During 2012, the United States Environmental Protection Agency (“EPA”) issued multiple rules affecting the U.S. energy sector. Two of these rules, however, have directly stymied energy developers’ efforts to construct new coal-fired generating facilities. The two rules reflect an apparent decision by this Administration to shift the energy sector towards natural gas-fired generation and away from coal, and have the potential to dictate the composition of the Nation’s generation fleet for decades to come.[*]

The MATS Rule

On February 16, 2012, EPA issued national emission standards under Section 112 of the Clean Air Act setting limits on hazardous air pollutant emissions from coal- and oil-fired electric generating units (“EGUs”). [1] The “Mercury Air Toxics Standards,” or “MATS Rule,” is expected to be one of the most costly rules ever issued by EPA. It has also proven highly controversial, drawing numerous legal challenges in the U.S. Court of Appeals for the D.C. Circuit as well as petitions for administrative reconsideration filed with EPA.

While the MATS Rule will generally require all coal- and oil-fired EGUs to reduce their hazardous air pollutant emissions, it is particularly problematic for any new coal-fired sources. This is because the new-source limits are so low that they cannot be accurately measured and vendors of pollution control equipment have said they cannot provide commercial guarantees that the limits can be achieved. And because such guarantees are a precondition to obtaining financing in the marketplace, the MATS Rule effectively amounts to a ban on the construction of new coal-fired EGUs.

The Greenhouse Gas NSPS

In April 2012, EPA proposed new limits on greenhouse gas emissions from new EGUs under Section 111 of the Clean Air Act (“GHG NSPS”). [2] The proposed limits are referred to as “new source performance standards” because they apply only to new or reconstructed sources. In essence, EPA would require all new fossil-fuel-fired EGUs to emit no more than 1,000 pounds of CO2 / megawatt hour on an average annual basis, which is based on the CO2 emissions from a highly efficient, natural gas combined cycle facility. Under the Clean Air Act, new source performance standards like the GHG NSPS have binding effect from the date of proposal.

The GHG NSPS represents a dramatic departure from EPA’s 40-year history administering the NSPS program in that it combines two very different kinds of sources—gas-fired EGUs and coal-fired EGUs—into one source category and issues a standard that is based solely on the emissions from the natural gas combined cycle units. The GHG NSPS is a major obstacle to the construction and development of any new coal-fired generation capacity because, as EPA admits, the limits cannot be achieved by a new coal-fired EGU using presently available technology. Notably, EPA proposed to exempt certain “transitional sources” if they had already obtained a final air quality permit for their facility prior to publication of the GHG NSPS in the federal register, and if they can commence construction within one year of publication.

The Antagonistic Effects of the Two Rules and Challenges to EPA’s Multiple Rulemakings

The MATS Rule has met with vigorous opposition from the coal-fired energy sector. Multiple petitions for reconsideration have been filed with EPA, including petitions from pollution control equipment vendors, air emissions experts, and one proposed new coal-fired EGU. Simultaneously, more than 30 different petitions for review challenging the MATS Rule have been filed in the United States Court of Appeals for the D.C. Circuit. These petitions have been consolidated in the case, White Stallion Energy Center, LLC v. EPA, No. 12-1100 (D.C. Cir. filed Feb. 16, 2012).

After the petitions for review were consolidated, several developers of new coal-fired EGUs asked the D.C. Circuit to expedite their challenges to EPA’s rule because EPA had created a regulatory Catch-22. As the new-unit developers explained, on the one hand, EPA’s MATS Rule prevented them from constructing their projects because the standards are so low they cannot be measured or guaranteed; while on the other hand, the GHG NSPS requires them to commence construction within one year or be subject to EPA’s new proposed standards for greenhouse gas emissions, which EPA acknowledges cannot be met by coal-fired power plants because the technology is not yet available.

In the face of vigorous opposition from EPA, environmental groups, and States that intervened in support of the rule, the D.C. Circuit granted the motion to expedite, severed the new-unit developers’ claims from the consolidated case, and put their case on a fast track schedule for briefing and oral argument that will have the case decided by the end of the year. See White Stallion Energy Center, LLC v. EPA, No. 12-1272 (D.C. Cir. opened June 28, 2012). Shortly thereafter—apparently in response to the D.C. Circuit’s order granting expedited review—EPA issued a letter stating that it intended to grant the petitions for reconsideration, and that it will reconsider the MATS Rule’s new-source limits. In addition, EPA agreed to administratively stay the effectiveness of the MATS Rule’s new-source standards for three months during the reconsideration process, and offered for the D.C. Circuit to judicially extend that stay pending issuance of a revised rule.

EPA’s decision to reconsider the MATS Rule new-source standards is an admission that the standards are fundamentally flawed, as the new-unit developers have been arguing for many months (both in seeking reconsideration and in their legal challenges filed in the D.C. Circuit). EPA claims that a new proposed rule will be issued in the near future, and that new rule will be finalized during the first quarter of 2013. That said, EPA is notorious for missing rulemaking deadlines. Interested parties should keep apprised of EPA’s rulemaking efforts and comment on any proposal EPA issues at the appropriate time.

On the litigation front, EPA has asked the D.C. Circuit to abate the litigation challenging the MATS Rule’s new-source standards. The developers of new coal-fired EGUs have opposed EPA’s motion, explaining that a decision on the merits of the MATS Rule is needed whether or not EPA intends to reconsider the new-source standards. A decision on EPA’s abatement motion is expected within the month.

Finally, the developers of new coal-fired EGUs and the Utility Air Regulatory Group have challenged EPA’s GHG NSPS in the D.C. Circuit. Their petitions have been consolidated in the case, Las Brisas Energy Center, LLC v. EPA, No. 12-1248 (D.C. Cir. filed June 11, 2012). EPA and others have filed motions asking the court to dismiss these challenges. Briefing on the motions to dismiss is ongoing, and the challenges remain pending at this time.