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Duke-ing It Out at the High Court: The End of New Source Review?

To what extent can the EPA force utilities to update aging fleets with expensive pollution-control technology?

Fortnightly Magazine - February 2007

Austin’s Washington office, argued that EPA only recently has started using the annual test. It only took a few minutes of Donahue’s argument for Scalia to follow up.

“What I am concerned about,” he mused “is that companies can get whipsawed. They don’t challenge the regulations when they come out. … And then some years later, when it turns out the agency is using a different interpretation, you have the jurisdictional bar.”

Although both Donahue and the EPA attorney pointed out that the annual test has been around since at least 1988, in his opening remarks, Duke attorney Phillips shot back: “It seems to me it is very clear that the understanding of everyone in the industry, outside the industry, from 1980, candidly well beyond 1988 all the way up to 1999, was the regulations didn’t apply under any circumstances in the absence of an increase in the capacity.” Unfortunately for Mr. Phillips, this is simply incorrect. The environmental groups dumped literature proving otherwise on many reporters the day after the case, including one of Duke’s own company training guides from 1991 that references the annual test. 16

The Economists Chime In

In October, just before the November arguments, two professors affiliated with the Center for Economic Development and Research released a timely study at a Capitol Hill briefing in Washington, D.C., arguing: “Should Environmental Defense v. Duke Energy be overturned by the U.S. Supreme Court, rising electricity costs from compliance with the EPA’s new interpretation of NSR requirements likely will fall disproportionately on rural businesses and households, especially those with the least financial ability to pay higher utility rates.” 17

While this paper garnered considerable press and agency attention, 18 its findings are not supported by any empirical evidence.

Essentially, the paper argues that “because rural America relies so heavily on coal-fired electricity, the EPA reinterpretation of NSR would be especially harmful to these already distressed communities.” 19 It points out that rural businesses consume a higher percentage of electricity than metropolitan ones. 20 It then essentially argues that these two facts, coupled with the Supreme Court overturning the 4th Circuit’s decision, would wreak havoc on rural America. Other than the obvious lack of empirical proof, the primary flaw of the paper is similar to that argued by Duke attorney Phillips. Both assume EPA’s 1999 lawsuits triggered a change in EPA’s interpretation of “modification” from the hourly test to the annual test. This is simply incorrect. If the Supreme Court overturns the 4th Circuit’s decision, the rule would revert back to EPA’s annual test, which has been around since at least 1988. Moreover, EPA might change its rule to the hourly test anyway. Fortunately, the other economics study out of Yale was much more thought-provoking and useful to the regulated community.

The Yale study, which also was released in October, uses data from the U.S. electric power industry to explore two questions: (1) What factors increase the likelihood of EPA New Source Review enforcement? and (2) How did utilities respond to the threat of future New Source Review enforcement and actual