The current debate in Congress over the Environmental Protection Agency's ("EPA") authority to regulate greenhouse gases ("GHGs") under the federal Clean Air Act has drawn attention away from a series of recent and anticipated regulatory developments that will have significant impacts on the U.S. power sector and other major emissive industries, and in particular the use of coal-fired power. In short, EPA has proposed or will soon propose several regulations affecting the operation of power plants and other facilities burning fossil-fuels that will cumulatively require the installation of costly state-of-the-art controls, practices and monitoring, and may drive the re-powering or retirement of some plants not willing or able to make the necessary investments. This update briefly describes what has been recently proposed and what is expected regarding the regulation of conventional pollutants from power plants and other major sources. It will also discuss some of the more recent developments in GHG regulation.

EPA Issues Rule on Toxic Emissions from Power Plants

On March 16, 2011, EPA proposed its first national standards to reduce mercury and other hazardous air pollutants ("HAPs") from coal and oil-fired power plants with a capacity of 25 megawatts ("MW") or more. The proposed "Utility MACT" rule replaces EPA's Clean Air Mercury Rule, which was vacated in 2008 by the D.C. Circuit. As proposed, the Utility MACT will require these power plants to meet strict maximum achievable control technology ("MACT")-based limits on emissions of mercury, acid gases, and metallic toxics such as arsenic, chromium and nickel (using particulates as a surrogate). These standards reflect levels that EPA has determined are achieved by the best-performing sources in operation. Emissions of organic toxics such as dioxin would be subject to work practice standards. At the same time, EPA is proposing new source performance standards (see below) for particulates, sulfur dioxide ("SO2") and nitrogen oxides ("NOx") from power plants.

Existing sources will have up to four years to comply, depending on their ability to install the necessary advanced technologies, which EPA anticipates will include the installation of scrubbers, selective catalytic reduction ("SCR"), fabric filters, activated carbon or dry sorbent injection as well as the upgrading of particulate matter controls. Plants could also re-power with natural gas or shut down. EPA estimates that the standards will prevent 91% of mercury emissions from coal, reduce acid gases by 91% and reduce SO2 by 55%. EPA further calculates the costs of compliance to be nearly $11 billion, though industry believes this underestimates the costs of compliance with this rule and other overlapping emissions rules EPA has or will issue in the near future. EPA also acknowledges that the rule would result in "relatively small" changes in the average price of electricity, primarily due to increased demand for natural gas production (which is not regulated by the rule) and the retirement of smaller coal-fired units. Industry studies have projected more shutdowns and greater impact on regions of the country that rely primarily on coal-fired generation.

A 60-day comment period will follow publication of the rule in the Federal Register. A final rule is expected by November 16, 2011, as required by a consent decree.

EPA Sets Toxic Standards for Industrial Boilers

On February 21, 2011, pursuant to consent decree, EPA finalized emission standards for large and small boilers as well as incinerators that burn solid waste and sewage sludge. As to boilers, EPA established National Emission Standards for Hazardous Air Pollutants ("NESHAPs") for major source industrial, commercial and institutional boilers and process heaters (some 13,800 boilers) as well as smaller boilers located at "area sources" of toxic emissions (about 187,000 boilers located at commercial and industrial facilities). The major source boiler rule impacts facilities burning fuels such as coal, oil, biodiesel, natural gas and biomass, and establishes work practice standards and emission limits for mercury, organic toxics, particulate matter, and acid gases. It also requires a one-time energy assessment or audit of existing boilers to identify cost-effective energy-saving measures to reduce emissions. The area source boiler rule covers sources below certain thresholds that burn coal, oil and biomass, but does not cover natural gas-fired boilers. Compliance with standards set under both rules is generally required within three years.

Boilers and process heaters that are already subject to another MACT standard are not subject to these boiler standards. Thus, this rule will effect boilers at major sources other than power plants, such as at refineries, chemical plants and other industrial facilities, as well as at smaller sources such as universities, hospitals and commercial buildings. Like the Utility MACT, the industrial boiler MACT will require installation of costly advanced controls and likely further the shift from coal to gas as a fuel.

The proposed rules were quite controversial, and the regulated industry expressed concerns over the cost and feasibility of compliance. EPA evidently took some of these concerns into account in its final rule, including a decision to reconsider certain implementation aspects raised during the comment period.1

The Proposed Clean Air Transport Rule

On July 6, 2010, EPA released its proposed Clean Air Transport Rule, which, when final, will replace its current Clean Air Interstate Rule ("CAIR"). CAIR was struck down by the D.C. Circuit but allowed to remain in force until EPA developed a substitute rule. The proposed Transport Rule would require 31 eastern states and the District of Columbia to reduce power plant emissions that "contribute significantly" to another state's inability to attain national ambient air quality standards ("NAAQS") The proposed Transport Rule would require emission reductions more rapidly and in amounts greater than those under CAIR by reducing sulfur dioxide ("SO2") emissions by 71% and nitrogen oxides ("NOx") emissions by 53%, from 2005 levels, by 2014. Depending on how the rule is finalized, it could dramatically impact allowance trading that now occurs under the CAIR.

Under the proposed Transport Rule, EPA would require these states to reduce NOx and SO2 emissions from power plants with capacity greater than 25 MW within their jurisdiction to meet existing NAAQS for ozone and fine particulate matter through one of three alternative methods. In the first, which is EPA's preferred approach, EPA would set limits on a state-by-state basis and allow for intrastate and limited interstate trading. EPA's alternative approaches would be to set limits for each state but allow trading only among power plants in one state or to set a limit for each state and specify emission limits for each plant but not allow trading. EPA has proposed federal implementation plans ("FIPs") to achieve these limits but would allow states to develop their own state implementation plans ("SIPs"). There would be two phases for compliance for NOx and SO2 requirements, in 2012 and 2014, and two similar phases for compliance with ozone season NOx requirements.

To meet these requirements, EPA anticipates that affected power plants will operate already installed control equipment more frequently, use lower sulfur coal or install advanced pollution control equipment such as scrubbers and SCR. EPA estimates the annual costs of compliance at $2.8 billion. A final rule is expected later in 2011. EPA will also propose a second Transport Rule to meet revised ozone NAAQS (see below), and each time it revises relevant NAAQS, EPA will consider further reductions under the Transport Rule.

EPA Considers Revisions of NAAQS

EPA is currently working on reconsideration of national ambient air quality standards ("NAAQS") for ozone, fine particulates and other pollutants. The tightening of these standards will require additional controls, re-powering or retirement of coal-fired units, and compliance will dovetail with some of the rules discussed above. For example, in January 2010, EPA proposed revising the ozone NAAQS from the current standard of 0.075 parts per million ("ppm") to within a range of 0.060-0.070 ppm. Such a change will likely expand the areas of non-attainment downwind of plants, requiring the need for additional state-of-the-art controls to achieve emissions reductions. EPA estimated annual costs of $19-90 billion by 2020 for compliance with the proposed standard. Revised standards are currently expected in July 2011, but that date may continue to slip.

EPA is also expected in the near future to propose lowering the current standard for fine particulate matter, which will likely result in expanded areas of non-attainment and require additional scrubbers and other sulfur dioxide controls on coal-fired units. EPA is reportedly reviewing secondary NAAQS for nitrogen oxides and sulfur oxides.

EPA Seeks Comment on Regulation of Coal Ash

In June 2010, EPA proposed a rule to regulate coal combustion byproducts, such as fly and bottom ash and scrubber sludge from coal-fired units, under Resource Conservation and Recovery Act ("RCRA"). The proposal listed two alternatives for regulation and opened them for public comment. The first would regulate these byproducts as a hazardous waste under RCRA Subtitle C. The second would authorize EPA to regulate the byproducts as a non-hazardous solid waste under Subtitle D. The difference is critical since listing of these by-products as a hazardous waste under Subtitle C would require disposal at federally-licensed facilities and allow more stringent enforcement at the federal level. This would significantly raise the costs for disposal. EPA estimates annual costs at $1.5 billion for this alternative, compared to $600 million for Subtitle D treatment, where states enforce narrower federal standards. It is unclear when EPA will issue a final regulation.

Cooling Water Intake Structures Rule to be Proposed

EPA is set to propose, by the end of March 2011, new regulations under Clean Water Act § 316(b) that would prescribe standards for existing power plants and other sources identifying the Best Technology Available for minimizing adverse environmental impacts of cooling water intake structures. New regulations are likely to require at least some existing facilities to retrofit to more costly closed cycle cooling water intake structures, especially near waters that EPA determines to be sensitive.

The Status of Current and Future GHG Regulation

EPA has taken a number of significant actions that have resulted in the regulation of GHGs under the Clean Air Act, and is planning to further undertake such actions in the future. These are the regulations that have spurred members of Congress to seek to strip EPA of authority to regulate GHGs, or at least to delay imposition of these regulations for several years. It is likely, however, that some members may seek to further scrutinize other EPA regulations in view of the more recent proposals and rules which will impose significant economic costs.

Tailoring Rule

EPA has determined that its establishment of GHG standards for cars and light trucks, which it set in May 2010, means that GHGs are now "subject to regulation" under the Clean Air Act, and therefore trigger the Clean Air Act's Prevention of Significant Deterioration ("PSD") and Title V operating programs. In order to avoid the potential imposition of PSD and Title V permit requirements on millions of small entities that may emit GHGs over a very low statutory threshold, EPA promulgated its Prevention of Significant Deterioration and Title V Greenhouse Gas Tailoring Rule ("Tailoring Rule".) That rule, in short, raises the threshold of GHG emissions that would trigger PSD requirements so that only large emitters of GHGs will trigger PSD requirements, including securing construction permits that apply the Best Available Control Technology ("BACT") to GHGs.

Under the Tailoring Rule, as of January 2, 2011, PSD requirements apply to a stationary source that undertakes a construction activity that is already subject to PSD on account of non-GHG emissions and that will emit or have the potential to emit 75,000 tons/year of carbon dioxide equivalent ("CO2e") of GHGs. The rule also applies to existing major stationary sources that undertake major modifications that will have a significant net emissions increase of a non-GHG regulated pollutant and will emit at least 75,000 tons/year of CO2e of GHGs. EPA refers to these as "anyway" sources because, even without GHG regulation, they would be required to undertake PSD and Title V permitting for non-GHG pollutants. However, the inclusion of GHG regulation will likely delay the permitting of these facilities as the permitting authority and applicant work out what controls might constitute BACT for GHGs, and the permits will likely be challenged in court by environmental advocacy groups. To date, only a few facilities have undergone the PSD BACT analysis for GHGs so it is unclear precisely what impact this rule will have on the power sector and other large emitting sectors -- though industry and its Congressional allies are anticipating significant costs and delays. In November 2010, EPA published initial guidance on how permitting authorities are to consider BACT for GHGs.

Further under the Tailoring Rule, beginning July 1, 2011, PSD and Title V will apply to "new" major GHG sources regardless of whether they are also subject to PSD for their non-GHG pollutants. This means that PSD for GHGs applies to a new source if it will emit or has the potential to emit 100,000 tons/year CO2e of GHGs and to modifications at any existing major facility (i.e. which is major for any regulated pollutant, including GHGs), where the modification would result in a significant net emissions increase of GHGs of at least 75,000 tons/year of CO2e. After July 1, Title V also applies to a source that emits or has the potential to emit at least 100,000 tons/year CO2e. EPA has also committed to several additional actions, beginning in July 2012, relating to smaller sources.

The Tailoring Rule, and a number of related rulemakings EPA undertook to make the Tailoring Rule capable of implementation, have been very controversial. For one, EPA did not assess the likely costs to the regulated community, focusing instead only on the relief it was providing smaller entities. Further, requiring PSD for GHGs means additional delays in the PSD permitting process and provides opportunities for extensive administrative and judicial challenges. The Tailoring Rule, and a number of related rulemakings, have been challenged in the D.C. Circuit (as well as in Congress), so their final status is uncertain. The D.C. Circuit recently issued briefing schedules for these cases that will carry through the remainder of 2011.

Biogenic Fuels Receive a Three-year Reprieve

On March 15, 2011, EPA announced that GHG emissions from biomass power plants and other biogenic sources will not be subject to PSD and the Tailoring Rule for three years to allow EPA to develop rules on how to account for such emissions. EPA's decision to a large extent reflects the debate between those who view biomass and biogenic fuels as "carbon neutral" and those that believe that such fuels produce significant net emissions, although the Agency must consider other scientific and technical implementation issues as well. At the same time, EPA has also stated in its BACT guidance that co-firing with biomass could be among the list of options for BACT for biogenic CO2 emissions at stationary sources under the Tailoring Rule.

Reporting Rule Extension

At the end of 2009, EPA finalized a rule, effective January 1, 2010, requiring large GHG emitters, including power plants, refineries, and facilities emitting 25,000 metric tons or more of CO2e of GHG, to report their annual GHG emissions to EPA by March 31 of each year, beginning in 2011. Covered entities were to begin monitoring their GHG emissions in 2010. Since promulgation, EPA has issued a series of regulations expanding and clarifying the scope of reporting facilities and activities. On March 1, 2011, however, EPA surprisingly announced that it would postpone the March 31, 2011 deadline for the first reporting period while it works to refine its electronic reporting platform, test it with stakeholders and give reporters an opportunity to become familiar with the tool. EPA has now stated that 2011 reports will be due September 30, 2011.

NSPS Standards for Electric Generators Underway

While the PSD program for GHGs has developed as an indirect effect of EPA regulation of motor vehicle fuel efficiency, EPA has a potentially more direct approach available for establishing GHG standards. Under section 111 of the Clean Air Act, EPA can set emission performance standards for industrial categories that cause, or significantly contribute to, air pollution that may endanger public health or welfare. EPA, in fact, it has been under considerable pressure by some states and environmental groups to develop new source performance standards ("NSPS") for GHG emissions from power plants, refineries and other large sources of GHGs. Such NSPS would establish performance standards for new sources and establish emission guidelines for existing sources that would limit the amount of GHGs that could be emitted from these facilities. In the past, EPA had refused to set NSPS for GHGs, decisions that were challenged in court by states and environmental groups. In December 2010, EPA entered settlement agreements with these petitioner parties whereby it agreed to establish NSPS for GHGs emissions from power plants and refineries.

The agreement regarding NSPS for power plants is especially noteworthy because it calls for fairly prompt regulatory action. EPA commits to issuing proposed regulations by July 26, 2011 and final regulations by May 26, 2012 (the refinery commitments are slightly longer). EPA states that its settlement will allow it to take a comprehensive approach to pollution from power plants, as reflected in the Utility MACT, Transport Rule and NSPS for conventional pollutants. EPA is proposing to take a number of other regulatory actions with regard to refineries in its settlement as well.

While the impact of NSPS for GHGs on power plants and refineries will depend on what standards and guidelines are set, the combination of these regulations, along with the Tailoring Rule and other non-GHG regulations listed above is certain to have a significant cumulative impact on the costs of operating plants burning fossil-fuels, and regulated facilities will need to make key choices concerning how to balance the operation of controls for conventional pollutants with the process efficiencies and fuel use reductions necessary to meet GHG limits. It is also important to note that NSPS for GHGs would be independent of any action taken under the PSD program, so that if EPA's Tailoring Rule is vacated by the D.C. Circuit, that ruling may not directly impact EPA's NSPS program. Members of Congress, however, have sought to strip EPA of its authority to regulate GHGs under the NSPS program as well as PSD.

NSR Enforcement Initiative Continues

In addition to the regulations described above, EPA continues to aggressively pursue the sector-wide New Source Review ("NSR") enforcement initiative it began in 1998. Under its initiative, EPA has litigated (with mixed success), negotiated and settled claims brought against power generators, refiners, cement manufacturers and other emissive sectors, alleging that plant modifications, dating back as far as two decades or more, violated the complex and confusing NSR permit regulations Through these actions, EPA seeks to ensure that at least 80% of an entity's power generation is covered by state-of-the-art emission controls. The regulation of GHGs may present a new front for NSR cases in the future since the relative high emissions of GHGs may more easily trigger NSR requirements for given projects.