EPA's Clean Air Rule Looks Doomed

 | Sep 19, 2011 | 2:00 PM EDT
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There is confusion about the new clean air rules that the Environmental Protection Agency (EPA) is implementing. On one side is the EPA, which is claiming there is adequate generating capacity and retiring a few old plants will not introduce any significant impact. On the side are power producers who warn of grave consequences if certain power plants are forced out of service.

When an industry comes out against a set of carefully developed federal rules, one normally questions the industry's motives. We automatically assume the industry is using the media to assert their position to push their agenda at the expense of others.

This is not the case with EPA's Cross-State Air Pollution Rule (CSAPR). The EPA claims the economic impact on the nation's grids will be de minimis. On a macro level, the EPA may be right. But the macro level does not separately analyze the nation's seven grids. At the grid level, the EPA is wrong.

In certain grids, like the Electric Reliability Council of Texas (ERCOT), Eastern PJM Interconnection (PJM) Southern New York ISO (NYISO) and ISO New England (ISONE), there is not enough power plant capacity. Suddenly removeinga couple of coal plants and two ugly events are guaranteed to occur: wholesale power prices will soar and some grids will be forced into rolling blackouts.

 This is not a theory. Even before the rule was implemented, and even while the nation was in a recession, several grids could not keep up with demand. Last winter, Texas was forced to import power from Mexico. Last summer, PJM declared an emergency and curtailed load. New York had the same experience. New England depends on Canada to make up for inadequate capacity.

Everyone seems to agree that EPA's CSAPR will cause some of ERCOT's base loaded power to retire early. Most plants slated for retirement are fuelled by lignite, an abundant low-grade form of coal. Contrary to EPA's analysis, retiring these low-cost producers will impact ERCOT.

 Apparently, the Federal Energy Regulatory Commission (FERC) agrees. According to Politico, FERC warned Congressional lawmakers that EPA's air and water regulations could harm the reliability of the nation's electricity supply. They not only warned about the potential economic "chaos" resulting from the new rules, the FERC also warned that EPA's rules could force power providers into the untenable choice of violating either environmental laws or FERC-approved reliability standards.

With inconsistent public policy thrown at the industry, it becomes clear some grownups need to get into the conversation. A simple resolution is to kill CSAPR, which is what Sen. Rand Paul, R-Ky., plans. He will use the Congressional Review Act, which allows Congress to veto a recently issued agency rule, guarantees a floor vote, and does not allow a filibuster. The Senator would need only 51 votes for his measure, rather than the 60 that has become business-as-usual in the upper chamber.

While EPA's objectives are framed by Congress, it would seem Washington might consider some of the grandfather rules used by other regulatory agencies. The grandfather rule essentially says that any facility built before a new rule is promulgated is immune from any subsequent regulations.

If the Senate is successful in curbing this rule, two winners will be Luminant and the Southern Company (SO). Luminant is the largest power generating company in Texas and is owned by private equity firms KKR (KKR), TPG Capital and Goldman Sachs (GS). Luminant announced that if CSAPR is implemented, they would idle two coal-fired power plants, will end lignite mining in Central Texas and cut 500 jobs.

The ultimate outcome for Southern will depend on each state where the company has generating capacity and the legal challenges currently before the Senate. Southern will not commit to any forecast until all the legal challenges are concluded.

The EPA clearly miscalculated the impact of their rules. Not only will the Senate attempt to override it, the House plans to get into the action as well. This Friday the House is expected to vote on the TRAIN Act. The bill, which will likely pass, would require an interagency committee to analyze the cumulative effects of EPA rules and would delay two EPA rules aimed at cutting power plant pollution. By hook or by crook, CSAPR appears to be doomed.

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