How does the utility industry plan to address the U.S. EPA's recent announcement of new mercury standards for coal – and oil-burning power plants? During today's OnPoint, Scott Segal, Director of the Electric Reliability Coordinating Council, explains how the rule will be challenged in the courts and in Congress. He also discusses why he believes some utilities are better prepared than others to meet the new standards.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Scott Segal, director of the Electric Reliability Coordinating Council. Scott, it's great to have you back on the show.
Scott Segal: Glad to be here.
Monica Trauzzi: Scott, EPA recently announced its final Utility MACT Rule, which will regulate mercury and other toxic emissions from coal and oil burning power plants. Some in the industry were lobbying for some changes to be made to the draft proposal. We didn't see a whole lot of change. Were you surprised by what came out in the final rule?
Scott Segal: I think the agency summed it up the best when their first talking point under changes was this rule is essentially the same as the rule we proposed. So, it's hard to say that industry was particularly successful in getting them to change the rule. The agency is to be congratulated on a couple of changes at the edges. For example, the mechanism for calculating particulate matter has been changed in the sense that we focus now on filtered particular matter and not on the total particulate matter, which also includes condensates that don't include the range of metals for which particulate matter is supposed to be a surrogate. Now, the flipside of that is this would have been the first rule ever that EPA used this particular definition of particulate matter and there was really no evidence in the administrative record that they could defend that proposition in court. So, we think they felt, for law and policy reasons, they were compelled to go in that direction.
There were other changes too, for example startup, shutdown and malfunction or SSM. This is a provision, as anybody knows who's ever started a car, you get a burst of additional emissions at the point at which the car starts. You can't use the same numeric levels that obtain for general operation to control for an extraordinary circumstance. The agency finally recognized that and said that normal working conditions and best operating -- you know, normal operating conditions can be utilized as a basis for regulating during those periods of startup and shutdown, whereas the numeric standards are reserved for general operations. Those are good changes, but if I had a list of 10 things they needed to do, those might have been eight and nine or nine and 10. So, it really isn't enough to make the rule what it needs to be in order to provide benefits without endangering job creation and also electric reliability.
Monica Trauzzi: Your view that this will cost the industry record amounts of money and raise electricity costs is not shared by everyone in the industry. In fact, many utilities have already taken to implementing changes so they can comply with these standards and many states have already put similar standards into effect. So why the disparity between what you're saying and what these other utilities are doing?
Scott Segal: Well, a few things to note. First of all, there's no such thing as a utility that has rested on its laurels and has not spent money on environmental compliance costs. In fact, one of the largest coal-fired utilities in the nation over the last say 20 years has spent $8.5 billion on Clean Air Act compliance. So, there's a whole lot of work that's been done, great work, on all sides of the divide over this rule. That said, different utilities have different business models. For some utilities the preference would be to increase what's called the clearing price of energy and to do so, very restrictive regulations on their competitors that may be coal-fired, has the effect of increasing that clearing price of energy, which essentially allows them to charge more for electricity without making any additional investment. This has been well covered in the media and is reflected in a lot of folk's quarterly earning calls, so it's pretty well accepted. It tends to be those utilities with that business model that want to see higher energy prices in order to be able to charge more that tend to be supportive of very restrictive or inflexible EPA regulations. On the other side of the divide are utilities whose growth model is based on basically expanding the pie. More folks that develop in an industrial context, more consumers that are able to use the product, electricity, the healthier those utilities are. So they have more of a growth model. And for those folks, the regulations really need to be cost-effective. It's not surprising that rent-seeking utilities, utilities that benefit from higher prices like this EPA rule, because it's a real expensive rule.
Monica Trauzzi: So, are you a minority then among the industry when it comes to your opinion on this rule?
Scott Segal: No, in fact, quite the opposite. I would say that probably 75 or 80 percent of utilities share the views that I've just espoused in whole or in part. It is the minority of utilities that want to run in the direction of potentially non-cost beneficial EPA regulations for competitive reasons.
Monica Trauzzi: Is there any evidence in the states that have already adopted similar rules that this does, in fact, cause economic harm?
Scott Segal: Well, you know, I'm not altogether certain. You'd have to go state by state. I do know that some of those states have some of the highest electricity costs in the country. Whether that's because of other market decisions that their electricity providers have made or because of a regulatory change or because of the cost of technology, I'm not expert enough in those particular regions to tell you. What I do know is this, when you look at a rapid change in the incumbent utility fleet, you see certain regions of the country, notably the industrial Midwest, the Southeast, that will be disproportionately impacted in terms of rate increases. And for those folks, we've seen estimates which are as high as 20 percent increases in those regions that are most heavily dependent on coal-fire power. And the horrible part about that is that those are some of the areas of the country which we have some of the best manufacturing assets in the entire United States. The South East attracting new manufacturing, the industrial Midwest historic manufacturing, those are industries which need affordable and reliable power. So it will have a disproportionate impact not just on consumers in those regions, but also on manufacturing jobs, which are some of the highest paying jobs in the country.
Monica Trauzzi: This is a +1 for Obama among environmentalists. Is it enough to get their vote in November?
Scott Segal: Well, a lot of my friends in the environmental community strike me as perpetually perturbed. So while they definitely like the outcome here, in fact, I was speaking with some of them only the other night and they were saying that this is probably not one they'll choose to litigate on, maybe intervene if there is litigation. I would not put the environmental community in the bank for the Obama administration, if only because there are so many, many issues where they are demanding so much of the administration. And if you were to agree with everything it would materially disrupt the U.S. economy.
Monica Trauzzi: So, the two ways to block this rule would be either through Congress or some kind of court action. Where do you see this going in the courts?
Scott Segal: Well, in the courts, you know, look, historically if you have any EPA regulation that exceeds a billion dollars, you know, you're likely going to find legal challenges to it. That's the history of the Clean Air Act. Here we have a rule that is 10 times that expensive, so it strains credulity to think that we won't have legal challenges associated with the rule. My anticipation would be that some in the regulated community will try and vindicate their legal rights with respect to this rule. The environmentalists will probably intervene on the side of the EPA and we'll have a pretty much similar dynamic as we do in a lot of air rules.
Monica Trauzzi: And in Congress there's already some talk about moving on blocking the rule, but it doesn't seem like anything can get done in this Congress. Does that have legs?
Scott Segal: Well, here's the situation. There was an announcement made by the Republican Senator Inhofe and other Republicans on the Senate Environment and Public Works Committee of an intention to file a petition under the Congressional Review Act to set aside the Utility MACT Rule once it is final and published. And so they'll likely do that as soon as possible. As you may recall, a similar effort was undertaken with respect to the Cross-State Air Pollution Rule and was not successful. There are some differences here. First of all, Utility MACT applies much more uniformly and is more costly than the CSAPR rule, so that's one big difference. And the second is that will be a different cast of players in charge of collecting votes. I believe this will be much more of a committee driven process, as opposed to one, in the case of CSAPR, that was run by Senator Rand Paul's office and that, you know, probably was not the most, you know, the most likely candidate to bring that kind of petition to the floor.
Monica Trauzzi: Are there signals that the administration might move to modify or delay the Cross-State Air Pollution Rule?
Scott Segal: Well, with respect to Cross-State, the thing that I think people are most interested in right now is looking at what the DC Circuit is likely to do on a stay motion. By the time this airs, we may have action. We likely will have action from the DC Circuit on that stay petition and, you know, a lot of people are trying to handicap it. It is difficult to get a stay, but, in this case, the case for a stay is very, very strong. For one thing, there will be a rule in place even if the DC Circuit decides to stay the rule, that would be the CATR rule, the Clean Air Interstate Rule -- Transport Rule will still remain in place. That's one item. The second item also is, with respect to administrative process, the addition for example of Texas very late in the game without any actual proposal, is probably suspect under both administrative law and the Clean Air Act. So, I think everyone's holding their breath and looking to see what will happen with respect to the stay petition. It's a better case than most for a stay petition.
Monica Trauzzi: All right, we'll end it there. Thank you for coming on the show, nice to see you.
Scott Segal: Great, good to see you.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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