The Cross-State Air Pollution Control Rule (the “Rule”), which requires 27 “upwind” states to reduce power plant SO2 and NOx emissions that add to fine particle and ground-level ozone pollution in “downwind” states, has raised serious economic, grid reliability, cross-boundary pollution, and political issues. Not surprisingly, the Rule is being challenged in court, and has led one major electric power generator to announce that it must shut down some generating units to meet the Rule’s requirements.

Under the new Rule, the first emission reductions are to start on January 1, 2012, and the second phase is to begin on January 1, 2014. [1] EPA had issued the Rule in response to a December 2008 court order that had: (i) found flaws in EPA’s previous effort to control the interstate movement of these power plant emissions (the Clean Air Interstate Rule); and (ii) directed EPA to replace the flawed rule as quickly as possible. [2]

The Rule comes at a time when the economic effect of rulemaking decisions is a major point of emphasis within the federal government. President Obama’s recent decision not to allow EPA to issue more stringent ozone pollution standards is a good example. Concern is mounting that rulemaking efforts affecting the electric power industry will have significant negative effects on both the industry’s financial stability and the continued reliability of the electric grid. Political pressure is also rising regarding the effects of these rules. This was highlighted by a recent hearing before the House Science, Space, and Technology Committee that heard serious criticisms of EPA’s new Rule. [3] Affected interests will continue to battle over this new Rule, and many of these power industry issues are likely to play a role in the 2012 elections.

EPA’s Rule is expected to have significant consequences for many in the electric power industry. The required emissions reductions are larger than those EPA had originally proposed. The final Rule provides smaller emissions credits than had been identified in the proposed rule. The timeline for compliance is extremely short. Accordingly, some industry members have reacted very strongly to the Rule’s requirements.

Luminant, the largest power generator in Texas, provides a concrete example of these concerns. Luminant has announced that it will close two coal-fired electric generating units, switch from Texas lignite to Powder River Basin coal at three other coal-fired units, and halt mining at three Texas lignite mines as its compliance option if challenges to the Rule fail. Should Luminant carry out its plan, about 500 workers will lose their jobs, and approximately 1,200 megawatts of generating capacity will be lost in Texas. [4]

Luminant formally asked EPA to reconsider and stay the Rule as it applies to Texas. In its filings, the company raised detailed concerns about legal and factual flaws in EPA’s rulemaking. Luminant also argued that the Rule’s mandates for Texas are unlawful and impose unreasonable emission-reduction requirements. [5]

EPA never formally acted on Luminant’s request, but EPA’s Deputy Administrator sent a letter to Luminant on September 11, 2011 describing EPA’s months-long efforts to resolve Luminant’s concerns. [6] EPA indicated it had made technical adjustments to the Rule’s requirements based on Luminant’s technical submissions. EPA also said it would give Texas and Luminant thousands of additional tons of pollution allowances thereby cutting the amount of required emission reductions. EPA emphasized that cost-effective pollution control options existed and stressed its willingness to use the Clean Air Act’s flexibilities to help Luminant achieve regulatory compliance without shutting down the operating units and mines.

On September 12, 2011, Luminant filed a Petition for Review in the United States Court of Appeals for the District of Columbia Circuit asking the court to review EPA’s new Rule. Luminant will ask the court to stay application of EPA’s Rule based on the legal issues identified in Luminant’s petition to EPA. EME Homer City Generation LLP and Genon Energy, Inc. have also filed court actions seeking a stay of the Rule, and all three cases have been consolidated. More recently, the States of Texas and Kansas have filed challenges, and more are likely.

Some members of the power industry, as well as other interests, support EPA’s Rule. For example, Exelon Corporation and Dynegy, Inc. both support the Rule and have sought to intervene in the pending litigation as supporters of EPA’s Rule. [7] Various environmental groups support EPA’s views, have denounced the actions of the companies challenging the Rule, and stated that those companies’ poor planning and investments, not the new Rule, led to their problems. [8] Both NRDC and the American Lung Association have sought to intervene on EPA’s behalf.

The divergent views concerning the Rule are not surprising because not all power generators face the same costs and consequences. Downwind states and companies located in them are expected to be beneficiaries, while upwind states and their resident facilities are expected to face significant burdens. In addition, the Rule imposes different requirements on different regulated states. Companies with relatively clean generation facilities will not face the same emission-control consequences as some of their competitors. This division among stakeholders will certainly add complexity for challengers as they seek to have either the court invalidate EPA’s rulemaking or Congress overturn it with legislation.