MACT Reactions: Renewed Concerns About Costs, Reliability

The Environmental Protection Agency’s (EPA’s) issuance of its final Mercury and Air Toxics Standards (MATS)—a rule that will mandate all coal- and oil-fired power generating units limit emissions of heavy metals and acid gases using “maximum achievable control technology” (MACT)—last week provoked a range of reactions, including renewed concerns about its costs and impact on grid reliability.

The final  MATS rule, also known as the “Utility MACT rule,” means that coal- and oil-fired power plants in the U.S. will be required to comply with stringent hazardous air pollution emission requirements governing mercury, other heavy metals, and acid gases within the standard three years. The EPA last week left the door open for extensions, saying it was “encouraging permitting authorities to make a fourth year broadly available for technology installations—and if still more time is needed, providing a well-defined pathway to address any localized reliability problems should they arise.”

Fitch: Rule Could Prompt Early Coal Unit Retirements
Most power sector concerns publicized last week focused on reliability. The new rule could prompt retirement of about 4.7 GW of coal-fired capacity—or about 2% of the nation’s coal capacity—by 2015, the EPA conservatively estimated. But in a statement, global rating agency Fitch Ratings said the final rule could “likely lead to the early retirement of power plants” particularly in some regions of the U.S. “The number of retirements may be modulated by the amount of time state regulators provide the plants to comply,” the agency said, though it added it foresaw “some beneficiaries” from the rule’s publication.

Fitch had previously estimated that about 83 GW of coal capacity in 37 states (most that were units smaller than 400 MW and older than 40 years and concentrated in Pennsylvania, Ohio, Indiana, Illinois, and Michigan) were at risk of retirement over the next decade due to various EPA rules. On Friday, the agency said many units would be “retired more quickly” because retrofitting those plants was not financially compelling.

“The timing and nature of those retirements remain to be seen,” it said. “The EPA’s rules give state regulators some flexibility with respect to the compliance time line. Lawsuits are already afoot that may add to that time frame.”

The EPA’s final rule showed several “useful technical changes” from its original proposal, but the Obama administration was “underestimating the complexity of implementing this rule in such a short period of time, which can create reliability challenges and even higher costs to customers,” said Edison Electric Institute President Tom Kuhn in a statement. “The Administration is not using all the available authorities in the Clean Air Act to coordinate implementation, to ensure electric reliability, and to avoid excessive costs.”

Obama to Jackson: Promote Orderly Execution of Rule
In Washington, President Obama last week issued a presidential memorandum praising the new rules as a “major step forward in my administration’s efforts to protect public health and the environment,” but he urged EPA Administrator Lisa Jackson to also “[p]romote early, coordinated and orderly planning and execution” of the rules. This required coordinating with the DOE, the Federal Energy Regulatory Commission (FERC), state utility regulators, and regional transmission organizations to specifically “promote predictability and reduce uncertainty."

On the congressional front, Republican lawmakers continued pressing concerns of the rule’s potentially significant implications for grid reliability. Among them was Sen. Lisa Murkowski (R-Alaska), who announced she would begin drafting legislation to define a “safety valve” to ensure that EPA rules “adequately take reliability issues into account and can be generally applied fairly across the board.”

“Based on the analysis we’ve seen so far—and the information that EPA either would not or could not provide—I continue to be concerned about the potential threat this rule poses to the reliability of the nation’s electric grid,” she said in a statement last week. Murkowski has alleged that no joint task force had been formed between FERC and the EPA to examine reliability issues as FERC Chair Jon Wellinghoff had testified, faulting the EPA for “largely ignored requests” for the agency to work closely with FERC and reliability experts. “Indeed, in recently released internal e-mails, a FERC employee expressed frustration with trying to work with EPA, noting that ‘I don’t think there is any value in continuing to engage EPA on the issues,’” she said.

Meanwhile, Sen. Joe Manchin (D-W.Va.) called the new standards “yet another onerous rule by the EPA” that “completely ignores the devastating impact these regulations will have on jobs and our economy, not only in West Virginia but across this nation.” Manchin and Sen. Dan Coates (R-Ind.) have introduces the Fair Compliance Act, which he called “a commonsense, bipartisan piece of legislation that would create a fair timeframe to comply with new rules.”

The legislation would delay compliance of the Cross State Air Pollution Rule finalized this July by two years so it would take effect in 2015, not in a week, as the rule decrees. The bill also would require utilities to submit implementation plans to ensure compliance occurs. To safeguard the reliability of the electric grid and avoid brownouts, utilities would need to submit their implementation plans to the North American Electric Reliability Corporation (NERC).

In a statement last week, Manchin said he hoped “Congress will address these regulations, and take up the Fair Compliance Act as soon as possible, to prevent the potential loss of a million jobs, increased utility rates, and more damage to our economy.”

EPA Rules are Increasingly “Politicized”
Several industry representatives also rallied against the cost of implementing the new standards. Last week, the EPA predicted the regulation could cost the industry $9.6 billion annually and raise U.S. retail electricity prices by an average of 3.1% in 2015.

But Institute of Energy Research President Tom Pyle called into question the EPA’s cost-benefit analysis, saying that environmental regulation under EPA Administrator Lisa Jackson was of an “increasingly politicized nature.”

“EPA itself has said that the costs could be as high as $11 billion, and the benefits could be as low as $500,000 annually. Even then, the EPA has been double-counting benefits that are already happening because of other rules,” he alleged.

Ratings agency Fitch said it expected the financial impacts on issuers to vary: “Regulated investor-owned utilities and public power entities are expected to successfully recover costs related to environmental compliance, but merchant generators owning coal-fired generation may struggle to do so,” the agency suggested. Of generators who could benefit from the accelerated retirement schedule and anticipated higher power prices were those who were less reliant on coal-fired capacity, it added.

Analysts: Challenges to Rule Compound Uncertainty
Law firms analyzing the new standards agreed that the rules could increase uncertainty, specifically because the EPA would likely face legal opposition relating to several aspects of the final MATS rule. “For example, affected sources and industry groups are expected to challenge the rule in court, with the deadline for filing such petitions 60 days from the publication of the final rule in the Federal Register,” explained Britt Fleming and Marisa Hecht in a blog entry for Van Ness Feldman. “Among other issues, the final MATS rule will give litigants an opportunity to challenge EPA’s contested pollutant-by-pollutant standard-setting methodology.”

Sources: POWERnews, Fitch, IER, EEI, Sen. Murkowski, Sen. Manchin, Van Ness Feldman