By Amanda Durish Cook

American Electric Power must bear the billion-dollar cost of installing scrubbers at the Rockport Generating Station in Indiana, an appellate court said, ruling in favor of the plant’s owners in a dispute over a lease contract.

A three-judge panel for the 6th U.S. Circuit Court of Appeals ruled April 14 that it’s the duty of plant operator AEP Generating ― not the plant owners’ trustee, Wilmington Trust ― to install court-ordered emissions-reducing technology at the coal-fired Rockport Unit 2 (No. 16-3496). The decision overturns an earlier district court ruling.

Rockport Unit 2 supplies about half of the output of the 2,620-MW plant on the Ohio River in southern Indiana.

Wilmington Trust charged that AEP subsidiaries Indiana Michigan Power and AEP Generating are responsible for the costs of a selective catalytic reduction (SCR) device on Rockport 2 for NOx control. Under a consent decree to settle Clean Air Act violations with EPA and several other parties, the approximate $1.4 billion SCR for Rockport 2 is required by Dec. 31, 2019.

Indiana Michigan Power and AEP Generating jointly operate the two Rockport units despite the fact that AEP sold Rockport Unit 2 to a group of investors in 1989. The investors in turn leased the unit back to the AEP subsidiaries for 33 years, ending Dec. 7, 2022.

In 2013, EPA and other parties agreed to modify the consent decree to allow AEP to instead install a less expensive emissions control by April 16, 2015, and then either install the expensive scrubber, retire the plant or switch it to another fuel by the end of 2028, six years after the current lease expires.

Wilmington Trust filed suit against AEP soon after, claiming the modified consent decree breached the lease by imposing an impermissible lien and by taking an action “that materially adversely affected the economic useful life of Rockport 2.”

Clauses in the complex contract prohibit AEP from taking action that “will materially adversely affect the operation, safety, capacity, economic useful life or any other aspect of Unit 2” and from creating or incurring liens, except in certain circumstances.

The appellate judges found that AEP’s financial promises to Rockport would be empty after the lease expires and said AEP’s settlements with EPA were its own responsibility. They said applying a temporary fix and pushing back a permanent solution would make Rockport’s owners essentially “responsible for the costs associated with either upgrading Rockport 2 or shutting it down.” The lease states that the operating AEP subsidiaries are responsible for “installing, owning and operating” major environmental controls to comply with regulations.

“AEP traded away Rockport 2’s long-term value in exchange for a more favorable settlement of claims against their other interests,” the judges said of the 2013 consent decree modification. AEP had argued that deferring the scrubber’s installation was not only good for itself, but also for the owners, as either party would have several more years of profit before a scrubber was required. The judges rejected the argument, saying the plant’s owners were not part of the modification.

It’s unclear if AEP’s lease will be extended. Completed in 1989, Rockport 2 has an expected useful life anywhere through 2034 to 2049, according to the order.