of the operation of the source.  U.S. EPA, Learn About New Source Review, https://www.epa.gov/nsr/learn-about-new-source-review.  There are three types of NSR permits:  (1) Prevention of Significant Deterioration (“PSD”) permits, which are required for new major sources or a major source making a major modification in areas that meet the National Ambient Air Quality Standards (“NAAQS”); (2) Nonattainment NSR permits, which are required for new major sources or major sources making a major modification in areas that do not meet one or more of the NAAQS; and (3) Minor Source permits.  Id. [62] Presidential Memorandum on Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing, 82 Fed. Reg. 8,667 (Jan. 24, 2017). [63] Id. [64] Exec. Order No. 13,783, 82 Fed. Reg. 16,093 (Mar. 28, 2017). [65] U.S. Dep’t of Commerce, “Streamlining Permitting and Reducing Regulatory Burdens for Domestic Manufacturing” (Oct. 6, 2017), https://www.commerce.gov/sites/commerce.gov/files/streamlining_permitting_ and_reducing_regulatory_burdens_for_domestic_manufacturing.pdf. [66] Id. at 43–44. [67] Id. [68] Id. at 48. [69] U.S. EPA, “Final Report on Review of Agency Actions that Potentially Burden the Safe, Efficient Development of Domestic Energy Resources Under Executive Order 13783” (Oct. 25, 2017), https://www.epa.gov/sites/ production/files/2017-10/documents/eo-13783-final-report-10-25-2017.pdf. [70] Id. at 2. [71] Id. at 2–3. [72] Id. at 3. [73] Id. [74] U.S. EPA, Memorandum, “New Source Review Preconstruction Permitting Requirements:  Enforceability and Use of the Actual-to-Proceed-Actual Applicability Test in Determining Major Modification Applicability” (Dec. 7, 2017) at 8 (“The EPA does not intend to substitute its judgement [sic] for that of the owner or operator by ‘second guessing’ the owner or operator’s emissions projections.”). [75] Id. at 2. [76] Indeed, the recently appointed Assistant Administrator for EPA’s Office of Air and Radiation, Bill Wehrum, was a leading litigator on NSR issues and was an integral part of several key decisions affecting the scope of the NSR program in his prior position in the Agency under President George W. Bush.  See, e.g., William L. Wehrum, U.S. EPA, “Source Determinations for Oil and Gas Industries” (Jan. 12, 2007), https://www.epa.gov/sites/ production/files/2015-07/documents/oilgas.pdf. [77] See, e.g., U.S. EPA, “Fact Sheet – Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NSR):  Removal of Vacated Elements” (Jun. 5, 2007), https://www.epa.gov/sites/production/files/2015-12/documents/20070605fs.pdf (discussing court ruling vacating portions of 2002 NSR improvement rule). [78] In re Application of Duke Energy Ohio, Inc., 82 N.E.3d 1148 (Ohio 2017) (Vectren Energy Delivery of Ohio, Inc. participated as an intervening appellee). [79] Sierra Club v. Chesapeake Operating, LLC, 248 F. Supp. 3d 1194 (D. Okla. 2017). [80] 848 F.3d 590 (4th Cir. 2017). [81] 42 U.S.C. §§ 2111(a), 2014(e)(2); see also 42 U.S.C. § 2111(b). [82] Pacific Gas & Elec. Co. v. State Energy Resources Conservation & Dev. Comm’n, 461 U.S. 190 (1983). [83] See Supreme Court Docket 16-1275. [84] United States v. Am. Commercial Lines, L.L.C., 875 F.3d 170, 173-74 (5th Cir. 2017) (quoting Rice v. Harken Exploration Co., 250 F.3d 264, 266 (5th Cir. 2001)). [85] 875 F.3d at 175-76. [86] Bd. of Comm’ns of Se. La. Flood Prot. Auth.-East v. Tenn. Gas Pipeline Co., 850 F.3d 714 (5th Cir. 2017), cert. denied sub nom. No. 17-99, 2017 WL 4869188 (U.S. Oct. 30, 2017). [87] Webb v. Exxon Mobil Corp., 856 F.3d 1150 (8th Cir. 2017). [88] Hill v. Sw. Energy Co., 858 F.3d 481 (8th Cir. 2017). [89] Elmore v. Dixie Pipeline Co., — So.3d — (Miss. Ct. App. 2017). [90] Bristow First Assembly of God v. BP p.l.c., No. 15-523, 2017 WL 3123661 (N.D. Okla. July 21, 2017). [91] Hill, 858 F.3d at 481. [92] Abrams v. Nucor Steel Marion, Inc., No. 15-4422 (6th Cir. May 25, 2017). [93] Brantley v. International Paper Co., No. 09-230, 2017 WL 2292767 (M.D. Ala. May 24, 2017); 2017 WL 3325085 (M.D. Ala. Aug. 3, 2017). [94] Refinery and Flaring are separate NEI, but we have grouped them in this update as each NEI addresses issues typically experienced by two common industry groups – refineries and chemical manufacturers. [95] U.S. EPA, Compliance Alert: EPA Observes Air Emissions from Controlled Storage Vessles at Onshore Oil and Natural Gas Production Facilities, at 1 (Sept. 2015), available at https://www.epa.gov/sites/production/files/2015-09/documents/oilgascompliancealert.pdf. [96] Deloitte Center for Energy Solutions, Oil and Gas Mergers and Acquisitions Report—Midyear 2017, Overcoming the Headwinds 1 (2017). [97] Id. [98] Keisha Bandz, Where Most 2017 Energy M&A Deals Took Place, Key Trends in Energy Sector Mergers and Acquisitions in 2017, http://marketrealist.com/2017/09/where-most-energy-ma-deals-took-place (Sept. 25, 2017). [99] Deloitte, supra n.1 at 4. [100] PriceWaterhouseCoopers LLP, US Oil & Gas Deals insights third quarter 2017 1 (2017). [101] Deloitte, supra n.1 at 4. [102] Keisha Bandz, This Sector Dominated M&A Activity in Energy Section in 2017, Key Trends in Energy Sector Mergers and Acquisitions in 2017, http://marketrealist.com/2017/09/this-sector-dominated-ma-activity-in-energy-sector-in-2017 (Sept. 25, 2017). [103] Deloitte, supra n.1 at 2. [104] PriceWaterhouseCoopers LLP, supra n.5. [105] Deloitte, supra n.1 at 2. [106] PriceWaterhouseCoopers LLP, supra n.5 at 5. [107] S&P Global, Midstream dealmaking dries up as debt concerns mount, Energy M&A Rev. 1 (Sept. 2017). [108] PriceWaterhouseCoopers LLP, supra n.5 at 5. [109] PriceWaterhouseCoopers LLP, supra n.5. [110] Deloitte, supra n.1 at 6. [111] Peter Maloney, Despite high-profile denials, power sector M&A strength to continue, Utility Dive, https://www.utilitydive.com/news/despite-high-profile-denials-power-sector-ma-strength-to-continue/441467/ (May 1, 2017). [112] PriceWaterhouseCoopers LLP, North American Power & Utilities Deal Insights Q3 2017 1 (2017). [113] Maloney, supra n.16. [114] PriceWaterhouseCoopers LLP, supra n.17. [115] Id. [116] PriceWaterhouseCoopers LLP, supra n.5 at 5. [117] Maloney, supra n.16. [118] PriceWaterhouseCoopers LLP, supra n.5 at 5. The following Gibson Dunn lawyers assisted in the preparation of this client update: Kristine Beaudoin, Rachel Corley, Mia Donnelly, Richard Dudley, Stacie Fletcher, Avi Garbow, Kyle Guest, Veronica Till Goodson, Kelsey Helland, Matthew Hoffman, Christopher Kopp, Thomas Manakides, Michael Murphy, Daniel Nelson, Andrea Neuman, Jeffrey Rosenberg, Peter Seley, Bryson Smith, and Katie Zumwalt. Gibson Dunn’s Environmental Litigation and Mass Tort practice group represents clients in all environmental, mass tort litigation, and environmental defense matters. The group’s lawyers also regularly provide counsel in ongoing regulatory compliance, legislative activities, transactional matters, and on environmental due diligence. We are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Environmental Litigation and Mass Tort practice group: Washington, D.C. Stacie B. Fletcher (+1 202-887-3627, sfletcher@gibsondunn.com) Avi S. Garbow – Co-Chair (+1 202-955-8558, agarbow@gibsondunn.com) Raymond B. Ludwiszewski (+1 202-955-8665, rludwiszewski@gibsondunn.com) Michael K. Murphy (+1 202-955-8238, mmurphy@gibsondunn.com) Daniel W. Nelson – Co-Chair (+1 202-887-3687, dnelson@gibsondunn.com) Peter E. Seley – Co-Chair (+1 202-887-3689, pseley@gibsondunn.com) Los Angeles Patrick W. Dennis (+1 213-229-7568, pdennis@gibsondunn.com) Matthew Hoffman (+1 213-229-7584, mhoffman@gibsondunn.com) Thomas Manakides (+1 949-451-4060, tmanakides@gibsondunn.com) New York Anne M. Champion (+1 212-351-5361, achampion@gibsondunn.com) Andrea E. Neuman (+1 212-351-3883, aneuman@gibsondunn.com) San Francisco Peter S. Modlin (+1 415-393-8392, pmodlin@gibsondunn.com) Please also feel free to contact the following Oil and Gas practice group leaders and members: Michael P. Darden – Chair, Houston (+1 346-718-6789, mpdarden@gibsondunn.com) Tull Florey – Houston (+1 346-718-6767, tflorey@gibsondunn.com) Hillary H. Holmes – Houston (+1 346-718-6602, hholmes@gibsondunn.com) Shalla Prichard – Houston (+1 346-718-6644, sprichard@gibsondunn.com) Doug Rayburn – Dallas (+1 214-698-3442, drayburn@gibsondunn.com) Gerry Spedale – Houston (+1 346-718-6888, gspedale@gibsondunn.com) Justin T. Stolte -Houston (+1 346-718-6800, jstolte@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 5, 2017 |
Internal Revenue Service Announces Relief for Southeast Texas Due to Hurricane Harvey

The Internal Revenue Service (the “IRS”) has announced relief from certain time sensitive deadlines for taxpayers affected by Hurricane Harvey (https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-harvey-in-texas). Pursuant to the announcement, affected Taxpayers (described below) may defer certain time-sensitive actions otherwise to be made on or after August 23, 2017 and before January 31, 2018 (the “Postponement Period”) to January 31, 2018. The IRS also reminded taxpayers of their ability to report deductions for casualty losses unreimbursed by insurance for Harvey in 2016 or 2017 and provided guidance on how to get expedited refund processing for 2016. In addition, the IRS has announced relief intended to ease the process whereby employer-sponsored retirement plans, such as 401(k) plans, may extend loans and make hardship distributions to individuals impacted by Hurricane Harvey and their family members (https://www.irs.gov/pub/irs-drop/a-17-11.pdf) (the “Relief Announcement”). Actions Postponed Tax Reporting and Payment Deadlines. Affected Taxpayers may postpone payment and filing deadlines for federal income taxes (e.g., individual, corporate and partnership tax return filings, estimated tax payments otherwise due September 15, 2017 and January 15, 2018) that would have been due during the Postponement Period until January 31, 2018. Payroll and certain excise tax reporting is postponed but not payment of employment and excise tax deposits (although penalties on deposits due on or after August 23, 2017 and before September 7, 2017 will be abated if paid by September 7, 2017). Employee plan reporting on Form 5500 due during the Postponement Period is included in the relief. Like-Kind Exchange Reporting Deadlines. The last day of the 45-day identification period and the 180 day exchange period and applicable reverse like kind exchange periods are postponed for Affected Taxpayers to the end of the Postponement Period and possibly up to 120 days thereafter. This rule also applies for some non-Affected Taxpayers in certain cases where the property at issue, a counterparty, a titleholder, or material documents are in the affected areas or lender or title insurance issues arise due to Hurricane Harvey. Affected Taxpayers Residence or Place of Business. Individuals with a principal residence in an affected area and business entities or sole proprietorships whose principal place of business is in an affected area Relief Workers. An individual relief worker affiliated with a recognized government or philanthropic organization and who is assisting in an affected area Location of Tax Records. Individuals, business entities, sole proprietorships, estates and trusts if such taxpayer has tax records necessary to meet a deadline and those records are maintained in an affected area Spouses and Traveling Victims. Spouses of an affected taxpayer (with respect to a joint return) and individuals visiting the affected area but are killed or injured as a result of the disaster Texas Counties Treated as Disaster Areas* Aransas Gonzales Newton Austin Hardin Nueces Bastrop Harris Orange Bee Jackson Polk Brazoria Jasper Refugio Calhoun Jefferson Sabine Chambers Karnes San Jacinto Colorado Kleberg San Patricio DeWitt Lavaca Tyler Fayette Lee Victoria Fort Bend Liberty Walker Galveston Matagorda Waller Goliad Montgomery Wharton *As of September 5, 2017 Casualty Losses In the announcement, the IRS reminds taxpayers that they may opt to deduct unreimbursed casualty losses from a federally declared disaster area in the year of the disaster or in the preceding taxable year. See IRS Publication 547 here: (https://www.irs.gov/publications/p547/ar02.html#en_US_2016_publink1000225399). Note casualty loss deductions are subject to other limitations, such as a floor of $100 and 10% of adjusted gross income, each discussed in IRS Publication 547. Affected taxpayers declaring the deduction on their 2016 return should put the disaster designation “Texas, Hurricane Harvey” at the top of Form 4684 (https://www.irs.gov/forms-pubs/form-4684-casualties-and-thefts) to expedite their refund claim. Benefit Plans This Relief Announcement extends to 401(k), 403(b) and 457(b) plans, IRAs, and qualified defined benefit pension plans with stand-alone accounts that hold employee contributions and rollover amounts.  Employees and close family members (e.g., spouse, children, grandchildren, parents, grandparents and other dependents) who live or work in areas affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA) are eligible for relief under the Relief Announcement.[1] The Relief Announcement provides the following forms of relief: A plan will not be treated as failing to satisfy any requirement under the Internal Revenue Code (“Code”) merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Harvey. When determining whether to make a hardship distribution, plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution (unless the plan administrator has actual knowledge to the contrary). The relief applies to any hardship of the employee, not just the types enumerated under the Code. The six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply. Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features.  However, the plan must be amended to allow for plan loans and/or hardship distributions no later than the end of the first plan year beginning after December 31, 2017 (i.e., on or before December 31, 2018 for calendar year plans). Even in a situation where a plan administrator has not assembled all of the documentation required for a loan or distribution, loans and distributions may be made so long as the plan administrator makes a good-faith diligent effort under the circumstances to comply with those requirements.  As soon as practicable, the plan administrator (or financial institution in the case of IRAs) must make a reasonable attempt to assemble any forgone documentation. The relief provided under the Relief Announcement only applies to loans and hardship distributions made on or prior to January 31, 2018.  It is important to note that the tax treatment of loans and distributions remains unchanged. Thus, any distribution (not including amounts already taxed) made pursuant to the relief provided in the Relief Announcement will be includible in gross income and generally subject to the 10-percent additional tax imposed under Code section 72(t).    [1]   Parts of Texas are currently eligible for individual assistance. A complete list of eligible counties is available at https://www.fema.gov/disasters.  If additional areas in Texas or other states are identified by FEMA for individual assistance because of damage related to Hurricane Harvey, the relief provided in the Relief Announcement will also apply from the date specified by FEMA as the beginning of the incident period. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other tax- or benefits-related developments.  If you have any questions, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax or Executive Compensation and Employee Benefits practice groups, or the authors: James Chenoweth – Houston (+1 346-718-6718, jchenoweth@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+1 214-698-3425,khanvey@gibsondunn.com) David Sinak – Dallas (+1 214-698-3107, dsinak@gibsondunn.com) Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 20, 2017 |
French Market Update – July 2017

France is great again? Many of you have read positive articles on the new government in France and its freshly elected President, Emmanuel Macron. Is it real? First, one needs to understand the context: a quasi-unknown individual a year ago, Mr. Macron has stunned all by winning the first, then second, round of the presidential election, as an "anti-populist", pro-European, candidate. Almost as surprisingly, his party (called "Republic on the Move!"), which has been in existence for less than a year, won an absolute majority (with 350 seats over 577) in the subsequent parliamentary election, held on June 11 and 18, 2017, reducing, for example, the Socialist representatives to 28 from 280 in 2012. This, in turn, means that for the next five years, Mr. Macron has both a mandate and an ability to implement his program. France, in electing him with such latitude, rejected the extreme right (with a Frexit program) and the extreme left (with a very high taxation program). One of Mr. Macron’s key strengths has been his "extreme centrist" positioning, based on the simple concept that necessary policies are neither leftist or rightist ones; they are just common sense and should be supported by all reasonable politicians regardless of their original party. He also promoted a very large number of non-politicians to political positions, thus considerably altering the political landscape. Being an ex-Rothschild banker, Mr. Macron is guided by a resolute desire to "open the country for business" and eliminate the disincentives to investment in France, particularly at a time when Brexit causes potential issues for businesses based in the UK. He also understands the need to act fast, and intends to pass his most emblematic promises, aiming at triggering a supply-side shock and boosting confidence, before the end of 2017. What are these promises? An extensive labor reform to "move the rules of the game" aiming at lowering the unemployment rate to 7% at the end of his term in 2022. Proposed measures include caps on financial penalties for companies sued for firing employees, allowing businesses more flexibility to define internal working rules, merging the various employee representative bodies currently existing in French business organizations to improve social dialogue. To achieve this reform expeditiously, the French Government wants to use a special procedure to pass the measures this Summer without extended debate in parliament. The details of the reform are expected to be announced at the end of August. Strong workers antagonism is likely, but the climate has changed and popular support for movements has weakened.  Tax reform aimed at restoring France’s attractiveness: Among the key signals sent to the business community: a decrease of the corporate income tax (from 34.3% today to 25% in 2022), and, as from 2019, the replacement of the tax credit for competitiveness and employment (CICE) by a substantial reduction in the employers’ social contributions.     Another aspect of the proposed tax reform will be the replacement of the general wealth tax by a special wealth tax limited to real estate and the creation of a "flat tax" on capital gains and dividends at a rate of about 30%. The purpose of this proposal is to favor financial investments over real estate ones.  These long-awaited measures will kick-in as soon as 2018. A 50-billion euro investment program: Although not yet fully financed, this plan will likely rely on the existing program "Investing for the Future" launched by President Sarkozy and on a new wave of privatizations. This program embraces huge investments in training (up to €15bn), supports to the ecological transition, the digitalization of the healthcare system, investments in infrastructures (such as transports) and modernization of the State services, all of which will favor future business fluidity. A large number of these projects will be open for bidding to non-French entities. An additional 10 billion euro "innovation program" is planned to invest into Cleantech, Greentech, AI, all in order to attract and retain start-ups. A new momentum for foreign investments in France After seven years of profound economic crisis, and five years of French bashing due to the former president’s administration, his tax increases and anti-business stance, France now benefits a true shift in perception. These changes have the effect to make France a desirable investment target, especially for business and real estate. Opportunities for foreign investors are relatively cheap, especially given the quality of the administration, education, health and infrastructure and the stability of the political system. France has numerous fundamental strengths including its central location in Europe, excellent communication and transport infrastructure, significant industrial achievements in a wide range of sectors, high productivity, and a well-qualified workforce. All these strengths support opportunities for foreign investments, from the United States and elsewhere. 2017 marks Gibson Dunn’s 50th year in France.  With 45 lawyers, whose expertise covers all aspects of business law, such as corporate transactions, restructuring/insolvency, private equity, litigation, compliance, public law and regulatory, technology and innovation, and finance, as well as tax and real estate, our Paris office,  is well-positioned to assist all the Firm’s clients as their strategy shifts towards France. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. For further information, please contact the Gibson Dunn lawyers with whom you usually work, or the following authors in the firm’s Paris office: Bernard Grinspan (+33 1 56 43 13 00, bgrinspan@gibsondunn.com) Judith Raoul-Bardy (+33 1 56 43 13 00, jraoulbardy@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 31, 2017 |
The Gross-Split Production Sharing Contract: The End of an Era for Indonesia’s Upstream Oil and Gas Industry and Traditional PSC Model

On 13 January 2017, the Ministry of Energy and Mineral Resources of the Republic of Indonesia issued Regulation No. 18 of 2017, which introduces a new form of gross-split production sharing contract and abolishes the cost recovery system, which has been a feature of Indonesia’s production sharing contracts since their inception in 1966. In this alert, we analyse the context and background of the regulation, provide an overview of its key provisions and express our views on areas that will require further clarification. Government officials hope the regulation will reinvigorate the oil and gas sector in Indonesia by drastically reducing the time for development plans to be implemented by allowing Contractors much greater control over their procurement activities. We examine this contention and review the effect of the regulation on the economics of Contractors and consider what is necessary to ensure that the Government’s objectives are met. To access a copy of our article, please click here:    Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the authors in the firm’s Singapore office: Brad Roach +65 6507 3685 broach@gibsondunn.com Alistair Dunstan +65 6507 3635 adunstan@gibsondunn.com © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 4, 2017 |
Regulatory Reform Agenda Opens Door For Public Input

​Washington, D.C. partner Avi Garbow and associate Bryson Smith are the authors of "Regulatory Reform Agenda Opens Door For Public Input," [PDF] published by Law360 on May 4, 2017.

April 28, 2017 |
The Commodities Activities of Banks: Comments on the Federal Reserve’s Notice of Proposed Rulemaking Reveal Key Concerns and Divides

One of the remaining significant issues facing the Board of Governors of the Federal Reserve System (Board) is its Notice of Proposed Rulemaking (Proposed Rule) relating to the physical commodities activities of U.S. and non-U.S. financial holding companies (FHCs).[1]  The public comment period for the Proposed Rule closed in February 2017, and like the Board’s 2014 Advanced Notice of Proposed Rulemaking (ANPR),[2] the Proposed Rule drew comments from a diverse group of parties, including members of Congress, academics, interest groups, the banking industry, and end-users of commodities and commodity-based derivatives. Commentary:  Key Points 44 end-users, comprising individual businesses, municipal end-users, and related trade groups and associations, reacted to the Proposed Rule with concern, citing issues including risk mitigation, market liquidity, transaction costs, and counterparty credit risk. Proponents, comprised of interest groups, academics and certain U.S. Senators, filed 11 submissions. They echoed the Board’s concern over perceived environmental risks and, in addition, noted the importance of restricting the potential for market manipulation. The comments filed by participants in the commodities markets show serious concerns with the Board’s approach to the Proposed Rule and disbelief that the costs of the regulation will be outweighed by market benefits.  Market participants argued that the Board failed to connect the proposed restrictions on commodities activities to the Board’s perceived risks, and that the Board did not sufficiently acknowledge the tangible commercial benefits that FHCs provide to U.S. counterparties.[3]  Market participants further contended that existing laws and regulations adequately constrain potential adverse effects. In particular, the commercial end-user community expressed strong concerns with the limitations that the Board proposed.  24 comment letters were filed by end-users and municipal end-users of commodities and commodities-based derivatives, and their related associations and industry groups,[4] including a letter from the National Association of Corporate Treasurers, on to which 18 additional end-users signed.[5]  These comment letters generally expressed a strong preference to transact with sophisticated, well-capitalized, and well-regulated FHC counterparties, as well as fear that FHCs will continue to exit commodities markets. Background The current legal authority for FHCs to engage in physical commodities activities is derived from several provisions of the Gramm-Leach-Bliley Act of 1999 (GLB Act),[6] which amended the U.S. Bank Holding Company Act of 1956 (BHC Act) to expand the permissible business activities of bank holding companies. The GLB Act permitted expanded financial activities to be carried out by a subset of bank holding companies – those whose insured depository institution subsidiaries met heightened capital and management standards[7] and had “satisfactory” or better ratings under the U.S. Community Reinvestment Act.  This subset of bank holding companies could elect “financial holding company” status; under a new section of the BHC Act, Section 4(k), FHCs could engage not only in the “closely related to banking” activities that had been permissible for all bank holding companies, but also activities that were “financial in nature” and “incidental to a financial activity,” and, on receiving a specific Federal Reserve approval, activities “complementary” to a financial activity as well.[8] Under Section 4(k)’s complementary authority, the Federal Reserve was required to find that the activity did not pose “a substantial risk to the safety or soundness of depository institutions or the financial system generally,” and that the public benefits from the activity outweighed any adverse effects.[9] In addition to Section 4(k), the GLB Act added a new Section 4(o) to the BHC Act. Section 4(o) provided that a company that was not a bank holding company when the GLB Act was enacted but that became an FHC after November 12, 1999, could “continue to engage in, or directly or indirectly own or control shares of a company engaged in, activities related to the trading, sale, or investment in commodities and underlying physical properties that were not permissible for bank holding companies to conduct in the United States as of September 30, 1997, if . . . the holding company, or any subsidiary of the holding company, lawfully was engaged, directly or indirectly, in any of such activities as of September 30, 1997, in the United States.”[10] In 2003, the Federal Reserve made its first interpretation under Section 4(k)’s complementary authority, and determined that certain physical commodities activities were “complementary” to financial activities and thus permissible for FHCs.  It did so in permitting Citigroup to retain its subsidiary Phibro, which had been a subsidiary of Travelers Group before the Citigroup-Travelers merger.[11] Following the Citigroup approval, a number of other domestic and foreign FHCs received approval to engage in physical commodities trading activities.[12]  In other orders, the Board declared energy tolling and energy management activities to be complementary to financial activities.[13] During the 2008 Financial Crisis, Morgan Stanley and Goldman Sachs became FHCs and subject to Board supervision and regulation. Both companies had been engaged in physical commodities activities in 1997 and therefore came under the legal authority contained in Section 4(o) of the BHC Act. For more information on the legal authorities that permit FHCs to engage in commodities-related activities, please see Appendix B. The ANPR In July 2013, the Board surprised most observers by announcing that it was re-evaluating its determination that physical commodities activities were complementary to financial activities.  Commodities activities had not been identified as contributing to the Financial Crisis, and Congress had specifically excluded spot commodities from the Volcker Rule’s proprietary trading prohibition, thus indicating a degree of comfort with the risks posed by commodities trading.[14] In January 2014, the Board issued its ANPR, requesting public comment with respect to three specific GLB Act authorities relevant to physical commodities activities: Section 4(k)’s complementary authority, Section 4(k)’s merchant banking authority, and The grandfather authority contained in Section 4(o) of the BHC Act. The ANPR also posed twenty-four questions that fall into the following three categories: Whether commodity-related activities by FHCs pose unacceptable systemic risk; What other costs and benefits are created by FHC engagement in commodity-related activities; and What other regulation of FHC activities in this area is necessary. Our Client Alert summarizing the ANPR and public comment is available here. The Proposed Rule On September 8, 2016, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued a study required by Section 620 of the Dodd-Frank Act (Section 620 Study).[15]  In it, the Board recommended that Congress repeal both Section 4(k)’s merchant banking authority and Section 4(o)’s grandfather provision. A little over two weeks later, the Board issued the Proposed Rule, premised on concerns over environmental risks such activities could pose.  Notably, the Board did not address allegations of market manipulation as a reason for the Proposed Rule.  Seen largely as a “de-risking” mechanism, the Proposed Rule was issued notwithstanding that many FHCs, for business reasons, have actively reduced commodity-related activities. The Proposed Rule would restrict FHC commodities activities in several ways: It would tighten the conditions for finding certain commodity activities to be “complementary” to a financial activity – most notably, by counting the value of commodities held in bank subsidiaries towards the 5 percent of Tier 1 capital limit; It would impose a 300% risk weighting on certain physical commodities held under Section 4(k) authority, and a 1,250% risk weighting on certain commodities and related assets held under Section 4(o) and the merchant banking authority; It would rescind the findings underlying the Federal Reserve orders that permitted certain FHCs to engage in energy tolling and energy management services; It would revise Regulation Y to provide that the owning and storing of copper is not an activity closely related to banking, which would remove the ability of bank holding companies to own and store copper absent a Section 4(k) complementary determination, which would be available only to FHCs; and It would impose new public reporting requirements in the form of a new Schedule HC-W, Physical Commodities and Related Activities, which would collect more specific information on the covered physical commodities holdings and activities of FHCs. In particular, the Proposed Rule’s increased risk-weights would apply to commodities defined: As a “hazardous substance” under section 104 of the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. 9601) and interpreting regulations; As “oil” under section 1001 of the Oil Pollution Act of 1990 (33 U.S.C. 2701) or section 311 of the Clean Water Act (33 U.S.C. 1321) and interpreting regulations; As a “hazardous air pollutant” under section 112 of the Clean Air Act (42 U.S.C. 7412) and interpreting regulations; or In a state statute, or regulation promulgated thereunder, that makes a party other than a governmental entity or fund responsible for removal or remediation efforts related to the unauthorized release of the substance or for costs incurred as a result of the unauthorized release; provided that the Board-regulated institution owned the commodity in the state that promulgated the law imposing such liability during the last reporting period. Comments on the Proposed Rule were originally due on December 22, 2016, but the Board agreed to extend the comment period through February 20, 2017. Scope of Comments to the Proposed Rule As of the close of business on April 26, 2017, the Board had posted 43 unique comment letters on its website.[16]  We have categorized commenters based on the following: End-Users 27 end-user companies submitted their own letter or joined a trade association letter; 8 municipal utility districts submitted their own or joint letters; 8 end-user trade associations submitted their own or joint letters; and 1 private equity firm with end-user operating companies submitted its own letter. Financial Holding Companies 1 FHC submitted a letter; 9 trade associations from the financial services industry submitted their own or joint letters; and 2 other financial companies submitted their own letters. Others 4 U.S. Senators and Representatives submitted their own or joint letters; 6 academics submitted their own or joint letters; and 9 interest groups submitted their own or joint letters. We summarize below the key points made by end-users, banks, and their trade associations as well as the arguments raised by certain U.S. Senators, interest groups, and academics.  For a list of commenters and a breakdown of certain key points raised in the comment letters, please see Appendix A. Comments to the Proposed Rule:  Key Points The end-user community focused on how the proposed rule could impact commodities markets.  They fear that the proposed rule could cause additional FHCs to exit commodities markets and identified the following concerns: End-users could be denied the ability to trade with the counterparties of their choosing. FHCs are market-makers and necessary counterparties that provide economies of scale, creditworthiness, and sophistication, which in turn provide affordable financing, risk mitigation, and other business solutions for end-user businesses. Non-bank financial institutions lack the institutional knowledge, capital, creditworthiness, transparency, and regulatory oversight necessary to serve as market makers and price commodities-related products as efficiently. With a departure of additional FHCs, the commodities markets generally would suffer from diminished liquidity and greater risk concentration. There would be fewer counterparties with the ability to enter into long-term transactions and to offer a range of financial solutions, as certain products essential to end-user operations were generally not available from non-FHCs; as a result, costs for end-user businesses and consumers would increase. Comments from an FHC commenter and industry trade groups made the following principal contentions: FHCs provide substantial benefits to consumers, commodity producers, investors, financial markets, and the broader economy by their participation in physical commodities markets and making merchant banking investments. FHC physical commodity activities are already subject to extensive regulation by the Federal Reserve and other government agencies, and Basel III has imposed additional capital requirements for certain of these activities.  Risks identified by the Board as justification for additional capital levies may already be captured under current regulatory requirements, such as requirements for FHCs to account for the credit risk of subsidiaries. Section 4(o) authority is an explicit recognition by Congress of the importance of the expertise and risk management provided by grandfathered companies in the physical commodity markets.  The Proposed Rule undermines this statutory grant and is a direct contradiction of the authority outlined in the GLB Act.  Such fundamental changes are contrary to well-recognized limits to administrative powers and, as suggested by the Board in its Section 620 Study, are solely within the purview of Congress. Before imposing punitive risk-weights, the Board should conduct in-depth empirical and qualitative studies to assess the potential effects that increased capital requirements and the related departure of FHCs would have on the physical commodities markets. The environmental risks cited by the Board are exaggerated and speculative.  In addition to the Board’s failure to point to a material environmental liability borne by an FHC since the inception of the GLB Act, generally accepted principles of corporate separateness prevent enterprise-wide liability of FHCs.  Moreover, the parties legally responsible for environmental liabilities are often the facility owners and operators, not the underlying commodity owners. The lack of empirical data supporting the Proposed Rule and acknowledgment of its failure to consider unforeseen consequences warrants further caution.  The Board should present data to support its claim that additional capital requirements improve the safety and soundness of FHCs and the U.S. financial markets.  Additionally, the Board should also consider the public benefits FHCs provide to the physical commodity markets and the potential downsides to their departure from such markets. Several U.S. Senators, interest groups like Public Citizen, Amazon Watch, and Americans for Financial Reform, and certain academics supported the Proposed Rule, making the following principal arguments: Physical commodities activities present risks that are wide-ranging and whose severity is unpredictable, therefore justifying new limitations and capital requirements. The Federal Reserve should narrowly construe the authority contained in Section 4(o) to pre-GLB Act activities due to the risks posed by commodities activities. The Board had interpreted Section 4(k)’s “complementary” authority in an expanded manner that did not accord with congressional intent. Additional disclosures of FHC commodities activities were required for the Federal Reserve to regulate such activities adequately. There have been and will continue to be conflicts of interest in the commodities markets when FHCs are allowed both to own physical commodities and trade their financial equivalents. Potentially adverse effects on the commodities markets are not outweighed by the benefits of reducing risk to particular FHCs and to the financial system generally. Comments to the Proposed Rule:  Key Themes and Contentions The debate over the appropriate extent of bank commodities activities in the comment letters shows four principal issues at play: Conflicting Viewpoints:  Market Participants vs. Interest Groups and Academics There was a clear delineation in the views of market participants, on the one hand, and representatives of interest groups and academia, on the other.  Outnumbering all other commenters nearly [three-to-one], end-users of physical commodities, including municipal end-users, noted their reliance on FHCs as counterparties to finance their businesses and engage in risk mitigation.  End-users expressed concern that the Proposed Rule could force more FHCs out of the commodities markets, which they argued could lead to (1) decreased market liquidity,[17] (2) increased counterparty risk,[18] (3) increased transaction costs,[19] (4) decreased counterparty sophistication,[20] and (5) greater price volatility.[21] In contrast, academics, several U.S. Senators, and various interest groups contended that the Proposed Rule should be strengthened in various ways in light of the risks that they claimed financial institutions pose to the commodity markets and the U.S. economy.  Suggested changes to the Proposed Rule included: (1) reinterpreting and limiting Section 4(o) authority to restrict permissible activities to pre-GLB Act activities;[22] (2) expanding the scope of commodities covered by the key provisions of the Proposed Rule (copper and aluminum, agricultural commodities, electricity);[23] (3) increasing FHC commodities disclosure requirements (such as by requiring FHCs to provide narrative disclosures detailing how their operations and assets related to physical commodities are interdependent);[24] and (4) redefining merchant banking authority (removing FHCs from business strategy formulation, decisionmaking, and employee overlap with boards of portfolio companies).[25] Authority:  Congress vs. the Board Relatedly, many commenters were divided on the scope of Section 4(o) authority and the Board’s authority to interpret it. As to the first issue, academics, interest group representatives, and several U.S. Senators suggested that the rulemaking should limit Section 4(o) activities to the actual activities in which the FHCs were engaged at the time that Section 4(o) was passed.[26]  Those concerned with the Proposed Rule noted that since Section 4(o) was enacted, there has been a steady decline in the number of FHC-eligible Section 4(o) institutions participating in physical commodity markets, and therefore that additional limitations on this provision could have economically adverse effects. Commenters also were divided on the question of the appropriate scope of Board rulemaking authority.  Those advocating for Board restrictions on the extent of Sections 4(k) and 4(o) argued that it was within the Board’s power, as it was when issuing its original interpretations, to reinterpret the scope of such authorities,[27] particularly in light of the environmental, market, and financial risks alleged.[28]  End-users, financial institutions, and trade associations countered that although the Board has the authority to issue capital standards as a general matter, the use of punitive risk weightings, which would make certain physical commodity activities economically unviable, amounted to agency legislation, and ignored the fact that Congress explicitly authorized additional financial activities without revising the attendant capital rules.[29] Public Benefits:  Healthy Markets vs. Systemic Effects Commenters also disagreed on whether perceived benefits to commodities markets or the broader financial system should be the priority in the Board’s analysis. End-users and financial entities urged the Board to focus on the “real-world” implications that the Proposed Rule would have on U.S. businesses and the physical commodity markets.  Central to their concern was the apparent lack of consideration in the ANPR and Proposed Rule in estimating the economic effects of additional FHC departures,[30] as well as a failure to consider the entities that would replace FHCs as market makers and counterparties.[31]  Similarly, Congressman Bradley Byrne of Alabama cautioned that the Board should postpone rulemaking until adequate consideration is given to “the potential adverse impact upon costs to the American public, the reduction in competition, the loss of markets, and the potential for fewer creditworthy and highly regulated bank counterparties with whom end-users may transact.”[32] Academics, interest group representatives, and certain U.S. Senators noted potential risks that FHCs pose to the market, and that the benefits considered by the Board should focus on overall market stability.[33]  Proponents cited past instances of manipulation in energy and aluminum markets and the potential for future abuses; however, the Board did not discuss, nor did it advance, past instances of market manipulation as a justification for the Proposed Rule.  Interestingly, Novelis, Inc., a major producer of aluminum, noted the substantial benefits that FHCs provide to its business.[34]  Subscribing to the belief of general de-risking and separation of commercial and investment banking, proponents urged the Board to consider the overall health of the U.S. financial system over the effects of FHC departures. Liability:  Environmental Risks vs. Principles of Corporate Separateness  Although the Board premised much of the Proposed Rule on the existence of serious environmental risks, there was a substantial debate in the public comments over the factual basis of the Board’s claims. Opponents of the Proposed Rule noted the Board’s lack of substantive discussion on the extent of environmental risks posed by FHC commodity activities.  They argued that, historically, FHC physical commodity activities have been conducted safely, without a major environmental incident since the inception of Section 4(k) and Section 4(o) authority.[35]  In addition, they contended that such speculative risks are already captured by capital requirements mandating that FHCs account for the credit risk of their subsidiaries, arguing that the larger capital reserves FHCs maintain to address institutional credit risk guard against environmental risks at the subsidiary level.[36]  Opponents further cited studies on legal principles of corporate separateness, which they stated demonstrated that most courts were not willing to pierce the corporate veil by reason of an environmental disaster alone.[37] Like the Board, supporters of the Proposed Rule focused on environmental disasters, albeit  disconnected to FHC activity, like the Deepwater Horizon disaster, as evidence of the potential for massive environmental liabilities; however, and also like the Board, they did not identify actual examples of material FHC liability stemming from physical commodity activities to date.  Instead, they referred to the specific holdings of large FHCs,[38] and cited disasters in related activities, such as oil exploration and energy projects,[39] in contending that such holdings pose unacceptable risks that should be divorced from banking activities. Conclusion Because many FHCs have retreated from the commodity markets since the Financial Crisis for other reasons, the concerns of market participants that further limitations on FHC activities will adversely affect their businesses and their customers—concerns expressed by numerous such participants during the comment period—appear justified.[40]  When weighed against the lack of concrete evidence of widespread veil piercing in environmental cases, these concerns justify a cautious approach in restricting commodity authority, particularly in the absence of congressional action.[41] Appendix A:  Summary of Key Points Raised by Commenters Commenter Type of Entity Key Points Raised in Comment Letter 1.      Alon USA Energy, Inc. End-User   Alon is an independent refinery owner and marketer of petroleum products in the United States that transacts with FHCs to hedge against normal and expected price volatilities. Relies on FHCs to timely access physical commodity markets to hedge against price volatilities and maintain stable funding. FHCs allow Alon to use excess inventory as collateral to hedge long- and short-term inventory needs.  FHCs further serve to bring better convergence between financial and physical assets which Alon uses to mitigate risks. Concerned that the departure of FHCs would force Alon to transact with counterparties in markets in which they do not operate. 2.      Barrick Gold End-User       Barrick is the largest gold-mining company in the world and a significant miner of copper. Argues that the Board has not and cannot demonstrate that the metals market poses a sufficient risk to warrant the proposed changes. It maintains that the proposal should be rescinded, but that if it is not, it should at least be modified so as to not cover the metals market. Concerned that risks to BHCs from metals activities are not substantial and that the oil and gas incidents that the Board cites are clearly distinguishable from any risks faced in the metals markets. Explains that there is no risk posed by metals since copper or precious metals are not released into the environment, mining activities are subject to rigorous safety and environmental controls and financial assurance requirements, mere owners of commodities are generally outside the scope of liability of environmental statues, and courts are very unlikely to pierce the corporate veil. Proposes the following revisions: excluding metals from the definition of “covered physical commodity”; reclassifying copper under the “closely related” authority only to the extent that it is in a form primarily suited for industrial or commercial use; and excluding non-covered physical commodities from the tighter Section 4(k) cap on assets held under the complementary authority (otherwise, this risks the possibility that FHCs will exit the metals market). 3.      Calpine Corporation End-User Calpine is the largest generator of electricity from natural gas and geothermal resources in the U.S. Opposes the rulemaking because it will hinder its ability to engage in risk-mitigation and could result in it having access to fewer credit-worthy counterparties. 4.      Cheniere Energy, Inc. End-User Cheniere is involved in the development and operations of liquefied natural gas terminals and transacts in the physical commodities markets to manage its risks. Argues that the Board’s analysis of the impact of the Proposed Rule is inconsistent with Cheniere’s experience in these markets.  Contests the Board’s assumption that FHCs only consist of 1% of the physical commodity markets and notes that companies like Cheniere transact with FHCs on a daily and monthly basis to address funding needs and mitigate risks. Concerned that increased regulation will cause FHCs to leave the markets.  Notes that they rely on FHCs to serve as market makers and facilitate liquid markets.  By contrast, commercial companies transact only to meet their acute needs. 5.      Cogentrix Energy Power Management, LLC End-User Cogentrix is a manager and operator of power generation facilities across the U.S. Concerned that the new rules will make it more difficult and expensive for it to achieve risk-mitigation through the use of commodity-related derivatives, will restrict competition and innovation, and will reduce market liquidity and result in higher prices for commodities and commodity-related production. Argues that this will ultimately result in higher prices for consumers. 6.      Delek US Holdings, Inc. End-User Delek is a diversified downstream energy company with operations in two primary business segments: petroleum refining and logistics. Notes that FHCs provide liquidity, offer customized solutions to meet its business needs, and provide important risk-mitigation opportunities.  Also asserts that it prefers to transact with financially sound and well-regulated counterparties such as FHCs. Economies of scale allow Delek to quickly sell and source inventory at market prices to FHCs to eliminate backlog and excess inventory.  Notes that arrangements like these eliminate the need for complex financing facilities and reduce exposures to price volatility given the short periods of ownership. FHCs allow access to lower crude oil prices even when Delek’s refinery does not have capacity, since FHCs will continue purchasing at advantageous prices and store the crude oil for Delek until Delek’s refinery has capacity for the oil. 7.      Novelis Inc. End-User Novelis is the world’s leading aluminum rolled products producer.  It produces aluminum sheet and light gauge products primarily for use in the beverage can, automotive, specialties (including transportation, consumer electronics, and architecture), and foil markets. Depends on FHCs to shift the metal price risk associated with aluminum to creditworthy third parties.  Argues that having multiple FHCs that participate in the aluminum futures market available to Novelis has helped keep hedging transactions costs relatively low and stable and given manufacturers in the aluminum industry improved liquidity. Notes that FHCs also allow Novelis to manage operational and business risks by engaging in repo transactions with excess inventory, acting as intermediaries between Novelis and related businesses, and carrying inventory on consignment. Concerned with the Proposed Rule because it will (1) reduce market liquidity, (2) increase costs and ultimately its costs to consumers, (3) increase price divergence, and (4) increase counterparty risks. 8.      Philadelphia Energy Solutions LLC End-User Philadelphia Energy Solutions LLC owns and operates a merchant fuel refinery (gasoline, ultra-low sulfur diesel, etc.). Argues that risk-mitigating derivatives make the commodity markets more stable and that increased capital requirements will make hedging risks more expensive and less effective.  Notes that many FHCs have already scaled back their physical commodity activities. Relies on expansive market knowledge of FHCs to tailor products to meet its needs. Asserts that high-risk weighting should be reserved for “the riskiest of bank exposures” and that physical commodities do not qualify. 9.      Black Belt Energy Gas District Municipal End-User Black Belt is a public corporation formed by three member municipalities in Alabama. It is a joint action gas supply agency that provides wholesale sales service to municipal gas systems both within and outside the State of Alabama. Black Belt also provides natural gas management services for certain large industrial customers. Argues that FHCs assist municipal end-users in financing and purchasing natural gas via long-term pre-paid purchase transactions.  By closing such a transaction with an FHC in 2016, more than 150 cities and towns spread across several southern states will have stable energy prices for the next 30 years. Further notes that given the nature of their business and transactions, FHCs are creditworthy counterparties that are necessary for small municipalities in securing long-term, stable natural gas prices. 10.  Central Plains Energy Project Municipal End-User CPEP is a joint action gas supply agency that provides wholesale sales service to its members and other municipal natural gas distribution systems in the states of Nebraska, Iowa, and South Dakota. Relies on prepayment transactions to meet the domestic and commercial needs of its customers.  Notes that the natural gas energy markets are primarily supported by FHCs and that their departure from this market would be hard to replicate with non-bank companies. Argues that the departure of FHCs from the physical natural gas marketplace would be highly adverse to the interests of municipal gas systems and gas consumers, while serving no countervailing public purpose. 11.  City of Rocky Mount, North Carolina, Richard H. Worsinger Municipal End-User As a community-owned electric and natural gas system, the goal of Energy Resources is to provide safe, efficient, and reliable electric and natural gas services to all customers. Argues that if FHCs stop participating in long-term municipal gas supply transactions, this will cause an increase in gas prices for its customers. Transactions with FHCs lead to discounted gas for its customers, and its customers have come to depend upon lower gas prices. 12.  Clarke-Mobile Counties Gas District Municipal End-User CMC is a public corporation formed by three member municipalities in Alabama. It is a municipal gas transmission and distribution system that provides natural gas transportation and sales service to retail gas customers in an eight-county area in southwestern Alabama. CMC also provides wholesale natural gas sales service to other municipal gas systems and their joint action agencies that it purchases in gas prepayment transactions. Relies on natural gas prepayments to serve Alabama counties.  Notes that FHCs play a critical role in providing stable and affordable supplies of natural gas.  For example, the use of prepayment transactions in 2016 are now serving gas consumers in Alabama, Louisiana, Florida, Georgia, Tennessee, and Kentucky. Concerned that the potential departure of FHCs would be replaced with less-liquid, less-capitalized, and less-efficient counterparties.  As a result, transaction costs would likely increase and it would not be able to provide services at their current rates. 13.  Greenville Utilities Commission Municipal End-User Electric utility company in Greenville, NC. Critical of the proposed requirements as increasing the likelihood that FHCs will be driven out of the commodities markets, which will result in a decrease in natural gas supply and an increase in natural gas prices. 14.  Public Utility District No. 1 of Chelan County, Washington Municipal End-User Consumer-owned electric utility that generates electricity and transacts in power markets.  Manages power needs, volatility, and exposure to price and volumetric risks by selling and buying wholesale power using short-, mid-, and long-term contracts. Cautions against new rulemaking because market access could become more difficult, more expensive, and less efficient without FHC participation.  Argues that reduced FHC participation will ultimately increase the cost and difficulty for end-users to serve customers. 15.  Tennessee Energy Acquisition Corporation Municipal End-User Tennessee Energy is an instrumentality of the State of Tennessee and certain Tennessee municipalities. It is a joint action natural gas supply agency that provides wholesale sales service to municipal gas distribution systems and to other joint action agencies within and outside the State of Tennessee. Tennessee Energy also provides natural gas supply, transportation, and storage management services for other municipal gas systems and joint action agencies, and supplies price-hedging services for its associated municipalities and others to whom it sells long-term gas supplies as part of its sales service to them. Relies on gas prepayment transactions (prepaid long-term natural gas contracts) which are offered by FHCs.  States that FHCs’ role in this regard could not and would not be replicated by other industry participants. Concerned that the Proposed Rule will force FHCs out of the natural gas marketplace by making it more expensive for them to participate.  Argues that this will result in the increase of natural gas prepayments and hedging services for Tennessee Energy, which would then increases costs for its customers. Suggests that FHCs are the most creditworthy counterparties with which they deal, and that they are more efficient and operate in a regulated environment. Notes that the fear of environmental catastrophe is completely misplaced in the natural gas industry. 16.  Town of Slaughter, Louisiana Municipal End-User Member of the Louisiana Municipal Gas Authority. FHC involvement in commodities activities provides their residents and retail and industrial consumers with affordable energy products. Argues that their Town has come to rely on FHC involvement and the economic savings involved. 17.  American Public Gas Association End-User Trade Association APGA is the national association for publicly owned, not-for-profit natural gas distribution systems, comprising over 700 public gas systems. Increased capital requirements threaten APGA members’ reliance on natural gas prepayment transactions—using swaps transactions and tax-exempt financing for the long-term purchase of natural gas—to provide affordable energy solutions. 18.  American Wind Energy Association End-UserTrade Association Trade association for a range of entities interested in encouraging the expansion of wind energy in the U.S. Notes wind industry reliance on FHC merchant banking authority investments to bring projects from development and construction into operation.  In 2015, over $14.7 billion was invested in new wind energy projects in the U.S. This included $5.9 billion from tax equity providers, including under the merchant banking authority. Concerned that some of the restrictions being considered by the Federal Reserve would unnecessarily limit or eliminate the ability of banking entities to help finance wind generation. Relies on FHCs to transact in stable, low-risk investment for long-term contracts to purchase their power at a set price.  Argues that this enables wind industry companies to reinvest money into growth rather than hedge against energy price fluctuations. 19.  Edison Electric Institute and the National Rural Electric Cooperative Association End-User Trade Associations Joint letter from the Edison Electric Institute (“EEI”) and the National Rural Electric Cooperative Association (“NRECA”). EEI is the association of U.S. shareholder-owned electric companies. EEI’s members comprise approximately 70% of the U.S. electric power industry, provide electricity for 220 million Americans, operate in all 50 states and the District of Columbia, and directly employ more than 500,000 workers. NRECA is the national service organization for more than 900 not-for-profit rural electric utilities that provide electric energy to more than 42 million people in 47 states or 12% of electric customers. Relies on banking entities and their affiliates as counterparties to customized energy commodity forward contracts and commodity trade options that can be physically settled to hedge and mitigate their commercial risks. Concerned that the proposed changes will make risk management more difficult and more expensive by disincentivizing banking entities from engaging in hedging transactions. Concerned that substantial increase in the regulatory capital requirements for FHCs’ holdings of certain commodities will have indirect cascading effects on the wholesale physical electric markets. 20.  National Association of Corporate Treasurers, et al.[42] End-User Trade Association NACT represents companies and trade associations (like its 18 co-signatories) that are end-users of physical commodities and commodity-related derivatives. Expresses concern that increased capital requirements would fuel the departure of FHCs from the commodities markets. Notes that FHCs provide affordable, well-tailored products and that non-bank financial replacements would likely be unable to address specific end-user needs. Notes that emerging and start-up end-users are likely to be the most affected as they will no longer be able to use their physical commodity assets as collateral to hedge risk, and would otherwise be unable to engage in risk management due to cash-flow and credit-rating constraints.  Further notes that without such benefits, such entities would have to enter into less-favorable, costly, and restrictive credit facilities. 21.  National Mining Association End-User Trade Association NMA is a national trade association that includes the producers of most of the nation’s metals, coal, industrial, and agricultural minerals; the manufacturers of mining and mineral processing machinery, equipment, and supplies; and the engineering and consulting firms, financial institutions, and other firms serving the mining industry. Notes that Mining is critical to the success of American manufacturers. Cites a 2014 Edelman Berland survey of 400 manufacturing executives, where more than 90% of respondents expressed their concern about supply disruptions outside of their control. FHCs enable mining companies to hedge risks associated with long-term investment projects.  A departure of FHCs would decrease liquidity in the commodities markets with no discernible corresponding benefit. Cites the robust federal and state environmental regulations applicable to mining operations, including those that require mining companies invest in and secure sites, as well as to post financial assurance instruments designed to cover potential unintended environmental releases. 22.  Natural Gas Supply Association End-User Trade Association Trade-association for the downstream natural gas industry. Argues that the Proposed Rule would reduce liquidity and efficiency in relevant markets, which will ultimately result in higher costs and increased credit risk for end-users, increased volatility in physical and financial markets, and a reduction in consumer choice for counterparties. Notes concern that increased capital requirements would also result in increased hedging costs. Argues that FHC financial products and market making activities have fostered growth within the natural gas industry.  Cites to overall reductions in CO2 emissions, increased technological breakthroughs, and job growth, all made possible with FHC backing. 23.  International Energy Credit Association End-User Trade Association The IECA is the leading global membership organization for credit professionals in the energy industry.  IECA is a not-for-profit association with over 1400 individual members who are involved in energy credit management. Urges the Board to reconsider issuing a final rule at all and also proposes a number of modifications that should be made to the rule before issuance. Argues that the Board does not present any evidence in support of its Proposal (“no precedent where financial entities involved in the physical commodities markets were held liable for environmental incidents”) and asserts that the Board is emphasizing hypothetical, potential risks (“possibility of a possibility of loss”) over the many positive effects of FHC activities.  Also notes that corporate separateness would shield FHCs from liability for environmental catastrophes. States that the definition for covered physical commodities is overly broad and the Board should provide a clear list of those commodities that are expressly covered by the definition (and those commodities should have evidence concerning the risks they post).  Also argues that the requirements should be proportional to the risks (e.g., natural gas activities do not pose the same risks as other commodities of concern). 24.  The Goldman Sachs Group, Inc. FHC Goldman Sachs has been a participant and market maker in the commodities and commodity derivatives markets since 1981. Argues that FHCs provide substantial benefits to consumers, commodity producers, investors, financial markets, and the broader economy by their participation in physical commodities markets and making merchant banking investments. Notes that FHCs enable end-users to obtain competitive pricing, manage their risks, and serve as stable, highly regulated counterparties. Argues that punitive capital requirements effectively pre-empt Congressional authority granted to FHCs under Section 4(k) and Section 4(o). Explains that the capital requirements do not reflect any change in the intrinsic risk of owning the physical commodities.  Further notes that an FHC engaged in a physically settled hedging transaction pursuant to Section 4(o) authority may be subject to the 1250% risk-weighting, while another FHC engaging in an identical transaction under Complementary Authority would only be subject to a 300% capital charge. 25.  The Clearing House Association, L.L.C., the American Bankers Association, the Financial Services Forum, the Financial Services Roundtable, and the Institute of International Bankers Financial Trade Associations Believes that limitations on FHC activities should be addressed by Congress, as suggested by the Board in its Section 620 study.  Notes that punitive rulemaking undermines current statutory authority. Concerned that additional capital charges are not commensurate with the environmental risks cited and that current capital standards already address the true risks.  Argues that corporate veil piercing standards are very difficult to overcome and such theories have not changed in recent years. FHCs are an efficient tool for providing capital to companies and industries.  Merchant banking authority affords FHCs flexibility to contribute capital at various stages in a company’s growth.  Notes that preliminary data to a Clearing House study suggests that FHCs provide ~40% of the renewable energy market’s financing needs. Argues that the Proposed Rule fails to address the impact it would have on the economy, small business, and the commodity markets.  Argues that further rulemaking in this area should take into account the impact on customers, markets, industries, and economic growth. 26.  The Futures Industry Association Financial Trade Association FIA is the leading trade organization for the global futures, options, and over-the-counter cleared derivatives markets.  Its mission is to support open, transparent, and competitive markets, protect and enhance the integrity of the financial system, and to promote high standards of professional conduct.  FlA’s members, their affiliates, and their customers are active users of physical commodities, futures, and over-the-counter derivatives. Urges the Board not to adopt restrictive regulatory measures or, at the very least, to conduct an analysis of the potential costs and benefits of the restrictions and to submit that analysis to the public for comment. Argues that FHCs provide many benefits to the physical commodities markets, including market depth, liquidity (serving as market-makers), and by offering a broad spectrum of financial services available to the market (e.g., risk-mitigating commodity-linked swaps and other derivatives).  Highlights the fact that commercial energy firms rely on inventory financing, which requires the FHC to take temporary title to the physical commodity.  This would now be subject to higher capital requirements, which would result in reduction of the practice. Makes the point that the Board does not support with any evidence its conclusion that any reduction in activity by FHCs in the commodities markets would not have a material impact on participants in those markets. 27.  International Swaps and Derivatives Association, Inc. Financial Trade Association Trade association for the global derivatives market with more than 850 member institutions in 67 countries.  Members comprise a broad range of derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks. Requests that the Board revise the Proposed Rule so as not to: impose heightened capital requirements in the absence of supporting evidence; lower the cap of total value of physical commodities permitted under Section 4(k)’s “complementary authority”; rescind the previous authorizations of FHCs to engage in energy management services and energy tolling activities; and implement restrictions on copper trading, and to limit the reporting provisions. Concerned with the lack of empirical support for restricting the activities of FHCs, and the failure to cite any instances where FHCs were liable for the full extent of an environmental catastrophe. Argues that removing FHCs will decrease liquidity, increase volatility, and ultimately result in higher costs to consumers (also specifically points to the practice of providing inventory financing transactions). 28.  Securities Industry and Financial Markets Association and the Institute of International Bankers Financial Trade Association The associations believe that “the benefits of continuing to permit FHCs to engage in physical commodities activities should continue to produce public benefits that outweigh their potential risks.” Argues that the risks cited in the Proposed Rule are speculative and unsupported by facts and the law, and that the Board failed to point to a single instance where an FHC incurred a significant loss arising from environmental liability related to these activities.  Notes that case law and real-world examples demonstrate that FHC involvement in commodities-based activities do not pose a substantial risk to the safety and soundness of the institution or the financial system. Cites to a Joint Memorandum of Law, prepared by four law firms, which concludes that “appropriately limited investment and trading activities relating to environmentally sensitive commodities present limited environmental liability risk” to FHCs, and “well-established doctrines of corporate separateness protect FHC groups from liability for investments in enterprises that engage in environmentally sensitive activities.”[43] Argues that proposed capital charges would be duplicative of FHC requirements to maintain capital based on the credit risk (i.e., bankruptcy risk) of its subsidiaries engaged in commodities activities.  Argues that environmental risks are accounted for by credit risk capital requirements.  As a result, increased capital charges would force FHCs out of the market, causing adverse effects on competition, end-users, the liquidity of commodities markets, small- and medium-sized companies in the commodities sector, and the real economy. Concerned that the Proposed Rule ignores the substantial public benefits accruing from FHCs’ participation in these activities.  Notes that numerous public benefits flow from the participation by FHCs in the commodities markets, including greater competition, increased liquidity in commodities, increased price convergence between cash and derivatives markets and more economical financing for end-users, among many others.  Further notes that prior Federal Reserve determinations have found that FHC involvement in commodities activities provide: (1) greater convenience, (2) increased competition, and (3) enable efficient hedging. Counters the argument that the tail risks associated with FHCs’ current physical commodities activities pose unique and/or more significant risks than any of the other permissible banking and financial activities conducted by FHCs.  Notes that the scope of regulated commodities is overly broad and should be limited to substances defined by the EPA as “Extremely Hazardous Substances,” such as arsenic, hydrogen sulfide, and sulfuric acid.  Notes that the Proposed Rule captures commodities that present no meaningful risk of environmental harm (e.g., iron, vinegar, silver, silicon). 29.  U.S. Chamber of Commerce Center For Capital Markets Competitiveness End-User Trade Association The Chamber is the world’s largest federation of business and associations, representing the interests of more than three million U.S. businesses and professional organizations of every size and every economic sector. These members are users, preparers, and auditors of financial information. Argues that the Section 4(o) risk-weighting requirements and the new Section 4(k) thresholds will push FHCs out of the physical commodities markets.  This will result in reduced competition, which will ultimately lead to less liquidity and higher prices for the commodities on which end-users depend, and ultimately to higher prices for customers. Reasons that the regulation contradicts Congress’ intent when enacting Sections 4(k) and 4(o), as both Section 4(o) and 4(k) provide authority to facilitate efficient functioning of commodity markets and the efficient exchange of risk. Concerned that the Board has provided no evidence for hypothetical extreme circumstances where FHCs could be subject to massive liability.  Emphasizes that the risk-weighting requirements are particularly unjustified, as the Fed cannot and has not provided any evidence of material loss. Also notes that that the potential costs to FHCs are remote, and argues that there are no examples of “corporate veil piercing” occurring in the FHC context. Calls for the need to undertake a comprehensive study of various regulatory initiatives as well as the effects of those initiatives on the broader global economy and the capital formation system. 30.  Exante Regulatory Compliance Consultants Inc. Financial Services Company Exante is a financial services consulting firm specializing in regulatory compliance under SEC, CFTC, and FINRA. Urges the Federal Reserve to work with the Financial Stability Oversight Council to strengthen the Proposed Rule to prevent future instances of market manipulation by FHCs. 31.  TrailStone Group Financial Entity TrailStone is an asset-backed trading and logistics company with in-depth experience in mining, oil and gas investment and finance, energy asset management, energy logistics, and trading. Argues that new restrictions will force FHCs out of the market, thus reducing market depth (i.e., the number of sophisticated parties in which TrailStone relies on to efficiently hedge, finance, and otherwise transact in commodities), and liquidity of the commodities market. Concerned that lack of FHC activity will increase price divergence between physical and financial products.  Because TrailStone regularly makes use of both, it requires closely aligned pricing to prevent market arbitrage. Notes that its end-user subsidiaries need FHCs to take physical commodities as collateral to hedge and manage market risks. 32.  Elise J. Bean and Tyler E. Gellasch Academic Elise Bean is the former Staff Director and Chief Counsel of the U.S. Senate Permanent Subcommittee on Investigations, and Tyler Gellasch is the former Senior Counsel of the U.S. Senate Permanent Subcommittee on Investigations. Reaffirms the Board’s position to limit FHCs’ physical commodity holdings in order to mitigate the dangers associated with an overconcentration of assets, volatile price swings, and unexpected costs arising from catastrophic events.  Cites a 2012 Federal Reserve study supporting greater disclosure, reporting, capital requirements, and enhanced risk management measures for FHCs engaged in physical commodities activities. Supports stronger prohibitions on FHCs’ ability to own and operate facilities connected to the distribution of commodities through Section 4(k)’s complementary authority, as well as the prohibition of energy tolling, the reclassification of copper as an industrial metal, and increased capital requirements. Contends that the U.S. Senate Permanent Subcommittee’s investigation found evidence of market manipulation and conflicts of interest with respect to FHC commodity activities. Recommends strengthening the Proposed Rule as it relates to Section 4(k)’s complementary authority so that it also addresses catastrophes caused by safety violations; clarifying the definition of “covered physical commodities” by making use of a straightforward list (e.g., petroleum and petroleum products, natural gas, fertilizer), and clarifying the scope of Section 4(o) on whether or not the clause is confined to physical commodity activities the entities were engaged in prior to 1997. 33.  James D. Hanson Academic Supports removing copper and silver from lists of bank permissible precious metals. Expresses concern over the conflicts of interests banks may have when they both transact in financial products related to physical commodities and also hold physical commodity assets. 34.  Reid B. Stevens and Jeffery Y. Zhang Academic Reid Stevens is a Professor of Agriculture Economics at Texas A&M University; Jeffrey Zhang is a Professor of Economics at Yale and Harvard Law School. Presents a case study concerning alleged manipulation of the U.S. aluminum market from 2010 to 2014.  Argues that the Proposed Rule will improve the detection of manipulation, since it strengthens the prohibition on owning and operating storage facilities and increases reporting requirements for FHCs. 35.  Saule T. Omarova, Professor of Law, Cornell University Law School Academic Urges the Board to strengthen the Proposed Rule to expand the scope of covered commodities, tighten complementary authority, narrow Section 4(o) authority, and require additional quantitative and qualitative disclosures of FHC activity. Notes that even markets for “non-hazardous” commodities are subject to the distortive and manipulative effects of FHCs.  Cites examples in the aluminum, copper, and electricity markets. Argues for several changes to the Proposed Rule: The key operative provisions should apply to all physical commodities (e.g., copper and aluminum, agricultural commodities, electricity, etc.) as opposed to just hazardous substances that carry the greatest potential liability. The rule needs broader prohibitions on FHCs’ ability to manage, direct, conduct, or provide advice regarding business operations of entities engaged in the physical commodities business. Should restrict Section 4(o) activity to only those activities that were conducted before 1997. Should require from FHCs a detailed qualitative narrative of the entire complex of their operations and assets involving, or related to, physical commodities and how they are linked or interdependent. 36.  Aidenvironment, et al.[44] Interest Group Consortium of environmentally focused organizations and investors. Supports the Proposed Rule in order for FHCs to account for the material financial, environmental, and social risks associated with their physical commodities activities. Argues that Section 4(o) and Section 4(k) authority contribute to deforestation and other environmental effects. Cites independent research which suggests that asset impairment due to environmental and social degradation poses significant risk to FHCs holding physical assets.  For example, references a study which suggests that the Noble Group’s balance sheet was reduced by $400 million due to impairments of their palm oil and coal assets and receivables. 37.  Amazon Watch Interest Group Nonprofit organization for the protection of the rainforest and advancement of the rights of indigenous peoples in the Amazon Basin. Argues that FHCs should not have business financing or owning commodities and assets that harm the environment or indigenous communities. Contends that FHC holdings are problematic, including jet fuel supplies and the recent purchase, sale, transport, and storage of oil, natural gas, coal, metals, electricity, and agricultural products.  Further cites the extractive activities of FHC-owned or -backed entities, such as oil drilling in the Amazon. Argues that FHCs’ direct involvement in commodities financing and ownership creates layers of legal liability, as well as political, reputational, and financial risks. 38.  Americans for Financial Reform Interest Group AFR is a coalition of more than 200 national, state, and local groups who advocate for reform of the financial industry.  Their members include consumer, civil rights, investor, retiree, community, labor, faith-based and business groups along with prominent independent experts. Believes in the elimination or the significant reduction of commodity ownership from bank portfolios. Supports limitations and restrictions to FHCs commodity activities to limit exposures to both changes in commodity prices and commodity-related catastrophic events.  Notes that increased capital requirements would further serve as a stop-gap to such losses. Argues that FHC commodities activities concentrate economic power and pose potential market manipulation risks.  Cites the concerns related to energy and aluminum market manipulation. Urges the Board to interpret Section 4(o)’s grandfather provision more narrowly, such as by limiting activities to those permitted when the GLB Act was passed. 39.  Better Markets, Inc. Interest Group Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets and support financial reform. Supports the new requirements and offers a number of proposals and amendments to strengthen the rulemaking and its enforcement. Supports restrictions on commercial activities of banking entities, which aligns with the original intent of the GLB Act.  Also supports the proposals outlined in the Section 620 Study to (1) repeal the authority of FHCs to engage in merchant banking activities entirely, and (2) repeal the grandfather authority under Section 4(o).  Argues that this will result in “reduced institutional and systemic risk; more fair competition; and better fulfillment of original Congressional intent.” Recommends that the Board: engage in coordination with other regulatory agencies (e.g., CFTC, FERC, etc.) with regard to physical commodities trading, such as by establishing a mechanism for sharing the nature and percentage of commodities ownership among BHCs and FHCs; prevent evasion of other laws dealing with financial market oversight (e.g., FHCs that own commodity businesses have insider information, which can lead to insider trading and manipulation); ensure that non-banking business are not given an unfair advantage through Discount Window funding; and refrain from exempting FHCs from disclosure requirements (suggests that they should define the exemption from disclosure as narrowly as possible). 40.  Institute for Agriculture and Trade Policy Interest Group Nonprofit organization focused on ensuring fair and sustainable food, farm, and trade systems. Supportive of the proposed capital requirements but cautions that the Board has underestimated FHC and bank involvement and market share within the physical commodity markets, and therefore may underestimate the impact of commodity derivatives losses on the FHC trading losses in physical commodities. Skeptical of FHCs’ claims that their involvement in physical commodities trading benefits end-users.  Recommends that the Board require FHCs to divulge comprehensive and standardized data about their complementary commodity activities to verify their claims of harm from the Board’s action, and their claims of end-user and social benefits from those activities. Suggests that the Board should possibly broaden its understanding of what constitutes a catastrophe for the purposes of determining whether an FHC could be liable for a catastrophe involving its physical commodity activities. 41.  Public Citizen, Inc. Interest Group Non-profit consumer rights advocacy group and think tank. Supports the increased capital requirements, the prohibition of FHCs from entering into energy tolling agreements, and the copper amendment, but cautions that the Board should narrow the language for what it means to be “closely related” to banking. Proposes that the Board should modify the reporting requirements to require (1) disclosure of ownership or control over infrastructure assets and (2) restrictions on communications between a bank’s energy infrastructure and energy trading affiliates (otherwise they have an “insider’s peek” into the physical movements of energy products which is unavailable to other traders). 42.  Congressman Bradley Byrne U.S. House Requests an extension of the comment period until the 115th Congress has convened and has a chance to review the proposal. Notes that the Board needs to “consider the potential adverse impact upon costs to the American public, the reduction in competition, the loss of markets, and the potential for fewer creditworthy and highly regulated bank counterparties with whom end-users may transact.” 43.  Senators Sherrod Brown, Jeff Merkley, and Jack Reed U.S. Senate Argues that the recent departure of FHCs from the physical commodity markets demonstrates that FHCs are not pivotal intermediaries as they claim to be. Cites airline practices of engaging with non-financial companies for their fuel needs. Supports the expansion of covered physical commodities on the ground that volatility and sudden swings are not limited to those commodities enumerated in the Proposed Rule. Contends that the Proposed Rule fails to address additional environmental concerns related to international and other long-term liabilities.  The Senators note that reclamation and remediation of abandoned mines in the U.S. is problematic. Concerned with the ability of FHCs to utilize repo-style transactions to move commodities exposures off the balance sheet.  Argues that this would allow FHCs to continue to engage in commodity activities beyond the proposed 5% Tier 1 Capital cap. Supports a limitation of Section 4(o) activities to those permissible pre-1997.     Appendix B:  Physical Commodities Legal Authorities Type of Authority Covered Entities Applicable Statutes, Rules and Guidance Scope of Activities 1.   Banking and “Closely Related to Banking” Activities All BHCs and FHCs. 12 U.S.C. § 1843(a), (c)(8) 12 C.F.R. §§ 225.21(a), 225.28(a)-(b), 225.123, 225.126, 225.129, 225.131 Within two years of becoming a BHC (subject to three one-year extensions from the Board), a BHC may only own shares in banks, or engage in, or own companies that engage in, banking activities or activities that the Board has determined by regulation or order to be “so closely related to banking as to be incident thereto.”[45] The Board has determined that commodities derivatives activities are “closely related to banking” as long as the contract requires cash settlement or the BHC makes every reasonable effort to avoid physical delivery or receives and instantaneously transfers the asset by operation of contract and without taking physical delivery.[46] BHCs generally must file a notice with the Board and receive approval prior to engaging in any “closely related to banking” activities.[47]  FHCs and certain well- capitalized and well-managed BHCs may commence the activities and file a notice after the fact.[48] 2.   “Financial in Nature” Activities and Merchant Banking All FHCs. 12 U.S.C. §§ 1843(k)(1), (k)(4)(H), (k)(7); 12 C.F.R. 225 Subpart J (225.170-177) Fed. Res. Interp. Ltr. from J. Mattingly, Esq. to P. Grauer (Credit Suisse First Boston) (Dec. 21, 2001) All FHCs are permitted to engage in, and to acquire and own shares of any company engaged in, activities that are “financial in nature or incidental to such financial activity.”[49] Merchant banking is a permissible “financial in nature” activity for FHCs and their non-depository institution subsidiaries.[50] The merchant banking authority permits an FHC to: acquire an ownership interest in any company as “part of a bona fide underwriting or merchant or investment banking activity,”[51] so long as the FHC controls (i) a registered broker-dealer or (ii) an insurance company that is advised by a registered investment adviser;[52] hold such ownership interests “only for a period of time to enable the sale or disposition thereof,” which period generally may not exceed 10 years;[53] select all of the directors of a portfolio company;[54] enter into an agreement with a portfolio company giving it approval rights over non-routine matters;[55] and provide advice to officers and employees of a portfolio company.[56] The merchant banking authority does not permit FHCs to: own assets other than securities or other ownership interests in a portfolio company, unless the assets are held by a portfolio company that maintains a separate existence from the FHC and has separate management; or “routinely manage or operate a portfolio company”[57] other than for a limited period 3.   “Complementary” Activities FHCs that have applied to, and received approval from, the Board to engage in specific complementary activity. 12 U.S.C. § 1843(j), (k)(1)(B) 12 C.F.R. § 225.89 Board complementary activities orders, including Citigroup (2003), Barclays (2004), and RBS (2008)[58] FHCs are permitted to engage in, and to acquire and own shares of any company engaged in, any activity that the Board has determined by regulation or order “is complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.”[59] A FHC must request approval from the Board to engage in a complementary activity, which the Board will evaluate as to whether the benefits to the public outweigh potential adverse effects.[60] In a series of orders beginning with the Citigroup order, the Board has determined that the purchase and sale of commodities in the spot market and taking physical delivery of commodities in connection with commodity derivatives activities—including owning and disposing of nonfinancial commodities (collectively, “Physical Trading Activities”)—are complementary to the financial activity of engaging as principal in BHC-permissible (i.e., cash settled) derivatives activities based on those commodities. As conditions to approval of its proposed Physical Trading Activities, Citigroup committed: that the market value of commodities held as a result of the activities would at no time exceed 5 percent of Citigroup’s consolidated Tier 1 capital; that it would notify its supervising Reserve Bank if the market value of commodities held by Citigroup as a result of its Physical Commodities Trading activities exceeded 4 percent of its Tier 1 capital; to only make and take delivery of physical commodities for which derivatives had been approved for trading on a U.S. futures exchange by the CFTC, unless explicitly excluded or approved by the Board.[61] 4.   “Grandfathered” Activities Any company that is not a BHC or foreign bank that becomes a FHC after November 12, 1999. 12 U.S.C. § 1843(o). Any company that is not a BHC or foreign bank that becomes a FHC after November 12, 1999 “may continue to engage in, or directly or indirectly own or control shares of a company engaged in, activities related to the trading, sale, or investment in commodities and underlying physical properties that were not permissible for bank holding companies to conduct in the United States as of September 30, 1997” if certain conditions are met.[62] These conditions are: that the FHC or one of its subsidiaries was engaged in any of such activities as of September 30, 1997; that the value of the assets of the company held by the FHC that are not otherwise permissible for a FHC are equal to or less than 5% of the total consolidated assets of the FHC (except as permitted by the Board); and that the FHC does not permit the company whose shares the FHC owns pursuant to section 4(o) to offer or market any product or service of an affiliated depository institution or vice versa. The Board, while not formally interpreting the extent of section 4(o) authority, has noted that the GLBA permits “FHCs that meet the criteria in section 4(o) to engage in a potentially broader set of physical commodity activities than generally authorized for BHCs and other FHCs.”[63] 5.   Sub-5% Investments All BHCs and FHCs. 12 U.S.C. § 1843(c) (6). BHCs are permitted to own “shares of any company which do not include more than 5 per centum of the outstanding voting shares of such company.”[64] BHCs may own more than 5% of the economic interest in such a company, but the size of such additional economic ownership may depend on the facts and circumstances. Sub-5% investments must be passive and non-controlling in nature.   [1]      Notice of Proposed Rulemaking, Regulations Q and Y; Risk-Based Capital and Other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-Based Capital Requirements for Merchant Banking Investments, 81 Fed. Reg. 67220 (Sept. 30, 2016) [hereinafter the “Proposed Rule”]. [2]      Complementary Activities, Merchant Banking Activities, and Other Activities of Financial Holding Companies Related to Physical Commodities, 79 Fed. Reg. 3329 (January 21, 2014); Complementary Activities, Merchant Banking Activities, and Other Activities of Financial Holding Companies Related to Physical Commodities, 79 Fed. Reg. 12414 (March 5, 2014) (extending the comment period to April 16, 2014). [3]      In previous Client Alerts, we analyzed public comments to the ANPR and the historical justifications for bank commodity activities in light of the enhanced regulatory framework existing after the passage of the Dodd-Frank Act, available at http://www.gibsondunn.com/publications/Pages/Commodities-Activities-of-Banks–Comments-on-Federal-Reserve-Advance-Notice-of-Proposed-Rulemaking.aspx and http://www.gibsondunn.com/publications/Pages/Federal-Reserve-to-Reevaluate-Permissibility-of-Physical-Commodities-Trading-Rationale-Historically-and-Today.aspx. [4]      In total, there were 44 individual end-users and municipal end-users signatories to the 24 letters. [5]      Trade associations and end-users that signed on to this letter include Accuride Corporation, Air Products and Chemicals, Inc., the American Investment Council, Apache Corporation, Ball Corporation, The Boeing Company, BP, Cummins Inc., FMC Corporation, General Electric Company, General Motors Company, Harley-Davidson, Inc., The Hershey Company, Honeywell International, NextEra Energy Resources LLC, Northern Virginia Electric Cooperative, Orbital ATK, Inc., and Southwest Airlines Co. [6]      Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999). [7]      The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required that such conditions be met at the bank holding company level as well.  12 U.S.C. § 1843(l)(1)(C). [8]      12 U.S.C. § 1843(k). [9]      Id. § 1843(j)-(k). Note that, under Section 4(k) of the BHC Act, making “merchant banking” investments in non-financial companies is an activity financial in nature. [10]     Id. § 1843(o). [11]     See Citigroup Inc., 89 Fed. Res. Bull. 508 (2003) (Citigroup Order). [12]     The FHCs other than Citigroup that received approval to engage in complementary physical commodities activities included UBS AG, 90 Fed. Res. Bull. 215, 216 (2004); Barclays Bank plc, 90 Fed. Res. Bull. 511, 512 (2004) (Barclays Order); Deutsche Bank AG, 92 Fed. Res. Bull. C54, C56 (2006); Société Générale, 91 Fed. Res. Bull. C113, C115 (2006); JPMorgan Chase & Co., 92 Fed. Res. Bull. C57, C58 (2006); Fortis S.A./N.V., 94 Fed. Res. Bull. C22 (2008) (Fortis Order); and The Royal Bank of Scotland Group plc, 94 Fed. Res. Bull. C60 (2008) (RBS Order). Beginning in 2006, many determinations were made by delegated authority to the Director of the Division of Banking Supervision and Regulation. See, e.g., Wachovia Co., Letter to Elizabeth T. Davy, Esq., dated Apr. 13, 2006; Credit Suisse Group, Letter to Paul E. Glotzer, Esq., dated Mar. 27, 2007; Bank of America, Letter to Gregory A. Baer, Esq., Apr. 24, 2007; BNP Paribas, Letter to Paul E. Glotzer, Esq., dated Aug. 31, 2007; Wells Fargo, Letter to John Shrewsberry, dated Apr. 10, 2008; Bank of Nova Scotia, Letter to Andrew S. Baer, Esq., dated Feb. 17, 2011. [13]     See RBS Order (energy tolling); Fortis Order (2008) (energy management). In an energy tolling arrangement, an FHC enters into an agreement with the owner of a power plant under which the FHC pays the plant owner a periodic payment that compensates the owner for its fixed costs in exchange for the right to all or part of the plant’s power output. Energy management services include acting as a financial intermediary for a power plant owner to facilitate transactions relating to the acquisition of fuel and the sale of power and advising on risk management. [14]     12 U.S.C. § 1851(h)(4) (definition of proprietary trading includes only commodity futures and derivatives). [15]     Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, Report to the Congress and Financial Stability Oversight Council Pursuant to Section 620 of the Dodd-Frank Act (Sept. 8, 2016).  For more information, please see our Client Alert, available at http://www.gibsondunn.com/publications/Pages/US-Bank-Regulators-Section-620-Study-Federal-Reserve-De-Risks-Merchant-Banking-Commodities.aspx. [16]     Comment letters are available at:  https://www.federalreserve.gov/apps/foia/ViewAllComments.aspx?doc_id=R-1547&doc_ver=1. For purpose of counting comment letters, we have removed instances where a commenter has submitted more than one letter. [17]     See, e.g., Comments submitted by the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (“[M]arket liquidity would suffer because FHC affiliates are frequently the most knowledgeable participants and the most willing to enter into customized trades, and there are few potential new market entrants who can replace them.”); Comments submitted by Novelis Inc. (“Having multiple FHCs that participate in the aluminum futures market available to us has . . . given manufacturers in the aluminum industry improved liquidity.”). [18]    See, e.g., Comments submitted on behalf of end-users and end-user trade associations by the National Association of Corporate Treasurers (“[W]e will likely find ourselves having to transact with less-resilient and less-regulated non-bank counterparties, who offer a less-sophisticated and less-customized array of products, and who are often located outside the United States.”). [19]     See, e.g., Comments submitted by end-users and municipal end-users such as Alon USA Energy, Inc., the Town of Slaughter, Louisiana, and Cogentrix Energy Power Management, LLC. [20]     See, e.g., Comments submitted by the TrailStone Group (“[O]nly FHCs can provide practical market solutions to transparency, bid/ask pricing, and the tenor in which market participants need.”); Comments submitted by Delek US Holdings Inc. (“[W]we do not believe that the remaining intermediaries that exist in or could be expected to enter the market would be able to service our physical commodity and commodity derivatives needs as well as FHCs currently do because of FHCs’ unique combination of favorable characteristics”). [21]     See, e.g., Comments submitted by the International Swaps and Derivatives Association (“[L]limitations and restrictions in the Propos[ed] [Rule] on the ability of banking organizations to engage in certain activities relating to physical commodities may have negative effects on the physical and financial commodities markets, including less liquid and efficient markets, greater volatility and higher costs for end-users and consumers.”). [22]     See, e.g., Comments submitted by U.S. Senators Sherrod Brown, Jeff Merkley, and Jack Reed. [23]     See, e.g., Comments submitted by Former Staff Director and Chief Counsel of the U.S. Senate Permanent Subcommittee on Investigations, Elise J. Bean, and Former Senior Counsel of the U.S. Senate Permanent Subcommittee on Investigations, Tyler E. Gellasch (suggesting that the definition of “covered physical commodities” be clarified by making use of a straightforward list). [24]     See, e.g., Comments submitted by Public Citizen, Inc. (“Given the critical role played by FHCs in the economy and in commodity trading markets, and considering the unique risks associated with energy infrastructure in our economy and national security, the public interest is best served by having the Board publically disclose limited aspects of FHC ownership and control over physical commodity assets such as pipelines, storage terminals and tankers.”); comments submitted by Professor Saule T. Omarova (“[T]the Board should require each FHC to provide a detailed qualitative narrative of the entire complex of its operations and assets involving, or related to, physical commodities. As part of this narrative, FHCs should be required to identify and discuss specific organizational, informational, and financial links and inter-dependencies between their specific physical commodities businesses and other business activities they conduct or seek to conduct.”). [25]     See, e.g., Comments submitted by U.S. Senators Sherrod Brown, Jeff Merkley, and Jack Reed (citing to the U.S. Senate Permanent Subcommittee on Investigations’ findings with relation to Goldman Sachs’ activities within the aluminum markets, the Senators reasoned that “because FHCs have been found to exercise a high level of control over physical commodity portfolio companies, the proposal’s strengthened restrictions are necessary and important.”). [26]     See, e.g., Comments submitted by Americans for Financial Reform, U.S. Senators Sherrod Brown, Jeff Merkley, and Jack Reed, and Professor Saule T. Omarova. [27]     See, e.g., Comments submitted by U.S. Senators Sherrod Brown, Jeff Merkley, and Jack Reed (noting that “the Director of the Board’s Bank of Supervision and Regulation Division has acknowledged that ‘there are multiple possible interpretations of section 4(o) of the BHC Act.'”). [28]     See, e.g., Comments submitted by Professor Saule T. Omarova. [29]     See, e.g., Comments submitted by the Goldman Sachs Group, Inc. (“In enacting Section 4(o) Congress explicitly acknowledged the importance of the expertise and risk management provided by FHC intermediaries in the physical commodity markets.”). [30]     See, e.g., Comments submitted by the Natural Gas Supply Association (crediting the growth in the natural gas industry in part to the “unique role in facilitating physical commodity and related financial market counterparty diversity.”). [31]     See, e.g., Comments submitted on behalf of end-users and end-user trade associations by the National Association of Corporate Treasurers (“[W]e will likely find ourselves having to transact with less-resilient and less-regulated non-bank counterparties, who offer a less-sophisticated and less-customized array of products, and who are often located outside the United States.”). [32]     Comments submitted by U.S. Representative Bradley Byrne; see also Comments submitted by the Securities Industry and Financial Markets Association and the Institute of International Bankers (“The Federal Reserve’s failure to take into account the public benefits of FHCs’ physical commodities activities that would be lost if the requirements of the Proposed Rule were to become effective fails to satisfy its obligation under the Administrative Procedures Act to engage in reasoned decision-making in its rulemaking.”). [33]     See, e.g., Comments submitted by Professors Reid B. Stevens and Jeffery Y. Zhang (presenting their study of manipulation by financial entities of regional commodity markets); Comments submitted by Better Markets (FHC physical commodity activity “invites market manipulation and excessive commodity speculation.”); Comments submitted by Americans for Financial Reform (citing to federal studies noting market manipulation in the energy, aluminum, and copper markets). [34]     See Comments submitted by Novelis, Inc. (noting that FHCs enable Novelis to (1) efficiently manage surplus inventory through short-term repo transactions and (2) lock-in favorable pricing in instances where its business demands do not correspond with current market pricing). [35]     See, e.g., Comments submitted by the Securities Industry and Financial Markets Association and the Institute of International Bankers (“Despite the fact that Congress and the Federal Reserve have allowed FHCs to engage in physical commodity activities for over 15 years, the Federal Reserve has failed to point to a single instance where an FHC incurred a significant loss arising from environmental liability related to these activities.”). [36]     Id. (“FHCs are already subject to existing capital charges for credit risk, market risk and operational risk, which are designed to address, among other risks, legal liability risk.”). [37]     Id. (noting that associations attach a Joint Memorandum of Law, prepared by four law firms, which concludes that “appropriately limited investment and trading activities relating to environmentally sensitive commodities present limited environmental liability risk” to FHCs, and “well-established doctrines of corporate separateness protect FHC groups from liability for investments in enterprises that engage in environmentally sensitive activities”). Additionally, the Board acknowledged such safeguards in the Proposed Rule, stating that these laws “generally impose liability on owners and operators of facilities and vessels for the release of physical commodities. . . [and while] a company that directly owns an oil tanker or petroleum refinery that releases crude oil in a navigable waterway” may be liable for damages that result from a spill, the owner of the commodity often times is not liable except in instances where the underlying owner engages in activities in addition to mere ownership.  81 Fed. Reg. at 67221. [38]     See, e.g., Comments submitted by Amazon Watch (“In 2013, Morgan Stanley reported trading aluminum, copper, gold, lead, palladium, platinum, silver, rhodium, zinc, coal, crude oil, heating oil, ethanol, fuel oil, gasoline, jet kerosene, naphtha, and natural gas. It also reported maintaining physical inventories in 2012 that included 1.7 million barrels of crude oil, 5.8 million barrels of heating oil, and 6.2 million barrels of gasoline.”). [39]     See, e.g., Comments submitted by Amazon Watch (“As a new study from the Center for Biological Diversity shows, existing pipelines in North Dakota have spilled crude oil and other hazardous liquids at least 85 times since 1996—an average of four a year—and released over 3 million gallons into rivers, farmland, reservoirs, and more. Those 85 spills caused more than $40 million in property damage.”). [40]     See Catherine Ngai and Olivia Oran, Barclays’ exit from energy trading stirs concerns over liquidity, Reuters, Dec. 6, 2016, available at http://www.reuters.com/article/us-usa-oil-barclays-bk-idUSKBN 13U2MW. [41]     We note also that the Proposed Rule could face an uncertain future.  Board Governor Daniel Tarullo, the de facto Governor for bank supervision and regulation, has announced his resignation, effective in less than a month.  With two Board seats currently empty, the Trump Administration will be able to add at least three Governors to the Board.  Aspects of the Proposed Rule seem in tension with several Administration priorities, including lessening regulatory burden, making clear the economic costs of agency rulemakings, and constraining administrative action to adhere more closely to the expressed will of Congress. [42]     Trade associations and end-users that signed on to this letter include Accuride Corporation, Air Products and Chemicals, Inc., the American Investment Council, Apache Corporation, Ball Corporation, The Boeing Company, BP, Cummins Inc., FMC Corporation, General Electric Company, General Motors Company, Harley-Davidson, Inc., The Hershey Company, Honeywell International, NextEra Energy Resources LLC, Northern Virginia Electric Cooperative, Orbital ATK, Inc., and Southwest Airlines Co. [43]     See Covington & Burling LLP, Davis Polk & Wardwell LLP, Sullivan & Cromwell LLP and Vinson & Elkins LLP, Joint Memorandum of Law Prepared for SIFMA In Response to the Notice of Proposed Rulemaking on Risk-Based Capital and Other Regulatory Requirements for Activities of Financial Holding Companies Related to Physical Commodities and Risk-Based Capital Requirements for Merchant Banking Investments (Docket No. R-11547; RIN 7100AE-58), available at https://www.federalreserve.gov/SECRS/2017/February/20170228/R-1547/R-1547_021717_131733_608227617620_1.pdf (Appendix A). [44]     Aidenvironment was joined by Climate Advisers, Green Century Capital Management, and Profundo. [45]     12 U.S.C. § 1843(a)(2), (c)(8). [46]     12 C.F.R. § 225.28(b)(8)(ii).  FHCs are also permitted to own commodities that state member banks are permitted to own, such as gold and silver bullion.  Id. § 225.28(b)(8)(ii)(B)(1), (b)(8)(iii). [47]     12 U.S.C. § 1843(j)(1)(A). [48]     Id. § 1843(j)(3)-(4). [49]     Id. § 1843(k)(1)(A). [50]     Id. § 1843(k)(4)(H). [51]     Id. § 1843(k)(4)(H)(ii)(II). [52]     12 C.F.R. § 225.170(f). [53]     Id. § 225.172(b). [54]     Id. § 225.171(d)(1). [55]     Id. § 225.171(d)(2). [56]     Id. § 225.171(d)(3). [57]     Id. § 225.171(a).  The rule provides examples of what constitutes “routine management or operation” of a portfolio company.  “Routine management or operation” generally includes when any FHC director, officer or employee serves as an executive officer or employee of a portfolio company or when any portfolio company officer or employee is supervised by a director, officer or employee of the FHC (other than in its role as director of the portfolio company).  See id. § 225.171(b).  See also Fed. Res. Interp. Ltr. from J. Mattingly, Esq. to P. Grauer (Credit Suisse First Boston) (Dec. 21, 2001) (available at http://www.federalreserve.gov/boarddocs/legalint/bhc_changeincontrol/2001/20011221/) (providing a list of example covenants that would not involve an FHC routinely managing or operating a portfolio company). [58]     Citigroup Order; Barclays Order; RBS Order. [59]     12 U.S.C. § 1843(k)(1)(B). [60]     Id. § 1843(j)(1)(A), (j)(2). [61]     After the Citigroup Order, the Board permitted FHCs to make and take delivery of physical commodities for which the CFTC had not approved derivatives for trading on a U.S. futures exchange.  See RBS Order. [62]     12 U.S.C.  § 1843(o). [63]     Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation & Office of the Comptroller of the Currency, Report to Congress and the Financial Stability Oversight Council Pursuant to Section 620 of the Dodd-Frank Act (September 2016), available at https://www.fdic.gov/news/news/press/2016/pr16079a.pdf, at 16.  Former Governor Daniel K. Tarullo has also noted that “[i]n contrast to section 4(k) complementary authority, this authority is automatic–meaning no approval by or notice to the Board is required for a company to rely on this authority for its commodities activities. Also, unlike the firms conducting limited commodities activities found to be complementary to financial activities under section 4(k), the section 4(o) grandfathered firms are authorized to engage in the transportation, storage, extraction, and refining of commodities.”  Speech:  Former Governor Daniel K. Tarullo, Statement before the Permanent Subcommittee on Investigations, U.S. Senate, Washington, DC (Nov. 21, 2014), available at https://www.federalreserve.gov/newsevents/testimony/tarullo20141121a.htm. [64]     12 U.S.C. § 1843(c)(6). Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Carl E. Kennedy – New York (+1 212-351-3951, ckennedy@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) James O. Springer – Washington, D.C. (+1 202-887-3516, jspringer@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 20, 2017 |
D.C. Circuit Overturns FERC’s ROE Methodology for Electric Utilities

On April 14, 2017, a unanimous panel of the D.C. Circuit Court of Appeals vacated the Federal Energy Regulatory Commission’s ("FERC") current approach to setting rate of returns on equity ("ROE").  Setting ROEs is often a major issue in any gas pipeline or electric transmission rate case.  Setting the ROE essentially determines the return investors get on the regulated capital they deploy. The ruling has widespread implications and will give the new FERC Commissioners to be appointed by President Trump broad discretion to establish a new ROE methodology that properly incents the building of new infrastructure. The current FERC ROE methodology was established in FERC Opinion No. 531.  That order: (a) slashed the ROE received by New England utilities for transmission operations and (b) established a new methodology (often referred to as the "Coakley method") to be used for calculating electric transmission ROEs going forward.  See Emera Maine v. Federal Energy Regulatory Comm’n, No. 15-1118, ___ F.3d ___, 2017 WL 1364988 (Apr. 14, 2017).  The Court held that FERC’s Opinion No. 531 and its progeny were arbitrary and capricious because the FERC: (1) failed to satisfy its dual-burden under Section 206 of the Federal Power Act ("FPA") by failing to make an independent finding that the ROE previously granted to the New England transmission owners was unjust and unreasonable and (2) failed to demonstrate that a "rational connection" existed between the record evidence and the new ROE established by the orders.  Id. at *10-11.  As a result, the Court vacated the orders and remanded to the FERC for further proceedings.  This ruling has widespread implications as it impacts all pending and future rate case proceedings where the Coakley methodology would have otherwise been applied.  With three new Commissioners appointed by President Trump soon to take seats at the table in the near future, this ruling opens the door wide open to allow for significant, swift changes to the FERC’s ROE methodology. We expect that the policy goal of any new methodology will be to incentivize new transmission build. Return on Equity for Transmission Owners under the Federal Power Act As the Court recognized, under Sections 205 and 206 of the FPA, the FERC "must ensure that all rates charged for the transmission or sale of electric energy are ‘just and reasonable.’"  Id. at *1 (quoting 16 U.S.C. §§ 824d(a), 824e(a)).  This duty also requires that transmission owners receive a ROE on their investment in transmission assets "commensurate with returns on investments in other enterprises having corresponding risks" and "sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital."  Id. at *4 (quoting FPC v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944)).  See also Bluefield Waterworks & Improvement Co. v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679, 692-93 (1923). Historically, the FERC utilized a one-step discounted cash flow analysis to calculate a "just and reasonable" ROE for transmission owners.  Under this approach, FERC constructed a "zone of reasonableness" consisting of ROEs for publicly traded companies similar to the transmission owner at issue.  Id. at *5.  The FERC traditionally assigned an ROE equal to the midpoint or median of the zone of reasonableness, id. at *1, but could make upward adjustments pursuant to Section 219 of the FPA in order to "further encourage the construction of transmission facilities and replacement of aging transmission infrastructure."  Id. at *2 (quoting S. Cal Edison Co. v. FERC, 717 F.3d 177, 179 (D.C. Cir. 2013)). Section 206 Challenge to New England Transmission Owners’ Return on Equity In 2003, a group of New England Transmission Owners (the "NETOs") submitted a proposal to the FERC pursuant to FPA Section 205 to recover their ROE through transmission rates charged by ISO New England, the regional transmission organization under which the NETOs operated.  Id.  The FERC used a discounted cash flow analysis to construct a zone of reasonableness and ultimately approved a base ROE of 11.14 percent plus an "adder" for certain transmission projects pursuant to Section 219 of the FPA.  Id.  In 2011, certain of the NETOs’ customers filed a Section 206 complaint arguing that the 11.14 percent ROE had become unjust and unreasonable.  Id. In its order ruling on the complaint against the NETOs, the FERC adopted a new two-step discounted cash flow analysis that, besides data on other transmission utilities, incorporated long-term GDP growth forecasts.  This new "Coakley methodology" yielded a new zone of reasonableness for the NETOs of 7.03 percent to 11.74 percent.  Id.  But FERC chose not to set the NETOs’ ROE at the median or midpoint of the zone.  Rather, because of "anomalous capital market conditions," the FERC was "less confiden[t]" that the midpoint of this zone of reasonableness was a sufficient ROE and so looked at "additional record evidence," including risk premium analysis, capital asset pricing model analysis, expected earnings analysis, and comparison of state-commission approved ROEs, to select a just and reasonable ROE from the zone of reasonableness.  Id. at *3 (quoting Opinion No. 531-B, 150 FERC ¶ 61,165 at P 50 (2015)).  The FERC thus set the base ROE for the NETOs at the midpoint of the upper half of the new zone of reasonableness, or 10.57 percent, after considering this additional evidence.  Id. at *3. The D.C. Circuit’s Opinion Vacating Coakley On April 14, 2017, the D.C. Circuit vacated the "Coakley orders" on two grounds.  First, the Court held that the FERC failed to satisfy the Section 206 "condition precedent" that an existing ROE be unjust, unreasonable, unduly discriminatory or preferential prior to the imposition of a new ROE.  Id. at *8, 10.  In reaching this holding, the Court rejected the FERC’s argument that "all ROEs other than the one FERC identifies as the utility’s just and reasonable ROE are per se unlawful in a section 206 proceeding."  Id. at *10 (citing Opinion No. 531-B, 150 FERC ¶ 61,165 at P 33 (2015)).  Rather, the zone of reasonableness "creates a broad range of potentially lawful ROEs" and so a finding that one ROE was just and reasonable did not, standing alone, establish that other ROEs within the range are unjust and unreasonable.  Id.  FERC’s failure to present evidence that the existing 11.14 percent ROE was unjust and unreasonable rendered its orders arbitrary and capricious.  Second, the Court held that there was no "rational connection between the record evidence and [the FERC’s] placement of the base ROE."  Id. at *10.  The Court noted that the "alternative benchmarks and additional record evidence [the FERC] used . . . merely pointed to a base ROE somewhere above [the midpoint of the zone of reasonableness]" and so did not support the selected rate of 10.57 percent.  Id. at *12.  The FERC’s orders were not "the product of reasoned decisionmaking" absent this "rational connection."  Id. at *10, 13. The D.C. Circuit vacated the orders and remanded the case to the FERC for proceedings consistent with its opinion, presenting the FERC with an opportunity to revisit its policy on calculating just and reasonable ROEs for transmission owners.  The Court repeatedly emphasized that the FERC retains broad discretion to establish a just and reasonable ROE based on the circumstances of the case.[1]  Ramifications of Emera Maine The D.C. Circuit’s order will have far-reaching impacts well beyond New England. Consistent with FERC’s dictates in Coakley that the two-stage DCF was to be used going forward, many cases and filings subsequent to Coakley have used the new two-stage DCF methodology.  Thus the impact of Coakley and the D.C. Circuit’s recent decision goes well beyond that specific case.  The fact that the D.C. Circuit vacated Coakley essentially prevents FERC from applying the Coakley methodology until the Commission issues an order on remand.  Thus, companies will need to return to the pre-Coakley one-stage DCF, at least and until FERC takes up the Coakley case on remand. There will be a great deal of speculation as to what  FERC will do on remand.  But it is clear is that President Trump is set to appoint three Republican Commissioners to the FERC, which will significantly alter the composition of the Commission.  There is no obligation for the "new" Commission to try to re-support or re-adopt the Coakley methodology on remand.  As a result, the new Commission will likely use its broad discretion and the opportunity presented by the remand to implement substantial revisions to its approach to calculating a just and reasonable ROE, including looking to other methods of calculation besides discounted cash flow models.  Indeed, with the Trump Administration promoting the need for infrastructure growth, the new Commission will likely establish an ROE methodology that creates the appropriate incentives to get new transmission built quickly. Additionally, the new Commissioners, once seated, will likely make addressing the order on remand and setting a new method a high priority soon after they are sworn in.      [1]   Id. at *4 (quoting S. Cal Edison Co., 717 F.3d at 182) ("FERC . . . has discretion regarding the methodology by which it determines whether a rate is just and reasonable."); id. at *6 (quoting Morgan Stanley Capital Grp., Inc. v. Pub. Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527, 532 (2008)) (internal quotation marks and alterations omitted) ("[B]ecause the statutory requirement that rates be just and reasonable is obviously incapable of precise judicial definition, we afford great deference to the [FERC] in its rate decisions."); id. at *7 ("Whether a particular rate within the zone is the just and reasonable rate for the utility at issue depends on a number of factors."); id. ("Whether a rate, even one within the zone of reasonableness, is unlawful depends on the particular circumstances of the case."); id. at *10 ("FERC has discretion to make ‘pragmatic adjustments’ to a utility’s ROE based on the ‘particular circumstances’ of a case."); id. at *11 ("FERC may make adjustments to a utility’s ROE based on the specific circumstances of the case.").   Gibson Dunn’s Energy Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:   William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com)Jeffrey M. Jakubiak – New York (+1 212-351-2498, jjakubiak@gibsondunn.com) Jennifer C. Mansh – Washington, D.C. (+1 202-955-8590, jmansh@gibsondunn.com) Christopher B. Smith – Washington, D.C. (+1 202-887-3764, csmith@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 8, 2017 |
Fourth Circuit Uranium Mining Ruling Narrows Federal Preemption

​Washington, D.C. partner Michael Murphy is the author of "Fourth Circuit Uranium Mining Ruling Narrows Federal Preemption," [PDF] published by Law360 on March 8, 2017.

January 27, 2017 |
Canadian Court Upholds Chevron’s Corporate Separateness and Its Right to Defend Against Judgment Obtained by Fraud

On January 20, 2017, the Ontario Superior Court of Justice granted summary judgment in favor of Chevron Canada Limited ("Chevron Canada") and partial summary judgment in favor of Chevron Corporation in Yaiguaje et al v. Chevron Corporation et al.  In Canada, Ecuadorian plaintiffs sought to recognize and enforce a fraudulent judgment obtained in Ecuador against Chevron Corporation.  And to collect on that judgment, the plaintiffs were attempting to seize the assets of Chevron Corporation’s seventh-level subsidiary, Chevron Canada.  Finding that Chevron Corporation and Chevron Canada are "separate legal entities with separate rights and obligations," however, the court dismissed the plaintiffs’ attempts to hold Chevron Canada liable.  Indeed, the Court recognized that the plaintiffs had not alleged any wrongdoing against Chevron Canada.  In a related decision, the Court rejected the plaintiffs’ attempts to prohibit Chevron Corporation from demonstrating that the Ecuadorian judgment was procured through fraudulent and corrupt means.   And, on January 25, the Court rejected the plaintiffs’ motion to add Chevron Canada’s shareholder, Chevron Canada Capital Company ("CCCC"), as a party to the action.  Extending its reasoning from the January 20 decision to another independent Chevron subsidiary, the court stated, "[b]ecause the plaintiffs seek the same relief against CCCC as they did against Chevron Canada, I am of the view that their claim against CCCC cannot succeed for the same reasons that I concluded it could not succeed against Chevron Canada."  The court also held that the plaintiffs had not alleged a cause of action against CCCC and had failed to plead grounds to establish the jurisdiction of the court.  The decisions represent a victory for Chevron, the principles of corporate separateness, and the rule of law.  It should have important implications for other companies and individuals faced with similar corrupt shakedown schemes.  Gibson Dunn represents Chevron Corporation in related actions and global strategy. The Fraudulent Ecuadorian Judgment and Chevron’s RICO Lawsuit The Ecuadorian case against Chevron was filed in 2003 by a group of Ecuadorian plaintiffs represented by U.S. plaintiffs’ lawyers alleging environmental harm.  Chevron never operated in Ecuador, but the plaintiffs asserted the company was responsible for alleged conduct by a Texaco subsidiary that operated in the region from 1964 to 1992.  In February 2011, the trial court in Ecuador entered a $17.2 billion judgment against Chevron–$8.6 billion in compensatory damages and another $8.6 billion in punitive damages unless Chevron agreed to "apologize."  Chevron declined to do so.  (The punitive damages aspect of the judgment was later eliminated on appeal as being contrary to Ecuadorian law.) As detailed here, Chevron uncovered extensive evidence of fraud on the part of the plaintiffs’ U.S. and Ecuadorian lawyers and agents.  As a consequence, Chevron filed suit in the Southern District of New York, alleging violations of the federal RICO statute and common law fraud and other torts.  In 2014, after a seven-week trial which included the live or deposition testimony of more than 50 witnesses and 4,000 exhibits, United States District Judge Lewis A. Kaplan issued a 485-page opinion detailing the fraudulent scheme to corrupt the Ecuadorian litigation.  The Second Circuit affirmed that decision in full, including the findings that the plaintiffs’ legal team bribed the Ecuadorian judge and ghostwrote the multi-billion-dollar judgment themselves. The Canadian Action In 2012, the Ecuadorian plaintiffs sought to recognize and enforce their fraudulent Ecuadorian judgment in Ontario, Canada.  Despite admitting in their complaint that they "do not allege any wrongdoing against Chevron Canada," the plaintiffs nonetheless sought to pierce the corporate veil and hold Chevron Canada liable for the judgment against Chevron Corporation.  Op. at ¶ 28.  Chevron Corporation and Chevron Canada initially challenged the jurisdiction of the Ontario courts.  In May 2013, the Ontario court held that there was "no basis in law or fact" to pierce the corporate veil and, since there were no assets to fight over in Canada, stayed the proceedings to avoid wasting judicial resources.  Op at ¶ 27.  On appeal, the Supreme Court of Canada held that the Ontario court had jurisdiction to hear the case, but expressly took no position on the merits of the Ecuadorian judgment, whether it could ever be recognized in Canada, or whether the assets of Chevron Canada could ever be used to satisfy a judgment against Chevron Corporation.  Op at ¶ 20.  The Supreme Court of Canada’s decision set the stage for a battle over two important questions–(i) can the assets of an independent subsidiary be seized in a recognition action to satisfy the alleged debts of a parent corporation; and (ii) can a judgment debtor defend against attempts to recognize that judgment on the basis that it was obtained through fraud, even where the foreign court itself addressed some of those allegations?  On January 20, the Ontario Court ruled in Chevron’s favor on both questions. Reaffirmation of the Bedrock Principle of Corporate Separateness The Ontario court’s decision reaffirms the bedrock principle of corporate separateness and demonstrates that those principles apply in the context of recognition and enforcement actions.  Following principles of law established since 1896, the court granted summary judgment for Chevron Canada, partial summary judgment for Chevron Corporation, and dismissed the plaintiffs’ motion for summary judgment on corporate separateness.  The decision rejects the plaintiffs’ attempts to hold an indirect subsidiary liable for the alleged debts of its parent corporation.  As it had in 2013, the court noted that Plaintiffs failed to allege "any wrongdoing against Chevron Canada" and, accordingly, dismissed the claim against it.  Op at ¶ 65.  Indeed, the court found that the plaintiffs’ claim "contains no pleading of facts which links Chevron Canada in any way" to Ecuador.  Op at ¶ 28.  That, in addition to the important fact that Chevron Corporation and Chevron Canada are "separate legal entities with separate rights and obligations," led the Court to rule that the fraudulent judgment against Chevron Corporation could not be enforced against Chevron Canada.  Op at ¶ 58. Reaffirming foundational principles of Canadian corporate separateness law, the court rejected the plaintiffs’ attempts to create a new notion of "enterprise group liability" or, in fact, any exception to corporate separateness "in the interests of justice."  The court also dismissed plaintiffs’ arguments that a Canadian statute, the Execution Act, conferred Chevron Corporation with beneficial property rights in an indirect subsidiary.  Op at ¶¶ 31-49.  The court held that the Execution Act–which provides mechanisms for seizing the assets of judgment debtors–is procedural only and does not create new substantive rights.  In so ruling, the court agreed with Chevron Corporation’s assessment of the policy consequences of the plaintiffs’ arguments: "If the plaintiffs’ position . . . is accepted, the assets of Ontario subsidiaries of both domestic and foreign companies would automatically and always be subject to execution orders to satisfy judgments against their parent companies . . . [t]his result is not only contrary to law, it would have startling and stark consequences for Ontario’s businesses and their ability to attract investment. A Corrupt Court’s Judgment Is No Judgment at All Chevron Corporation will argue against recognition principally on the grounds that: (a) the Ecuador judgment was obtained by fraudulent means from a corrupt and biased court in proceedings lacking Canadian standards of fairness and justice; and (b) the Ecuador court did not have jurisdiction over Chevron Corporation.  It also will defend on several other grounds, including that recognition of the Ecuador judgment would violate Canadian public policy because (i) the judgment was based on a law that retroactively created a cause of action regarding claims that had been settled and released; and (ii) the Republic of Ecuador had continuing obligations under international law to prevent the recognition of the judgment. The plaintiffs moved to strike all of those defenses, arguing that Chevron Corporation should not be able to defend on any grounds under applicable law.  The plaintiffs argued that Canadian law strictly limited the defenses a judgment debtor could bring in a recognition action and that since all of Chevron Corporation’s allegations had already been determined by the Ecuadorian courts, they could not be re-litigated in Canada.  In essence, the plaintiffs asked the court to rubber stamp a fraudulent judgment. In response, Chevron argued that the determination of a corrupt court is a nullity not entitled to any subsequent deference or respect and that once fraud infects the court, there can be no subsequent cleansing of that fraud either during trial or on appeal.  In its January 20th decision, the court agreed.  Specifically, the court held that Chevron’s core "allegations of fraud, corruption, bribery, ghostwriting and the overall corruption of the Ecuadorian judicial system" were "permissible defenses" and, if true, would render the judgment incapable of recognition in Canada.  Op at ¶¶ 99, 102.  The decision itself demonstrates the illogic of the plaintiffs’ position: the court noted that during oral argument even the plaintiffs’ counsel had conceded that allegations of judicial bribery and ghostwriting would be permissible defenses against recognition in Canada.  Op at ¶ 98.  The court also held that Chevron could challenge the jurisdiction of the Ecuadorian court since a finding of judicial bias "retroactively renders all the decisions and orders [of the court] void and without effect" thus, if Chevron’s allegations are shown to be true the Ecuadorian judge had no jurisdiction to render the judgment. The court did strike Chevron’s defenses based on the retroactivity of the Ecuadorian law and the Republic of Ecuador’s violation of international law, but ultimately rejected the plaintiffs’ attempt to prohibit Chevron from defending itself.  Fundamentally, the decision is an important victory for the rule of law.  It makes clear that a recognition court is not simply a rubber stamp, but that it must satisfy itself that the foreign court was fair and impartial.  And importantly, where the foreign court itself is implicated in the fraud, no appeal can right that wrong.  The decision strengthens a key principle for the rule of law: the judgment of a corrupt court is no judgment at all–it is not worthy of respect or deference by other courts.  In the words of the Ontario court, it is "void and without effect."  Op at ¶ 101. The following Gibson Dunn lawyers assisted in the preparation of this client alert:  William Thomson, Robert Blume, Andrea Neuman, Perlette Michèle Jura and Christopher Francis. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm’s Transnational Litigation Group: United States:Randy M. Mastro – New York (+1 212-351-3825, rmastro@gibsondunn.com) Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)Scott A. Edelman – Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)Andrea E. Neuman – New York (+1 212-351-3883, aneuman@gibsondunn.com) William E. Thomson – Los Angeles (+1 213-229-7891, wthomson@gibsondunn.com) Perlette Michèle Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)Robert C. Blume – Denver (+1 303-298-5758, rblume@gibsondunn.com)Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com) Europe:Philip Rocher – London (+44 20 7071 4202, procher@gibsondunn.com)Charlie Falconer – London (+44 20 7071 4270, cfalconer@gibsondunn.com)Patrick Doris – London (+44 20 7071 4276, pdoris@gibsondunn.com)Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com) Please also feel free to contact any of the following practice leaders and members: Appellate and Constitutional Law Group:Theodore B. Olson – Washington, D.C. (+1 202-955-8500, tolson@gibsondunn.com)Mark A. Perry – Washington, D.C. (+1202-887-3667, mperry@gibsondunn.com)James C. Ho – Dallas (+1214-698-3264, jho@gibsondunn.com) Caitlin J. Halligan – New York (+1212-351-4000, challigan@gibsondunn.com) Environmental Litigation and Mass Tort Group: Peter E. Seley – Washington, D.C. (+1 202-887-3689, pseley@gibsondunn.com)  © 2017 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 18, 2017 |
Claims Involving a Limited Partnership Deal Are Derivative Under ‘Tooley’ Test

​Los Angeles partner Benyamin Ross and New York associates Jefferson Bell and Lauren Kole are the authors of "Claims Involving a Limited Partnership Deal Are Derivative Under ‘Tooley’ Test," [PDF] published in Delaware Business Court Insider on January 18, 2017.

December 19, 2016 |
Watch out for some big M&A plays in 2017

​Dubai partner Hardeep Plahe and associate Fraser Dawson are authors of "Watch out for some big M&A plays in 2017: Regional economies could build on some high-profile deals done this year," published in Gulf News on December 19, 2016.

December 16, 2016 |
CPP Rollback May Impact SO2 Emissions Trading Markets

​Washington, D.C. associate David Fotouhi is the author of "CPP Rollback May Impact SO2 Emissions Trading Markets," [PDF] published by Law360 on December 16, 2016.

November 22, 2016 |
FERC Anti-Market Manipulation Update

On November 17, 2016, the Enforcement Staff of the Federal Energy Regulatory Commission ("FERC") released two white papers providing an overview of the Commission’s anti-market manipulation enforcement efforts and offered guidance on effective energy trading compliance practices.  Detailing the first decade of FERC’s enhanced enforcement authority granted by the Energy Policy Act of 2005, the papers are an effort by the Commission to provide significant guidance to the regulated community.  The papers also reinforce the Commission’s and the Office of Enforcement’s intent to continue aggressively combating market manipulation and encourage market participants to implement effective compliance systems that can help detect and prevent manipulative activity.  This client update provides an overview of the two separate whitepapers and highlights some key takeaways and unanswered questions for industry with respect to FERC’s enforcement policy.  Gibson Dunn will provide additional insight and in-depth analysis on these issues in a forthcoming webinar. 1.   A Sweeping Approach to Market Manipulation FERC’s Staff White Paper on Anti-Market Manipulation Enforcement Efforts Ten Years After EPAct 2005 (the "Enforcement Paper")[1] is reflective of the Commission’s zealous exercise of the enforcement powers granted to it by EPAct 2005.  The Enforcement Paper sketches FERC’s evolution over the past decade from a traditional utility regulator charged with establishing "just and reasonable" rates, with limited power to police manipulative activities, to a more muscular and assertive "energy market prosecutor."  It details Enforcement Staff’s application of their far-reaching definition of fraud covering any action "impairing, obstructing or defeating a well-functioning market," and Enforcement Staff’s view that the scienter required to prove fraud can be inferred from circumstantial evidence, even when that evidence shows that the activity was largely driven by a legitimate business purpose. The Enforcement Paper focuses on the "indicia of fraud" FERC looks for in initiating market manipulation enforcement proceedings and common forms of market manipulation.  Key indicia include manipulative intent, "uneconomic" behavior, and behavior inconsistent with "market fundamentals of supply and demand."  But what distinguishes such prohibited conduct from legitimate trading activities remains a fact specific, case-by-case inquiry. The Enforcement Paper also discusses three primary forms of market manipulation that FERC has targeted: cross-market manipulation (e.g., trading in physical markets to favorably affect financial positions), gaming of market rules (e.g., taking "unfair advantage" of market rules), and misrepresentations generally. Finally, the Enforcement Paper suggests steps market participants can take to mitigate penalties for market manipulation, including designing and maintaining internal compliance systems that can detect and prevent potentially fraudulent activity, self-reporting violations, and cooperating with investigators. 2.   Compliance Practices To supplement its guidance to energy firms on compliance efforts, FERC Enforcement Staff also released a separate white paper providing more detail on what the Commission expects regulated entities to do to monitor their own trading practices.  FERC’s Staff White Paper on Effective Energy Trading Compliance Practices ("Compliance Paper")[2] focuses on Enforcement Staff’s advice on "how-to" (i) design, (ii) establish, implement, and enforce, and (iii) assess the performance of an effective trading compliance program.   The Compliance Paper’s advice on how to design an effective compliance program focuses on organizational structure and composition, human resources, training, and information technology resources.  Enforcement Staff’s recommendations include: ensuring that compliance personnel are involved in and apprised of the trading practices of the firm; adequately supporting and effectively incentivizing compliance through budgeting, bonuses, and disciplinary action; vetting business personnel’s "compliance track record" through background checks; and tailoring training to the organization’s specific trading activities.  Regarding establishing, implementing, and enforcing a compliance program, Enforcement Staff’s recommendations include: maintaining a list of prohibited trading strategies; requiring traders to gain approval from compliance personnel before trading new products or at new locations; and implementing restrictions that discourage the use of price-setting instruments to benefit open financial positions.    On assessing the effectiveness of a compliance program, Enforcement Staff underscores the importance of performing regular audits of compliance programs and consistently improving such programs based on the results of those audits and real-life situations.  Enforcement Staff also identifies ineffective practices, including overreliance on standardized and long annual trainings, providing insufficient resources for a compliance program, and not providing compliance personnel with sufficient authority within the organization. 3.   Unanswered Questions   These two white papers represent a commendable attempt by Enforcement Staff to offer guidance to the industry, but also highlight a number of issues that remain unresolved:   No Coherent Definition of Market Manipulation: FERC Enforcement Staff continues to espouse a broad, amorphous definition of market manipulation that amounts to "we know it when we see it."  While the FERC Enforcement Staff continue to assert that flexibility is appropriate when defining what constitutes market manipulation considering the ever-changing nature of manipulative schemes, it nonetheless provides industry participants insufficient notice and uncertainty as to what constitutes manipulative activities and what are appropriate energy trading strategies.    Inferred Intent Can Turn Legitimate Transactions Manipulative:  Otherwise legitimate conduct may be deemed manipulative based purely on a post hoc inference of manipulative intent.  While Enforcement Staff describes some of the indicia they utilize when identifying manipulative intent, and provides some non-controversial examples, there still remains a great deal of ambiguity as to whether Enforcement Staff will infer manipulative intent in any given factual scenario.   A Legitimate Purpose Is No Defense:  Enforcement Staff continues to reject any legitimate purpose defense, specifically stating that any inferred manipulative purpose "satisfies the scienter element even if combined with a legitimate purpose."  Not only is Enforcement Staff’s position inconsistent with case law in the Rule 10b-5 securities law context, it also raises questions regarding how to structure and implement compliance activities designed to prove or document a legitimate purpose for trading activities.  Incentives are Not Meant to Incentivize Behavior:  Enforcement Staff deems incentives built into tariffs and market rules, such as make-whole payments, "secondary considerations" and states that they should not serve as the primary reason for any trading activity.  This leaves industry participants in the difficult position of having to draw a line between trading activity that aligns with the "just and reasonable" incentive structures designed by FERC and trading activity that may subvert or take unfair advantage of such incentives.   Increased Compliance Costs:  The compliance measures outlined by Enforcement Staff may prove burdensome from a cost perspective if implemented collectively.  This may be especially true for smaller and mid-size trading firms.  It will be important for industry participants to determine what measures are both necessary and cost-effective for them to establish an effective compliance program.    Difficult Compliance Choices:  Industry participants will also have to carefully consider the efficacy of Enforcement Staff’s compliance advice.  For example, both the Enforcement Paper and the Compliance Paper advise requiring traders to document all trading strategies and rationales behind conduct that could raise red flags, such as trading related physical and financial products.  Because the underlying conduct of such strategies is legitimate, and it is only the intent of the trader that could render it manipulative, it is unclear whether such documentation will help compliance efforts to detect manipulative activity, or if it will only serve to create a record which could prove damaging in a potential enforcement case.    The New Administration:  A Trump Administration will likely have a significant effect on Commission policies and priorities.  The Commission is currently comprised of three Democrats with two vacant seats.  As such, the Trump Administration will have the opportunity to appoint a new FERC chairman and two new commissioners. Combined with a Republican-controlled Congress, substantial changes may be coming to FERC’s policies and priorities in the near future.  Gibson Dunn will be providing more insight and in-depth analysis on these and other issues in a forthcoming webinar designed for industry participants seeking to better understand the enforcement regimes of FERC and the Commodity Futures Trading Commission ("CFTC").  The webcast will also address potential policy shifts at FERC and the CFTC under a Trump Administration and the timing of such policy implementation.    [1]   Available at https://www.ferc.gov/legal/staff-reports/2016/marketmanipulationwhitepaper.pdf.    [2]   Available at https://www.ferc.gov/CalendarFiles/20161117125529-WhitePaperCompliance.pdf. The following Gibson Dunn lawyers assisted in the preparation of this client alert:  William Scherman, Jeffrey Jakubiak, Jeffrey Steiner, Jason Fleischer, Jennifer Mansh, Kevin Barber, Nick Duvall and Ben Belair. Gibson Dunn’s Energy Regulation and Litigation lawyers are available to assist in addressing any questions you may have regarding the developments discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:   William S. Scherman – Washington, D.C. (+1 202-887-3510, wscherman@gibsondunn.com)Jeffrey M. Jakubiak – New York (+1 212-351-2498, jjakubiak@gibsondunn.com) Jeffrey L. Steiner - Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Jason J. Fleischer – Washington, D.C. (+1 202-887-3737, jfleischer@gibsondunn.com)Jennifer C. Mansh – Washington, D.C. (+1 202-955-8590, jmansh@gibsondunn.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 15, 2016 |
The Trump Presidency: Selected Initial Observations and Considerations

There is widespread speculation regarding what President-elect Donald Trump and a Republican-controlled Congress will choose to prioritize and pursue in 2017 and beyond.  With the majority of pollsters and media observers incorrectly forecasting a victory for Hillary Clinton, many are just now beginning to assess how they will operate under, and the potential opportunities presented by, the policies of the Trump administration and the Republican-led Congress.  We would like to share with you some of our initial observations about the potential effects that may be forthcoming in the near term.  With Republicans claiming the White House and maintaining control of both the House of Representatives and the Senate, we expect a flurry of legislative and administrative activity consistent with campaign promises made by the Trump campaign.  This is likely to include efforts to deregulate in a number of areas, a repeal of certain parts of the Affordable Care Act, a possible overhaul of certain aspects of the tax code, an infrastructure financing package, the renegotiation of free trade agreements, including NAFTA, and changes to banking and securities regulation.  There are, however, still many questions about what the President-elect will be able to accomplish legislatively given that the Republican majority in the Senate will be operating with at least two fewer seats and that some campaign positions, like opposition to NAFTA, are not shared by a number of fellow Republicans.  Congressional leadership is talking about moving an Affordable Care Act repeal/replace bill and a tax bill through the budget reconciliation process.  While that strategy certainly is possible, it is not clear how its execution might impact the willingness of Senate Democrats to negotiate towards other legislative achievements.  Notwithstanding their control of both chambers, Republicans will need Democratic support to move legislation outside of the reconciliation process, where filibusters are likely to occur absent bipartisan agreements on bill language.  It will also be interesting to see how policy is actually shaped over the next few years, particularly given that Mr. Trump’s positions on certain issues are likely to differ from what has previously been considered "traditional" Republican orthodoxy. The influence of Senate Democrats may have a tempering effect on the sweeping nature of the proposals that Republicans have put forth in the campaign.  For example, Senate Democrats may seek to negotiate and limit changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), whose reform is expected to be a key Republican legislative priority.  That said, Republicans may well have at least a four-year window in which to enact legislative priorities, as political observers note that the House of Representatives is unlikely to change hands in the 2018 midterm elections and Senate Democrats will be defending 25 seats (including a number in states that voted for President-elect Trump), while the Republicans will be defending only eight in mid-term elections. In addition to legislation, wide-ranging regulatory changes are anticipated as a result of the President’s power to fill senior positions in federal agencies.  The President-elect’s transition team is just beginning to make announcements about the individuals who will play key roles in the Trump administration, and many positions will require Senate confirmation.  President-elect Trump’s stated commitment to draft individuals with significant private sector experience for senior leadership positions in the Executive Branch may contribute to a regulatory environment that is viewed as business-friendly across a number of federal agencies.  In particular, we would expect a new emphasis on cost-benefit analyses of particular regulations, which in turn will provide an additional avenue for challengers of those regulations to seek relief in court.  And, given the slim Republican Senate majority, it is quite possible that significant regulatory changes will come more quickly than legislative ones. While no one can predict the medium- to long-term implications of this election, we can be sure that the next few years will be a time of change in the legal and regulatory environment in which our clients operate.  A few of our initial observations on selected areas of law and industries are set forth below.  As more information becomes available on specific legislative and regulatory proposals over the next few weeks, we will provide additional analysis and commentary on these and other areas. The Securities and Exchange Commission and Other Securities Matters  Preliminary Considerations.  The central role of the Securities and Exchange Commission (the SEC) in how businesses operate and grow in America means that we can expect the direction of the SEC to change.  It will likely be some time before the SEC’s direction takes shape and the SEC is operating with a full complement of five Commissioners, which will include a new Chair (who will likely be a Republican).  Since January, only three out of five Commission seats have been occupied, as several Senators have blocked confirmation of two recent nominees that are highly unlikely to be confirmed before the end of the Obama administration.  Yesterday, SEC Chair Mary Jo White announced that she will step down on January 20 when President-elect Trump is inaugurated.  Michael Piwowar, the sole Republican on the Commission, is expected to be appointed Chair for at least an interim period.  The term of the other remaining Commissioner, Democrat Kara Stein, expires in 2017. In the longer term, the process of identifying and confirming three nominees for the Commission will likely take several months, particularly if relations between the parties in the Senate are polarized.  Until that time, the SEC will be left to operate with just two commissioners, and as a result, will have difficulty proposing any new regulations or changes to existing ones. Once the SEC is more fully operational, following the appointment of new Commissioners, we expect to see a focus on increased deregulation and more self-regulation initiatives. For example, there may be renewed efforts to revise various disclosure-related sections of Dodd-Frank and a scaling back of related SEC regulations.  Any efforts to amend SEC rules that have already been adopted, such as those related to CEO pay ratios (which are to go into effect in 2017 and require disclosure by public companies the following year) and conflict minerals, would require a new rulemaking process including a period of public notice and comment.  In addition, the SEC staff may be active in publishing interpretations and other guidance to facilitate compliance with existing rules and provide greater context with respect to how companies should comply with these rules. Other initiatives that have been generally disfavored by the Republicans, such as proposed rules to implement a universal proxy card and the rulemaking petition advocating corporate political spending disclosure, are unlikely to move forward under the new SEC leadership.  Under Republican leadership, the SEC’s disclosure simplification project is likely to result in more trimming of, rather than adding to, the disclosure obligation landscape, if the project moves forward at all.  In addition, President Trump and the Republican-led Congress may seek to reduce, or least stop the growth in, the SEC’s annual budget.  That could have an impact on a number of aspects of the SEC’s work.  For example, recent years saw a steady rise in the number of enforcement actions, but a budget cut could potentially reduce the number and scope of new investigations. Regulation of the Capital Markets.  A number of financial market observers have speculated that Republican leadership in Washington may lead to a further easing of the regulation of capital raising, particularly by smaller companies.  Indeed, Republicans in the House of Representatives may dust off and expand the scope of previous legislative initiatives aimed at reducing burdens and costs associated with raising capital in the public markets and the requirements of being a public company.  Current uncertainties, and potentially volatile stock and bond markets, could drive deal making in the near term.  For example, the volatility could lead companies to seek to position themselves to more quickly access the market and take advantage of market windows, including through shelf registration statement takedowns and through the establishment and use of at-the-market (ATM) programs and medium term note (MTN) programs.  Companies may also choose to be ready to take advantage of potential opportunities for share or bond repurchases presented by volatile markets.  In addition, some observers have speculated that changes with respect to trade policy could result in a devaluation of the U.S. dollar versus other currencies, particularly those in Asia.  That devaluation, should it occur, could attract foreign investors who may seek to engage in private-placement-public-equity (PIPE) transactions, among other investment methods, to invest in domestic growth companies, particularly in the technology and biotech industries. Enforcement Actions.  While President-elect Trump’s campaign did not offer detailed proposals with respect to the SEC’s Division of Enforcement, there are already initial indications of potential changes for that division.  Former SEC commissioner Paul Atkins is a member of President-elect Trump’s transition team reviewing federal financial agencies.  As a past Commissioner (and in the years since), Atkins has criticized many aspects of financial regulation (including, in particular, significant components of Dodd-Frank) and has been a critic of SEC enforcement priorities and initiatives.  For example, Atkins has pushed the Enforcement Division to focus greater attention on traditional "retail" securities fraud cases, such as Ponzi schemes and penny stock fraud.  We can expect greater prioritization of straightforward fraud and misappropriation investigations and less emphasis on expanding the boundaries of the federal securities laws through novel enforcement actions. Atkins and other Republican-appointed Commissioners have also criticized the assessment of large fines on public companies, which have been a mainstay of enforcement actions in recent years. The Republican Congress is also likely to seek changes to the reach of Dodd-Frank, which will have some impact on enforcement.  For example, under Dodd-Frank, private equity and hedge funds managers became subject to SEC examinations, a number of which resulted in enforcement referrals.  The revision of provisions relating to the regulation of private funds could take the wind out of recent enforcement efforts to sanction inadequate disclosures of fees and expenses by these funds.  Similarly, the increasing use of administrative proceedings rather than federal court trials in the wake of Dodd-Frank may be curtailed, with more contested actions being brought in court.  Further, the significant impact of whistleblowers, who are entitled to sizable cash awards under Dodd-Frank, may see some changes as well. Tax Matters President-elect Trump’s tax proposals seek to make a number of changes that are premised on the notion that lower tax rates will help to stimulate the economy and fuel growth.  While high-income taxpayers would benefit substantially from his plan, middle- and lower-income families  could also see significant tax reductions under the President-elect’s campaign proposals, especially after taking into account the various child and elder care provisions.  Given the recent Congressional requirement for revenue neutrality and economic data estimating multi-trillion dollar increases in the federal deficit that could result from the plan, however, whether the extent of the tax cuts included his plan will survive the legislative process remains uncertain.  Many speculate that a Trump administration will either repeal or substantially amend certain regulations issued in the period leading up to this election.  These could include the recently issued regulations under Sections 385 and 7874 of the Internal Revenue Code, which address the treatment of related party debt and corporate inversions.  Also potentially on the chopping block are the recently proposed regulations under Section 2704, which if finalized in their proposed form would increase the valuation of interests in closely held businesses for estate tax purposes.  The following is a general summary of the major aspects of President-elect Trump’s tax plan.  Some tax reductions may be scaled back, and additional tax breaks (beyond those specifically referenced in the plan) may be eliminated or curtailed.  Individuals.  President-elect Trump’s current plan would lower the maximum marginal ordinary income tax rate from 39.6 percent to 33 percent, reduce the number of tax brackets from 7 to 3 and eliminate both the alternative minimum tax and the 3.8 percent investment income tax.  The maximum 20 percent tax on capital gains would remain unchanged.  Trump’s plan calls for a 15 percent tax rate on business income for businesses that "want to retain their profits in the business," which presumably includes the income of flow-through entities, such as tax partnerships and S corporations owned by individuals, but is short on specifics with respect to implementation.  Questions include whether the new tax rate would apply only to income used to increase "business" assets, as opposed to income distributed or converted to cash or other liquid investments. Several tax breaks would be available for families with children or caring for the elderly, limited to those making less than $500,000 ($250,000 for single filers) per year.  Several other benefits would apply to lower income families, including 50 percent government matching funds (with limits) for dependent care savings accounts.  These seemingly generous tax breaks will be tempered, however, including by the fact that personal exemptions would be eliminated (with an increase in the standard deduction to $30,000 for married joint filers), and only $200,000 ($100,000 for single returns) of itemized deductions would be allowed.  Finally, so-called "carried interest"–typically a percentage of investment fund profits paid to the fund sponsor in excess of the sponsor’s capital investment percentage–would be taxed as ordinary income, a topic that has been on the legislative radar for years. The possibility of lower tax rates and a cap on itemized deductions means that taxpayers may want to consider accelerating itemized deductions into 2016, although many other issues come into play in making this decision, including the effect of alternative minimum tax and certain tax credits.  We expect these proposals will lead to increased charitable giving before year end. Businesses.  As mentioned above, under President-elect Trump’s current proposals business income would be subject to a maximum 15 percent rate (subject to the "retained in the business" issue), and the corporate alternative minimum tax would be eliminated.  Depreciation deductions would be replaced with immediate write-offs for U.S. manufacturers, but those taxpayers would not be entitled to deduct interest expense.  Perhaps the hottest topic of the Trump proposals is the ability of U.S. corporations with untaxed, undistributed earnings of non-U.S. subsidiaries to distribute those earnings at a tax rate of only 10 percent as opposed to the current 35 percent.  This will enable corporations to bring money back to the U.S. that is currently being held offshore.  The plan also calls for the elimination of "corporate tax expenditures," but includes no details regarding what those expenditures entail other than that the research and development tax credit would be retained.  Some speculate Trump favors a territorial tax system that is expected to eliminate the ability of corporations to avoid income tax by shifting earnings to low-tax foreign countries.  Other tax expenditures subject to repeal could include the low-income housing credit, last-in first-out inventory accounting and the ability to defer tax using like-kind exchanges of property. Estates.  President-elect Trump’s plan would repeal the estate tax, but would limit the "basis step-up" at death to estates worth less than $10,000,000.  While the specifics of the plan are not entirely clear, estates valued in excess of $10,000,000 would not receive the basis step-up, and therefore appreciation in the assets of those estates would be subject to tax upon a taxable disposition.  Whether the first $10,000,000 of value on estates valued in excess of $10,000,000 would escape this treatment and how the proposal would apply to married couples are two questions that remain outstanding based on the current language of the proposals.  The plan would also limit the ability to reduce the size of an estate by contributing assets to certain private charities. Industry-Specific Considerations Legislative and regulatory changes will certainly affect businesses across all industries in the next few years.  While the extent to and speed with which these changes will be made remain unknown, there are a few early observations we can offer with respect to a few of the industries in which our clients operate as described below, which we will update as the policy implications become more clear.  Energy.  President-elect Trump campaigned heavily on boosting traditional domestic energy production and seeking to reduce regulations on the oil, gas, and coal industries.  Specifically, he has expressed support for opening public lands for drilling and mining and for reducing regulations on hydraulic fracturing (fracking) in an effort to increase production.  The midstream sector may also benefit from his support of energy-related infrastructure projects, including the opening of new pipelines.  He has also expressed support for repealing regulations on the coal industry while reducing governmental support for the renewable energy sector, including the elimination of subsidies to wind and solar firms.  Beyond his domestic initiatives, Trump’s foreign policy plans include uncertainties for the energy industry, including opposition to the Paris Accord on climate change and opposition to lifting sanctions on Iran, implicating foreign oil production levels. Banking.  With respect to bank and derivatives regulation, the effects of the election are still unclear.  While the election was marked by negative sentiments towards both Wall Street and the regulatory agencies that supervise its activities, few of the specific policy proposals articulate what reform would entail.   That said, during the campaign, President-elect Trump made clear his general view that overregulation of all sectors of the economy was hampering growth and job creation, and thus a deregulatory agenda is to be expected.  In the short term, we can expect there will be a slowdown in the remaining required regulatory implementation of Dodd-Frank, where there is still substantial agency action needed, even though six years have passed since the statute was enacted.  With respect to the Dodd-Frank statute itself, at this time it appears reform is more likely than outright repeal, given that the Republicans do not have a filibuster-proof majority in the Senate.  Potential areas for bipartisan legislation include relief for community and regional banks, narrowing the extraterritorial application of Title VII of Dodd-Frank’s derivatives market reforms, and, possibly, imposing additional constraints on agency rulemaking.  There will likely be support for requiring more cost-benefit analysis when financial regulations are proposed, which in turn would give the market participants additional arguments when challenging such rulemakings.  The question is, however, whether Democrats will support greater cost-benefit analysis requirements.  For more extended analysis of the likely effects of the election on the financial services industry, please see our client alert available at: http://www.gibsondunn.com/publications/Pages/Financial-Regulatory-Reform-Under-a-Trump-Presidency–What-We-Know-and-What-to-Expect.aspx. Healthcare.  A Trump presidency is being viewed as a boon for the healthcare and biotech industries.  Both the Dow and S&P Biotech Indexes have risen over 10 percent in the days following the election.  In his 100-day Action Plan, the President-elect has promised to reform the FDA by cutting the red tape associated with the drug approval process.  While the action plan is short on specifics, a streamlined approval process would allow more drugs to enter the market at a faster rate, which would be quite beneficial to drug companies.  Trump’s victory also eliminates concerns held by many healthcare and biotech companies regarding Clinton’s aggressive drug price control and cost-containment agenda.  In terms of taxes, President-elect Trump promised to lower the business tax rate from 35 to 15 percent and the repatriation rate to 10 percent.  This would allow large pharmaceutical companies to bring back the billions of dollars currently trapped overseas and would likely incite a mergers and acquisitions binge in the biotech industry.  Of course, one of Trump’s signature campaign promises was to repeal or overhaul the Affordable Care Act.  We believe that there is a reasonable chance Trump will attempt to accomplish this pledge during his first 100 days in office. Technology.  As a candidate, President-elect Trump offered relatively few specific plans with respect to the technology industry and policies addressing intellectual property and other matters of importance to the industry.  Proposed changes to the tax code, as discussed above, that have been of interest to congressional Republicans for years could result in repatriation of some of the estimated $2 trillion that American companies currently hold offshore.  That cash could be put to use in enhanced research and development initiatives or for acquisitions.  A Trump administration may also seek to scale back Obama-era reforms regarding net neutrality and the FCC or simply choose not to enforce them.  One of President Obama’s signature initiatives involved reclassifying broadband providers as Tier II common carriers and preventing internet service providers from speeding up, blocking or throttling internet traffic in exchange for payment. Although not a campaign issue, some congressional Republicans have pursued bills to limit the FCC’s authority and to eliminate, rewrite or relax existing rules.  President-elect Trump’s immigration policies will likely affect technology companies, which heavily recruit overseas engineers and coders to meet domestic labor shortages. Trump’s policy in this regard is uncertain: he has both opposed H-1B specialty occupation non-immigrant visas and supported highly skilled immigration to the U.S.  Additionally, technology and other sale transactions with foreign buyers from certain countries, including China, may face a stiffer review when seeking approval from the Committee on Foreign Investment in the United States (CFIUS). Gibson Dunn has established a working group that will continue to monitor the developing situation in Washington, D.C. and provide insight and analysis to you in the months to come. The following Gibson Dunn lawyers assisted in the preparation of this client update:  Marc Fagel, Paul Issler, Stewart McDowell, Ryan Murr, Robyn Zolman, Arthur Long, Beth Ising, James Moloney, Lori Zyskowski, Sean Sullivan and Melanie Gertz.      Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following: San Francisco:Marc J. Fagel (+1 415-393-8332, mfagel@gibsondunn.com)Stewart L. McDowell (+1 415-393-8322, smcdowell@gibsondunn.com)Ryan Murr (+1 415-393-8373, rmurr@gibsondunn.com)Sean Sullivan (+1 415–393–8275, ssullivan@gibsondunn.com) Washington, D.C.:Michael D. Bopp (+1 202-955-8256, mbopp@gibsondunn.com)Thomas H. Dupree, Jr. (+1 202-955-8547, tdupree@gibsondunn.com)Elizabeth Ising – (+1 202-955-8287, eising@gibsondunn.com)Brian J. Lane (+1 202-887-3646, blane@gibsondunn.com)Ronald O. Mueller (+1 202-955-8671, rmueller@gibsondunn.com)John F. Olson (+1 202-955-8522, jolson@gibsondunn.com)Benjamin Rippeon (+1 202-955-8265, brippeon@gibsondunn.com)William S. Scherman (+1 202-887-3510, wscherman@gibsondunn.com)Joshua H. Soven (+1 202-955-8503, jsoven@gibsondunn.com) New York:Andrew L. Fabens (+1 212-351-4034, afabens@gibsondunn.com)Jose W. Fernandez (+1 212-351-2376, jfernandez@gibsondunn.com)Arthur S. Long (+1 212-351-2426, along@gibsondunn.com)Lori Zyskowski (+1 212-351-2309, lzyskowski@gibsondunn.com) Dallas:Ronald Kirk (+1 214-698-3295, rkirk@gibsondunn.com) Denver:Robyn E. Zolman (+1 303-298-5740, rzolman@gibsondunn.com) Los Angeles:Paul S. Issler (+1 213-229-7763, pissler@gibsondunn.com)Peter W. Wardle (+1 213-229-7242, pwardle@gibsondunn.com) Orange County: James J. Moloney (+1 949-451-4343, jmoloney@gibsondunn.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

August 9, 2016 |
Chevron Earns Decisive Victory in Second Circuit Civil RICO Appeal Concerning Corrupt Scheme to Obtain $9.5 Billion Ecuadorian Judgment Through Bribery and Fraud

On August 8, 2016, a unanimous panel of the United States Court of Appeals for the Second Circuit affirmed the judgment in favor of Chevron Corporation in Chevron Corp. v. Donziger, Case No. 14-826.  The decision represents a resounding victory for Chevron in exposing what The Wall Street Journal has called the "legal fraud of the century."  The Wall St. J., Legal Fraud of the Century (Mar. 4, 2014).  The Second Circuit affirmed in full the district court’s 2014 decision that granted Chevron equitable relief under the federal RICO statute and New York common law from a fraudulently procured $9.5 billion Ecuadorian judgment.  Meticulously rejecting every argument the defendants raised on appeal, the Second Circuit’s 127-page decision marks a turning point in one of "the most extensively [chronicled] [cases] in the history of the American federal judiciary."  Op. at 11.  Indeed, within hours of yesterday’s closely watched decision, one commentator concluded:  "One of the most egregious legal frauds in history may finally be over."  The Wall St. J., Chevron Shakedown Rout, Steven Donziger Suffers Another Legal Humiliation (Aug. 8, 2016).  Gibson Dunn represented Chevron at trial and on appeal. In an opinion authored by Circuit Judge Amalya L. Kearse and joined by Circuit Judges Barrington D. Parker and Richard C. Wesley, the Second Circuit repeatedly underscored that the defendants had not challenged the district court’s extensive factual findings.  The lower court’s decision chronicled how New York plaintiffs’ attorney Steven Donziger and his co-conspirators orchestrated an extortionate scheme by procuring a multi-billion dollar Ecuadorian judgment against Chevron through corrupt means and then attempted to leverage it to extract a massive payment from the company.  Observing that the "record in the present case reveals a parade of corrupt actions by the [Ecuadorians’] legal team" (op. at 85), the Second Circuit noted that the defendants’ wrongful conduct included fabricating evidence, bribing foreign officials in violation of the Foreign Corrupt Practices Act, and even ghostwriting the multi-billion-dollar judgment against Chevron and bribing the Ecuadorian judge to issue it.  The Second Circuit also affirmed in full the relief granted by the district court, including enjoining Donziger and his Ecuadorian clients from attempting to enforce the judgment in any court in the United States, and placing a constructive trust over any proceeds they manage to collect from the judgment.  The Second Circuit’s decision addressed several important questions of law, including the ability of private plaintiffs to obtain equitable remedies under RICO.  The decision reaffirms that "'[j]ustice is not served by inflicting injustice’" (op. at 15), and it should have important implications for other companies and individuals faced with similar corrupt shakedown schemes.  The Lago Agrio Lawsuit and Fraudulent Judgment The Ecuadorian case against Chevron was filed in 2003 by a group of 48 Ecuadorians (the "Lago Agrio Plaintiffs" or "LAPs") represented by U.S. plaintiffs’ lawyers–including Donziger–alleging environmental harm.  Chevron never operated in Ecuador, but the LAPs asserted the company was responsible for alleged conduct by a Texaco subsidiary that operated in the region from 1964 to 1992.  That subsidiary, TexPet, was a minority partner in a consortium with Ecuador’s state-owned oil company, PetroEcuador.  Although Ecuador received the vast majority of the economic benefits from the consortium and was the majority owner of the consortium, the LAPs did not sue PetroEcuador.  In February 2011, the trial court in Ecuador entered a $17.2 billion judgment against Chevron–$8.6 billion in compensatory damages and another $8.6 billion in punitive damages for Chevron’s refusal to "apologize."[1]  Chevron’s RICO Lawsuit in the Southern District of New York Through discovery in the United States, Chevron uncovered extensive evidence of fraud on the part of the LAPs’ lawyers and agents.  As a consequence, Chevron filed suit in the Southern District of New York and sought, among other things, relief under RICO and New York common law.  In March 2014, after a seven-week trial, which included the live or deposition testimony of more than 50 witnesses and more than 4,000 exhibits, United States District Judge Lewis A. Kaplan issued a 485-page opinion detailing the defendants’ fraudulent scheme to corrupt the Lago Agrio litigation from start to finish.  As the court put it, the evidence included "things that normally come only out of Hollywood–coded emails among Donziger and his colleagues describing their private interactions with and machinations directed at judges and a court appointed expert, their payments to a supposedly neutral expert out of a secret account, a lawyer who invited a film crew to innumerable private strategy meetings and even to ex parte meetings with judges, an Ecuadorian judge who claims to have written the multibillion dollar decision but who was so inexperienced and uncomfortable with civil cases that he had someone else (a former judge who had been removed from the bench) draft some civil decisions for him, an 18-year old typist who supposedly did Internet research in American, English, and French law for the same judge, who knew only Spanish, and much more."  Chevron Corp. v. Donziger, 974 F. Supp. 2d 362, 384 (S.D.N.Y. 2014).  The district court found that Donziger and his co-conspirators, in procuring the Ecuadorian judgment by fraud, violated numerous criminal statutes and committed racketeering, extortion, obstruction of justice, witness tampering, wire fraud, money laundering, and violations of the Foreign Corrupt Practices Act.  The court concluded that "[t]he wrongful actions of Donziger and his Ecuadorian legal team would be offensive to the laws of any nation that aspires to the rule of law, including Ecuador–and they knew it."  Donziger, 974 F. Supp. 2d at 386.  The court ordered the defendants to disgorge any profits traceable to the fraudulent judgment, imposed a constructive trust on any future judgment proceeds, and prohibited the defendants from enforcing the judgment in the United States.  The defendants appealed. The Second Circuit Appeal After extensive briefing, motion practice, and oral argument, the Second Circuit affirmed the district court’s judgment in full.  Noting that "[n]one of [the facts as found by the district court] is disputed" on appeal (op. at 17), the appellate court recounted the substantial evidence that Donziger and the LAP team corrupted the Lago Agrio litigation from the very beginning:  they touted damages estimates they knew to be false (id. at 18-20), forged expert reports (id. at 21-23), and secretly hired experts to pose as purported "independent monitors" of the court-ordered inspections (23-24), all with the aim of having "an in terrorem effect" on Chevron that would "impel[] [it] to agree to a settlement" (id. at 17).  When these tactics did not work, Donziger and the LAP team "coerced" the Ecuadorian judge with threats to appoint "Donziger’s choice" as the purportedly neutral global damages expert.  Id. at 24-28.  This expert was far from neutral, however, as Donziger and his team secretly paid him and, in fact, wrote the report to which he simply affixed his name.  Id. at 28-38.  Donziger and the LAP team then secretly came to an agreement with a former Ecuadorian judge–who later testified to this effect at trial in New York–for him to ghostwrite orders for the then-presiding judge.  Id. at 61-62.  The defendants’ scheme reached its climax when they bribed the judge with a promise of $500,000 and then ghostwrote the multi-billion dollar judgment itself.  Chevron proved this judgment-ghostwriting scheme at trial with a painstaking forensic analysis, comparing the Ecuadorian judgment with unfiled work product from the LAPs’ team’s files; the judgment contained substantial passages and references which are nowhere in the court record, but which appeared verbatim (including with the same typographical errors) in the LAPs’ internal emails and files.  Id. at 51-57.  This forensic evidence was corroborated at trial in numerous respects, including by testimony from the former Ecuadorian judge who facilitated the bribery scheme and edited the judgment before it was issued.  Id. at 60-64.  In affirming the district court’s judgment, the Second Circuit dispensed with Donziger’s argument that Chevron lacked standing, finding it "without merit" and holding that "Chevron clearly met the requirements for Article III standing when it commenced the present action."  Id. at 75-77.  The court similarly rejected Donziger’s mootness argument and dismissed as "untenable" the assertion that there was no connection between the "corrupt conduct at the trial level" and the judgment.  Id. at 82.  In fact, the court stressed that the multi-billion Lago Agrio judgment is "clearly traceable to the LAPs’ legal team’s corrupt conduct."  Id. at 85. The Second Circuit likewise rejected all of Donziger’s challenges to the RICO-based aspects of the district court’s decision.  Again noting that there was "no challenge to the sufficiency of the evidence" that Donziger committed a pattern of racketeering (id. at 98), the court concluded that Chevron had proven all the requisite statutory elements of its civil RICO claim.  The court also specifically held that "a federal court is authorized to grant equitable relief to a private plaintiff who has proven injury to its business or property by reason of a violation of [18 U.S.C.] § 1962."  Id. at 103.  In addition, the Second Circuit held that "New York common law has long recognized that equitable relief may be granted to a person victimized by the procurement of a judgment through fraud that is extrinsic to the gravamen of the cause of action," and that such relief may be granted by a court with personal jurisdiction over the parties, "even through the fraudulent judgment was entered in a different jurisdiction."  Id. at 109.  The court also rejected the defendants’ argument that Chevron had an adequate remedy at law–namely, a money judgment and/or the ability to defend against individual enforcement actions.  Id. at 112-13.  Noting that the defendants’ professed strategy was to "inundate" Chevron with multiple enforcement actions, thereby "forcing it to incur sizeable legal fees," the court held that Chevron’s ability to defend itself in these actions was not an adequate remedy at law.  Id. at 113. The Second Circuit also dispatched the "international comity" arguments of Donziger, the LAPs, and several amici.  Emphasizing the in personam nature of the relief entered by the district court, the court noted that the injunction was "directed at only three persons . . . over whom the district court has personal jurisdiction" (namely, Donziger and the two appearing LAPs), and that its application was "limited to the United States."  Id. at 114.  The court also noted that there was no risk of "international friction" where the Ecuadorian appellate courts expressly "deferred to the courts of the United States" on Chevron’s allegations of corruption.  Id. at 115. Finally, the Second Circuit rejected the LAPs’ arguments regarding personal jurisdiction and the appropriateness of enjoining them from enforcing the judgment based on the conduct of their lawyers and agents.  The court affirmed the district court’s sanction against the LAPs–the striking of their personal jurisdiction defense–for their repeated failure to comply with discovery orders, finding their challenges "meritless."  Id. at 121-23.  The court also reasoned that not holding the LAPs accountable for the actions of their lawyers would violate basic lawyer-client principles and "run afoul of the Supreme Court’s warning that fraud ‘is a wrong against the institutions set up to protect and safeguard the public. . . .’"  Id. at 124 (quoting Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 246 (1944)).  The court found "ampl[e]" support for the district court’s conclusion that the LAPs "retained Donziger as their attorney and gave [their Equadorian lawyer] power of attorney," thereby ratifying all of their fraudulent conduct.  Id. at 125.  Assuming for argument’s sake that the LAPs had not been personally involved in the wrongdoing, the court explained, "[e]ven innocent clients may not benefit from the fraud of their attorney."  Id.  *          *          * The decision in Chevron Corp. v. Donziger represents a major victory for Chevron.  It is also a significant victory for the rule of law.  As the U.S. Court of Appeals for the Second Circuit aptly stated, again quoting the district court, "The ends do not justify the means.  There is no ‘Robin Hood’ defense to illegal and wrongful conduct.  And the defendants’ ‘this-is-the-way-it-is-done-in-Ecuador’ excuses–actually a remarkable insult to the people of Ecuador–do not help them."  Op. at 15.       [1]   The punitive damages aspect of the judgment was later eliminated on appeal as being contrary to Ecuadorian law. The following Gibson Dunn lawyers assisted in preparing this client alert:  William Thomson, Kahn Scolnick, Anne Champion, Bradley Hamburger, Dylan Mefford and Richard Dudley. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the firm’s Transnational Litigation Group: United States:Randy M. Mastro – New York (+1 212-351-3825, rmastro@gibsondunn.com) Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)Scott A. Edelman – Los Angeles (+1 310-557-8061, sedelman@gibsondunn.com)Andrea E. Neuman – New York (+1 212-351-3883, aneuman@gibsondunn.com) William E. Thomson – Los Angeles (+1 213-229-7891, wthomson@gibsondunn.com) Perlette Michèle Jura – Los Angeles (+1 213-229-7121, pjura@gibsondunn.com)Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com) Europe:Philip Rocher – London (+44 20 7071 4202, procher@gibsondunn.com)Charlie Falconer – London (+44 20 7071 4270, cfalconer@gibsondunn.com)Patrick Doris – London (+44 20 7071 4276, pdoris@gibsondunn.com)Michael Walther – Munich (+49 89 189 33 180, mwalther@gibsondunn.com) Please also feel free to contact any of the following practice leaders and members: Appellate and Constitutional Law Group:Theodore B. Olson – Washington, D.C. (+1 202-955-8500, tolson@gibsondunn.com)Mark A. Perry – Washington, D.C. (+1202-887-3667, mperry@gibsondunn.com)James C. Ho – Dallas (+1214-698-3264, jho@gibsondunn.com) Caitlin J. Halligan – New York (+1212-351-4000, challigan@gibsondunn.com) Environmental Litigation and Mass Tort Group: Peter E. Seley – Washington, D.C. (+1 202-887-3689, pseley@gibsondunn.com)    © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.