MEXICO

SOUTHWEST POWER POOL

TEXAS

ENVIRONMENTAL MARKETSEMISSIONS

August 3, 2016

Court Stay of Regional Haze Rule Adds to Judicial Scrutiny of EPA AuthorityMultiple Lawsuits to Determine State versus Federal Primacy in Environmental Regulations

On July 15, 2016 the U.S. Court of Appeals for the Fifth Circuit granted a stay of the Environmen-tal Protection Agency’s (EPA) Regional Haze Rule for Texas and Oklahoma pending judicial review in State of Texas, et al. v. EPA, et al (Case: 16-60118). The court decision adds to the list of pending litigation against EPA, signifying increased judicial scrutiny of EPA authority.

JULY 15 U.S. COURT OF APPEALS STAY DECISION

BOTTOM LINE

The court found that petitioners showed a likelihood of success on the merits, as well as a threat of irreparable injury in the absence of a stay. Petitioners included:

State of Texas

Stateregulators

Powercompanies

Consumergroups

Steelmanufacturers

2

Sources: EnerKnol, EPA, ERCOT© EnerKnol Inc. 2016

EnerKnol connects you with comprehensive, real-time energy policy data from federal, regional, and state sources.

Visit enerknol.com to learn more!

Increased Judicial Scrutiny of Federal Agency ActionsThe State of Texas et al. v. EPA ruling adds to the list of legal actions against EPA. In previous instances, lawsuits over EPA rules have gone back and forth between the appellate and supreme courts with intervening remands to the agency for several years, thereby delaying implementation schedules. Recent court actions identifying legal flaws and granting motions for stay signal a new era of increased judicial scrutiny

Prompt Decisions NecessaryStates and state agencies will continue to reiterate the need for prompt decisions to facilitate compliance, as EPA requirements demand long lead times for infrastructure projects causing irreversible changes in energy markets and state policies, undermining the states’ ability to maintain or achieve their priorities.

1Regional Haze Rule 101

Petitioners’ Case

3Run-Up to the Lawsuit

6Duration of Federal Implementation Plan

8Legal Precedent: MATS

7Other Judicial Uncertainties

4Costs of Federal Implementation Plan

Passed in 1999, the Regional Haze Rule calls for state and federal agencies to improve visibility in 156 national parks and wilderness areas.

Under the rule, states must implement air quality plans to reduce visibility-impairing pollution, together with the EPA, the National Park Service, U.S. fish and Wildlife Service, the U.S. Forest Servide, and other parties.

The first state plans were due 2007. Comprehensive revisions are planned in 2018, 2028, and every 10 years thereafter.

01/2009

EPA finds 37 states have missed the deadline; triggers the 2-year

deadline for a federal implementation plan (FIP)

03/2009

Texas submits its SIP

2013

EPA partially disapproves

the SIP

2016

EPA issues FIP to replace

deficient portions in

SIP

2018

End of 2009-2018 compliance

window

2001

PM 2.5 monitors installed

2007

First deadline for state implemen-

tation plans (SIPs) for

2009-2018 period

2003 2006

EPA designates PM 2.5 areas as “nonattainment”, “attainment”, or ”unclassifiable”

1999

EPA issues final Regional

Haze Rule2years

In addition to imposing federal reasonable progress goals, the FIP sets sulfur dioxide emission limits on 15 generators in Texas. Petitioners contended that upgrades at the targeted power plants would cost up to $2 billion, resulting in plant closures and grid vulnerability, and that reopening affected plants would be expensive if the rule was ultimately rejected. According to the Electric Reliability Council of Texas (ERCOT), EPA’s haze rule would affect 3,000 MW to 8,500 MW of generating capacity in Texas. Petitioners argued that the FIP failed to adequately consider such costs.

The deadlines for EPA sought scrubber upgrades at eight facilities and retrofits at an additional seven facilities with installation deadlines of 2019 and 2021, producing no benefits in the current period (2009–2018). The Court agreed with the petitioners that EPA had no permission to impose the FIP which relied on outcomes outside of the 10-year regulatory window.

In June 2015, the Supreme Court identified a flaw in EPA’s rulemaking process for Mercury and Air Toxics Standards (MATS) rule, finding that the agency had failed to consider costs (Michigan v. EPA), remanding the regulation to the D.C. Circuit, which ruled that EPA could continue MATS enforcement while addressing cost requirements. Subsequently, in April, EPA issued a supplemental finding (in response to the Michigan v. EPA ruling), reaffirming that it was “appropriate and necessary” to regulate power plants after including cost considerations. While MATS compliance period had already begun and most regulated entities have invested significant capital for compliance, litigations signify the need to address overreach.

9Legislative Backlash

Legislative proposals have also sought to address EPA’s regulatory actions including bills that would have delayed or prohibited EPA actions. Among recent legislative proposals, H.R. 5668, the Transparency and Honesty in Energy Regulation Act of 2016 (THERA) would stop the use of the Social Cost of Carbon (SCC) and the Social Cost of Methane (SCM) in rulemaking. Industry groups, led by the American Energy Alliance, have expressed support for the bill citing flawed calculations to guide rulemaking processes.

5Reliability Concerns from Federal Implementation Plan

The electric grid in Texas, 90% of which is covered by ERCOT, has limited interconnections with the neighboring regions. According to ERCOT, the affected units would retire by 2021 due to upgrade costs. Given that the Federal Energy Regulatory Commission (FERC) was not involved in the rulemaking, the Court pointed out that EPA’s lack of expertise in grid reliability weakens deference to the Agency’s assertions, particularly when compared with ERCOT’s analysis.

Retrofit

Upgrade

Other

Requirements

<500<1000 <2000

Size of plant, MW

Monticello 1/2

Monticello 3

Martin Lake 1/2/3

Big Brown 1/2

Limestone 1/2DC South · 36 MW

DC North · 220 MW

DC East · 600 MW

DC Laredo · 100 MW

DC Railroad at McAllen · 150 MW

Sandow 4

Coleto Creek

San Miguel

ERCOT

90%

ERCOT’s share of electricity load in Texas

Source: ERCOT Source: ERCOT

Total DC connections: 1,106 MW,or 1.5% of

recorded peak demand

2018

End of 2009-2018 compliance

window

2018

End of 2009-2018 compliance

window

2019

Deadline for upgrades

2021

Deadline for retrofits

Clean Power Plan Methane RuleGoal: 32% lower CO2 emissionsTarget facilities: Power plants Target year: 2030Base year: 2005Status: Under judicial review

Goal: 40-45% lower CH4 emissionsTarget facilities: New sourcesTarget year: 2025Base year: 2012Status: Challenged in court

ERCOT’s January analysis suggests that compliance with the CPP and the regional haze FIP could result in the retirement of at least 4,700 MW of coal-fired capacity, with many of the retirements occurring before the start of CPP compliance in 2022. ERCOT expects the impacts of these changes to result in a retail energy price increase of 8-18 percent in 2030, without including potential transmission investments needed for compliance. The study raises concerns of reliability risks resulting from retirement of multiple units within a short timeframe. Many states opposing CPP as Texas depend on economic activity tied to coal and fossil fuel-based generation.

EPA’s methane rule issued in May is also being challenged, reiterating concerns over EPA overreach. The agency finalized rules for methane emissions from new, modified, and reconstructed oil and gas facilities, as well as initiated a rulemaking process for existing facilities as part of part of the 2013 Climate Action Plan to achieve 40-45 percent reduction in methane emissions by 2025 relative to 2012 levels. EPA estimates costs of $530 million and climate benefits of $690 million in 2025. However, in July, North Dakota sued EPA over the new rule, deeming it “arbitrary, capricious, an abuse of discretion and not in accordance with law."