CLEAN POWER PLAN

What consequences await states that 'just say no' to EPA carbon rule?

Power generators used to building U.S. EPA regulations into their plans are expected to be the key to meeting carbon emissions targets, particularly in states where governors refuse to comply with the Obama administration's upcoming rule.

The rule aimed at fighting climate change, which the White House may release as early as Monday, is expected to face a gauntlet of lawsuits and congressional opposition. Ahead of its release, White House Chief of Staff Denis McDonough yesterday touted the flexibility it provides states to craft plans that tackle power plant emissions from a variety of directions.

But the prospect that a number of governors will protest the Clean Power Plan rule by refusing to submit a state compliance plan will put greater onus on individual power plants to hit enforceable federal emissions targets, lawyers on both sides of the debate say.

EPA's backup plan for states that do not write a plan under the Clean Air Act to cut carbon emissions through 2030 -- referred to as a federal implementation plan (FIP) -- is widely expected to target electricity generators directly. Lawyers say that's the way the Clean Air Act typically works.

"If the state doesn't do that, EPA regulates, not the state, but the power plant -- the same as it does for acid rain or the mercury rule," said David Doniger, director of the climate and clean air program at the Natural Resources Defense Council.

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EPA sent its proposed federal implementation plan to the White House Office of Management and Budget for review July 2.

Environmental law experts theorize EPA's federal plan may assign targets to individual generators and allow them to either shut down or purchase credits for renewable energy and demand-side energy efficiency to offset their emissions and reach those goals. That could throw a wrench in the plans of governors and gubernatorial candidates -- including in Indiana, Kentucky, Louisiana, Oklahoma, Texas and Wisconsin -- who have either implied or said directly that they will not comply with the rule.

Two sides of the same coin

Advanced Energy Economy , a member group of green energy and technology companies, agrees with Doniger that EPA's FIP is likely to set standards on generators, not states.

"EPA has proposed to provide states the option of designing a plan that includes obligations on entities other than fossil fuel-fired EGUs [electric generating units] (a 'portfolio approach')," AEE said in a recent paper. "However, EPA's past regulatory actions suggest that, where EPA must impose a Federal Plan, it will impose emission reduction obligations solely on affected (electric generating units), rather than utilize such a portfolio approach."

Opposing attorneys, including Peter Glaser, who has written for the Federalist Society and represented coal mining interests, also argue EPA could only force power plants to run less, not direct states to implement sweeping energy overhauls to shift to natural gas and renewable power and more efficiently use electricity.

But the two sides diverge on what they think EPA could achieve with that approach.

Glaser and two other lawyers said in a Federalist Society report last fall that to achieve its state goals, EPA would have to order a hard limit on coal plant operations. Because EPA could not order other generators to run or demand that consumers consume less power, "EPA would leave it to the State to figure out how to replace the coal generation," the paper said.

The Federalist Society paper argues EPA would hesitate to order plants to go offline for fear of electric rate increases and grid reliability problems.

"If EPA dismisses these concerns and simply mandates that coal generators operate less, it takes the risk that other resources will not be available in the time frame needed to maintain grid reliability," it says. "If it is wrong and blackouts or brownouts ensue, EPA would be the cause."

That's why critics think EPA might set easier goals for states that are refusing to comply. Proponents of the "just say no" strategy say that because EPA lacks the legal authority to set up renewable energy or efficiency standards in states, it must confine any FIP to heat-rate improvements on site.

"A Building Block 1-only federal plan will not achieve the full CO2 performance goal for a state," said Matthew Larson, a utilities lawyer with Wilkinson Barker Knauer LLP in Denver. "If the entire four Building Block formula (i.e., the rate-based goal) is applied to each source individually, virtually no coal plant will be able to meet that emission standard."

Further, Larson said EPA's federal plan will "serve as a sign of how far EPA is willing to push its construction of its statutory authority."

"If EPA comes out with a federal plan that draws upon reductions from all four Building Blocks and goes 'outside the fence' of the source, this is a dramatic claim to the outer frontiers of possible EPA authority and would indicate that EPA, not state regulators, will be the electric planner for the nation," Larson said.

Kyle Danish, a utility sector lawyer at Van Ness Feldman LLP, dismissed the argument that EPA's FIP will be weaker than its final rule. He said he had asked EPA Administrator Gina McCarthy directly whether FIPs would require fewer reductions than the rule assigns to states and said her response was "the target's the target."

"I take her at her word," Danish said.

Daniel Selmi, a visiting scholar at Columbia Law School's Sabin Center for Climate Change Law, argued in a primer on the issue that EPA is also legally required to set the same state goals under an FIP.

Trading system as a federal plan?

Clean Power Plan opponents have also said EPA might not be able to handle the workload of writing multiple federal plans. But EPA is required under the Clean Air Act to adopt an FIP for a state that fails to submit an adequate plan, or the agency risks being sued by public interest groups, Selmi notes.

EPA could have a simpler option than writing customized state plans, though.

The Natural Resources Defense Council has long supported an FIP that would allow states or generators to meet targets by improving the efficiency of coal plants or acquiring credits for activities outside the power plant "fenceline." That idea has been gaining traction among other environmental advocates who say it's the model that is most legally defensible and makes the most sense for EPA's federal plan.

Jeff Holmstead, an industry lobbyist and partner at law firm Bracewell & Giuliani, and Doniger both say EPA could offer rate- or mass-based trading as two options when proposing a federal plan. Under a rate-based federal plan, generators would have to reach a certain rate by making plants more efficient or obtaining credits from others producing zero-carbon power or taking actions that offset greenhouse gas emissions. Under a mass-based federal plan, EPA could allow each generator a certain number of allowances toward an emissions count. They would need to purchase allowances to emit more.

"I think that it is likely that the federal plan will impose direct obligation on the generators rather than on the states themselves," Danish said. "The question will be if it is rate-based, what mechanism does EPA create to allow generators to acquire renewable energy and energy-efficiency credits they would need to meet those rate-based targets?"

AEE recommends EPA's federal plan set goals for generators and then allow them to purchase emission-reduction credits generated "by a wide array of advanced energy providers -- including zero- and low-emission generation resources and demand-side resources." AEE explored design principles for a rate-based plan, which it says would be more complicated than a mass-based plan.

A rate-based federal plan would require converting statewide emissions rate targets into electric generating unit targets, explained Matt Stanberry, AEE's vice president of market development.

With a rate- or mass-based plan, which would set a cap on emissions, EPA will need to play a role in deciding which projects and programs qualify under the rule and can be used to offset emissions of fossil-fuel generators.

The agency would also need to set up or condone a tracking system, Stanberry said.

"They have to find some sort of mechanisms by which the generators can acquire those sorts of credits without state policy," Danish explained.

Stanberry said that is doable, but Larson thinks a trading option "creates a number of significant questions at the state level, however, not the least of which is the need for state legislation to establish common trading currencies, measurement and verification processes, and other trading architecture."

"Trading has the apparent virtue of simplicity but will require an extensive institutional apparatus to actually be put in place and be effective," Larson said.

Even if states aren't ultimately in charge of whether their energy companies comply, they may want to consider the consequences of stepping back while EPA implements an FIP, Selmi said.

Selmi cautioned in his paper that an FIP imposed solely on power plants would be "far less flexible than state plans which choose to achieve the reductions by imposing legal constraints through a wider variety of measures not just limited to power plants."

"Furthermore, EPA certainly has less knowledge than states about the particular circumstances in which existing sources operate. Its lack of knowledge would result in an FIP that was less-informed, and probably more expensive, than a state plan would be," he said.

Reporter Jean Chemnick contributed.

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