In a landmark ruling that has been seen as a major victory for thermal generators, the U.S. Court of Appeals for the District of Columbia Circuit vacated the Environmental Protection Agency’s (EPA’s) Cross-State Air Pollution Rule (CSAPR) in August, finding that it violated federal law. The EPA must now continue implementation of the Clean Air Interstate Rule (CAIR) until it can promulgate a replacement, which likely will not happen until at least 2014, industry analysts said.
The court found in its Aug. 21 decision that the EPA had exceeded its authority, granted to it by Congress, in two respects. First, the court held that the EPA could not force states to reduce their emissions by more than an amount determined to be their "significant contribution" to nonattainment in other states. The Clean Air Act did not give the EPA a "blank check … to address interstate pollution on a regional basis without regard to an individual upwind State’s actual contribution to downwind air quality," the court ruled. This meant the court found that "EPA imposed massive emissions reduction requirements on upwind states without regard to the limits imposed by the statutory text," said Katerina Milenkovski, an attorney with Steptoe & Johnson.
Second, and perhaps critically, the court held that the EPA violated the Clean Air Act by imposing federal implementation plans (FIPs) to implement emission reduction obligations at the state level, "usurping the state’s ability to identify and make such reductions on its own," said Milenkovski. Under the Clean Air Act, the states are the "first implementers" of federal requirements, and the EPA must give them a reasonable time to implement new emission reduction obligations imposed by the EPA, the court ruled.
“Our limited but important role is to independently ensure that the agency stays within the boundaries Congress has set. EPA did not do so here,” the court ruled. Noting that Congress could easily alter the Clean Air Act to allow the CSAPR rule to withstand challenge, the court said, “unless and until Congress does so, we must apply and enforce the statute as it’s now written.”
The court’s decision had been expected earlier, and even when it made its decision, the three-judge panel at the D.C. Circuit was deeply divided. Judge Brett Kavanaugh wrote the opinion for the court, joined by Judge Beall Griffith. Judge Judith Rogers strongly dissented, arguing Judge Kavanaugh’s opinion represented a “trampling on this court’s precedent on which the [EPA] was entitled to rely in developing the Transport Rule rather than be blindsided by arguments raised for the first time in this court.”
Back to the Drawing Board
The rule finalized in July 2011 would have required, by January 2012, 3,632 electric generating units at 1,074 coal-, gas-, and oil-fired facilities in 28 states to reduce nitrogen oxide (NOx), sulfur dioxide (SO2), and particulate emissions that cross state lines and contribute to ground-level ozone and fine particle pollution in other states. About $800 million would be spent annually on this rule, according to EPA projections for 2014—but the nation would see $120 billion to $280 billion in annual benefits, the agency claimed.
The D.C. Circuit on Dec. 30 stayed the rule just two days before it was set to go into effect, ordering the EPA to continue administering the previously promulgated Clean Air Interstate Rule until a final decision could be made on the merits of the rule. Among entities opposing the rule were Southern Co., EME Homer City Generation, the state of Texas, the National Mining Association, and the International Brotherhood of Electrical Workers. Six states and a few power companies had intervened in support of the EPA. The motions considered by the court in its order stemmed from 45 separate appeals from several companies, industry and environmental groups, and 15 states. Nineteen parties had filed motions to stay the rule.
CSAPR replaced CAIR, a rule promulgated in 2005. The D.C. Circuit struck down CAIR in July 2008, but later that year, the court reinstated CAIR and directed the EPA to issue a new rule to implement Clean Air Act requirements concerning interstate air pollution.
The EPA must now redo its analysis of interstate air pollution from power plants and go through another full notice-and-comment rulemaking process to finalize a replacement rule. Once a new rule is finalized, the agency will need to give states at least two years to react to it. "Practically speaking, EPA will likely not be able to finalize a new program until at least 2014, and such a program, if adopted, will likely not impose new requirements on power plants until 2016 at the earliest. Thus, the compliance deadlines for EPA’s ‘Mercury and Air Toxics Standards [MATS]’ rule will likely arrive before a new rule to replace CSAPR can come into effect," said law firm Bracewell and Giuliani.
The firm said that the MATS rule is “now the critical path for coal-fired generators to decide whether to repower, retire, or install expensive pollution controls.” But, decision-makers in the power sector should consider that the MATS rule is also being challenged in court and that presidential candidate Mitt Romney has supported congressional efforts to overturn MATS. “Thus, there continues to be uncertainty as to the emission reduction requirements that will ultimately apply to coal-fired power plants,” it said.
UBS said the ruling was a "positive read" for thermal generators, especially those with "exposure to eastern coals." But the EPA has the option to appeal the ruling and take it to the U.S. Supreme Court, and "we see this saga playing out for a long time," the investment firm said. "Furthermore, natural gas prices remain low and are still not high enough to justify fuel switch reversal in most cases in the east."
The EPA said it was reviewing the decision to determine what steps it should take. Meanwhile, the ruling was lauded by several companies as well as state agencies. Maryland-based Constellation said CSAPR could have been a "source of higher costs over the next two to three years" for coal plants that have not already invested in pollution control technologies. The EPA’s Mercury and Air Toxics Standards, scheduled to go into effect in 2015, would accomplish many of the emission reductions targeted in CSAPR.
In Congress, the Senate was divided about the ruling. Sen. Rand Paul (R-Ky.), who sponsored a resolution to overturn CSAPR that was defeated last November by a 41-56 vote, said he was "pleased" to see the court confirm that the EPA exceeded its statutory authority in issuing CSAPR. "I will continue to use the resources at my disposal to fight against an out-of-control EPA overreach into the rights of states and the lives of citizens," he said.
Sen. James Inhofe (R-Okla.), ranking member of the Senate Committee on Environment and Public Works, and another vocal critic of the EPA’s regulations affecting coal plants, said the courts had "reined in" the EPA on an "illegal, flawed rule." "With CSAPR, EPA moved too far too fast, setting unrealistic deadlines for states to meet its stringent requirements; the agency also pushed ahead without any regard for the fact that states were intended to play the primary role in reducing emissions," he said.
Sen. Tom Carper (D-Del.) urged the Obama administration to appeal the decision, saying that as chair of the Clean Air and Nuclear Safety Subcommittee in the Senate, he would work with "impacted states" to find a "swift solution to ensure all states do their fair share to clean up our air if that appeal was not successful." Carper’s call was echoed by Rep. Edward Markey (D-Mass.), who called for an "appeal to the misguided decision."
In Texas, one of a dozen states that had challenged the provision, the Texas Commission on Environmental Quality (TCEQ) hailed the court’s recognition, saying, "the first obligation of emissions reductions is at in-state sources and not the nonsensical requirement that Texas reduce sulfur dioxide emissions by 47 percent in order to address a hypothetical and minute effect on a monitor hundreds of miles and several states away." Greg Abbott, the state’s attorney general, said on Twitter: “EPA overlords suffer another defeat to Texas.”
Texas is facing shrinking reserve margins, and regional grid operator the Electric Reliability Council of Texas (ERCOT), the Texas Public Utility Commission, and the TCEQ had separately warned last year that CSAPR would have caused generation shortages, reducing margins to below 2% in the power-strapped state. ERCOT CEO Trip Doggett said in a statement that the rule, as originally proposed, had potentially far-reaching reliability impacts for a grid in which electric use is growing far more rapidly than new generation resources are being built to serve that need. "As the [EPA] revisits these cross-state air quality rules, ERCOT hopes to serve as a resource to help ensure that the long-term solution considers the electric reliability issues that affect this electric grid and our region," he said.
GAO Weighs In
A report by the Government Accountability Office (GAO), “Better Monitoring by Agencies Could Strengthen Efforts to Address Potential Challenges,” concludes a year-long performance audit of the EPA, the Federal Energy Regulatory Commission (FERC), and the Department of Energy (DOE). It seeks to determine how the now-defunct Cross-State Air Pollution Rule (CSAPR), the Mercury and Air Toxics Standards (MATS), the proposed Cooling Water Intake Structures regulation, and the proposed Disposal of Coal Combustion Residuals regulation could impact the power sector.
The report emphasizes that uncertainties loom over the regulations themselves. In addition to the CSAPR decision, several legal challenges have been directed at the MATS rule. "Furthermore, several bills have been introduced in Congress that would affect some or all of the regulations. Some power companies may delay taking actions to respond to these regulations until there is additional certainty about their final regulatory requirements."
The GAO report responds to a request by Sen. John Rockefeller (D-W.Va.) for available information on what actions power companies would take in response to the EPA’s four regulations, how they could affect the electricity market and reliability, and the extent to which the EPA, FERC, and the DOE could mitigate adverse reliability implications.
It also takes into account a December 2011 memorandum in which President Obama directed the EPA to promote early, coordinated, and orderly planning and execution of the measures needed to implement MATS while coordinating with the other two federal agencies to maintain electricity reliability.
According to the 105-page report, the EPA estimated that the CSAPR rule would have cost $900 million (in 2011 dollars) annually to implement (though it would have $128 billion to $299 billion in benefits annually); MATS would cost $10.2 billion a year (with between $39 billion and $96 billion in benefits); the coal residual rule would cost between $600 million and $1.5 billion annually (with benefits ranging from $90 million and $1.3 billion); and the cooling water intake rule would cost $400 million per year (with benefits of just $20 million).
The GAO estimated, citing an EPA report, that in addition to operating and maintenance costs, a typical coal-fueled unit with a capacity of 700 MW could incur costs from $287 million to $351 million to install a scrubber, from $116 million to $137 million to install a selective catalytic reduction unit, and from $97 million to $114 million to install a fabric filter. "Other controls are less expensive, and a 700 MW unit could incur $22 million to $43 million to install a dry sorbent injection unit or $4 to $5 million for an activated carbon injection unit." It also cited two reports–one by the Bipartisan Policy Center and the other by NERA Economic Consulting–that projected costs of actions power companies could take in response to the four regulations in the range of $16 billion to $21 billion.
Costs could also be incurred to build new generating capacity or upgrade transmission systems due to unit retirements, the GAO noted. The Midwest Independent Transmission System Operator (MISO), for example, has estimated that it could cost between $2 billion and $10 billion to offset capacity lost from coal plant retirements. An additional $580 million to $880 million will be required for transmission upgrades.
Electricity prices would also likely rise, the report found. "Electricity prices may increase because the investments associated with the actions power companies take to respond to the EPA regulations, and any increases in the costs of generating electricity, would be passed on to customers to varying extents."
Critically, the GAO reported that while the EPA and DOE suggested that much of the power sector may be able to complete actions by compliance deadlines, industry disagreed, highlighting necessary regulatory approvals for retrofits, site-specific concerns for retrofits, and supply chain concerns.
Concerning reliability, actions taken in response to the regulations were "not likely" to cause widespread supply challenges. In general, the GAO found that capacity is expected to continue to exceed demand by the amount needed to maintain resource adequacy—"in some cases substantially." Only in Texas and New England could reserve margins fall below levels needed by 2015, the GAO noted.
The report found that existing tools could “help mitigate many, though not all, of the potential adverse implications associated with the four EPA regulations, but the Federal Energy Regulatory Commission (FERC), Department of Energy (DOE), and EPA do not have a joint, formal process to monitor industry’s progress in responding to the regulations.” Some tools, such as state regulatory reviews to evaluate the prudence of power company investments, may address some potential price increases, it said. Tools available to industry and regulators, as well as certain regulatory provisions, may address many potential reliability challenges. “However, because of certain limitations, these tools may not fully address all challenges where generating units needed for reliability are not in compliance by the deadlines.”
Finally, FERC, the DOE, and the EPA have not established a formal, documented process for jointly and routinely monitoring industry’s progress and, “absent such a process, the complexity and extent of potential reliability challenges may not be clear to these agencies,” the GAO found. “This may make it more difficult to assess whether existing tools are adequate or whether additional tools are needed.”
Sources: POWERnews, D.C. Circuit, Steptoe & Johnson, Bracewell & Giuliani, UBS, Constellation, Sen. Rand Paul, Sen. James Inhofe, Sen. Tom Carper, Rep. Ed Markey, TCEQ, ERCOT, GAO
An earlier version of this story ran in the Aug. 23 issue of POWERNews.
—Sonal Patel, Senior Writer (@POWERmagazine)