Lots of Rules, Lots of Uncertainty

There has been an unprecedented amount of regulatory action by U.S. EPA over the last several years.  As a consequence of this activity, uncertainty for industry has become the “new normal” along with the associated “regulatory backlog” that afflicts under-staffed state air pollution control agencies charged with implementing new regulations.  Topping the list of these regulatory actions is the new Cross-State Air Pollution Rule (CSAPR).  Other regulations adding to the chaos include the Industrial and Utility Boiler National Emission Standards for Hazardous Air Pollutants (NESHAPs) and implementation of the new 1-hour sulfur dioxide (SO2) National Ambient Air Quality Standards (NAAQS).   While previous issues of 4 The Record have dissected the unique impacts of these individual regulations, this issue examines the synergistic effect that the rules are creating for regulated entities.

CSAPR and CAIR

Let’s start with CSAPR.  On July 6, 2011, U.S. EPA signed (and promulgated on August 8, 2011) a rule that requires 27 states to make very significant reductions to SO2 and NOX emissions from electric generation units (EGUs).  SO2 and NOX have been identified by U.S. EPA as contributing to the formation of ozone and fine particulate matter (PM2.5) pollution, respectively, that is transported to other states.  The CSAPR rule replaces U.S. EPA’s now defunct 2005 Clean Air Interstate Rule (CAIR). A December 2008 court decision kept the requirements of CAIR in place temporarily but directed U.S. EPA to issue a new rule to implement Clean Air Act (CAA) requirements concerning the transport of air pollution across state boundaries.  As we now know, there were many surprises in the final CSAPR rule that was issued by U.S. EPA. The amount of additional emission cuts that are mandated and where these emission reductions are required to occur raised more than a few eyebrows.  Compared to calendar year 2005, U.S. EPA now estimates that by 2014 the CSAPR rule and other Federal rules will lower annual SO2 and NOX emissions from power plants in the Eastern United States by 6.4 million tons and 1.4 million tons, respectively.

Over 45 separate petitions for review were filed with U.S. EPA by 89 parties challenging CSAPR, including 14 states, two municipalities, two unions, several utility trade groups, and a number of industrial corporations and associations.  Some parties support CSAPR, but many do not.  As a result of all of the court action, U.S. EPA proposed technical adjustments to CSAPR.  It will be interesting to see what, if anything, U.S. EPA modifies in CSAPR as a result of the October 6, 2011 proposed changes.  Comments were due to U.S. EPA on November 28, 2011.

At the heart of these filings are the substantial emission reductions that are mandated in certain locations under CSAPR.  The CSAPR reductions are greater than the reductions that were required under CAIR, which in turn has raised concerns regarding the stability of the electricity supply grid.  While U.S. EPA reported that their Integrated Planning Model (IPM), which was utilized to help develop CSAPR, supports the cost effectiveness of the new emissions cap rule without grid disruptions, many electric utilities claim that there are significant flaws to some of the underlying assumptions in the model.  Many coal-fired electric generation facilities that were not identified by U.S. EPA to shutdown under CSAPR have now announced that they will likely shutdown if CSAPR is implemented as identified by U.S. EPA to shutdown under CSAPR have now announced that they will likely shutdown if CSAPR is implemented as finalized.  The emission allowance markets have also reacted to anticipated supply concerns with very high NOX allowance prices.  In a showing of concern about high initial allowance prices and limited NOX allowance supply, U.S. EPA suspended implementation of the more restrictive State Assurance Budget caps  for two years, until 2014.

Under CSAPR, states have State Allowance Budgets for emissions of SO2, NOX (annual), and NOX (ozone season) for each existing EGU and a pool of allowances specifically set-aside for new EGUs.  However, under CSAPR, U.S. EPA will also be imposing state allowance caps, which are called the State Assurance Budgets, that will be approximately 20% greater than the State Allowance Budgets.  The cap aspect of the State Assurance Budgets comes into play as a significant economic driver to limit use of out-of-state allowances by requiring a 2-for-1 surrender for any allowances used in excess of the State’s Assurance Budget.

The finalization of the CSAPR rule has also created a problem for several states where regulatory programs allowed the use of purchased CAIR Allowances to provide emission reductions in place of more costly NOX emission reductions.  U.S. EPA has indicated that it will likely not let CSAPR allowances be used for programs other than CSAPR.  U.S. EPA’s position could force some states to require additional source emission reductions to replace lost CAIR allowance emission reductions for non-utility industry sources.  The root of this U.S. EPA position appears to be the concern regarding the availability of allowances as modeled in their already criticized IPM evaluation that demonstrates stability of the electric grid.   Needless to say, both the EGU owners and the allowance market are still gun-shy based on past history when the CAIR allowance program essentially collapsed, costing utilities millions of dollars.

CSAPR, NESHAP, and NAAQS

The utility industry (and industry in general) has spent a great deal of time and money preparing to address the technical and financial aspects of adding significant additional air pollution control equipment that is anticipated under CSAPR and the many new NESHAP requirements.  In addition to the flurry of new regulatory activity, industry and state regulatory agencies also face the unprecedented process of SO2 NAAQS designation determinations through very conservative air quality modeling evaluations (in lieu of traditional monitoring).  Even if Best Available Control Technology (BACT)- and Maximum Available Control Technology (MACT)-level air pollution controls are implemented to meet these new regulatory requirements at existing facilities, the stringent short-term SO2 NAAQS and the use of dispersion modeling to define SO2 NAAQS designations could mean that even more expansive (and expensive) controls could be needed that exceed the demonstrated costs of BACT- and MACT-level controls.  Companies are quite literally paralyzed, unable to make informed business decisions with such widespread uncertainty.  There have already been a number of examples of this “paralysis” for industry.  For some industries at the present time, the only sensible move is the “no action” alternative.  However, that is not a business model that is conducive to long-term sustainability.

The implementation of the SO2 NAAQS through dispersion modeling (compared with the typical monitoring approach) is very disruptive to sources that are in the process of complying with the “other” regulatory requirements.  To make matters even more dire, the accelerated timing of the SO2 NAAQS implementation does not allow any time for the meaningful evaluation of the reductions in ambient SO2 that will result from CSAPR and the various NESHAP rules.  Normally the process for implementation of a new NAAQS with a new averaging period involves the determination of what additional ambient air quality monitors are needed, deployment of these new monitors at hotspots (determined by air quality modeling), the collection of three air quality modeling), the collection of three years of ambient data, and finally targeted source specific emission reduction evaluations where real ambient exceedances of the NAAQS are monitored.  “Modeled” exceedances are often artifacts of imperfect data and a part of the imperfect nature of ambient air quality dispersion modeling that is purposely designed to be conservative for use in PSD permitting of new source modifications and new emission units.  Under PSD permitting, conservative ambient air quality modeling of proposed major emission increases is the accepted method for determining the impact of these emission increases before they occur.  When dealing with existing air emission sources, the logical, and previously accepted method, is to actually measure their ambient impact. After all, real businesses and real jobs are at stake.

To top it all off, U.S. EPA granted a Section 126 suit by the state of New Jersey against a Pennsylvania power plant for exceeding the new SO2 NAAQS. This unprecedented action by U.S. EPA bypasses the normal 3-year timeframe provided for the implementation of a new NAAQS as specified under Section 110 of the CAA.  Instead, U.S. EPA elected to accelerate the implementation of a new NAAQS in a much shorter timeframe by utilizing Section 126 of the CAA.  Section 126 suits were used in the past only where Section 110 had failed to protect the NAAQS.

Conclusion

The combination of regulatory requirements mandating major reductions in emissions results in double jeopardy for industry trying to decide how, or if, to make capital investments for emissions control when air quality modeling related to SO2 NAAQS designations could require even further emissions reductions, or worse, result in economic shutdown of the facility.  The synergistic effect of multiple major regulations on top of a new short-term NAAQS and the use of dispersion modeling to define NAAQS attainment areas (versus the usual 3-year monitoring period) has all but paralyzed industry in their compliance planning.  As is typically the case, there are two financial certainties.  There will be big money winners and big money losers from what is about to unfold, and consumers will ultimately end up paying for any losses in the long run.