John Walke's Blog
Demise of the Clean Air Interstate Rule: Blame, Shame, Thy Name is Duke Energy
July 15, 2008
Posted by John Walke in Curbing Pollution , Health and the Environment , The Media and the Environment , U.S. Law and Policy
“The lady doth protest too much, methinks.”
– Hamlet Act 3, scene 2, 230.
On Friday July 11th, the U.S. Court of Appeals for the D.C. Circuit struck down the Bush administration’s signature air quality accomplishment, the “Clean Air Interstate Rule.” CAIR established cap-and-trade programs for SO2 and NOx air pollution from power plants in 28 eastern and Midwestern states plus the District of Columbia.
EPA had projected that upon full implementation of the rule, in the mid-2020’s, CAIR would have reduced SO2 emissions in the CAIR region from 9.4 million tons to 2.5 million tons (73% below 2003 levels); and reduced NOx emissions from 3.2 million tons to 1.3 million tons (61% below 2003 levels). Upon full implementation, EPA had projected that the rule would have prevented 17,000 premature deaths, 22,000 non-fatal heart attacks, 12,300 hospital admissions, 1.7 million lost work days, and 500,000 lost school days.
The lion’s share of these public health benefits would have resulted from the SO2 program component of CAIR, due to reductions in deadly fine particle pollution (PM2.5) associated with SO2 emissions.
The overwhelming majority of utilities in the CAIR region was prepared to comply with CAIR and did not challenge the rule in court. Neither did the utility industry’s trade associations, which are otherwise regular litigants opposing EPA clean air rules.
Instead, the SO2 trading program was challenged by a fringe element of utility companies led by Duke Energy in Charlotte, North Carolina, a coalition that also included FPL Group, AES, and South Carolina Electric & Gas. The NOx trading program was challenged by Entergy and FPL Group.
The Court vacated both the SO2 and NOx trading programs based on these challenges, as well as a challenge by the state of North Carolina that CAIR was not protective enough of the state’s citizens.
I focus here on Duke Energy’s challenge to the SO2 trading program for three reasons: first, because of the tremendous health benefits that would have flowed from the SO2 (and PM2.5) emissions reductions; second, because of Duke’s leading role in authoring the legal papers; and third, because of Duke’s public reaction to its litigation victory overturning CAIR.
Soon after the court’s ruling Friday morning, and in the days that followed, Duke Energy issued the following surprising and perplexing reactions to the ruling:
- “It was not the intent of Duke Energy’s participation in this litigation to overturn E.P.A.’s Clean Air Interstate Rule.” Duke Energy spokesman, Thomas Williams, in an email to the New York Times.
- According to the Charlotte Observer, “Duke Energy objected, said spokesman Tom Williams, because of the low number of emission allowances the rule would give Duke. ‘Our whole focus was not to overturn CAIR, but to make sure we got the appropriate number of allowances,’ Williams said.”
- The “court has thrown out the baby with the bathwater.” Duke Energy statement to CBS Evening News repeated in its July 12th broadcast.
At best, these protestations are irresponsible and recklessly naive: had Duke Energy not intended to vacate CAIR, it should not have brought the lawsuit challenging the rule. The overwhelming majority of utility companies in the country, along with the industry's major trade associations, did not challenge the rule.
Moreover, any decent attorney practicing in the D.C. Circuit would know that the frequent practice in that court is to vacate unlawful rules in their entirety, rather than letting the rules remain in place and remanding them to EPA for correction.
But Duke Energy's position was represented in the D.C. Circuit by more than just decent attorneys. Duke's lead attorney on its legal brief was a former veteran air pollution attorney from EPA's Office of General Council, well-known and well-regarded within the corporate environmental bar. The attorney presenting the oral argument on Duke's behalf was a former classmate of mine at Harvard Law School and editor of Harvard's Environmental Law Review. She presented a well-crafted oral argument that lacerated CAIR’s SO2 rules to their very core. Both of these highly capable attorneys surely understood the D.C. Circuit practice of vacating unlawful agency rules.
Let’s get one other thing straight too: the main challenge to the NOx trading program reflected a disagreement over how CAIR allocated emissions allowances. The challenge to the SO2 trading program did not – it was a fundamental statutory challenge to EPA’s very authority, alleging that “EPA’s SO2 CAIR rules violate statutory mandates and congressional intent, far exceeding EPA’s CAA authority,” to quote from Duke Energy’s brief.
At worst, Duke Energy's assertions are disingenuous nonsense: Duke Energy's legal brief represented a frontal assault on CAIR's SO2 trading program, the rule’s most important element by far from a public health perspective since the dramatic SO2 cuts reduced the death toll caused by PM2.5 pollution. Duke's brief did not chip around the edges or raise claims simply that the rule was arbitrary, both of which EPA might have been able to fix on remand without the rule being torn down. Instead, Duke's brief argued that CAIR was fundamentally incompatible with another statutory provision, indeed another statutory title, Title IV -- the Clean Air Act's acid rain program. So it hardly could come as a surprise to Duke that the court would agree with Duke's own legal arguments and overturn CAIR.
Indeed, a high-level EPA official called me shortly after Duke's legal brief was filed, expressing alarm and anger that Duke was mounting a frontal assault on the heart of CAIR. EPA and administration officials had believed that the utility sector was prepared to comply with CAIR and would not be challenging its very underpinnings. EPA expected that some of the peripheral states included in CAIR's trading region might file lawsuits, arguing their states or portions of their states should not be covered by CAIR. EPA even anticipated that the NOx trading program’s allowance distribution method might face challenge from the cleaner electricity generators that CAIR had disadvantaged, based on the Bush administration’s insistence on bending over backwards to reward coal-heavy utility fleets (which includes Duke Energy). (CAIR was important and a necessary step forward, neither of which should be confused with perfect, a topic I hope to cover in another post.)
But this official explained that EPA was completely caught off guard by Duke's direct challenge arguing that the SO2 trading program itself was legally incompatible with the statute. This official urged me to respond forcefully to Duke’s challenge, since NRDC and other environmental groups had intervened on EPA's behalf, opposing the industry lawsuits mounted against CAIR. We did, to no avail.
But let's not dwell on logic or circumstantial evidence that Duke Energy intended to vacate CAIR.
Here is the clincher, quoting the last two sentences of Duke Energy's legal brief in the lawsuit: "For the foregoing reasons, EPA's CAIR SO2 rules exceed EPA's authority and are arbitrary, capricious and an abuse of discretion. This Court should vacate them."
Disingenuous nonsense it is.
Duke Energy urged the Court to vacate the SO2 rules. The Court did.
Rather than protesting too much about the truth, perhaps Duke Energy's time would be better spent trying to explain its contradictions and hypocrisy to the tens of thousands of Americans whose deaths will be hastened by the company's air pollution and litigation victory over the coming years.
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Comments
dan — Jul 15 2008 05:50 PM
Great post. But where do we go from here? Surely, most utilities that didn't challenge CAIR must be upset over all the confusion this court decision adds to their plans for the next several years. Businesses need certainty to make investments. Is there any way to channel industry support into an effort to get Congressional passage of a bill that would effectively carry out CAIR but with a proper legal basis? If not, then what? Presumably the NOx Budget Program will continue in the absence of CAIR, right?
Economics of Operating Existing Scrubbers is Fading — Jul 16 2008 10:13 AM
Forget removing the incentive for generators to construct new SO2 scrubbers, the economics of operating existing scrubbers no longer make sense for most generators.
Immediately, upon the announcement that the Court struck down CAIR, SO2 allowance prices collapsed approximately $200/ton to just $100/ton. Many market participants have been obviously been anticipating this outcome as allowance prices have slowly declined $435/ton since the beginning of this year.
Operating a scrubber typically causes a coal plant to have a derate in generating capacity of 2-4%. While this may seem trivial, its not. The high current oil and natural gas price translates into high electricity prices. Because of the high price of electricity, the supplemental power that a generator can get out of its existing power plants by turning off its scrubbers is extremely valuable.
Because of this embedded real option, in many cases, a generator can simply turn off its scrubber to realize this capacity uplift and realize extra revenues through increased electricity sales. Under current federal law, in most cases, generators can optimize this way completely lawfully. Is all that is required is that a generators surrender one allowance per ton of emissions at the end of every year. With the price of allowances at such low levels scrubber dispatch economics are crystal clear.
Even though a group of coal generators with the help of a smart legal team were successful in striking down the rule, the EPA should be commended for its efforts. Instead of advancing a stand alone rule or command and control approach the EPA’s CAIR rule was designed with an overarching goal of being operationally successful.
Now its time for Congress to do their job. Congress needs to step-up to the plate and amend the Clean Air Act and provide the EPA with the necessary authority it needed to implement CAIR. At the very least, because of immediate public health concerns, Congress should provide some sort of bridge authority to temporarily increases the allowance surrender rate.
PPL — Jul 16 2008 03:16 PM
PPL says court ruling may require company to take impairment charge on emissions allowances
NEW YORK (AP) -- PPL Corp. said Wednesday it may book a third-quarter impairment charge related to emissions allowances worth about $100 million after a recent court ruling invalidated the Clean Air Interstate Rule, or CAIR.
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In a Form 8-K filed with the Securities and Exchange Commission, the energy and utility holding company said its PPL EnergyPlus LLC unit had purchased additional sulfur dioxide allowances beyond those required under the CAIR acid rain program. The company also had bought annual nitrogen oxide allowances under CAIR's nitrogen oxide program.
Earlier this month, the U.S. Court of Appeals for the District of Columbia Circuit ruled that the Environmental Protection Agency overstepped its authority by instituting CAIR, a key part of President Bush's clean air policies. CAIR included cap-and-trade provisions, which allow companies that exceed emissions caps to buy credits from companies that do not.
PPL said it "now anticipates that all of the annual nitrogen oxide allowances PPL EnergyPlus had purchased may be impaired because the CAIR rule has been vacated and therefore these allowances are no longer required."
The approximately $100 million amount, the combined book value of the emission allowances on June 30, excludes season nitrogen oxide allowances unaffected by the ruling, the company said.
PPL said it is still evaluating the impact of the court's decision and said the allowances may be impaired in the third quarter. The amount of any charge will be based on market prices at the end of the quarter in September, an assessment of the emission allowances PPL expects to consume in the future, and other factors
The company added that the market prices of sulfur dioxide allowances has fallen "dramatically" since the court's decision.
"PPL cannot predict the outcome of the legal proceedings related to the court's decision, what action the EPA will take in response to this decision and the timing of such action, or the ultimate impact on PPL of these proceedings and resulting regulatory and other actions," PPL said.
Shares of the Allentown, Pa., company fell $1.26, or 2.5 percent, to $48.88 in midday trading. So far this year, the stock is down 3 percent.
Phil Creed — Jul 17 2008 06:58 PM
There's a couple of nagging questions concerning this--
1. Why hasn't there been movement of any clean air bills (especially in the Senate) in the wake of this ruling?
2. Are there any states that are moving to establish SO2 and NOx standards in the wake of the ruling (especially Pa., which has a lot of scrubber installations planned by 2010). I know MD and NC have their own standards, but I haven't heard a peep out of state EPA's.
3. If a scrubber is either not started up, or an existing one is shut off, what happens when these areas can't attain the newere PM2.5 standards in 2010? Will they then be forced by state boards to start them up anyway?
4. What about the *massive* PR hit of either not running an existing scrubber or the outright cancellation of one? Wouldn't a bunch of companies sitting on idle pollution controls that were already paid just make the case for more severe Congressional legislation?
5. Mercury reduction is a co-benefit of FGD. But if you *specifically* try to reduce mercury by 80%+, as mandated by PA, would that result in an ancillary reduction in SO2/NOx (i.e. activated carbon, baghouse filters, etc.)
I live in Eastern Ohio, and at this point, I'm grateful for the pollution reduction I *know* will take place from AEP and First Energy due to court rulings. But I'm worried that they can be offset by idling the scrubbers at J.M. Stuart and Miami Fort in one fell swoop (the latter...installed by Duke Energy, of course.) And having a mother with severe asthma living here makes this just a *tad* personal.
Phil