In a significant and potentially precedent-setting action, EPA terminates the Clean Power Plan, narrows the scope of required controls to the regulated unit, and axes previously available compliance options.

By Stacey L. VanBelleghem and Robert A. Wyman

On June 19, 2019, the US Environmental Protection Agency (EPA) released its final Affordable Clean Energy (ACE) Rule to replace the Obama Administration’s Clean Power Plan (CPP). Both rules would regulate carbon dioxide (CO2) emissions from existing electric generating units (EGUs) pursuant to Section 111(d) of the Clean Air Act (CAA).[i] EPA made few changes from its 2018 proposal (summarized in this prior Latham post), with the notable exception of EPA’s decision to proceed with a separate rulemaking to finalize its proposed revisions to New Source Review (NSR) rules for power plants.

EPA Rulemakings

EPA’s recent notice announcing the final ACE Rule identifies three actions, which EPA characterizes as “separate and distinct rulemakings.”

First, EPA formally repeals the CPP, marking the end of a long path to reversal of that Obama Administration rule.

On March 28, 2017, Executive Order 13783 first directed EPA to reconsider the CPP to determine whether to suspend, revise, or rescind the rule.[ii] EPA initiated its formal review of the CPP on April 4, 2017, and published its proposal to repeal the CPP on October 16, 2017.[iii] EPA’s final rule adopts the legal analysis supporting the proposed repeal. EPA finds that the CPP exceeded EPA’s statutory authority, that Best System of Emission Reduction (BSER) is limited to systems that can be applied to an individual stationary source (to a “building, structure, facility, or installation” at that source), and that generation-shifting is inconsistent with EPA’s current legal interpretation. EPA bases these conclusions on the plain meaning of Section 111 and application of relevant terms from related CAA sections, on the broader statutory context of the CAA, on legislative history, and on policy considerations, such as avoiding a shift in the federal/state relationship or a conflict with the jurisdiction of other federal agencies.

Second, EPA finalizes the ACE Rule, which requires each state to establish its own standards of performance for affected EGUs.

The rule does not set a presumptive numeric emission limit, which some stakeholders requested. Rather, EPA’s final rule establishes heat rate improvements as the BSER for CO2 emissions from regulated EGUs and it finalizes the list of candidate measures (including technologies and operational changes) that EPA proposed last year. EPA’s final rule goes a step further than the proposal and also provides findings on the degree of emission reduction that EPA determines is achievable through these candidate measures. These findings are expressed as ranges of expected emissions reductions associated with each technology or operational change. The ACE Rule then calls on states to evaluate the BSER measures in relation to regulated EGUs within the state and to set standards based on unit-specific considerations.

Third, EPA updates the foundational implementing rules for existing source emissions guidelines under CAA Section 111(d), which were promulgated in 1975.

These changes to the implementing regulations are made prospectively and would govern future guidelines issued under Section 111(d) to regulate emissions from other sectors and, to some extent, ongoing emission guidelines already issued under Section 111(d).

While EPA chose not to include its proposed NSR reforms for power plants in this set of final rules, EPA indicated that it will finalize the proposed NSR reforms in a separate rulemaking at a later time. EPA notes that since it is finalizing the ACE Rule without the parallel NSR reforms, states may deem NSR to be a barrier to installation of certain of the identified technologies, such as blade path upgrades and redesigned/replaced economizers.

Key Takeaways

Stakeholders should be aware of the following six key points concerning EPA’s final rules.

  1. The ACE Rule prevents states from adopting market-based or flexible compliance mechanisms to satisfy the standards.

The final ACE Rule maintains the proposed requirement that compliance measures be implemented at the source itself. In the final rule, EPA expressly prohibits the averaging and trading of compliance instruments (i.e., emission reduction credits or allowances) between units.[iv] EPA concludes that averaging and trading across affected sources or between affected and non-affected sources is inconsistent with its interpretation of BSER as limited to measures taken at and by the affected source.

EPA’s final rule also requires state-adopted standards of performance to be expressed as an emission rate (i.e., amount of CO2 emitted per megawatt hour) — not as a mass-based standard. Finally, EPA makes certain statements in the notice implying that it may not approve state plans, to the extent that those plans include certain more stringent measures than those identified by EPA. While EPA does not prejudge whether or not it will approve state plans that are more stringent than EPA’s ACE Rule as a general matter, it notes that EPA’s review of state plan submissions will ensure that the plan does not include “measures that the EPA has no authority to approve or enforce as a matter of federal law.”

These aspects of the proposal appear to prevent states that have adopted a greenhouse gas (GHG) emissions trading program — such as the Regional Greenhouse Gas Initiative (RGGI) — from using compliance with that program as a standard under the ACE Rule. The practical implication is that individual units may have to make investments to comply with the ACE Rule in addition to participating in such a program. In certain instances, a unit may face inconsistent or even contradictory requirements.

Numerous commenters argued that EPA’s approach improperly conflates the BSER determination with a state’s implementation options. Such commenters noted that, as with many other CAA Title I programs, EPA can and should allow states flexibility to incorporate market-based mechanisms, given the broad authority Section 111(d) grants to states to design the compliance program. For example, the National Climate Coalition,[v] a Latham-facilitated, multi-industry coalition, submitted comments to EPA that outlined the legal and policy reasons EPA should preserve this state authority and allow states to use the full range of compliance flexibility mechanisms the CAA provides under Section 110 in state plans to implement the Section 111(d) standards. Aside from its implications for power-sector compliance, EPA’s prohibition of averaging and trading will almost certainly impede state use of cost-effective strategies if and when EPA regulates other source categories under Section 111(d).

  1. States will be writing standards and implementation plans on a blank slate without significant guideposts.

The final rule does not provide presumptively approvable standards or model plans. Rather, the final rule calls on states to set standards based on unit-specific considerations. While EPA has identified ranges of emissions reductions expected with the EPA-identified heat rate improvement measures, EPA notes that states’ unit-specific evaluation of heat rate improvement potential may reflect a value that falls outside of these ranges. The final rule also authorizes states to design custom compliance schedules for affected EGUs or EGU subcategories, with latitude to consider unit-specific factors. Therefore, each state will develop an implementation plan that includes distinct standards, compliance timelines, and implementation and enforcement provisions.

Because the final ACE Rule provides states with significant leeway with respect to both stringency and timing, the regulated community can anticipate substantial variation from state to state and from unit to unit within any given state. These decisions may affect rates and/or markets, as well pollutant emissions. Power companies — especially those managing multiple units within a state and/or multi-state portfolios — will need to plan for sustained engagement in the state administrative proceedings to ensure their interests are appropriately represented. In short, state regional energy and corporate planning will be handicapped by the absence of any nationally or regionally uniform benchmarks. Moreover, the variability may lead to legal challenges to state plans based on arguments of disparities or lack of uniformity in the treatment of regulated sources.

  1. Most sources will not have to comply with the new rule for a number of years.

EPA gives states discretion to establish tailored compliance deadlines for sources, noting the compliance deadline may be up to 24 months from the date of state plan submittal. Moreover, states may allow for compliance extending beyond 24 months based on source-specific factors, but the state plan must include “legally enforceable increments of progress” to achieve compliance.

From a practical perspective, given that the ACE Rule requires submission of state plans within three years of a final rule, this means that sources may have compliance deadlines of up to five years after the final rule (i.e., 2024 or later). These deadlines may extend even longer if states adopt legally enforceable increments of progress for the source, or if a state fails to submit an acceptable plan, such that EPA must develop a federal plan. EPA has also implemented this timeline in the final changes to the Section 111(d) implementing regulations that would govern CO2 rules under this CAA provision for other sectors. EPA explains that the timelines for action under Section 111(d) more closely align with timelines for state and federal plan deadlines under Section 110 of the CAA.

  1. The ACE Rule is limited to coal-fired power plants for now.

The ACE Rule only applies to coal-fired EGUs. EPA’s notice confirms that the final rule does not apply to integrated gasification combined cycle (IGCC) units, oil- or natural gas-fired utility boilers, or fossil fuel-fired stationary combustion turbines. EPA explains that it did not have adequate information to determine the BSER for these EGUs, but it may address GHG emissions from these units in a future rulemaking if it later obtains this information.

  1. The legal predicates for regulating GHGs under the CAA remain intact.

Critics of GHG regulation in the Obama Administration have taken issue with EPA’s 2009 finding that elevated concentrations of GHGs in the atmosphere may reasonably be anticipated to endanger public health and welfare of current and future generations. Nonetheless, the final rules do not revisit or reconsider that finding — which served as the basis for the CPP and other GHG regulations, and remains on the books. EPA’s notice for the final rules cites the finding as background and notes that it “is not at issue in this action.” EPA similarly does not re-open the CPP’s conclusion that EPA was required to regulate existing sources under CAA Section 111(d) because of its promulgation of standards under CAA Section 111(b). Although EPA has proposed to revise its Section 111(b) standards for CO2 emissions from new EGUs, EPA notes that the Section 111(b) rule continues to trigger applicability of Section 111(d).

  1. Litigation will dominate the landscape for the foreseeable future.

Opponents of the CPP sought judicial review of that rule in the US Court of Appeals for the D.C. Circuit in 2015. Those petitioners persuaded the Supreme Court to take the extraordinary action of staying implementation of the CPP, pending judicial review of the rule. The D.C. Circuit CPP challenge was fully briefed and argued before the court, en banc in 2016. However, prior to ruling on the petition, the D.C. Circuit held the CPP litigation in abeyance, pending EPA’s process to revisit the rulemaking.

The government will likely now seek dismissal of the CPP litigation as moot in light of the repeal and the replacement ACE Rule. But the litigation will certainly continue. Petitions for judicial review of the ACE Rule, CPP repeal, and revisions to the 111(d) implementing regulations must be filed in the D.C. Circuit within 60 days of the final rules’ publication in the Federal Register. Litigation involving EPA approval of individual state plans is likely to follow.

 

[i] EPA has also proposed a rule to regulate CO2 emissions from new EGUs under Section 111(b) of the CAA to replace the new source rule promulgated under the Obama Administration. See Latham’s December 11, 2018 overview of EPA’s proposal. EPA is expected to finalize that new source rule later this year.
[ii] For more information on Executive Order 13783, see Latham’s April 5, 2017 Client Alert, “President Trump Takes First Step on Long Road to Roll Back Climate Rules.”
[iii] For more information on EPA’s proposed rescission of the CPP, see Latham’s November 1, 2017 webcast presentation “EPA Takes First Step in Reversal of Clean Power Plan.”
[iv] While EPA initially proposed to allow emissions averaging only among affected EGUs within a single facility, the final ACE Rule even precludes compliance through averaging among units within a single plant because the final ACE Rule defines individual units as the “designated facility.”
[v] The National Climate Coalition is a multi-industry coalition that was formed in 2008 to provide input to EPA regarding GHG regulation under the Clean Air Act. Its members have included companies in the aerospace and electronics, automotive, cement, consumer products, electricity generation, manufacturing, oil refining, and renewable energy sectors.