In March 2011, we reported on a number of regulations finalized, proposed or under development by the U.S. Environmental Protection Agency (EPA) under the Clean Air Act (CAA) which will have significant impact on the U.S. power sector and other major emissive industries, and in particular on coal-fired power. Six months later, there have been noteworthy changes and events. For example, EPA has issued a major new rule on cross-state transport of air pollutants but has withdrawn at the White House's behest a controversial proposal on ozone standards, stayed another rule on toxic emissions from boilers pending reconsideration, and delayed other deadlines. Nevertheless, EPA remains on course to finalize a suite of regulations that cumulatively will require the installation of costly state-of-the-art controls, practices and monitoring at many fossil fuel-fired plants, and may drive the re-powering or retirement of some plants not willing or able to make the necessary investments. EPA's actions continue to generate concern in the power industry and in Congress. This update briefly describes these new developments and the overall political backdrop which may explain, at least in part, recent regulatory decisions and give some indication as to what may lie ahead.

Greenhouse Gas Regulations

The Tailoring Rule Takes Effect

On July 1, 2011 the second phase of EPA's "Tailoring Rule" began under which all new "major" sources of greenhouse gases (GHGs) must meet Prevention of Significant Deterioration (PSD) requirements for their GHG emissions, including Best Available Control Technology (BACT). This means that a new source must secure a PSD pre-construction permit if it will emit or has the potential to emit 100,000 tons/year carbon dioxide equivalent (CO2e) of GHGs or if it is already a major source for any regulated pollutant and will make a modification that 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 (under 50,000 tons/year CO2e.)

Since the Tailoring Rule first took effect in January 1, 2011, few PSD permits have been issued so it has been difficult to gauge the precise impact of the rule on large emitters. On June 29, 2011, a permit was issued by Michigan under the new GHG rules for a 600-megawatt coal-fired power plant with only a few technical comments by EPA. That plant will operate on a mix of 95% coal and 5% woody biomass. More recently, on August 18, 2011, the EPA's Environmental Appeals Board denied petitions for review of a permit allowing the construction of a 600-megawatt power plant in Avenal, California. In re Avenal Power Center LLC, Nos. 11-02, -03, -04 and -05 (EAB, August 2011). The Avenal permit, issued in May, had been pending for over a year (before the Tailoring Rule took effect) and EPA had been ordered by a court to take action. When granting the permit, EPA grandfathered the plant under the rules in force when the permit was submitted, so did not apply the Tailoring Rule. Environmental advocacy groups also challenged the first BACT determination for GHGs made under the Tailoring Rule; the iron manufacturing plant at issue was granted a permit in January 2011 which included requirements for "good combustion practices" for its gas-fired boiler and to meet an energy efficiency standard.1

The Tailoring Rule itself has been challenged by a number of states and industry groups, and opening briefs were filed June 20, 2011. Litigation on this and other related EPA GHG findings and rules will continue in the D.C. Circuit through 2011.

Biogenic Fuels Receive a Three-year Reprieve

On July 20, 2011, EPA finalized a rule it announced in March whereby it deferred for three years the application of the Tailoring Rule to CO2 emissions from biomass-fueled power plants and other biogenic energy sources. 76 Fed. Reg. 43490. This delay will allow EPA to study and develop rules on how to account for such emissions -- a study EPA stated would be submitted for peer review "later" in 2011. EPA's decision to a large extent reflects the ongoing debate between those who view biomass and biogenic fuels as "carbon neutral" and those who believe that such fuels produce significant lifecycle GHG emissions. The Agency must consider other scientific and technical implementation issues as well. EPA expects to have a rulemaking on treatment of biogenic CO2 emissions completed within this three-year window. EPA's action has been challenged in court by several environmental advocacy groups.

New Source Performance Standards for GHGs Further Delayed

Under a settlement agreement reached with environmental advocacy groups, EPA agreed to issue proposed New Source Performance Standards (NSPS) for GHG emissions from power plants, refineries and other large sources of GHGs. Such NSPS would set 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. Under that agreement, EPA was to have proposed NSPS for GHG emissions from electric utilities by July 26, 2011, but EPA then pushed the date back for a proposed rule to September 30, 2011. On September 15, 2011, EPA announced it would further delay its proposal, citing the complexity of the rule, the amount of information it needed to consider, and its desire to make sure the proposal was "cost-effective and protective." EPA has not yet announced its new schedule nor whether it still will meet the deadline of May 26, 2012 for a final rule set forth in its settlement. Environmental advocacy groups reacted with concern, especially after the withdrawal of the ozone rule, see below, and are pressuring the Agency to set a more immediate deadline. Under a similar settlement, EPA is to propose NSPS for GHG emissions from refineries in December 2011 with final rules by November 2012.

In a related action, on July 29, 2011, EPA proposed NSPS for the oil and gas production sector, revising existing standards for volatile organic compounds (VOCs) and sulfur dioxide (SO2) and establishing air toxic standards for oil and gas production and gas transfer and distribution. 76 Fed. Reg. 52738. Though EPA did not regulate GHGs directly in this rule, it did propose that companies engaging in hydraulic fracturing or re-fracturing for natural gas employ reduced emissions completions or "green completion" technology to capture escaping hydrocarbons from flowback water, rather than venting or releasing them. EPA touted this aspect as creating the co-benefit of reducing the emissions of methane, a powerful GHG, as well as VOCs. The proposal was also noteworthy as the first new proposed regulation of the hydraulic fracturing technique. EPA is to finalize these rules by February 28, 2012.

EPA Excludes CCS From Hazardous Waste Regulation

On August 8, 2011, EPA proposed regulations that would exclude from its hazardous waste regulations CO2 that was captured from power plants and industrial smokestacks, sequestered and stored underground (carbon capture and storage or CCS) in accordance with applicable EPA regulations. 76 Fed. Reg. 48074. EPA proposed to exempt CCS carbon from Subtitle C of the Resource Conservation and Recovery Act (RCRA), which imposes strong federal cradle-to-grave management requirements on hazardous wastes. This does not mean that EPA will not regulate CCS; the agency has already promulgated regulations for underground injection of CCS streams under the Safe Drinking Water Act, and to be exempt from RCRA Subtitle C, CCS would need to follow these requirements. Though CCS carbon could contain toxic elements, EPA explained that based on its knowledge of the composition of CO2 waste streams and its analysis of existing standards and regulations designed to prevent exposure of the waste stream, no further regulation under RCRA Subtitle C would be necessary. EPA considers CCS vital to the future of coal-fired power and the process is very expensive; further regulation under RCRA Subtitle C would add significantly to this expense.

Reporting Rule Data Due

Under EPA's mandatory GHG reporting rule, data on 2010 GHG emissions are due by September 30, 2011, an extension from the original March 31, 2011 due date. On August 22, 2011, EPA finally launched a tool to facilitate the submission of GHG emissions data for more than 7,000 facilities by the September deadline. The tool will allow 28 industrial sectors -- those responsible for 70 percent of the United States' GHG emissions -- to submit their 2010 GHG emissions data electronically. EPA also delayed for up to four years (depending on sector) the reporting of potentially sensitive data and inputs to emission equations underlying reported emissions. Concerns had been expressed across industry that public disclosure of such operational information could reveal details of a company's operational strategies and harm its competitiveness. Finally, EPA proposed a six-month delay in the 2012 reporting deadline for electronics manufacturers, petroleum and natural gas facilities and several other sectors to allow these sectors to test the new reporting tool.

Supreme Court Rules Against Common Law Federal Nuisance for GHGs

In a related matter, on June 20, 2011, the Supreme Court ruled in American Electric Power Co., Inc. et al. v. Connecticut et al., No. 10-174, 564 U.S.__ (2011) (AEP), that the CAA's authority for EPA to regulate GHGs clearly displaced any federal common law action for reduction of GHG emissions under a tort theory of nuisance. This case followed on the Court's prior ruling in Massachusetts v. EPA, where it held that the CAA authorized EPA to regulate GHGs. In AEP, the Court held that such authority, even if not currently implemented by the Agency through regulations, would prevent the state and environmental advocacy plaintiffs from limiting GHG emissions from defendant power plants under a federal common law theory of nuisance liability. A divided court did uphold the justiciability of the action, with four justices supporting standing at least for some petitioners and declining to apply the political question doctrine. Neither ruling is considered precedential, however, given the split in the Court's ruling. Significantly, the Court did not rule on whether or not such a lawsuit could be based on state tort law theories.

Toxic Emissions

EPA Issues Rule on Toxic Emissions from Power Plants

On May 3, 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. 76 Fed. Reg. 24976 (Utility MACT). 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). Emissions of organic toxics such as dioxin would be subject to work practice standards. At the same time, EPA proposed NSPS for particulates, SO2 and nitrogen oxides (NOx) from power plants. EPA projected costs of $10.9 billion in 2015 and $10-11 billion through 2030, largely for installation of scrubbers and fabric filters.

The proposal has been extremely controversial, with industry claiming that EPA has vastly underestimated costs of and time needed for compliance, and bills in Congress introduced to delay the rule and compliance dates. See below. Comments on the proposal were due in early July 2011 but EPA extended the comment period thirty days to August 4, 2011. EPA stated this extension would not affect the due date of its final rule, November 16, 2011, as required by a consent decree.

EPA Delays Rule on Toxic Emissions from Industrial Boilers

On June 24, 2011, EPA released a timeline for reconsideration of a final rule it published on March 21, 2011, 76 Fed. Reg. 15704, setting toxic emission standards for large and small boilers as well as incinerators that burn solid waste and sewage sludge (Industrial Boiler MACT). As to industrial boilers, EPA established National Emission Standards for Hazardous Air Pollutants (NESHAPs) for major source industrial, commercial and institutional boilers and process heaters as well as smaller boilers located at "area sources" of toxic emissions (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. The area source boiler rule covers sources below certain thresholds that burn coal, oil and biomass, but does not cover natural gas-fired boilers. At the same time, EPA also issued rules establishing stringent emission limits for hazardous air pollutants from incinerators, energy recovery units, waste burning kilns and small incinerators and clarifying which non-hazardous secondary materials would be considered solid waste and which would be considered fuel under RCRA.

The proposed rules were quite controversial; the regulated industry expressed serious concerns over the cost and feasibility of compliance and sought reconsideration and a stay of the rules. As a result, in May 2011, EPA decided to delay the effective date of the major source boiler rule pending completion of reconsideration or judicial review of challenges that had been filed to the final rules. In a court filing in June 2011, EPA has now stated it will finish reconsideration by October 2011 and issue final standards by April 2012. EPA did not delay the effective date of the area source rule or the incinerator rule, but has decided to reconsider those rules as well under the same schedule. Environmental advocacy groups have challenged the reconsideration decision in court. Legislation has been introduced in the House (where it passed) and Senate to provide an even longer period for reconsideration.

Conventional Pollutants

EPA Issues Rule on Interstate Transport of Emissions

On August 8, 2011, EPA published as final the Cross-State Air Pollution Rule (CSAPR), which will impose further limits on emissions of NOx and SO2 from 1,081 fossil fuel-fired utilities in 27 specified eastern, mid-western and southern states. The long-anticipated rule will, by 2012, replace current emissions limits under the existing Clean Air Interstate Rule (CAIR) which imposed, by and large, less strict limits of these pollutants with a longer lead time. Some companies and states have expressed concern that the CSAPR will impose significant costs on coal-fired power plants, particularly in combination with several existing and upcoming EPA rules. Others cite the health benefits and price signals sent by the rule as critical to achieving a less emissive power sector.

CSAPR applies to electric generating units with a nameplate capacity exceeding 25 megawatt electrical (MWe) that combust any amount of coal, oil, or gas (or products derived from these) to produce power on or after 2005, with exemptions for certain cogeneration and solid waste incinerators. States have the flexibility to broaden the applicability to plants with nameplate capacity as low as 15 MWe. CSAPR is intended to limit the interstate transport of NOx and SO2 that contributes to harmful levels of fine particulate matter (PM2.5) and ozone downwind of the states. CAIR, the program now in existence, was vacated by a court in 2008 but allowed to operate on an interim basis pending finalization of the CSAPR program. CSAPR supersedes CAIR, sets emission "budgets" for certain specified states and allocates allowances for NOx and SO2 emissions at existing fossil fuel-fired generating units within those states. Twenty-three states must meet annual NOx and SO2 limits to achieve emission reductions related to transport of PM2.5. Twenty states must meet "ozone season" (May-September) limits to achieve reductions in seasonal ozone. The annual NOx and SO2 programs begin January 1, 2012 with seasonal ozone beginning May 1, 2012. Sixteen states, called Group 1, must meet strict SO2 limits beginning in 2012 and face even more stringent controls in a second phase in 2014. Seven other states in Group 2 face less strict SO2 limits beginning in 2014.

To meet these requirements, CSAPR sets forth four separate trading programs:

  • An annual NOx trading system
  • An ozone season NOx trading system
  • Two separate SO2 trading programs (SO2 group 1 and group 2)  

Covered facilities with allocated allowances may only trade those allowances among themselves within each program. While intrastate trading is freely available, interstate trading is subject to certain constraints, called "assurance provisions," to ensure that no state exceeds its budget. CAIR or other program allowances cannot be traded or used for CSAPR obligations. The rule imposes Federal Implementation Plans (FIPs) on the states in order to ensure the program can begin in 2012, but states can replace those plans with their own state implementation plans (SIPs) beginning in 2013.

EPA estimates the costs of compliance at $1.4 billion in 2010 and $0.8 billion in 2014, on top of the $1.6 billion in controls already being installed to comply with CAIR. EPA calls these costs "modest" and predicts only "small changes in power generation," with "reasonably" priced allowances. According to EPA, covered plants would either maximize use of installed controls, switch fuels (or types of coal) or install or upgrade pollution control equipment. The rule has already generated significant controversy, particularly because it now brings Texas into the annual NOx and SO2 programs and imposes fairly immediate reduction requirements. EPA is also considering tightening its national ambient air quality standards (NAAQS) for PM2.5, which will cause it to modify the CSAPR in the future to ensure that downwind states' attainment of these standards is not harmed by emissions from upwind states. EPA might also apply the transport rules to additional types of sources if necessary.2

EPA Withdraws Issuance of Revised NAAQS Standards for Ozone

In January 2010, EPA proposed revising the ozone NAAQS from the 2008 standard of 0.075 parts per million (ppm) to within a range of 0.060-0.070 ppm, and stayed the 2008 standard pending its reconsideration of that standard. It then stated it would issue a final rule on its reconsideration by the end of July 2011. Such a change would have significantly expanded 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 standards. Industry pushed back hard on EPA, arguing that meeting the revised standards would be extremely costly and harm the economy. Rather, these groups and companies pushed for EPA to consider any revisions through its statutory-mandated 5-year review process due by 2013.

This issue continued to generate significant controversy, delaying EPA action. Then, on September 2, 2011, EPA's proposal was pulled by the White House. According to the President's statement and his Office of Management and Budget, EPA was asked to withdraw the regulations because they created uncertainty and were costly and duplicative of other protections. Industry applauded and environmental groups threatened further legal action. The Administration lauded other regulatory actions EPA was taking regarding air pollution so as to indicate continued support.

Nevertheless, the Administration's decision represents a significant reversal in policy and signals a recognition by the Obama Administration that it may need to scale back, at least to some extent, EPA's expensive regulatory proposals in a time of economic uncertainty and concern over job growth. EPA stated tersely that it will "revisit the ozone standard, in compliance with the Clean Air Act." The White House statement reports that work is underway to update an existing data review to result in reconsideration in 2013. Meanwhile, the fate of the current 0.075 ppm standard has been unclear, since EPA had stayed it pending reconsideration and had criticized it as inadequate. With the immediate reconsideration terminated, EPA recently sent guidance to state and local governments on the enforcement of the 2008 standard, which must await EPA's determination of which regions fail to meet attainment of the 2008 standard.3

Significant New Source Review Ruling - NSR Violation Must Be Based on Actual Emissions

On August 23, 2011, the Eastern District of Michigan ruled on summary judgment in favor of a utility that EPA had pursued for allegedly undertaking a major modification without a pre-construction permit under the CAA's New Source Review (NSR) program. United States v. DTE Energy Company, et al., Civ. No. 10-13101 (E.D. MI., August 23, 2011). EPA had alleged that the utility had undertaken a major modification because it had projected prior to construction an emissions increase arising from work on one unit. The utility had filed a notice with the state that, among other things, any emissions increase was unrelated to the project and that the project was simply routine maintenance. The court held that, since the utility had filed an adequate notice with the state before construction as required under state law, any action for violation of NSR must await a post-construction determination that there had actually been a significant net emissions increase as a result of the project. Since the utility had only operated the unit for less than a year following construction, the court held that a challenge was premature. The ruling is significant because EPA has based NSR enforcement cases on pre-construction projections. Under this ruling, if utilities properly follow state law in providing adequate notice of projects the utilities determine do not constitute major modifications, EPA would need to await results of post-construction monitoring before bringing a complaint. Under Michigan law, utilities would need to monitor and report annual emissions for five to ten years depending on the project. It is likely the decision will be appealed.

Attacks and Limits on EPA's Rules and Authority

All the regulatory developments described above have played out against a backdrop of tremendous political controversy. Though the attacks on EPA authority by Congress encountered in early 2011 during the budget debate were briefly silenced by the dispute over raising the federal deficit, the matters have not gone away. In fact, many in industry haves continued to attack the Utility MACT and its timelines, pushed back hard against the release of revised ozone NAAQS and roundly criticized the CSAPR. These concerns were echoed in Congress, where bills were introduced to delay reconsideration of the Industrial Boiler MACT even beyond EPA's plans and to give industry more time to comply with new standards. On September 23, 2011, the House passed 233-180 the Transparency in Regulatory Analysis Act of 2011 (TRAIN Act), largely along party lines, which requires a one-year study of the cumulative effects on the economy of more than a dozen EPA regulations related to air emissions, power plants and industrial boilers. The legislation, among other things, would delay the CSAPR until 2015 and prohibit EPA from using modeled data to determine the impact of pollution on downwind states, thereby affecting EPA's abilities to issue cross-border rules in the future. The legislation would delay the Utility MACT for at least another year and extend the compliance date to five years. The TRAIN Act would also overturn a 2001 Supreme Court decision and allow costs and feasibility to be considered when EPA sets NAAQS. Senate Democratic leaders have strongly opposed the TRAIN Act and the White House has threatened veto, but the idea of an economic study preceding regulations may find some traction with other Democrats in the Senate, including those who have introduced legislation requiring congressional approval of all "significant" regulations. (the "REINS Act.") Further, in June 2011, a House committee also reported out a bill that would bar EPA from regulating coal combustion residue (CCR) as a hazardous waste in favor of a state-level permitting program. 4

On August 29, 2011, the Republican House leadership released a memorandum stating it would be focusing its attacks this Fall and Winter on EPA's CAA regulation as part of its strategy to highlight the job crisis and the Obama Administration's failure to remove or reject regulations allegedly choking the economy. Passage of the TRAIN Act in the House was the first exercise but the GOP strategy seeks to reject or repeal the ten most allegedly harmful "job-destroying regulations" which include the Utility MACT, CSAPR, Industrial Boiler MACT, CCR proposal, cement plant regulations, ozone standard and GHG rules. This strategy ensures that there will be more hearings and legislative proposals throughout 2011. The Obama Administration's August 30 release -- in response to a request from Speaker of the House Boehner -- of a list of regulatory proposals that would cost more than $1 billion further stoked the controversy, since four of the identified seven proposals were directed at emissions and wastes from fossil-fuel fired power, i.e. the Utility MACT, Industrial Boiler MACT, ozone reconsideration and CCR proposal. It is noteworthy that in an August 23, 2011 review by EPA of its regulations as part of a White House process to streamline regulations and eliminate unnecessary and costly rules, EPA did not consider any of its recent air emissions regulations and proposals.

The Summer of 2011 also saw the release of several reports either stating that the cumulative effect of EPA's regulations and proposals would lead to significant retirement of coal or gas-fired power and reliability issues,5 or that these predictions were excessive and the power industry would -- and indeed is -- adapting by, among other things, providing new gas-fired facilities to offset any retirements.6 Senator Murkowski and others pressed the Federal Regulatory Commission (FERC) on the matter, and the commission responded that EPA regulations would likely result in a retirement of 81 GWs of power, 8% of all U.S. electricity generation capacity. But FERC also responded that it and the industry had the tools and capacity necessary to avoid significant reliability concerns. At the same time, coal-fired plants in Massachusetts, Ohio, Texas Virginia and West Virginia are closing allegedly due to the cost and impact of EPA rules. One utility, American Electric Power, announced in June 2011 it would retire 25% of its coal-fired fleet due to EPA rules.

The debate about the impacts of EPA's regulatory actions, the agency's authority to regulate and, indeed, its very existence, will continue to dominate the political debate through the remainder of 2011 and beyond. Already, current Republic presidential nominees are strongly attacking the agency's alleged "job killing" agenda. Significantly, most of these nominees appear to reject the basis for any GHG regulations at all. Against this political backdrop, all federal agencies will need to make significant cuts in their budgets to meet new spending limitations, and it is likely that EPA regulations will become further enmeshed in the overall debt relief proposals as well as 2012 appropriations (riders attacking EPA authority were included in an earlier House Appropriations Committee-passed EPA fiscal 2012 spending bill, HR 2584).

Given this complex and uncertain backdrop, it will be interesting to see whether EPA further modifies its regulatory agenda in 2011-2012, and whether it will continue to press for more stringent emission reductions, back off of some of its expected rules or make them less stringent. EPA will be pressured by its critics to further scale back its plans and by its supporters who will push for the agency to stand firm on its remaining regulatory program. In any event, with the White House weighing in and pulling the ozone standard, it appears EPA's actions going forward will inevitably be impacted by the Administration's underlying political considerations.7