The state of North Carolina can proceed with a lawsuit against the Tennessee Valley Authority that demands the utility clean up its power plants and reduce air pollution, a federal appeals court ruled Thursday.

The three-judge panel of the U.S. 4th Circuit Court of Appeals rejected TVA's motion to dismiss the lawsuit and affirmed an earlier decision by a lower court to let the nuisance lawsuit go forward.

North Carolina sued the TVA in 2006, claiming that thousands of North Carolina residents suffered ill health from pollutants blowing across the mountains from TVA's 11 coal-fired power plants in Alabama, Kentucky and Tennessee. North Carolina's environment and economy also are harmed by TVA's emissions, which pose a public nuisance, the lawsuit contends.

"Clean air is critical to our health and our economy," Attorney General Roy Cooper of North Carolina said in a statement after the decision. "This ruling clears the way for us to to make TVA clean up its pollution that's dirtying our air and making North Carolinians sick."

TVA officials dispute claims that their plants harm North Carolinians. Officials say they are complying with federal air pollution laws and have spent almost $5 billion in the past 30 years to reduce emissions, including $1.2 billion on pollution controls at three plants in East Tennessee.

TVA asked a federal appeals court to dismiss the suit, arguing essentially that as a federal agency, the utility has immunity from nuisance lawsuits. But the argument has now failed twice to convince judges.

"We're disappointed in the outcome," said John Moulton, a TVA spokesman. "We're analyzing the decision and considering what steps we would need to take."

Moulton said TVA did an analysis showing that emissions from North Carolina power plants affect air quality in the state far more than emissions from TVA plants. And the state's home-grown pollution, he said, would continue to have more effect than TVA's -- even after utilities cut pollution to comply with North Carolina air pollution law.

North Carolina argued before the Fourth Circuit that TVA can be held accountable in court for their business decisions related to producing power, including creating pollution.

Reports by environmental health experts filed as part of North Carolina's lawsuit suggest residents of Southeastern and Midwestern states would see significant health benefits from cuts in TVA pollution. The experts projected that reductions in TVA emissions would mean 1,400 fewer premature deaths a year and 2,300 fewer missed school days from asthma and other ailments. North Carolina, Alabama, Georgia, Kentucky, Ohio and Tennessee would realize the greatest benefits.

Nineteen states, including New York, California, Ohio and South Carolina, joined North Carolina in opposing TVA's appeal. The American Lung Association also sided with the state.

The TVA has said it is taking a broad approach to improving air quality and plans to make its emissions cleaner than even North Carolina's. But most of the reductions aren't expected until after 2015. The goal of the lawsuit is to get clear air more quickly.

The federal district court has been awaiting the appeals court decision before setting a trial date in the lawsuit.