Last year, the Environmental Protection Agency cut the legs out from under the utility industry by issuing the Cross-State Air Pollution Rule (CSAPR), which puts new limits on sulfur dioxide and nitrogen oxide emissions from power plant smokestacks for 26 eastern states and Texas.
Last week, the EPA cut the utility industry's head off by announcing a proposed rule to regulate the amount of carbon dioxide any new power plant may emit to 1,000 pounds per megawatt-hour. This proposed rule effectively removes coal and some natural gas as an option going forward because the EPA reports that the average U.S. coal plant emits 2,249 pounds of carbon dioxide per megawatt-hour, compared with 1,135 pounds for a natural gas plant.
With the utility industry's legs and head about to be cut off, the issue has been defined by the Obama administration: it is keenly focused on hydrocarbons. The administration is caught in a minefield. The EPA doesn't have the flexibility that many believe it has. Numerous issues frame the EPA's policymaking, and some are stubbornly inflexible.
The environmental issue is carbon. Coal has too much of it, crude oil is defined by it, and natural gas has a lot of it, but it's the best of a bad lot.
The energy issue is the national need to produce safe, economical and reliable power. Electric power is the engine of the nation's economy. It runs everything: the banking system, national defense, transportation, security, water, building systems and even plug-in hybrids. The nation's infrastructure would collapse if the economy were denied access to economical electric power.
The equity issue is private investment in energy production. When investors put their money in long-term assets, such as power plants, they expect government policies will be stable enough as the investment plays out. If the government changes rules midstream without grandfathering existing assets, investors are wiped out. Policymakers sometimes forget investors include ratepayers.
The policy issue is cost regulation. In the EPA's new regulations, policymakers targeted the utility industry to bear the entire cost of reducing carbon emissions. Yet vast tons of carbon is produced by other industries, which the regulator seems to give a pass. If the regulator included the entire economy in its thinking, the cost burden on the utility industry would not have to be so severe.
The strategic issue is opportunity. The EPA's current approach appears to be a patchwork solution. It seems the EPA identifies a solution and then defines a problem. It identifies another solution and then defines a new problem. After a while, the nation is saddled with disjointed solutions solving unclear problems, as the nation's overall problem remains unresolved.
The legal issue is the Clean Air Act (CAA). In 2006, the EPA declined to regulate carbon dioxide and other greenhouse gases until it was sued by 12 states, three cities and 12 interest groups. In 2007, the U.S. Supreme Court issued a decision that forced the EPA to design and expand CAA regulations.
The political issue is Congress, not the EPA. Congress has the ability to preempt the Supreme Court's decision by modifying the CAA. The EPA's hands are tied; Congress and the Courts have forced it to regulate greenhouse gases, including carbon. Since Congress failed to act, the EPA has no option but to go forward with expanded regulations.
The practical issue is the public. When presented with the facts, polls suggest most Americans want clean air and want the EPA to regulate emissions. On the other hand, there are serious attempts by special interest groups to alter voters' views using controversial advertisements.
The business issue is also Congress. Most utility executives understand the nation's greenhouse gas challenge. They prefer Congress to set policy, not the EPA. They understand, absent direction from Congress, that the EPA must act.
Utilities have successfully stayed their executions; the EPA's regulations are on hold. Edison International (EIX), Southern Co. (SO) and approximately 35 other organizations filed federal suits to seek review of the EPA's CSAPR. If successful, these suits could delay implementation of the rule, but not kill it.
Delaying the EPA will help the nation's biggest emitters and give Congress more time to act. According to the EPA, the nation's top three emitters are all owned by Southern. The fourth is owned by Luminant, which in turn is owned by Kohlberg Kravis Roberts & Co. (KKR), Goldman Sachs (GS) and others. The fifth largest emitter is owned by Duke Energy (DUK).
The EPA's carbon rule is in the commenting stage, and will likely become regulation, unless Congress acts. And more regulations are in the EPA's pipeline.
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