News Analysis
The lawyers debated over ozone and soot, but the markets saw NOx as the "smoking gun."
November 2000 may be remembered for ambiguous election results that went straight to the U.S. Supreme Court, but it was also a banner month for debate in the realm of air quality regulation, a dispute that ended up in the very same place.
The Supreme Court heard oral arguments on Nov. 7 in two companion cases involving national ambient air quality standards, and the scope of authority at the Environmental Protection Agency to regulate without considering the price of its actions. To its credit, the EPA had regrouped following unfavorable rulings from the lower courts, moving full-steam ahead with its previous, less-stringent standard. But the high court's ruling, once declared, will have ramifications sure to be felt across the country.
How Many Parts per Million? At What Cost?
At stake in one of the cases is whether the EPA overstepped its authority in tightening its standards for both ozone (from a maximum 0.12 parts per million over one hour to 0.08 ppm over eight hours) and for particulate matter, or soot (from an acceptable size of 10 micrometers to 2.5 micrometers in diameter).
The industry side, led by the American Trucking Associations, contends that the EPA's standard setting violates the so-called "nondelegation doctrine," a rarely referenced doctrine that prohibits the unconstitutional delegation of legislative power. In other words, ATA argues that only Congress can implement such far-reaching standards.
The companion case raises the question of whether the EPA, when setting standards, must factor the cost of implementation into its equation, as the industry side contends. EPA hasn't done so previously; it says that cost is not considered until the implementation stage, when states take on the responsibility of lowering ozone levels in designated "non-attainment areas."
The American Trucking Associations, meanwhile, argues that not only is it logical that cost be weighed against benefit, but that the authors of the Clean Air Act intended for cost to be considered when the EPA sets standards. The association bases this assertion largely on the fact that the Act charges the EPA with protecting the health, as opposed to health. Cost considerations are implicit in the term , the industry side contends, whereas had lawmakers intended for cost considerations to be excluded, authors of the Clean Air Act would have referred to health-a term which, American Trucking points out, was used in the failed Senate version of the original bill. (Back in 1970 it was the House version that passed.)
The bottom line, the industry side says, is that if the EPA doesn't have to consider cost, it has virtually no boundaries to reign it in. Why not just set the standard at zero for optimum health benefits, the reasoning goes.
"[T]he one thing [EPA] doesn't have discretion to do is to take all those countervailing factors [such as cost] off the table," attorney Edward W. Warren, representing the industry side, told the Supreme Court. "Because ... what that means is that the agency has the freedom to take us all the way down to deindustrialization, as the Court of Appeals said."
Certainly, that issue appeared to pique the interest of the Supreme Court justices, for they pressed Solicitor General Waxman, who argued the case for the EPA, on the matter. Conjecturing whether the EPA conceivably could outlaw the combustion engine, Associate Justice Sandra Day O'Connor asked, "What is there, though, that would suggest that EPA could not decide that with electric motor vehicles we could achieve a better standard and it would be better for health, and therefore, we are going to set a much lower standard?"
Emphasizing that the EPA would not set standards that would cripple any one industry, Waxman cited the evolution of tailpipe emissions standards for new cars. "The automobile industry stated publicly that it was impossible to meet those standards, and if it were possible, the companies would go bankrupt. As it turns out É the companies did develop the technology."
Yet the high court also repeatedly questioned Warren on what basis he reasoned that cost considerations are implicit in the term public health. "[EPA Administrator Carol Browner] surely has some latitude in defining [public health] since it isn't defined in the statute," Chief Justice William Rehnquist reasoned, challenging Warren.
The justices repeatedly returned to that theme, apparently unconvinced by Warren's definition of public health and noting that authors of the Clean Air Act had the opportunity to specifically include cost-benefit in its definition of public health, yet did not do so.
High Stakes for Federal Programs
As Rehnquist's comment indicates, the nature of the justices' questioning often transcended their ideological reputations. Associate Justice Antonin Scalia, also known for his conservative ideology, asked Warren, "Is $1,000 too much [to prevent] a cough, or $2,000, $3,000? Why does it give you a standard simply to add economic effects to the thing?"
It's no wonder that in many cases questioning by the justices transcended their individual ideological reputations, because the ramifications of a nondelegation ruling conceivably could spill beyond the sphere of the EPA to virtually all other federal agencies, some observers say.
Certainly, those on the EPA side would have you believe that. "If they don't find the language in the Clean Air Act sufficiently clear É then it doesn't take any time at all to make a dozen or two dozen other major federal statutes that are also in serious question," says Susan Durbin, deputy attorney general in California and participant in the Supreme Court case.
Durbin cites as one example another energy law that has received a lot of attention in California lately: the Federal Power Act and its "just and reasonable rates" clause. "[That clause] is less clear," she says, going on to suggest that the ramifications of a nondelegation ruling would reach into areas as far-reaching as antitrust, consumer protection, and civil rights.
Eight-Hour vs. One-Hour Standard: Is That Clear?
Sorting it out at the high court.In the several years that have elapsed since the Environmental Protection Agency issued its more rigorous ozone "eight-hour standard," much confusion has surrounded the new standard and the old "one-hour standard." What exactly do the two terms mean? The concepts were not clear to at least one Supreme Court justice, who posed that very question in the oral arguments. Moreover, it took Solicitor General Seth Waxman, who argued the case for the EPA, a few interchanges with the justice before he could offer an answer.
U.S. Supreme Court: General Waxman, if we're permitted to ask unimportant questions, can I ask what eight hours we are talking about, in the eight-hour standard? Which eight hours of the day is it?
Waxman: You're referring to the ... standard that is set for ozone.
Court: Yes.
Waxman: And I don't think that the standard—
Court: Because eight hours is more reliable than one hour, but I'm wondering if, I just don't find—you tell me, which eight hours is it? Is it from midnight to 8 a.m., because—
Waxman: I believe it is—
Court: Because it would vary, I think, tremendously.
Waxman: I am certain that in either the criteria documents, the staff papers ... it specifies that in detail, but I'm afraid that I can't tell you the answer. ...
Court: I had assumed that it meant you couldn't go over those levels during [an] eight-hour period in the day.
Waxman: I believe that's right, but I am not a—I'm not even in the realm of being a scientist, and I would want to be more certain before I set it, but it's not just—
Court: Just a matter of averaging it over the eight hours rather than averaging it for one hour.
Waxman: It is, in fact, the three-year average of the annual fourth-highest daily eight-hour average, if that's clear.
-C.J.L.
At minimum, Durbin says that the impact of the ruling will reach across the spectrum of air quality regulation. "If the court upholds the D.C. Circuit ruling about nondelegation, that is going to throw every air quality standard that currently exists into question because they've all been established by that authorization, by that principle."
But, say attorneys representing the industry side, EPA was capricious in setting its standards, failing to show how it arrived at its numbers based on scientific evidence. "These standards are more stringent and, interestingly, when you look at the record, it's not clear that they're going to result in any significant improvement in public health protection," says F. William Brownell, the attorney at Washington, D.C. law firm Hunton & Williams who is representing Appalachian Power and American Public Power Association in the case.
According to the industry side, the EPA lacks any scientific evidence suggesting that the collective public health would benefit from the more rigorous standards. "The utilities and others were concerned about having much more strict standards that would cost much more to implement but would not improve the level of public protection ...," explains Brownell.
How did the questioning go from the perspective of each side in the cases?
"Our legal position is the superior position. The oral argument, I thought, went very well," says Durbin, on the EPA side. While admitting a bias, she contends, "I was there and the Solicitor General [Waxman] definitely received less-hostile questions than the industry attorney."
Brownell's take, naturally, is almost the mirror opposite. "It was clear at the beginning of the argument in the questioning of Solicitor General Waxman by Justices Scalia, [Stephen] Breyer, and O'Connor that they were very troubled by the government's inability to define how they set a standard when confronted with a range of public health risks. They kept pressing Waxman, 'What's your principle?' ... And I don't think they ever got a good answer from the government and were never satisfied by what they heard from the government."
Effects on Power Markets
While the high court sorts out the federal case, the parties move forward. The EPA back in July, following the unfavorable lower court ruling, regrouped by reinstating its one-hour standard, which had been rescinded to make way for the eight-hour standard. Meanwhile, all indications are that states in non-attainment are moving forward on their state implementation plans, or SIPs. Durbin, in fact, says California is "going on as before" with its SIP based on the old standards.
On the legal front, at least two adversaries have met successfully at the negotiating table. After filing suit in November 1999 against Dominion Virginia Power and other out-of-state power producers in a dispute over downwind, cross-state-lines pollution, New York and the EPA reached an agreement with the company, calling for Virginia Power to spend $1.2 billion over 12 years to cut its nitrogen oxide emissions by 71 percent and sulfur dioxide emissions by 70 percent. The lawsuit, which New Jersey, Vermont, and Massachusetts also joined, had marked the first time that a state had sued out-of-state power plants directly for violating the Clean Air Act.
And from the perspective of the emissions credit marketplace, the pending Supreme Court case hasn't changed anything, at least for now. "It's business as usual," says Josh Margolis, who heads up nitrogen oxide trading at Cantor Fitzgerald Environmental Brokerage Services.
Margolis does point out that a ruling accepting the eight-hour standard would increase the number of states requiring implementation plans, and therefore the demand for credits, but for now the one-hour standard is driving the market as states work to achieve attainment.
Regardless of the Supreme Court case, emissions credits are receiving more attention. In October Cantor Fitzgerald and PricewaterhouseCoopers launched CO2e.com, an electronic marketplace focusing on greenhouse gas emissions. Moreover, at the Federal Energy Regulatory Commission's Nov. 9 hearing on the summer wholesale market price spikes in California, one participant pointed to spiking emissions credit prices as a significant contributor to the problem.
"To the extent there is a smoking gun, it's NOx," J. Stuart Ryan, executive vice president of AES Corp. and AES Pacific, told the FERC. "The cost of credits for NOx emissions in the L.A. Basin have skyrocketed." Ryan continued, "That entire program right now is stressed to the point of breaking."
Sure enough, NOx credits, which are traded in California as part of the Southwestern Quality District Reclaim Program, since the summer have traded in the $30 to $40 range, whereas 18 months ago they were closer to $2. Could this be a factor in the California wholesale market woes?
"People have pointed to NOx costs as major costs out there, but they haven't taken that next step of [citing] the type of exponential exporting effect when those units are setting the clearing price for everybody in California ...," says Aaron Thomas, manager at AES Pacific. "And to the extent that that market is influencing markets in the West, all of a sudden you're getting these basin units driving costs for 50 million people in the West."
But the high numbers simply may be price signals at work in a competitive market. Carlton Bartels, managing director of environmental brokerage services at Cantor Fitzgerald and chief executive officer of the recently launched CO2e.com, notes that NOx prices last year briefly surged to around $7,600 on the East Coast, but that "price signals were absorbed" and power producers responded to the soaring prices by installing emissions-reduction equipment.
And so should California's emissions credit prices fall into place. "I'm sure [by] this summer there will be a lot of reductions equipment put in place, and I would imagine the market will settle right back down," Bartels says.
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