Is the Obama administration's new carbon emissions proposal for existing power plants court-ready? During today's OnPoint, Roger Martella, a partner at Sidley Austin and a former general counsel at U.S. EPA, discusses the sections of the rule that could face legal challenges and weighs in on the agency's strategy in using a rate-based approach. He also talks about EPA's method for assigning individual state targets.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Roger Martella, a partner at Sidley Austin and a former general counsel at U.S. EPA. Roger, always great to have you on the show.
Roger Martella: Thank you, Monica. I'm happy to be here.
Monica Trauzzi: Roger, the Obama administration took a significant step on climate change yesterday with the introduction of the existing power plant regulations, highly anticipated. The top line is a 30 percent reduction in emissions by 2030 from 2005 levels. All along the agency has said that they would try to craft this rule, taking into account the various opinions of the stakeholders. Did they do a good job?
Roger Martella: Well, you're right. This is probably the most highly anticipated announcement from the Obama EPA, and I think actually one of the best-kept secrets as well, because we didn't really know about it until yesterday morning the details, and I think that there's two stories going on here, as is usual. On the one hand, the word that was probably used the most during Administrator McCarthy's presentation was "flexibility," and she kept her promise to give the states as much flexibility as possible. And from one perspective that's true. I think EPA's basically saying any way you want to reduce greenhouse gas emissions, we'll find a way to make it work. But what she didn't discuss as much as the other side of that coin, which is the numeric targets that EPA's set for individual states, now, I think 49 states, state-by-state numeric targets, so it's in some cases are extremely aggressive, not flexible, and EPA makes it very clear these will be mandatory, binding targets on these states.
Monica Trauzzi: So why the disparity between one state and the other? Why are some in the 20s in terms of percentage and some up near 60?
Roger Martella: EPA's applied a very complicated kind of four-factor formula, and from what we can tell, what it seems to do is bias against those states that have existing coal facilities but the potential for natural gas renewables and nuclear. And what EPA seems to be doing is saying when you have the potential for other types of energy, we're going to put the pressure on you to really phase out your coal and take advantage of that capacity that you have in those states.
Monica Trauzzi: And the 2005 marker is also significant. It's not as stringent as some had hoped.
Roger Martella: Depends on what state you're in. I think for many states the EPA would say, "We're giving you a head start. We're going back to an era where greenhouse gas emissions were higher than they are today, so we're giving that little leap forward." But for a state like Texas that because of the growth of its economy has actually seen greenhouse gas emissions increase over the years despite more efficiency, it's actually a significant setback for them. I think we're going to see Texas, as is not uncommon, be the state most adversely impacted by this. I'm hearing numbers of 52 to 60 percent reductions in greenhouse gases by 2030 because of the issue we talked about with the coal and the gas, as well as the base-line effect on it.
Monica Trauzzi: So the agency went for a rate-based approach as opposed to a mass-based approach. What do you think the reasoning was there?
Roger Martella: I think there's probably twofold. There's a technical reason and a political reason. On the technical side, I assume they decided that they could come up with a more uniform methodology on a rate-based approach and say, "We're going to apply a standard formula, come up with rates for each individual state, harder to do on a mass-based approach." I also think from a political perspective mass-based sounds more like cap and trade, and I have to imagine a couple months ahead of the midterm elections nobody wanted to be talking about cap and trade today. Having said that, EPA does put the option in for states that are already adopting a mass-based approach. They can switch over and do a conversion, but they don't make it mandatory.
Monica Trauzzi: And Administrator McCarthy specifically encouraged the idea of multi-state, market-based programs. Does this make the most sense for states at this point, to link in with others?
Roger Martella: Well, I think the winners today are California and the RGGI states. I'm sure California, which has A.B. 32, which just in the last 12 months adopted a new regulation that says, "We will allow other states to link with us" -- if you're a state that can participate with California, you're looking at this burdensome, 700-page regulation, and you're looking at the existing California system. It's probably going to be pretty tempting to say, "Well, maybe we should work with these guys, who've already figured it out."
Monica Trauzzi: Can the target be met with existing technologies?
Roger Martella: I think that for some states like Texas they're going to say that this was going to be definitely impossible to me shutting down the growth that they're already achieving. And even with existing technologies, EPA goes beyond that. They say in order to define how we're going to look at standards for coal and gas facilities, we're going to take into account the potential for renewable and nuclear energy in a state, as well as end-use demand. And so EPA's not even limiting itself to existing technologies. It's saying we're going to look at the full picture of how we can reduce greenhouse gas reductions beyond the fence line and across the entire energy infrastructure of a given state.
Monica Trauzzi: So let's talk about the legal aspects. This EPA has demonstrated the ability to craft rules, many would say, that are court-ready. This rule will most definitely be challenged in court. How legally defensible is it?
Roger Martella: Well, one of the things that surprised me, first of all, is that it will be challenged sooner than I might've predicted. We kept hearing the administrator refer to this as guidelines, but when you actually read it, it is a rule. It's a rule with mandatory obligations, which means when it is finalized in 2015 it will be capable of being challenged. Now, this is an area of the law that's kind of proverbial tabula rasa, that there has been no precedent on this provision, and EPA uses that to its advantage. It says directly in the rule that it has the ability to fill in gaps, and the courts will defer to it, but it is definitely pushing the envelope in a number of ways. There's inconsistencies in here between the new source rule, the existing source rule. It is for the first time allowing renewable energy and end-use energy efficiency to be a factor in setting a standard for coal and gas facilities, and some of the standard-setting we talked about like with Texas I think will be borderline arbitrary and capricious-type arguments we'll be seeing made, so it's going to raise a host of legal issues come next year, when no doubt this rule will be challenged.
Monica Trauzzi: So were you anticipating more consistency between the new source and existing source standards?
Roger Martella: I would've anticipated some kind of linkage between the two. Actually, if you search it, there's almost no reference to Section 111(b). The two stand on their own, and I think that itself is a legal risk. To me, I've always looked at the existing source rule as a subset of what EPA's trying to do in the new source rule, something that doesn't go as far. This actually goes much farther than a new source rule in terms of reach -- in a new source rule they say for coal facilities we're only going to look at coal facilities in setting the standard. For existing sources for coal facilities, they say, "We'll look at coal, gas, nuclear, renewable energy and end-use efficiency. And, by the way, we're not only going to hold coal operators liable; we're going to allow states to hold everyone else liable, including renewable energy providers, under the standard as well." So this is a much, much broader interpretation than even the new source rule was.
Monica Trauzzi: We now enter a period of comments and public hearings that are slated for this summer. What are the potential hurdles to reaching that June 2015 deadline?
Roger Martella: EPA's provided for a 120-day comment period, which I was happy to see. Traditionally they provide for less and you have to request extensions, so I appreciate the fact that they just came out and said, "We're going to give you 120 days." And we know that this is Mission Number One for the agency. They're going to probably have an unprecedented amount of comments filed. I'm sure they're gearing up or preparing for that, and if there's one priority for the agency, it's to meet the president's deadline of next June. No doubt Congress will throw some bumps in the road, and I think the midterm elections could play some impact in terms of how effective those bumps would be. I don't anticipate anything's going to stop them until after, perhaps, the midterm elections, but there's probably going to be a fair amount of oversight on this that could slow some things down.
Monica Trauzzi: Any surprises as you read through the proposed rule?
Roger Martella: I think the big surprises to me were saying it's a rule, not a guidance, which will subject it to legal challenges sooner. The portfolio standard provisions would say that we will allow states to hold the nonregulated industry responsible, so industries beyond coal and natural gas can be held legally liable for compliance with this rule and the state-specific standards, the fact that they're setting state standards based not just on coal emissions or fossil-fuel emissions but based on the broader renewable portfolio and end-use energy efficiency. That's really unprecedented.
Monica Trauzzi: Very interesting. We'll end it there. I appreciate your time. Thanks, Roger.
Roger Martella: Thank you, Monica.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
[End of Audio]