June 01, 2015

Clean Power Plan: Testing the Limits of EPA’s Clean Air Act Authority

Phillip F. Fargotstein and Rhett A. Billingsley

In June 2014, the U.S. Environmental Protection Agency (EPA) proposed a rule to reduce greenhouse gas (GHG) emissions from existing fossil fuel-fired electricity generating units (EGU). 79 Fed. Reg. 34,830 (2014) (Clean Power Plan). EPA also issued a proposal restricting GHG emissions from modified and reconstructed EGUs, 79 Fed. Reg. 34,960 (June 2014) and a proposal for EGU’s located in Indian country and U.S. territories. 79 Fed. Reg. 65,482 (Nov. 2014).

Download a printable PDF of this article (membership required).

EPA received more than two million comments on the proposed rules and announced that it will issue final rules in summer 2015. If the final rules are similar to the draft proposals, the impact on the electricity generating industry and those who use electricity will be significant. Judicial challenges of EPA’s technical and legal justifications are inevitable.

The road to the current proposals began with Massachusetts v. EPA, 549 U.S. 497 (2007). In that case, the U.S. Supreme Court held that carbon dioxide (CO2) was a contaminant under the Clean Air Act, 42 U.S.C. § 7401 et seq. (CAA or Act), and that CO2 was subject to EPA regulatory authority if EPA determined that CO2 endangered human health and the environment.

Following the Supreme Court’s decision, EPA began what has been described as the single largest expansion in the scope of the CAA in its history. Clean Air Act Handbook at xxi (3rd edition). EPA first analyzed GHG emissions from motor vehicles and concluded that such GHG emissions cause or contribute to climate change, which in turn endangers human health and the environment. 74 Fed. Reg. 66,523 (2009).

EPA and the U.S. Department of Transportation (DOT) subsequently promulgated the Mobile Source Tailpipe Rule (Tailpipe Rule). The Tailpipe Rule established new mileage requirements and GHG emission limits for new light-duty motor vehicles and went into effect in January 2011. 75 Fed. Reg. 25,324 (2010). EPA also published a memo concluding that once GHG emissions were regulated under any section of the CAA, GHG emissions were subject to stationary source permitting under the Prevention of Significant Deterioration (PSD) and Title V programs. 75 Fed. Reg. 31,514 (2010).

EPA then issued its Tailoring Rule, 75 Fed. Reg. 31,514 (2010). That rule provided that in order to prevent a cataclysmic impact on permitting agencies’ resources and ability to issue permits, because even small sources can emit GHGs in excess of 100–250 tons per year, the GHG permit thresholds should be 100,000 tons per year of GHG initially and then 75,000 tons per year, which is the threshold through at least 2016. 77 Fed. Reg. 41,051 (2012).

Finally, in January 2014, EPA proposed New Source Performance Standards (NSPS) for new fossil fuel-fired EGUs, which EPA indicates will also become final during summer 2015. 79 Fed. Reg. 1430 (2014). That proposal set different emission rate standards for natural gas-fired EGUs and coal-fired EGUs. While EPA believes the natural gas standard is achievable by most modern natural gas fueled EGUs, the coal-fired standard requires the capture and underground injection of 50 percent of GHG emissions using Carbon Capture and Storage (CCS). There is an ongoing debate whether the cost and unproven performance of CCS on large scale coal-fired EGUs or the lower cost of electricity generated by natural gas-fired EGUs will prevent the construction of new coal-fired EGUs. 79 Fed. Reg. at 1477 (2014).

According to EPA, in 2013 67 percent of the electricity used in the United States was generated by coal, natural gas, or other fossil fuels. 79 Fed. Reg. 34,843. The Clean Power Plan is estimated to reduce GHG emissions from the electricity generating sector by 26 to 30 percent by 2030 when compared to 2005 levels. 79 Fed. Reg. 34,839. The proposed rules establish “guidelines” expressed as pounds of CO2 equivalent per megawatt of power generated. (The proposal also allows emission rates to be converted into a mass based approach if preferred.) The guidelines are mandatory in all jurisdictions with covered EGUs. All jurisdictions with CAA permitting authority will be required to submit plans similar to State or Tribal Implementation Plans (SIP or TIP) demonstrating how they will achieve the emissions rates. If a jurisdiction fails to submit a plan within the time frames specified in the rules, or submits a plan that is not approved by EPA, EPA can propose a federal implementation plan. EPA indicates that during summer 2015 it will promulgate a sample implementation plan for consideration by jurisdictions in preparing submittals.

In addition to mandatory 2030 “guidelines,” the proposal establishes mandatory “interim guidelines” that apply to the period 2020 to 2029. In many cases, the proposal establishes interim guidelines that are very close to the 2030 guideline. 79 Fed. Reg. 34,895. For example, the interim target for Arizona is a 49 percent reduction from the 2012 rate, while the final goal is a 52 percent reduction. NRDC Summary of EPA’s Clean Power Plan (June 2, 2014). The interim step, which must be achieved between two to three years after states submit their plans to EPA, could be impossible to achieve without significant disruptions to the mix of electricity generating facilities, which could threaten grid reliability.

To establish the guidelines, EPA uses assumptions and projections concerning the electricity generating sector, referred to as “building blocks.” EPA then estimates how much each state can reduce its GHG emission rates by using the building blocks. EPA’s approach results in emission rates unique to each jurisdiction. It also results in some states, such as Washington, having to reduce emission rates 72 percent while other states, such as North Dakota, need only reduce emission rates by 11 percent. While EPA emphasizes the individual nature of the guidelines as evidence of flexibility, the significant variation between states could be unfair to those with greater mandated reductions simply because they made early progress with energy efficiency, renewables, and natural gas-fired EGUs.

The building blocks utilized by EPA include the following:

Block One: EPA projects that coal-fired EGUs, regardless of design or age, can increase their heat efficiency by 6 percent or more.

Block Two: EPA projects that electricity dispatched from coal-fired plants can be redispatched from existing natural gas-fired plants up to 70 percent annual usage rates for natural gas-fired plants. EPA’s reliance on an annual usage factor does not consider seasonal variations. For example, some natural gas plants in the Southwest may use less than 70 percent in the winter but have much higher usage in the hot summer months.

Block Three: EPA projects that states can continue to increase the amount of electricity generated by renewable resources such as solar and wind. EPA cites efforts by state utility commissions to impose renewable energy portfolio standards on regulated utilities as evidence that this is achievable. 79 Fed. Reg. 34,835. EPA’s assumption, however, fails to account for EGUs that are not subject to state utility commission jurisdiction such as merchant power plants.

Block Four: EPA projects that electricity use and transmission efficiency can be increased by 1.5 percent each year between 2020 and 2030, resulting in less demand and lower GHG emissions. EPA again cites efforts by state utility commissions to impose energy efficiency standards on regulated utilities. 79 Fed. Reg. 34,849–34,850, 34,871–34,873. EPA’s assumption of continued improvements in efficiency based on past efficiency successes is debatable because the past achievements may reflect low-hanging fruit of energy efficiency.

EPA emphasizes each state has flexibility to employ none, some, or all of the building blocks, 79 Fed. Reg. 34,897–34,898, but states may not be able to meet the 2030 guidelines or the interim guidelines without employing most if not all of the building blocks. Consequently, any flexibility could be illusory in practice.

The number of comments reflects significant public interest in the Clean Power Plan and a wide range of viewpoints. Unsuccessful judicial challenges were filed by industry and a dozen states to prevent EPA from issuing a final rule. In re Murray Energy Corp., No. 14-1112 (D.C. Cir. June 9, 2015). Once EPA issues final rules, there will be further legal challenges. The authors believe that two issues will most certainly be raised.

(a) Does EPA have the authority to regulate GHG emissions from the electricity generating sector?

(b) If so, does EPA have the authority to require compliance with a standard that requires actions or reductions beyond the stationary sources itself (i.e., beyond the fence line)?

Scope of EPA Authority under Section 111(d)

There is a significant question regarding whether EPA has statutory authority to regulate GHG emissions from existing EGUs under section 111(d) of the Act when that source category is already regulated under national emissions standards promulgated by EPA under section 112 of the Act.

The issue stems from Congress’s enactment of two amendments to section 111(d) under the 1990 CAA Amendments—a House version and a Senate version—that were not clearly reconciled during Conference Committee. See Pub. L. 101-549, §§ 108(g) and 302(a); 104 Stat. 2399, 2467, 2574. The Senate version prohibits EPA from regulating any air pollutant already listed under section 112(b) of the Act. See id. at § 302(a); 104 Stat. 2399, 2574. The House version, on the other hand, which is the version that was codified at 43 U.S.C. § 7411(d)(1), prohibits EPA from regulating any air pollutant “emitted from a source category which regulated under section 112” of the Act. See id. at § 108(g); 104 Stat. 2399, 2467. Both of these limitations on EPA’s Section 111(d) authority are referred to below as the “Section 112 Exclusion.”

EPA Interpretation of Section 111(d)1

EPA makes two arguments in favor of its authority to regulate GHG emissions from existing EGUs under section 111(d). First, EPA argues the U.S. Supreme Court’s holding in American Electric Power Co. v. Connecticut, 1313 S. Ct. 2527, 2537–38 (2011), that “the Clean Air Act and the EPA actions it authorizes displaces any federal common law right to seek abatement of carbon-dioxide emissions form fossil fuel-fired power plants” was “premised on the Court’s understanding that section 111, including section 111(d), applies to carbon dioxide emissions from those sources.” See Legal Memorandum for Proposed Carbon Pollution Emission Guidelines for Existing Electric Utility Generating Units, U.S. Environmental Protection Agency (June 2, 2014) (Legal Memorandum), p. 21.

Second, EPA takes the position that the House and Senate versions of the section 112 Exclusion are inconsistent and ambiguous and, therefore, EPA may “reasonably construe the Section 112 Exclusion to authorize the regulation of GHGs under Section 111(d).” Legal Memorandum, p. 23. Relying on an earlier interpretation of section 111(d) that EPA asserts “give[s] some effect to both amendments,” EPA interprets the Section 112 Exclusion as follows: “Where a source category is regulated under Section 112, a section 111(d) standard of performance cannot be established to address any [Hazardous Air Pollutant] listed under Section 112(b) that may be emitted from that particular source category.” See Legal Memorandum, at pp. 26 (discussing 70 Fed. Reg. 15,994, 16,029–32 (Mar. 29, 2005)). Because “GHGs are not a [Hazardous Air Pollutant] regulated under section 112,” EPA concludes that the “Section 112 exclusion in section 111(d) does not apply to GHGs, and 111(d) does not preclude the EPA from establishing guidelines covering GHGs from EGUs.” Id. at p. 27.

Likely Challenges to EPA’s Interpretation of Section 111(d)

Both of EPA’s justifications for its authority to regulate GHGs under section 111(d) are vulnerable to challenge. First, EPA’s reliance on American Electric Power is arguably misplaced. EPA fails to acknowledge that the American Electric Power opinion also provides that “EPA may not employ § [111](d) if existing stationary sources of the pollutant in question are regulated under the national ambient air quality standard program, §§ [108–110], or the ‘hazardous air pollutants’ program, § [112].” American Electric Power, 1313 S. Ct. at 2537–38, n. 7 (citing 42 U.S.C. § 7411(d)(1)). Accordingly, the Court was relying on the House and U.S. Code version of section 111(d) in reaching its decision, not the Senate version. While the issue of the competing versions of section 111(d)(1) were not before the Court, American Electric Power does not support EPA’s authority to regulate GHGs from existing EGUs.

Second, even if EPA is correct that the differing House and Senate amendments to section 111(b)(1) make the statute ambiguous, EPA’s interpretation of section 111(d)(1) is arguably not a reasonable construction of the statute entitled to deference. See Chevron USA, Inc. v. Nat’l Res. Def. Council, Inc., 467 U.S. 837, 843, 104 S. Ct. 2778, 2782 (1984). Contrary to EPA’s assertion in the Legal Memorandum, EPA’s interpretation does not give effect to both the House and Senate versions of section 111(d)(1). Rather, the EPA’s interpretation effectively removes the House’s “source category” exclusion from section 111(d)(1) contrary to the intent of Congress. As explained below, the House amendment to section 111(d)(1) is consistent with the overall statutory scheme enacted under the 1990 CAA Amendments and was arguably intended by Congress to control over the clerical cross-reference correction contained in the Senate amendment.

The 1990 CAA Amendments significantly expanded EPA’s authority under the national emission standards program for existing sources to cover emissions “which present, or may present, through inhalation or other routes of exposure, a threat of adverse human health effects . . . or adverse environmental effects” and required EPA to issue national emissions standards that would maximize emissions reductions while considering costs. See CAA, §§ 112(b)(2) and (d). Previously, EPA’s authority to issue national emissions standards for existing sources was limited to extremely hazardous emissions. In addition, the standards were designed to provide an ample margin of safety rather than to maximize emissions reductions in consideration of costs.

The House and Senate took different approaches to balancing this expansion of the national emissions standards program against EPA’s authority under section 111(d) of the Act to mandate state standards for existing sources. The House amendment preserved the mandate program for emissions regulated nationally, but modified section 111(d) to prohibit the double-regulation of sources that were already regulated under section 112. See Senate Comm. on Environment and Public Works, 103d Congress, 1st Session, A Legislative History of the Clean Air Act Amendments of 1990 (Leg. Hist. for 1990 Clean Air Act Amendments) at 481 (Comm. Print 1993). Consistent with that change, the House Bill also included a provision, section 112(n)(1), that only required EPA to regulate EGUs under the section 112 if EPA determined it was “appropriate and necessary” to do so. Accordingly, the House bill allowed EPA to choose whether it would regulate EGUs under section 112 or prescribe state standards for that source category under section 111(d). In contrast, the Senate bill only altered section 111(d) by making a conforming change to that section’s reference to the expanded list of emissions included under the section 112 national emissions standard program. Id. at 588. This could have had the effect of eventually phasing out the section 111(d) mandate program as the list of emissions under section 112 expanded. The one exception was that the Senate bill required EPA to continue to regulate existing incinerators under section 111(d) rather than section 112 national emissions standard program. Id. at 593.

The final bill emerging from the Conference Committee arguably struck a balance in favor of the House amendment to section 111(d)(1). The House and Senate’s decision to provide EPA with discretion to elect whether or not to regulate power plants under section 112 and to specifically require that existing incinerators be regulated under section 111(d) is consistent with House’s “source category” approach to prevent double regulation of sources. Under the Senate amendment, EPA could not regulate “emissions” under section 111(d) that were listed under section 112, even for existing sources unregulated under the national emissions standards program. Accordingly, while the House amendment ensures coverage under one program or another, the Senate amendment to section 111(d)(1) could result in gaps in regulation.

Furthermore, it seems that the Senate amendment was only intended as a clerical change to correct the cross-reference to section 112 of the Act. In fact, the Senate amendment to section 111(d)(1) is included under a section of the 1990 CAA Amendments entitled “Conforming Changes.” See Leg. Hist. for 1990 Clean Air Act Amendments at 588. Given the more substantive changes to section 111(d)(1) under the House amendment, the clerical cross-reference update under the Senate amendment was unnecessary and arguably should not be given any effect.

EPA Authority beyond the Fence Line

Section 111(d) of the CAA requires EPA to establish a procedure whereby each state submits a plan that establishes “standards of performance” for existing sources for any air pollutant for which air quality criteria have not been issued. “Standard of performance” is defined as a standard for emissions of air pollutants that reflects the degree of emission limits achievable through the application of the “best system of emission reduction” (BSER), which, taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements, the administrator determines has been adequately demonstrated. EPA has interpreted BSER to mean the entire national electric grid. 79 Fed. Reg. 34,879–34,881. The current proposal relies on one building block that can be implemented within a stationary source, or within the fence line (Block One), and three that require actions by those beyond the fence line of the source.

The CAA does not define BSER. Thus, under Chevron USA, Inc. v. National Resources Defense Council, Inc., EPA’s interpretation is entitled to deference. That deference, however, has limits.

In Utility Air Regulatory Group v. EPA, 573 U.S. ____, 134 S. Ct. 2427 (2014), the Supreme Court discussed those limits. In that case the issue was EPA’s authority to require sources that emit only GHG to obtain a PSD or Title V permit. While answering that question, the Court also addressed examples of what it deemed to be EPA overreach.

First, the Court analyzed EPA’s authority to promulgate new GHG thresholds under the Tailoring Rule in lieu of the traditional PSD and Title V thresholds of 100 to 250 tons per year. The Court referred to EPA’s statements in the Tailoring Rule that using the original PSD thresholds would result in numerous smaller sources being swept into the PSD/Title V permitting program, 73 Fed. Reg. 4420, 44,498–44,499, and that without the Tailoring Rule such a result would constitute “an impermissible expansion of the EPA’s authority that would have a profound effect on virtually every sector of the economy and touch every household in the land.” 73 Fed. Reg. 44,355. The Court then summarized the Chevron deference standard as follows:

Even under Chevron’s deferential framework, agencies must operate within the bounds of reasonable interpretation, which in turn must account for both the specific context in which the language is used and the broader context of the statute as a whole.

134 S. Ct. at 2442. (Citing Robinson v. Shell Oil Co. 519 U.S. 333, 341 (1997)). An agency interpretation that is inconsistent with the design and structure of the statute as a whole does not merit deference. Id. The Court therefore invalidated EPA’s rewriting the PSD/Title V statutory threshold’s for GHG emissions.

Second, the Court outlined factors to be considered when evaluating the amount of deference given to EPA’s interpretation of a statute. The Court stated that EPA’s Tailoring Rule was also unreasonable because it would bring about an enormous and transformative expansion of EPA’s regulatory authority without clear congressional authorization. “When an agency claims to discover in a long-extant statute unheralded power to regulate a significant portion of the American economy, we typically greet its announcement with a measure of skepticism. We expect Congress to speak clearly if it wishes to assign to an agency decisions of vast economic and political significance.” 134 S. Ct. at 2442.

The Court concluded that EPA could not require sources that emit only GHG to obtain a PSD/Title V permit but EPA could require sources that already emitted criteria pollutants in excess of the traditional PSD/Title V thresholds to also obtain permits for GHG emissions. In doing so, however, the Court cautioned about possible EPA overreach:

We are not talking about extending EPA jurisdiction over millions of previously unregulated entities, but about moderately increasing the demands EPA (or a state permitting authority) can make of the entities already subject to its regulation . . . We acknowledge the potential for greenhouse gas BACT to lead to unreasonable and unanticipated degree of regulation, and our decision should not be taken as an endorsement of all aspects of EPA’s current approach, nor as a free reign for any future regulatory application of BACT in this distinct context.

134 S. Ct. at 2448.

Based upon UARG v. EPA, strong arguments can be made that EPA’s use of building blocks that require actions beyond the fence line of the EGUs is in excess of the authority granted EPA under the CAA, even if EPA is given Chevron deference.

The issue in UARG v. EPA was the scope of “Best Available Control Technology (BACT). BACT is the maximum degree of reduction of each pollutant subject to regulation that is “achievable through application of production processes and other methods, systems and techniques, including . . . innovative fuel combustion techniques” (emphasis added). CAA § 169. The term “systems” is also included in the definition of the “Maximum Available Achievable Controlled Technology” (MACT) standard in CAA § 112(d)(2). Thus, BACT, MACT, and BSER all utilize “system” in their definition. EPA has previously applied BACT and MACT standards to stationary sources by requiring actions within the fence lines. There is no reason why “systems” should be limited to actions within the fence line under BACT and MACT, while the same word justifies the expansion of EPA authority beyond the fence line to every user of electricity in the country under section 111(d). One ordinarily assumes “that identical words used in different parts of the same act are intended to have the same meaning.” 134 S. Ct. at 244. (Citing Envtl. Def. v. Duke Energy Corp., 549 U.S. 561, 574 (2007)). This also is demonstrated by the fact that EPA applied BSER to only require actions within the fence line under section 111(d) for such things as Sulfuric Acid Plants, 42 Fed. Reg. 55,796 (1977); Phosphate Fertilizer Plants, 42 Fed. Reg. 12,022 (1977), Primary Aluminum Plants, 45 Fed. Reg. 26,294 (1980), Kraft Pulp Plants, 44 Fed. Reg. 29,828 (1979), and Municipal Solid Waste Landfills, 61 Fed. Reg. 9905 (1996). Even when EPA allowed the use of emissions averaging between facilities such as Municipal Waste Combustors, 40 C.F.R. §§ 60.33, averaging was optional, unlike the defacto mandatory building blocks.

EPA justifies the different treatment of “system” in section 111(d) in part based upon the 1990 amendments to section 111(d). As originally enacted in 1970, section 111(d) referred to the “best system of emission reduction.” Public Law No. 91-604, § 4(a), 84 Stat. 1676, 1683. In 1977, section 111(d) was amended to read “best technological system of continuous emission reduction.” Public Law 95-95, Section 109(c)(1)(A), 91 Stat. 685, 699–700. In 1990, section 111(d) was again amended to reflect the language originally used in 1970. Public Law 101-549, § 403(a); 104 Stat. 2399, 2631. The issue is congressional intent in 1970 when the original BSER language was created and in 1990 when the original language was reinstated. Is EPA correct that Congress intended it to have the authority to regulate the entire electrical grid in the United States to include EGUs, alternative energy sources, and electricity consumers? Or is this a case where EPA is claiming unheralded power to regulate a significant portion of the American economy based on a long-extant statute, which was questioned in UARG v. EPA?

Finally, what happens if a state does not submit a plan or submits a plan that is not approved and EPA issues a federal plan for that state? Under this hypothetical, EPA clearly has the authority to require coal-fired EGUs to improve heat efficiency. Whether or not all EGUs can achieve a 6 percent improvement is a separate issue. The bigger question is whether EPA has the authority to directly (1) order coal-fired EGUs to reduce production and natural gas-fired EGUs to increase production in order to allow the redispatch from coal-fired EGUs to natural gas-fired EGUs, (2) order investment and construction of more renewable energy facilities, and (3) order business and residential consumers to reduce the use of electricity by 1.5 percent per year between 2020 and 2030. EPA’s attempt to directly enforce the Building Blocks is the type of “unprecedented expansion of EPA authority that would have a profound effect on virtually every sector of the economy and touch every household in the land,” which was condemned by the court in UARG v. EPA.

Phillip F. Fargotstein and Rhett A. Billingsley

Mr. Fargotstein is a shareholder at Fennemore Craig, P.C. in Phoenix and is the chair of the firm’s Regulatory Practice Section. Mr. Billingsley is a shareholder at Fennemore Craig, P.C. in Phoenix and member of the firm’s environmental and natural resources law practice group.