Week Ending April 8, 2016

Environmental Protection Agency Responds to 27 States and Allied Trade Associations Seeking Reversal of Controversial “Clean Power Plan” to Cut Power Sector Carbon Emissions

This Article Appears as Published in Foster Report No 3094
Environmental Protection Agency Responds to 27 States and Allied Trade Associations Seeking Reversal of Controversial “Clean Power Plan” to Cut Power Sector Carbon Emissions

On March 29, EPA filed its brief before the D.C. Circuit Federal Court of Appeals in West Virginia et al. v. EPA in response to the February 29 initial brief of a broad coalition of states, electric utilities, and various trade associations seeking reversal or remand of the Clean Power Plan (“CPP” or “the rule”).  EPA’s ambitious undertaking to reduce carbon dioxide emissions from fossil-fuel plants in the power sector in the coming years is relying on the active participation of all states. [1]

The final rule for existing power plants announced in August 2015 by the White House and EPA[2] was greeted with antipathy by various stakeholders including the 27 opposing states and various associations of private parties (utilities, other affected industries, and labor unions) that have appealed to the courts.  In early February, the rule’s opponents succeeded in obtaining a stay of the rule from the Supreme Court, not long after the D.C. Circuit had declined to issue one.[3]

The petitioners’ initial brief argued that EPA was vastly exceeding its statutory and constitutional authority in fashioning a “transformative” rule – ousting the states from their traditional role of regulating public utility choices of generation technologies and fuel mixes – through a novel interpretation of a seldom-used provision of the Clean Air Act – section 111(d) – that, on its face, appears to permit states under EPA’s “guidance” only to develop performance standards and prescribe cost-effective emissions controls applicable to specific sources.

The petitioners contended that EPA’s rule, in contrast, seeks to regulate emissions cumulatively from entire fleets of generators – thereby bundling together many discrete emission sources and plant sites – through a complex “building block” scheme.  That construct would compel fossil fuel- dependent power plants (mostly coal-fired steam generators) either to shut down, curtail production, or offset their unavoidably high CO2 emissions with lower or zero-carbon-emitting plants, though a combination of (1) dispatching lower-emissions (i.e., gas-fired) plants more frequently and (2) constructing new, zero-emitting renewable resources.[4]

The petitioners’ brief contended that this “beyond the fence” approach crafted by EPA, and the resulting “environmental dispatch” of power plant fleets to comply with the EPA-dictated statewide CO2 reduction goals, were never contemplated under section 111(d), have never before been asserted, and under Supreme Court precedents would require far clearer Congressional authorization to be attempted.  It also warned that the logic of EPA’s “expansive view” of section 111(d) could be similarly applied to any industry whose production plants emit carbon dioxide, compelling them to “shutter the existing sources entirely” and “even subsidize their non-regulated competitors” – something Congress “could not have imagined.”

EPA Fires Back.  The EPA’s answer brief begins not with a defense of its legal authority, but with a depiction of the enormity of the environmental issue – climate change – that it is attempting to address.  It presents the CPP as this nation’s primary regulatory effort to control CO2 from a large emitter – the power sector – which poses, according to the agency, “a monumental threat to Americans’ health and welfare by driving long-lasting changes in our climate.”

EPA proceeds to enumerate the calamities it believes will ensue if decisive action against “fossil-fuel-fired power plants” is not undertaken, among them: (1) rising sea levels and flooding of coastal populations; (2) increasingly frequent and intense weather events; (3) shrinking water supplies; (4) species extinction; and (5) national security threats.  Later on, it ties its CPP initiative to the 195-nation “long-term global framework” for addressing climate change agreed to in December 2015 in Paris.

Next, seeking to rebut the petitioners’ central argument that the agency lacks statutory authority to launch the rule, EPA asserts that a 2011 Supreme Court case, American Electric Power v. Connecticut, “clarifies” that it has the authority to limit power plants’ emissions of CO2 to “abate climate change threats.”[5]  It posits that it has “thoroughly and carefully applied” section 111(d)’s principle performance standard – the “best system of emissions reduction” – to the “unique circumstances” of greenhouse gas (GHG) emissions from power plants.  Based on its analysis of what “states are already using to reduce CO2 emissions,” maintains the agency, it has devised “cost effective…proven emission-reduction strategies premised on increased utilization of cleaner forms of power generation.”

EPA further claims that its core strategy for controlling power plant GHG emissions, which it labels “generation shifting,” is nothing new, but has been incorporated into “numerous” Clean Air Act regulatory programs applicable to electric utilities, taking advantage of an industry structure featuring an interconnected grid tying together diverse but “coordinated” power sources having “vastly different air pollution impacts.”

It also observes that in utility operations power plants shift their generation around in “the normal course of business.”  Thus, the argument concludes, “generation shifting” to achieve environmental objectives is a convenient, conventional, and cost-effective way to cut GHG emissions.

Considerable portions of EPA’s brief are devoted to explicating the overall statutory framework and how the CPP is structured and meant to work, including its gradual phase-in of statewide emissions limitations from 2022-30 and its granting “considerable flexibility” to the states to tailor their performance standards to their “individual circumstances and preferences.”  As additional flexibility measures, states may embark on emissions credit-trading programs, or individually enact programs to incentivize energy efficiency at the demand level, so long as the overall state goal is achieved.[6]

Suggesting that the prescribed emissions reduction requirements are not so radical as portrayed by opponents, EPA observes that in 2030, when the rule is fully phased in, it will require just a 16% reduction in CO2 emissions versus the level EPA expects by 2020; and, further, that increment of additional reduction is “not far” from the CO2 reductions achieved by the power sector between 2002 and 2013.  Moreover, EPA notes that its “detailed assessment of [the rule’s] likely economic impact” did not project any “substantial increase” in electricity costs to the public, nor any reliability impacts.

Assault on the Petitioners’ Goals and Legal Theories.  EPA’s brief takes the petitioners to task for seeking to “thwart” any meaningful federal limitation of the power industry’s “voluminous CO2 emissions” while promoting statutory interpretations “not required by the statutory text” that would “frustrate Congress’s intent.”

Dealing with the petitioners’ key contention that section 111(d) does not contemplate a collective, fleet-wide approach to ramping down CO2 emissions from generation sources, EPA asserts that if it had elected just to impose “technology measures such as co-firing and carbon sequestration,” few fossil fuel plants would have tried that approach; instead, they would “rely on lower-cost generation shifting.”  EPA also insists that its rule does not “impinge” on state prerogatives to “regulate intrastate electricity sales” or “license new power facilities.”

The brief also seeks to discredit another of the petitioners’ statutory arguments:  that any regulation of fossil fuel generation emissions is barred under section 111(d) because this class of “sources” is also regulated (albeit for different pollutants) pursuant to section 112 of the Clean Air Act (CAA).  The petitioners’ section 112 “exclusivity” argument is founded on 1990 amendments to the CAA that arguably created such a limitation on section 111(d)’s applicability to fossil fuel-fired plants.

But EPA seizes on a degree of confusion over just what verbiage Congress actually meant to enact.  It asserts that (1) legislative “ambiguities” surround the scope of section 111(d) vis a vis section 112; and (2) it has “reasonably resolved those ambiguities” and “avoided creating an unnecessary conflict in enacted statutory text” by determining Congress did not intend the barrier to regulation under section 111(d) that petitioners have raised.

In addition, EPA addresses the petitioners’ constitutional argument that the agency has usurped the states’ traditional regulatory role over generation plants, explicitly recognized under the Federal Power Act (FPA).  The states and private associations opposing the rule contend that EPA has assumed a far more sweeping and dictatorial role under section 111(d) than either the statutory text or any prior instance of its application can support – thus violating the 10th Amendment’s preservation of residual state authority.  EPA counters that the CPP falls within the boundaries of “cooperative federalism” in a manner “akin to numerous other court-approved regulatory programs.”

Correctly Characterizing the CPP Regulation.  The petitioners’ brief characterizes EPA’s rule as a broad and audacious takeover of the utility industry on the slender pretext of an obscure CAA provision enabling states to develop emissions standards for existing sources under EPA “guidance.”  EPA’s brief opposes such a characterization.  It asserts that the petitioners’ “core legal arguments largely rest on hyperbolic mischaracterizations of this Rule as broadly regulating energy markets and generation.”  To the EPA, however, its CPP is “not an energy rule.”  It “limits emissions of an exceptionally important air pollutant” emitted in “huge quantities” by the power industry, but “does not regulate any other aspects of generation, distribution, or sale.”

Far from reconfiguring the generation landscape, says EPA, the rule only makes modest changes in ongoing industry trends.  The rule projects that, by 2030, coal-fired generation will be 27.4% of total generation – an amount “only 5.4% less than projected without the rule.”  It quotes its finding in the CPP that the added push the rule provides is “fully consistent with the recent changes and current trends in electricity generation” and will not “entail fundamental redirection of the energy sector.”

What a “Best System” May Be.  The agency’s brief also tackles the petitioners’ argument that EPA has misinterpreted what a “best system of emission reduction may be under the language of section 111(d).  The statute authorizes EPA, in its role of formulating “guidelines” for states to follow, to determine the “best system of emission reduction.”[7]  While the petitioners’ brief maintains that any such “system” must be one that a specific plant “source” can implement, EPA’s CPP compliance scheme is built around its premise that “system” is an “expansive” term that can encompass “a set of things or parts forming a complex whole” (i.e., a grid).

This broader reading of what a “system” may be propels EPA to conclude that the statute authorizes its holistic approach –- bundling together multiple plant sites and orchestrating an array of operational adjustments and offsets to achieve the net level of statewide GHG emissions the agency deems acceptable.  EPA’s statutory interpretation undergirds its reliance on “generation shifting” as the pivotal tool in achieving a “best system of emission reduction.”

EPA concedes there are “constraints” in the variety of actions that might be fused into such a “system,” but claims it has honored those constraints.  Thus, it has eschewed such forms of “emission reduction” as planting forests, and instead has focused on “supply-side activities” allowing for “continued production” of the grid operator’s product, albeit through “cleaner processes.”

Better than the Alternatives?  EPA’s presses its position further that its generation-shifting model for attaining CO2 reductions is less onerous than other potential regulatory approaches.  By “shifting some generation from higher-emitting to lower-emitting plants,” EPA suggests, utilities can achieve an “effective degree” of emissions limitation and avoid “much more expensive investments in end-of-the-stack technologies at their particular plants.”[8]

To satisfy the statutory criterion that a best system of emission reduction must be “adequately demonstrated,” EPA points to state-driven and “corporate” utility programs that have employed the same strategy of “invest[ing] in zero- and lower-emission resources.”  Likewise, it cites the nine northeastern U.S. states that have joined in a “cap-and-trade” program that relies on generation shifting, a program emulated in California.  The agency also notes its own air pollution “transport” rules under other sections of the CAA addressing “criteria pollutant precursor emissions” as concrete examples of employing “generation shifting” to achieve environmental goals.[9]

The brief moreover stakes out a position, “contrary to Petitioners’ argument,” that Congress’s creation of a cap-and-trade program in another statutory context “strongly supports” EPA’s assertion that this is an “adequately demonstrated” and “appropriate” approach for existing power plants under section 111(d).  (The petitioners’ initial brief had contended that EPA is effectively treating section 111(d) as a vehicle for a “cap and trade”-type compliance approach, as though it was acting under other provisions of the Clean Air Act where such methods have been expressly authorized.)

Finally, EPA suggests that, when it comes to the appropriateness of generation shifting as part of a “best system,” some of the petitioners are trying to have it both ways.  Citing the 2005 Mercury Rule,[10] also developed under section 111(d), EPA charges that utility industry petitioners attacking its compliance construct in this case had applauded the agency’s authorization of generation shifting in the Mercury Rule as an alternate means to achieve overall compliances (versus forcing them to use site-specific, “add-on controls” exclusively).

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[1]   The petitioners’ brief is discussed in FR No. 3089, pp. 20-25.

[2]   The final rule was not published in the Federal Register until 10/23/15.

[3]   Although the D.C. Circuit’s ruling, expected later this year, is a crucial phase in the litigation over the CPP, most observers anticipate that the Supreme Court will ultimately accept the case and review the D.C. Circuit’s disposition on its merits, regardless of which side is the victor at the present stage.

[4]   The three “building blocks” EPA set up for states to utilize in framing compliance plans include (1) improving the operating efficiency of coal-fired plants; (2) dispatching natural gas-fired power plants at a greater rate, thus “displacing” the higher levels of CO2 associated with coal-fired plant emissions; and (3) displacing both coal- and gas-fired generation with new generation from renewable resources (largely solar and wind). The petitioners argued that only the first “building block” falls within the intent of section 111(d), while stressing that most of the carbon emission reductions envisioned by EPA would come from the second and third building blocks.

[5]   The meaning of this Supreme Court decision is likely to be a key battleground, since the petitioners’ brief cites the same case to suggest that EPA has overstepped its legislative limits. The main holding in the case was that plaintiffs cannot pursue “private” rights of action against owners of CO2-emitting generators, since Congress entrusted EPA under the CAA to regulate emissions.

[6]   Before the final rule was promulgated, demand-side energy efficiency/conservation programs constituted a separate, fourth “building block” under EPA’s compliance construct.  The concept was retained, not as a formal building block, but as a state option.

[7]   Importantly, EPA’s discretion to determine the “best” system is constrained by additional qualitative factors listed in the statute, as EPA’s brief recognizes.  That is, the “best system of emission reduction” must also be “adequately demonstrated,” take into account “costs” and “energy requirements,” and reflect an “achievable” degree of emission limitation.

[8]   However, this argument presumes there are “end of the stack” treatments that satisfy the other tests of section 111(d) – e.g., demonstrated feasibility, cost, consumption of energy.  EPA asserts it did “consider” such “technological” measures as co-firing and carbon sequestration and “did conclude some of these measures are feasible,” but rejected them because they’re “more expensive” than the control system it selected.

[9]   EPA also cites its “acid rain program” as another regulation which permits generation shifting as one of the strategies for pollution control.

[10] EPA notes the Mercury Rule was vacated on other grounds in a D.C. Circuit decision, New Jersey v. EPA (2008).

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Copyright © 2016 by Concentric Energy Publications, Inc.  All rights reserved.

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