In what will amount to an open call for litigation from environmental and health groups, the U.S. Environmental Protection Agency ("EPA") on August 21, 2018, released a prepublication version of its proposed rules for regulating greenhouse gas ("GHG") emissions from existing coal-fired power plants. A copy of the prepublication version of this proposal is available via this link. Called the Affordable Clean Energy ("ACE") Rule, this proposal aims to replace the 2015 Clean Power Plan ("CPP"), the implementation of which was halted and proposed for repeal in 2017. EPA views the ACE Rule as a way to continue decreasing GHG emissions from the power sector while avoiding the "building blocks" used to establish the CPP that were "legally flawed" and "exceeded EPA's authority." EPA believes the ACE Rule "corrects the fundamental legal flaws in the CPP to more appropriately balance federal and state responsibilities under CAA section 111(d), and revise[s] the NSR program as it applies to affected EGUs to better accommodate energy efficiency projects." Proponents of the CPP and general air quality advocates will challenge this proposal as going impermissibly beyond a mere scale back of the CPP to undermine fundamental air quality provisions under the New Source Review ("NSR") provisions of the Clean Air Act ("CAA").

The ACE Rule has the following four major components:

  1. Under Section 111 of the Clean Air Act, EPA must identify a Best System of Emission Reduction ("BSER") that adequately controls emissions of a particular pollutant from a particular category of existing source and set a New Source Performance Standard based on the application of that BSER. In this action, EPA proposes to determine that heat rate improvements ("HRI"), also known as efficiency improvements, are the BSER for existing fossil fuel-fired electric generating units ("EGUs"). This determination was based in part on comments received in response to an Advanced Notice of Potential Rulemaking, published December 28, 2017 (82 Fed. Reg. 61507). EPA has identified a list of the "most impactful" HRI measures that it proposes to serve as the "candidate technologies" constituting the BSER, which states should consider when establishing standards of performance for affected EGUs, as discussed in Item 2 below. In this action, EPA also solicits comments regarding the BESR for existing natural gas-fired stationary combustion turbines, which are not affected EGUs under the current ACE rule.
  2. Consistent with the current administration's focus on cooperative federalism, EPA emphasizes that its authority under Section 111 is to provide "a guideline… that presumptively reflects the degree of emission limitation achievable by the BSER," but that it is not required "to provide a presumptive emission standard." EPA views its responsibility as providing "information sufficient to assist states in the development of state plans… establishing appropriate standards of performance for affected EGUs." While EPA proposes that the states use allowable emission rates as the standard for evaluating performance for affected EGUs, EPA in this rule proposes giving states the flexibility to consider a variety of source-specific factors when establishing that standard, including useful life, unreasonable costs of control, physical impossibility of installing control equipment, or other unit-specific criteria. EPA also solicits comments about authorization of trading and average between sources.
  3. EPA is proposing new regulations implementing this and any future emission guidelines promulgated under Section 111(d). These new regulations include among other things: (1) replacing the term "emission guideline" with "guideline document" to confirm EPA's understanding that its determination under Section 111(d) is not a "presumptive emission standard"; (2) using the term "standard of performance" instead of "emission standard" to allow states to include design, equipment, work practice, or operational standards when establishing a standard; (3) extending the state plan submission deadline from 9 months following promulgation to 3 years; (4) extending the time EPA has to act on a state plan submission from 4 months after submission deadline to 12 months; and (5) extending the timing for EPA promulgation of a federal plan, in the absence of the submittal of state plan, from 6 months after submittal deadline to 2 years.
  4. Finally, EPA proposes revisions to the New Source Review ("NSR") regulations to include an hourly emissions increase test for EGUs. Under the proposed approach, a source would not be subject to major NSR unless the physical change or change in operations would result in an hourly emissions increase at the existing EGU and a significant net emissions increase in actual annual emissions. This hourly emissions test would apply to all regulated NSR pollutants and not just GHGs. EPA believes this change is necessary as HRI projects at existing EGUs could result in an increase in operation of the EGU and thus a corresponding increase in annual emissions, and that failure to change the NSR regulations accordingly would result in triggering NSR review for sources required to perform HRIs and thus unfeasibly increasing the costs of compliance.

Notably, the hourly test approach to NSR applicability hearkens back to previous rulemaking proposals put forth by the EPA in 2005 and 2007. The 2005 proposed regulatory approach cited to the decision of the Fourth Circuit in United States v. Duke Energy Corp., 411 F.3d 539 (4th Cir. 2005), which held that a company was not required to undergo NSR when the proposed modification did not increase the maximum hourly emissions rate, even if the annual emissions did increase. The Fourth Circuit's ruling was overturned by the Supreme Court in 2007, but EPA's subsequent 2007 proposal argued that the Supreme Court's decision left room for EPA to revise the NSR regulations to incorporate a maximum hourly emissions test, and furthermore that any increase in emissions due to the change in the NSR applicability test would be offset by implementation of other air regulations, like the Clean Air Interstate Regulation ("CAIR"). However, following the publication of the 2007 proposal, the D.C. Circuit vacated CAIR. The EPA also received multiple comments in response to the 2007 proposal from legislators and environmental groups like Greenpeace and the NRDC opposing adoption of the hourly test approach. Neither the 2005 nor the 2007 proposals were finalized or withdrawn. In the current proposal, EPA points to the Regulatory Impact Analysis ("RIA") performed for the ACE Rule, which shows that compared to a complete repeal of the CPP, the current approach with the changes to NSR would result in emissions levels of CO2 and other pollutants staying the same or slightly decreasing. However, EPA requests comments on the proposed revisions to the NSR applicability test, including any comments on the concern that the proposed NSR changes will result in emission increases.

The RIA also found that compared to the CPP, implementation of the ACE rule would result in fewer compliance costs, reduced retail electricity prices, and increased coal production, but would result in increases to the emissions of not only CO2, but also SO2, NOx, and mercury.

The comment period for this proposal will last for 60 days following publication in the Federal Register. EPA plans to hold a public hearing, which will be announced in a future notice in the Federal Register.