The future of greenhouse gas (GHG) regulation in the United States, as well as the future mix of electric power generation sources, is linked to the fate of climate and energy legislation in Congress. With all eyes on the Senate recently released Kerry-Leiberman comprehensive climate and energy legislation and what by most accounts is its slim chances for passage, let’s consider the possibility that Congress will fail to pass climate or energy legislation.

If that is the case, this does not mean no regulation of greenhouse gases and no energy reform. It simply moves the discussion to another government branch, namely, the Executive Branch, and in particular the U.S. Environmental Protection Agency (USEPA) and the Federal Energy Regulatory Commission (FERC). In other words, if Congressional climate and energy legislation fails to pass, executive branch initiatives gain in importance, and these initiatives will proceed apace regardless of Congressional inaction.

A Shift to USEPA Regulation of GHGs

USEPA can be expected to move forward with regard to regulating GHGs from stationary sources. On December 7, 2009, in compliance with the US Supreme Court’s decision in Massachusetts v. EPA, 549 U.S. 497 (2007), USEPA issued its Endangerment Finding, opening the door to USEPA regulation of GHGs under the existing Clean Air Act (CAA). Although the Endangerment Finding is currently being challenged in the Federal Circuit, challenges to the Endangerment Finding will not likely impede further EPA action to regulate GHGs under the CAA. However, challenges to these USEPA further actions are likely.

USEPA’s Reconsideration of the “Johnson Memo”

On April 2, 2010, EPA published a notice announcing its final reconsideration of the Bush administration's "Johnson memo" (issued December 18, 2008, by former EPA Administrator Johnson), indicating that permit requirements and regulation of GHGs would become effective no earlier than calendar year 2011 and delaying until after January 2, 2011 the date when PSD and Title V regulations will apply to GHGs. This reconsideration is vulnerable to legal challenge for 60 days, until June 2, 2010.

USEPA’s Tailoring Rule

Further, on May 13 EPA issued itsfinal "tailoring" rule for GHG emissions, the rulemaking where EPA sets GHG emissions thresholds to define when (at what emission levels) permits under the New Source Review Prevention Significant Deterioration (PSD) and Title V Operating Permit programs are required for new and existing industrial facilities under the Clean Air Act. Facilities responsible for nearly 70 percent of the national GHG emissions from stationary sources will be subject to permitting requirements under this rule. Emissions from small farms, restaurants, and all but the very largest commercial facilities will not be covered by these programs at this time. At first, no sources would be subject to Clean Air Act permitting requirements due solely to GHG emissions. As of Jan. 2, 2011, only sources currently subject to the PSD permitting program (i.e., those that are newly-constructed or modified in a way that significantly increases emissions of a pollutant other than GHGs) would be subject to permitting requirements for their GHG emissions over 75,000 tpy under PSD and operating permit programs. Come July 1, 2011, for the first time PSD permitting requirements will cover new construction projects that emit GHG emissions of at least 100,000 tpy even if they do not exceed the permitting thresholds for any other pollutant. This final rule too will likely be open to attack on substantive grounds and industrial and energy sector actors should watch this closely

USEPA’s BACT Guidance

Finally, USEPA will likely publish guidance with regard to how covered sources will be regulated and what constitutes Best Avaible Control Technology (“BACT”) for a covered source. Although this guidance is not subject to the same appeal provisions as a rulemaking, industrial and energy sector actors should pay special attention to its development.

Another Key Federal Actor: The Federal Energy Regulatory Commission

In addition to monitoring USEPA actions, the energy sector also needs to keep tabs on certain FERC initiatives.

For example, FERC announced on January 21, 2010, an inquiry into whether its regulatory policies should be modified to efficiently and reliably integrate the rapidly increasing number of variable energy resources into the nation’s power grid. Variable energy resources include power generation which utilizes any fuel whose availability varies outside of the generator’s control, such as wind, solar and some hydroelectric resources. FERC seeks public comments on the need for regulatory reforms in order to maintain power system reliability while also efficiently, and in a non-discriminatory manner, integrating such variable energy resources into the grid.

FERC issued its Notice of Inquiry in FERC Docket RM10-11, seeking public comment on whether to reform any of its rules or procedures as the nation’s generation portfolio expands to include more variable energy resources. Growing use of these types of facilities presents unique challenges to the maintaining the reliability of the electric power system, such as managing the intermittent availability of energy generated by such resources, ensuring that sufficient other, non-variable energy sources are available when the availability of variable energy resources diminishes at various times of the day, and managing the transmission impacts of large variable energy resources being located at remote points on the nation’s grid. FERC also recognized that increasing use of such variable energy resources also offers significant benefits such as low marginal energy costs and reduced greenhouse gas and other emissions.

Comments from industry continue to be submitted, several thousand pages to date, and the FERC has set no timetable for taking action in Docket RM10-11. FERC's initiative gains in importance if congressional climate and energy legislation fails to pass

Further, the questions in the FERC inquiry suggest that FERC sees plenty of reason for concern about the prospects for wind and solar power based on the way the grid is run today. Energy sector actors want to be sure FERC is leading where they can follow and flourish … and the only way to do that is comprehensive responses to inquiries like this one.

In addition, significant new transmission facilities will have to be constructed to enable many wind and solar resources in the U.S. to be developed due to their geographic remoteness from large power markets and the lack of consistent regulatory policies at the state level applicable to the construction of such transmission lines as they cross multiple states’ boundaries. In FERC Docket AD09-8, FERC requested public comments on transmission planning processes, including (i) whether existing processes consider needs and solutions on a regional or interconnection-wide basis, (ii) whether such processes are capable of handling the challenges of such matters as the integration of large amounts of location-constrained generation and the treatment of demand response and energy efficiency resources, as well as (iii) the allocation of costs of such transmission facilities. This process has also resulted in thousands of pages of comments from various electric industry participants, including wind and solar generation developers.

Fundamental differences exist in the industry over how the transmission grid should be planned, who should pay to expand it, and how climate benefits of remote wind and solar generation should be recognized in transmission planning and cost allocation. Other issues have also arisen, such as whether incumbent electric utilities should have a right of first refusal to construct needed new transmission facilities.

Some Conclusions

What USEPA and FERC will propose in response to these recent announcements and inquiries and what sort of regulatory scheme will ultimately become effective is still open, but those regulatory proceedings are underway and will continue regardless of whether Congress enacts new legislation.

Industrial and energy sectors should not sit still watching Senate developments, or assume the game is over if Congress fails to act. Significant efforts should be placed on studying and commenting on federal agency actions as well.