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Battle Lines: 2011 Law and Lawyers Report

Generators fight back against EPA’s new regulations

Fortnightly Magazine - November 2011
“EPA responded with some significant amendments, and I think that’s tacitly saying they made errors in the Cross-State Air Pollution Rule.” – David Buente, Sidley Austin

several new regulations being implemented by EPA, CSAPR has so far generated the greatest controversy in the industry. EPA issued the final rule in July, with revisions in October, and it’s scheduled to take effect beginning Jan. 1, 2012.

Among the companies, advocacy groups, and state governments challenging the rule, a central argument involves CSAPR’s compliance timeline. January 1 is far too soon, objectors say, to retrofit plants, build replacement capacity, or make other changes needed to comply with CSAPR’s limits on emissions of sulfur and nitrogen oxides. The CSAPR emissions budgets vary from state to state and unit to unit, but the budget for Texas would require a 47-percent reduction in SO2 emissions, and Luminant estimated it would have to reduce its sulfur emissions by more than 60 percent.

In response to CSAPR, the company said it would idle as many as three lignite mines, as well as its Monticello 1 and 2 coal-fired power plants, for somewhere between six months and four years. Thomas Oney, Luminant’s chief compliance officer, says the company needs to idle the plants while it decides whether and how to retrofit them with emissions control equipment. The plants and mines employ about 500 people, according to Luminant, and those jobs would be lost with the shutdowns.

Even as it plans to comply with CSAPR, however, Luminant is challenging the EPA rules in federal court. The company asked the District Court in Washington, D.C., to remove Texas from the list of states regulated by CSAPR, and to stay the rule entirely to prevent “immediate and irreparable harm.”

The harm, according to Luminant, stems from the rule’s compliance timeline. “You can’t do environmental retrofits overnight,” Oney says. “It comes down to resource adequacy. The rule might require mothballing or retirement of plants, and we have tight reserve margins in ERCOT [the Electric Reliability Council of Texas]. We set three demand records this summer. So these rules will impact reliability.”

Luminant’s concerns are supported by an ERCOT report, Impacts of the Cross-State Air Pollution Rule on the ERCOT System , published September 1. In that report, ERCOT estimated the CSAPR budgets outlined in EPA’s July final rule would result in between 1,200 MW and 6,000 MW of generating capacity being forced offline in ERCOT in various months, depending on the scenario. The study states that “had this incremental reduction been in place in 2011, ERCOT would have experienced rotating outages during August.”

“When you have PUCs and ISOs saying, ‘Hold on, we need to keep the lights on,’ it creates a lot of political pressure.” – Jeff Holmstead, Bracewell & Giuliani

Subsequently, in early October, EPA proposed amendments that would adjust some states’ emissions budgets—reportedly to incorporate new data on emissions from existing sources. The amendments increased unit budgets on average between 1 percent and 4 percent compared to the July budgets. Also EPA proposed to amend the assurance penalty provisions of the CSAPR, pushing back their effective date to a control period starting Jan. 1, 2014. This means the most onerous penalties for CSAPR non-compliance— i.e., two-for-one forfeiture of allowances plus financial penalties—won’t take effect for the first two years.

EPA calls the amendment “a program enhancement to promote the development of allowance market liquidity as