Applying Chevron deference, the U.S. Court of Appeals for the Second Circuit on January 18, 2017, reversed the Southern District of New York by a 2-1 margin and concluded that the United States Environmental Protection Agency’s (the “EPA”) Water Transfers Rule that permits transfers between waters of the United States without a National Pollutant Discharge Elimination System (“NPDES”) permit was sound.  (Catskill Mountains Chapter of Trout Unlimited, Inc. et al. v. USEPA, et al., U.S. Court of Appeals, Second Circuit, Docket Nos. 14-1823, 14-1909, 14-1991, 14-1997, 14-2003, 2017 U.S. App. LEXIS 914). The controversy stemmed from the transfer of water from the Schoharie Reservoir through the Shandaken Tunnel into the Esopus Creek in New York.  Historically, the EPA has taken a hands-off approach to water transfers, choosing not to subject them to the requirements of the NPDES permitting program established by the Clean Water Act (“CWA”) in 1972.

Following several court decisions in which it was held that the Water Transfers Rule lacked sufficient reliance by the agency to support deference during the 1990s and 2000s, EPA took steps to formalize its position. In August 2005, the EPA’s Office of General Counsel and Office of Water issued a legal memorandum written by then-EPA General Counsel Ann R. Klee (the “Klee Memorandum”) concluding that Congress did not intend for water transfers to be subject to the NPDES permitting program.  In the litigation, the rule was supported by the States of California, Colorado, New Mexico, Alaska, Arizona (Department of Water Resources), Idaho, Nebraska, Nevada, North Dakota, Texas, Utah, and Wyoming, and several trade groups.  Opposition was mounted by the States of New York, Connecticut, Delaware, Illinois, Maine, Michigan, Minnesota, Missouri, and Washington, and the Province of Manitoba, as well as a number of trade groups.

Finding that neither the unambiguous language of the CWA, nor canons of statutory construction, supplied the answer to what “waters” meant for purposes of the Water Transfers Rule, the Court employed Chevron deference and found the agency construction to be appropriate. According to the Court, the EPA’s interpretation of the CWA is reasonable and neither arbitrary nor capricious.  Further, the EPA’s explanation for its Water Transfers Rule was deemed well-reasoned.  In upholding the rationale behind the rule, the Court noted that compliance with an NPDES permitting scheme for water transfers is likely to be burdensome and costly for permittees, and may disrupt existing water transfer systems.   The Court also recognized that several alternatives could regulate pollution in water transfers even in the absence of an NPDES permitting scheme.  In addition, the Court noted the concern of amici that the invalidation of the Water Transfers Rule would (i) throw the status of agricultural water-flow plans into doubt, and (ii) require state water agencies to increase revenues to pay for permits for levies and dams.

The dissenting judge argued that the plain language and structure of the CWA is unambiguous and clearly expresses Congress’s intent to prohibit the transfer of polluted water from one water body to another;  that Congress did not intend to give a pass to interbasin transfers and doing so is incompatible with the goal of the CWA; that prior decisions of the Second Circuit and the Supreme Court make clear that the unitary waters theory is inconsistent with the plain and ordinary meaning of the text of the CWA; and finally that the Water Transfers Rule is an unreasonable, arbitrary, and capricious interpretation of the Act.