State Supreme Court Rejects Hypothetical Maximum Operating Capacity As Environmental Baseline Under CEQA

The California Supreme Court has issued an opinion determining that projects reviewed under the California Environmental Quality Act ("CEQA") cannot be approved through a Negative Declaration based on the absence of significant impacts when the proposed project is compared to a hypothetical maximum permitted capacity rather than existing physical conditions at the time of the commencement of the environmental review. Communities for a Better Environment v. South Coast Air Quality Mgmt. Dist., Case No. S161190, __ Cal.4th __ (March 15, 2010) ("CBE v. SCAQMD").

Background on CEQA

CEQA mandates that any "project" in California undergo environmental review to determine if the project may pose significant adverse environmental impacts. The first phase of environmental review is the Initial Study carried out by the lead agency. If, after conducting the Initial Study, the lead agency concludes that the project will not have a significant adverse effect on the environment, it may issue a Negative Declaration and approve the project. If, however, the lead agency determines that substantial evidence exists that supports a fair argument that the project may have significant adverse environmental effects, then the lead agency must undertake the lengthy, expensive and often contentious process of preparing an Environmental Impact Report ("EIR") before it may approve the project. In both the Initial Study and the EIR, a critical issue is the baseline against which the environmental impacts of the proposed project should be evaluated to determine if any adverse impacts are significant.

The Diesel Project at Issue in CBE v. SCAQMD

The CBE v. SCAQMD case concerned a project proposed by the ConocoPhillips Company ("ConocoPhillips") to install new equipment and modify existing equipment at its Wilmington, California petroleum refinery to enable it to produce ultra-low sulfur diesel fuel in response to a mandate by the State of California (the "Diesel Project"). In general, to construct new equipment that generates air emissions or to modify existing equipment that generates air emissions, a facility must first apply to the local air district for a "permit to construct." Once a permit to construct is issued, and the work is completed, the air district will issue a "permit to operate" the new or modified equipment. The application for a permit to construct can trigger CEQA review.

ConocoPhillips applied for permits to construct from the South Coast Air Quality...