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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

Utility executives take notice: The U.S. Supreme Court will issue a contentious and potentially far-reaching Clean Air Act (CAA) decision soon in Environmental Defense v. Duke Energy Corp. , a case involving the nation’s third-largest energy company. The Supreme Court heard oral arguments in early November and likely will issue an opinion before June 2007. Although the press has been focused on the other environmental case pending before the court, which deals with ability of the Environmental Protection Agency (EPA) to regulate greenhouse gases, the upside of the Duke Energy case for the electric industry could be much more significant—particularly for utilities with aging coal-fired fleets.

The Duke Energy case marks a significant opportunity for the court to clarify one of the most litigious issues in the electric-power industry today: How and to what extent can the EPA force utilities to update their aging fleets with expensive pollution-control technology? Under the EPA rules at issue in the case, utilities that modify their plants often are forced to retrofit them with expensive pollution controls like selective catalytic reduction and flue-gas desulfurization. These controls typically cost hundreds of millions of dollars and require long installation outages. According to Scott Segal, the Electric Reliability Coordinating Council’s director, “Clarity regarding these concepts is essential to improved efficiency, reduced emissions, enhanced workplace safety, and electric reliability.” 1

The EPA rules are so divisive because, as plants grow older, they become less reliable and emit air contaminants at a higher rate than newer vintage plants. Yet, the rules at issue in the Duke case would inhibit utilities from upgrading or modifying their older facilities. Indeed, because these older plants are not fitted with many pollution controls, they operate at much lower costs than new or controlled plants, thereby keeping the cost of baseload power low. In other words, the subject provisions have put environmentalists and electric industry officials at loggerheads. To keep the cost of power low, utilities and merchant generators cannot significantly modify their plants. To keep our air clean, however, environmentalists and the EPA must hover over the electric industry, looking for a triggering modification and suing if they spot one.

The pending case at the Supreme Court is not the only noteworthy New Source Review news from the last few months. Two recent economic studies out of Yale and the Center for Economic Development and Research have shed some light on EPA’s New Source Review enforcement tendencies, how utilities respond to increased regulatory scrutiny, and what effect the Supreme Court’s decision might have on rural