[UPDATED] EPA Stands Ground on MATS with Final Cost Consideration

Public benefits offered by the Mercury and Air Toxics Standards (MATS) far outweigh the costs, the Environmental Protection Agency (EPA) said as it released a review of the 2012-finalized rule’s cost implications.

The final cost consideration—released just days before power plants that received a one-year extension must come into compliance with the rule—was prompted by a divided Supreme Court that last year told the agency it must consider costs in the “appropriate and necessary” finding that bolsters MATS. The final consideration evaluates several metrics relevant to the power sector, the EPA told POWER in an e-mail today.

“Based on this analysis, EPA has determined that the cost of complying with MATS, whether assessed as a percentage of total capital expenditures, percentage of power sector sales, or predicted impact on the retail price of electricity, is reasonable and that the electric power industry can comply with MATS and maintain its ability to provide reliable electric power to consumers at a reasonable cost,” it said.

The Cost Metrics

The agency’s 167-page final supplemental finding dated April 14 explains how it took cost into account in evaluating whether it is appropriate and necessary to regulate coal- and oil-fired power plants under section 112 of the Clean Air Act.

The EPA said it considered four metrics per a “preferred approach” to weigh whether compliance with MATS is “reasonable” for the power sector: revenues, capital expenditures, retail electricity rates, and potential impact on reliability.

The projected annual costs of MATS are just a “small fraction” compared to overall sales in the power sector, the analysis concludes. Projected annual costs range between 2.7% and 3.5% of annual electricity sales from 2000 to 2011, the EPA said. Meanwhile, capital costs to comply with MATS are also small compared to capital expenditures in a historical context. These represent between 3% and 5.9% of total annual power sector capital expenditures over a 10-year period, it said.

“In response to public comments, EPA supplemented this analysis by also looking at annual production expenditures. Together, the capital and production costs to comply with MATS are still a small fraction of the historical capital and production costs of the power sector. This reinforces that compliance costs are reasonable in the context of broader power sector costs,” it added.

The projected impact on electricity rates—of 0.3 cents/kWh—was also minimal. That “represents a national average increase of 3.1%, well within the range of retail price fluctuations over a 10‐year period,” said the EPA. At the same time, analysis showed that retirements resulting from MATS “would not adversely impact the ability of the power sector to meet demand for electricity.”

The MATS Rule’s Complex Legal History

When the EPA published its final MATS rule in February 2012 requiring all U.S. coal- and oil-fired power plants with a capacity of 25 MW or more to comply within the standard three years, it released a companion regulatory impact analysis that projected annual incremental private costs of the final MATS rule to the power sector would be $9.6 billion in 2015 (in 2007 dollars). But it also estimated that the annual benefits of the rule, including the avoidance of up to 11,000 premature deaths annually, would be between $37 billion and $90 billion.

Power companies and industry groups challenged the rule, many arguing that the EPA had failed to conduct a cost-benefit analysis in its initial determination that control of mercury and air toxics from power plants was “appropriate and necessary.” Some contended that almost all of the avoided deaths and monetized benefits cited by the EPA came from the rule’s effect on emissions of particulates, instead of from effects of slashing mercury and air toxics exposure.

On June 29, in Michigan v. EPA, the U.S. Supreme Court decided 5–4 that the EPA interpreted the Clean Air Act unreasonably when it deemed cost irrelevant to the statutory decision of whether regulating power plants was “appropriate and necessary.” In the high court’s majority opinion, Justice Antonin Scalia said that it was not appropriate for the EPA “to impose billions of dollars in economic costs in return for a few dollars in health or environmental benefits.”

The Supreme Court, however, did not vacate the rule. Instead, it reversed an April 2014 judgment by the D.C. Circuit that upheld the EPA’s February 2012–finalized standards. The appeals court said in that 2–1 decision that the agency is not required to take costs into account when it promulgates rules that are “appropriate and necessary” to address hazards to public health.

In response to the Supreme Court’s holding, the EPA said in a Nov. 20 supplemental finding that it did conduct a benefit/cost analysis for the rule. Significantly, in that notice, the agency called for public comments on a proposal to declare that it would have reached the same conclusion if it had completed the analysis before making the “appropriate and necessary” finding rather than after it began the rule-making process. In other words, the agency said that consideration of cost does not alter the EPA’s previous conclusion that regulation of the power sector for hazardous materials is “appropriate and necessary.”

Then on December 15, 2015, the D.C. Circuit allowed the rule to remain in effect as the EPA works on its final cost finding. The finding was due today, on April 15, 2016.

New Hurdles for MATS

Meanwhile, attempts to block the rule continue.

Last month, U.S. Supreme Court Chief Justice John Roberts rejected the plea of 20 states to stay the rule while the agency worked on its final cost consideration. And on March 18, yet another decision for certiorari was submitted to the Supreme Court to vacate MATS, with petitioners claiming that the D.C. Circuit ruling conflicts with previous decisions by the 5th and 8th Circuit courts on the question of vacating unauthorized agency decisions.

“I expect additional legal challenges to the rule, challenging both of EPA’s approaches for considering cost in its ‘appropriate and necessary’ analysis,” Adam Riedel, an attorney from Manatt, Phelps & Phillips’ D.C. office, told POWER on April 15. “Ultimately, I think EPA will prevail with one or both approaches being deemed sufficient by the courts.  However, if a court reaches the question regarding the EPA’s consideration of co-benefits in its cost benefit analysis, this could have repercussions well beyond the current case.”

It is not uncommon for EPA to consider co-benefits in its cost-benefit analysis of regulations under a variety of statutes, he explained. “A court decision either sanctioning or rejecting this approach could impact  how EPA conducts cost-benefit analyses in the future.”

—Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)

 UPDATED on April 21: Adds comments by Adam Riedel