The EPA released the final Affordable Clean Energy (ACE) Rule in June 2019. The ACE Rule replaces the 2015 Clean Power Plan and establishes emissions guidelines for states to utilize when crafting plans to limit carbon dioxide at existing coal-fired power plants. Our panelists will discuss how the ACE Rule differs from the Clean Power Plan in terms of statutory construction, delegation of authority and flexibility to the states. Discussion will include anticipated legal challenges as well as judicial review timelines.
Michael J. Nasi, Partner, Jackson Walker (Austin)
Thomas A. Lorenzen, Partner, Crowell & Moring (Washington, D.C.)
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Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Environmental Law & Property Rights Practice Group, was recorded on Tuesday, August 6, 2019, during a live teleforum conference call held exclusively for Federalist Society members.
Wesley Hodges: Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is on the Affordable Clean Energy Rule, or ACE. My name is Wesley Hodges, and I am the Associate Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the experts on today's call.
Today we are very fortunate to have with us Mr. Michael Nasi, who is a Partner at Jackson Walker in Austin, Texas. Also with us is Tom Lorenzen, who is a Partner at Crowell & Moring here in Washington D.C. After our speakers give their remarks, we will move to an audience Q&A, so please keep in mind what questions you have for this subject, or for one or both of our speakers. Thank you very much for sharing with us today. Tom, I believe the floor is yours to begin.
Thomas Lorenzen: Thank you so much. Good afternoon, everybody. I'm Tom Lorenzen with Crowell & Moring here in D.C. Those of you who followed the Clean Power Plan litigation may remember me as one of the lawyers who argued for industry and the states in opposition to the Clean Power Plan during that marathon seven-and-a-half-hour en banc hearing before the D.C. Circuit back in September of 2016.
What I am going to go over today is, I hope, going to be brief. And I want to give you, during my brief time, an overview of what's in the Affordable Clean Energy Rule. We'll talk about three elements of it: first, the repeal of the Clean Power Plan; second, EPA's determination of the statutorily required best system of emission reduction; and third, the implementation rules that EPA has promulgated, not only to apply to this particular Section 111 rulemaking, but to Section 111(d) rulemakings more generally. And then finally, to the extent there is time, we'll discuss the current status of the Clean Power Plan and the anticipated litigation schedule for the Affordable Clean Energy Rule before I turn it over to Michal Nasi to discuss state implementation matters.
So let's dig in. As I said, the rule does three things. The first of those is it formally repeals the Clean Power Plan. And it's interesting to note that it does so based on EPA's determination that the statutory language best system of emission reduction, or more specifically, application of the best system of emission reduction, cannot apply to outside the fenceline measures like generations shifting. And you may recall that generation shifting was really the core of the Clean Power Plan. Now, EPA takes a very bold move here in the Affordable Clean Energy Rule and it repeals the Clean Power Plan based on a Chevron Step One analysis that the clear language of the statute read in context supports only this very narrow reading of EPA's authority under Section 111 that it can only implement measures that are inside the fenceline and that are based on continuous systems of emission reduction.
It is bold because, to prevail on that, EPA will need to get the D.C. Circuit and, eventually, the Supreme Court to agree that this is the only possible reading of the Clean Power -- pardon me, not of the Clean Power Plan, but of Section 111. If the Court concludes that the statute is not clear on its face, then there is a question about what happens next. And there is some debate about whether the Court would remand the rule to the agency to reevaluate what it would do if the statute were determined to be ambiguous or whether it would vacate the rule. And I'm not going to give you an answer to that because that is a battle that the lawyers will have out during the litigation, if it ever comes to that.
Let's turn to the rule itself, the Affordable Clean Energy Rule, and the first component of that, which is the definition of the best system of emission reduction. And EPA's determination of that permissible BSER, as we recall it, is constrained by its Chevron Step One reading of Section 111. Under that reading, the Clean Air Act expressly limits the BSER to systems that can be applied at and to a particular statutory source. Second, it limits the BSER to systems of emission reduction that result in continuous emission reductions at the source. And these all have some implications which we'll discuss. Third, the BSER elements must each have been adequately demonstrated for use by the regulated units. And then fourth, the BSER elements must each have been demonstrated to be broadly achievable for a source category nationwide. So a BSER element that might be useable in one region of the country but not in others would not, according to BSER, or EPA's definition of BSER, be a permissible component of BSER.
So under this, what's in and what's out? Principle one, as you'll recall, was that the systems must be something that can be applied at and to a stationary source. So heat rate improvements, which are really the core of the BSER requirements under the ACE rule, are okay because those are applied at and to the specific source. Averaging or trading across units is not permissible because those sorts of measures look beyond the fenceline to emission reductions that are achieved somewhere else. So too, biomass co-firing, which is advocated by some as a BSER measure, is not permissible because it achieves its emission reductions elsewhere, namely, where that biomass is obtained from, so it too is prohibited as a BSER measure.
Principle two: systems that result in continuous emission reductions at the source. This sounds like it's a bit technical, but it's actually quite important. Under this principle, technological or operational measures that reduce emissions while not requiring reduction in utilization of the unit are really the only permissible sorts of systems of emission reduction.
If your element is something that requires the shuttering or reduction in utilization of a unit in order to meet the standard, it is not permissible because shuttering or reduction utilizations are not continuous emission reductions. So you are focusing on the hourly rate of emissions, not on whether you ramp production up and down. By the same token, averaging and trading across units is not permissible under principle two for the same reasons, that it mainly results in emission reductions only because you are ramping emission in generation up and down at units.
Third principle: the BSER elements must be adequately demonstrated. So carbon capture and sequestration, partial carbon capture and sequestration, have not been demonstrated adequately for commercial use, so they're not part of the BSER. Note, however, that utilities may choose to use those things as a compliance measure if they can actually do so. So while it can't be required by EPA nationwide, if someone wants to use those as a measure to comply, they can do so because use of CCS or partial CCS actually does result in continuous emission reductions at the particular unit.
Principle four: the elements must be broadly achievable for a source category nationwide. Consequence of this is, for instance, you cannot do co-firing. And that is due to costs and other factors that may vary across the nation. Like CCS, however, if you can show that you can actually use co-firing, then you may use it as a compliance measure. Repowering a unit, say, converting it from a coal unit to a natural gas unit is out because EPA has determined that this redefines the source, thereby creating a new source. And EPA is not willing to use Section 111(d) to effectively require the creation of a new source.
So a few final thoughts on the BSER. The BSER that EPA has defined is based on a Chevron Step One analysis. EPA does not offer in any portion of the rule an alternative Step Two analysis under which it would determine BSER to be similarly limited, even were the statute ambiguous. This creates some risk for the rule because if the D.C. Circuit rejects EPA's Step One argument and concludes the statue is ambiguous, the Court then cannot uphold the BSER based on the Court's own conclusions that EPA's reading of the statute is reasonable. Instead, it would have to remand to EPA and ask EPA to examine, on its own, whether EPA would espouse that reading of the statute in light of the ambiguities.
Because the BSER determination that EPA has made is based on the same Chevron Step One analysis that underlies the repeal of the Clean Power Plan, the two elements of the rule are not actually severable from one another, despite what EPA says in the rule. And that's because a finding by the Court that the statute is ambiguous and not clear on its face will inevitably result in the invalidation of both portions of the rule since they are inextricably intertwined. EPA is well aware of that risk, but they have determined to swing for the fences on this in the specific hope of getting a court, probably the Supreme Court, to buy into this argument and thereby prevent future administrations from requiring generation shifting or reduced utilization in a future Section 111(d) rule.
Let's talk very briefly about implementation, I will say pretty much this and only this about them. In the general implementing regulations for Section 111(d), EPA has made it very clear that the states have the principle role in establishing the standards of performance for individual existing units in the source category. The new regs make that division of authority clear. The other thing that they do is they conform the timelines for the preparation of state plans and for the implementation of those state plans with the less stringent timelines that apply more generally to submission of state plans under Section 110, basically the SIP provisions of the act that apply to national ambient air quality standards. Mike will probably talk about this more as we get into state implementation.
And then, finally, what's likely to happen in the courts at this point? There are two things that you should keep your eyes on. The first is that there are still pending challenges to the Clean Power Plan three years after the oral argument was held. Those have been held in abeyance while EPA reconsiders the rule. We believe that with the promulgation of the final ACE rule and the repeal of the Clean Power Plan, those existing challenges have been mooted. There is no longer an Article III case or controversy for the Court to resolve, and we, the challengers of the Clean Power Plan, have moved to dismiss those challenges as moot.
Sort of curiously, the environmental groups and some of the blue states who supported the Clean Power Plan have opposed that motion to dismiss, saying that if the Clean Power Plan springs back to life, this is really the only way to ensure that a case can still move forward. That's sort of odd for the proponents of the Clean Power Plan to be urging that, but we suspect what is going on there, really, is that they want to consolidate these challenges to the ACE rule with the underlying challenges to the Clean Power Plan in order, potentially, to force Justice Kavanaugh to recuse himself from the case. I don't think they will be successful in that effort, but bear in mind that that is out there.
As for the ACE rule itself, no stay motions have yet been filed on the ACE rule. The window for filing petitions for review does not close until early September. The Court has already postponed further procedural deadlines in the few existing challenges to the ACE rule pending the closure of that filing window. Once that window has passed in the fall, the parties will engage with one another about briefing proposals, timelines, formats, and then we're off to the races with merits briefing.
I think at best, we're probably talking about a decision from the D.C. Circuit by summer of next year, and that's a fairly ambitious schedule. And that, I think, raises perhaps one of the critical issues that people should be thinking about is what happens after that decision issues because we are then hard up against the November election. Whether the case will then proceed to the Supreme Court is probably going to be dictated by who prevails in that November election, just as it determined the future of the Clean Power Plan.
And with that, I'll conclude my remarks and await questions. I think at this point, Michael Nasi.
Michael Nasi: Great job, Tom. It's my pleasure to work with Tom in the context of litigation on the Clean Power Plan, and we both do a lot of work with cooperatives. I also have heavy involvement in state implementation plan development in multiple states, and I'm orchestrating some discussions among states and with different affected entities about the potential benefits of early state implementation, and I'll make comment about that a little bit later.
But let me just start at the highest level with some things that obviously impact state implementation. The timelines that the EPA has provided for states to submit plans and for EPA to review and approve those plans, and for compliance to ultimately be established are quite extended. That was actually something that was a subject to comment in the comment period to make sure that sufficient time was provided in those states that needed it. So it is paradoxical, I know, to suggest to you that we might actually encourage early implementation when we certainly wanted flexibility to have more time, but there's a reason for that, and I'll explain that later.
The basic rules of the game as established in the final rule are that states have three years from the final publication in the federal register, which was July 8. And so once they actually submit a plan, EPA has six months to make a completeness determination, and they have twelve months after the completeness determination to approve or disapprove of the plan. Unit compliance, the compliance requirements, the ultimate hammer in terms of establishing compliance with the approved state plan, interestingly, does not come from the EPA approval.
It is stemmed from the submission of the state plan because if you think about it logically, when a state plan is submitted, it is establishing new state requirements. One of the provision's requirements prerequisites of the state plan is that it's enforceable, so whether it be in the form of new regulatory provisions, permit provisions, or agreed orders—and I'll explain that later—those become potentially immediately effective as a matter of state law. But certainly, twenty-four months from the submittal of the state plan, unit compliance is expected. So that's an interesting wrinkle in case folks hadn't paid attention to that.
I won't go on too long about all the various highly technical things that go into state plan development, but I'll make a couple of general observations about the process and then focus on some explicit things EPA said about state implementation. The general observations I'll make is that some of what Tom has mentioned, has said implies this -- and to be really clear, one of the outcomes of the final rule and certainly was signaled in the proposed rule, is that this rule is a huge shift to a more state-controlled process, one that empowers states to do under 111 that I would submit the statutory framework is much more consistent with, and that is that states are going to be developing site-specific emission guidelines, emission limits, and they are going to have a significant amount of flexibility in doing so. There a couple of levers that EPA has thrown under 111, and I'll discuss those.
The other general principle that I'd note is that states are somewhat restricted in how flexible they can be in terms of compliance, and maybe in a good way, depending on how you look at it. As Tom mentioned, because of the way they articulated BSER, they've also articulated that there's certain compliance mechanisms that are off the table, inter- and intra-state trading, inter- and intra-site trading. You can't just prematurely retire a unit to secure compliance. So all those things obviously impact how a state develops its plan, and states are given a roadmap by EPA to go through a BSER candidate technology evaluation to ultimately derive site-specific standards for those units.
I'm going to hit upon a couple of high-level things regarding their flexibility. Most of the flexibility that a state derives in doing these programs or developing their plans comes from a component of Section 111 that references the ability for that requirement to take into consideration, among other factors, the remaining useful life of the existing source to which such standard applies. That comes directly out of 111(d)(1) of the Clean Air Act. And EPA has, in this rulemaking, articulated some guidance as to what those things are, both the remaining useful life consideration and the other factors.
While it certainly preserves the states' flexibility to make some decisions in the gray area, it's also articulated some guidance that will guide states. It has identified three items in the final rule under 60.24(a)(e) to put some meat on the bone of what "other factors" means. One is the unreasonable cost of control resulting from plant age location or basic process design. The second is physical impossibility of installing necessary control equipment. And the third is other factors specific to the industry or -- sorry, to the facility or class of facilities that make application of a less stringent standard or final compliance time significantly more reasonable.
So you see, they're not totally open ended but very broad considerations that can be factored in when a state is developing a standard. And in fact, one could contemplate that several facilities across the country in each of these states will have the ability to demonstrate that these factors really do lean toward a significantly more flexible and less stringent standard than would otherwise be imposed by strictly evaluating BSER to be applied at the facility.
EPA, in the preamble to the final rule, does provide some good guidance. And I would just not read to you the whole section, but I would direct you to page 32554 of the preamble for some fairly detailed discussions of what other factors and how other factors can be implemented at the state. As a matter of just reference for you being on the phone, I'll give you that citation. Many of you may already be well aware of it, but I'm not going to read that language. But there's certainly some guidance given, and that's true as well of the remaining useful life aspect. In fact, there's some hypothetical discussions about remaining useful life that are worthy of some attention if you're trying to project how a state might implement this rule at the site-specific level and if you're looking for ways to talk to your state about how they might implement it.
A couple of other flexibility mechanisms that are worth noting is the EPA has directly empowered the states to factor in some flexibility in terms of averaging of their compliance requirement. In other words, for those of you who do a lot of air quality or any environmental regulatory work, you know that many times, the period during which you're averaging your compliance with the stated limit is almost as important as the limit itself. And one of the big issues, as you all probably are aware, in the electricity fleet as it relates to CO2 emissions and heat rates generally is the more the unit is cycling up and down to follow load, to follow the demands of the grid, and given the increased penetration of renewable energy in electricity markets that tends to flood and then to deprive markets of electricity such that thermal units like coal plants are often reduced to a load following mechanism, one that they maybe aren't necessarily designed for, one of the consequences of that kind of cycling is less efficient operations.
So EPA has expressly addressed that really frankly in response to a lot of comments. Tom and I were involved in development of comments like that on behalf of the co-ops, for example, that have a lot of data that indicates that that can be a complexity that needs to be addressed in this rule that units should not be subject to averaging time periods that do not contemplate that the unit will cycle. They need to have flexibility. The averaging timelines need to be long enough to allow units to kind of bracket that cyclical nature of their dispatch.
So it's conceivable, and I think EPA's explicitly stated -- and there you can find at page 32559 a discussion of what that might look like. Certainly multi-seasonal, because seasonal operation can be very different, both in terms of the atmospheric barometric weather related impacts on the facility itself and its emissions, but also on the needs of the grid and how much power is needed can influence the amount of dispatch of that unit and how much it will or will not be load following, and therefore how much it will or will not be impacted in terms of its efficiency and ability to comply with a pound per megawatt-hour CO2 limit consistently. So multi-year averaging is actually something that seems very much on the table for potential state flexibility.
Obviously, bracketing always, states are going to have to show that they meet the requirements of the Clean Air Act in terms of Section 111's expectations that these programs have a system in place where compliance with the standard can be demonstrated and where the compliance -- where the standard itself is clearly enforceable. So always a difficult balance when you're developing a state plan to maximize flexibility but don't trip the wires of making it look like the flexibility has swallowed the basic requirements of the program to be both enforceable and for compliance to be demonstrated in a consistent way.
Related to averaging, but a different issue, certainly was the subject of many comments and a significant discussion by EPA at 32552 of their preamble, is the need to factor in what the operating parameters of the facility will be for compliance testing. Compliance testing is an element of most 111 programs. EPA considered but did not embrace the concept that just basic operation and maintenance, O&M, would be the method of compliance here. They said, "No, we're going to have the states derive emission standards, site-specific standards, rate-based standards that will be enforceable, but we're going to allow the states to develop not only an averaging period that would be appropriate, given the circumstances and the loading characteristics of the plant, but also a compliance testing regime." Even though they're going to require compliance testing, they're giving states the ability to have some flexibility about how frequently and under what parameters.
And what that really means, to decode it a little bit, is are you going to test a facility, and in the first instance, are you going to derive the standard based on a fully loaded power plant? In other words, operating at its full capacity where it's most likely to be the most efficient, or are you going to actually have tiered or a sliding scale of emission limits based on what load cycle they're engaged in? They contemplate that that could be an option that the states want to deploy. Very tricky there, some complex work for states to do if they're going to follow that.
A simple approach would probably be for states, and you'll see this probably in many states, to simply say, "Listen, we're going to test these facilities at full load, and we're going to give them the ability to identify the time frame during the year when that's most likely. And we're going to set our emission limit on that basis."
Now, there will be pushback and there will be debate about, well, wait a second, if they're going to be operating a less than full load, they're going to have a different CO2 emission profile, so is it a better approach to actually have different tiers or a sliding scale of both an emission limit and compliance testing against those limits? So probably some of the most tricky work to be done by states, frankly, in making decisions about that kind of thing.
And close here with a couple of observations about just programmatic development of the state plans. I think everybody who's been familiar with SIPs generally understands that these are documents that are compiled by the state regulatory agency and generally signed off by the chief legal official of the state as being enforceable as a matter of state law. And so they can be regulatory provisions much like the CFR provisions on the federal level. They can be a combination of regulatory provisions and permit conditions applicable at the site level. Or they can also contemplate the incorporation by reference of agreed order for voluntary enforcement provisions, for lack of a better word. You see a lot of that activity in regional haze type plan development.
EPA did, by the way, in the final rule, make it clear that agreed orders, permit provisions and such, are the kinds of things that could be considered as part of the state plan. You see that discussion at 60.27(a)(g)(2), the actual final rule. And that's not a surprise. That's really a clarification, not a change. The states have that ability, and that'll be a programmatic decision states will be making. Are they going to rely upon agreed orders in permits in lieu of broadly applicable regulatory provisions, or some combination of the two?
And then the other thing I'd say about state plan development is that the states, in order to do many of the things that I just talked about, are going to need to know an awful lot about the units that they're going to be subjecting to this plan. So there will be a front-end process of collecting information. And I would expect to see a significant reliance upon the facilities themselves to derive information and even third party contractors because understanding the CO2 emissions and heat rate characteristics of each unit during different loading cycles, understanding what has and has not been installed already from among the list of candidate technologies, and what the long-term durability of those installations might be, and what the expected remaining useful life of the facility is are all factors that are going to need to be loaded in.
And I guess the general watchword I would say is states have a significant amount of work to do. And for those that are looking to try to implement sooner rather than later, they need to get cranking right away. And I know several states are actually already ramping up their process. And depending on how many power plants a given state has to go through, we'll see plans getting developed and submitted to EPA on different time frames because it'll simply just take longer in some states because they'll have more to do and the complexity might be a little higher, whereas in other states that maybe have a smaller fleet of plants to deal with and might be able to expedite implementation a little sooner.
So that's probably more than enough detail about state plan implementation. Again, I hit a lot of high points there. There's a lot more details and technical discussion that can be had, but I think I'd rather leave this for Q&A.
And I'll make one other observation that's state related, much in the way that Tom did, about the litigation. Obviously, in a situation where 27 states litigated against the Clean Power Plan, it is a very interesting time indeed where you have a replacement rule that is what most people asked for in terms of having a 111 rule that stays inside the fence, having a Chevron Step One analysis that would tie a future administration's hands to vary from such an interpretation if, in fact, it can be affirmed before a change in administration, which is the significant timing issue that Tom flagged. But there are states that, and there are members of industry that have articulated -- and I would think that The Federalist Society is a pretty good audience for the statutory construction arguments that have been offered about 111 and about whether regulation under 111 is appropriate for this source category.
One significant thing that is out there as a to-be-determined item is that EPA, in a footnote known as Footnote 25 of the proposed rule, flagged this issue of in order to regulate under 111, the agency needs a 111(b) new source, new and modified source rule. That rule has been proposed to be, or is being, revisited by EPA in a separate docket. EPA needs a final and legal 111(b) rule in place in order to have a 111(d) ACE rule. So right now, it's resting its statutory prerequisite on the Obama era 111(b) rule but has noted in its final rule here, in its proposal, that it's revisiting that rule. What will it do in the final 111(b) rule? Will it conclude that, in fact, it needs to make a source category specific endangerment finding?
I'm not going to go in the details of that legal issue, but for those of you who are familiar with it, you'll know the issue well that they're about to release a methane rule regarding upstream oil and gas operations where they may well conclude that, yes, they actually do need to make source category specific endangerment findings, and that in that rule they may conclude that there is not a significant contribution to endangerment from that source category. Would they make the same finding for power plants?
They clearly have chosen not to go forward with that approach, and they've moved forward with an ACE rule. But what will they do long-term strategically with the 111(b) rule is a very significant question because for those of you who don't know the issue, the standard for evaluating whether or not there's adequate endangerment coming from greenhouse gasses, or in this case, CO2, to the ultimate endangerment of public heath and welfare, the standard that was used in the 2009 endangerment finding, known as the tailpipe endangerment finding, was under Section 202 of the Clean Air Act, which has a standard that reads that the administrator must determine that the pool of emissions, in that case, tailpipe emissions, cause or contribute to endangerment, whereas in 111, if the EPA determines that they are required under the statutory construction of 111(b)(1)(a) to make a source category finding under 111, that standard is that the administrator must determine that the source category is contributing significantly to endangerment. Lots of different arguments.
Historically, the EPA's interpretation of that provision is that they are not required to make a source category specific finding if they have previously listed the source category, in this case, power plants back in the 70s, for particulate matter and sulfur and other emissions. The argument has been proffered in the comment period and even in the litigation that that's an overly broad construction and would give the agency a very broad regulatory fiat because greenhouse gasses and CO2 have little to do, if anything, with the original toxicology that went behind listing the source category for particulate matter and sulfur dioxide. Lots of uncertainty on the legal side about that, but those are going to be some really key statutory construction answers that we're going to get from EPA's promulgation of both the methane rule and, ultimately, the 111(b) rule.
So that's the last thing I'll say, and I'll let the moderators open us up for questions.
Wesley Hodges: Well, very good. Thank you so much, Michael. And thank you, Tom, for the thorough remarks. Let's go ahead and go to our first caller.
Donald van der Vaart: Yes, this is Don van der Vaart in North Carolina. As another threshold question to this ACE rule, could you give us a couple of thoughts on the prohibitory language that's also in the Clean Air Act under Section 111 that has been variously named ambiguous and not ambiguous? Some of the blue states and NRDC and some other special interest environmental groups in the CAMR litigation said it was absolutely unambiguous that you couldn't regulate under Section 111(d) a source category that was regulated under 112. So could you give us a couple of thoughts on that, including the fact that the MATS proposal left the door open, I think, to perhaps not regulating the source category under 112, thereby opening the door potentially?
Thomas Lorenzen: This is Tom. I will be happy to answer that, and then I'll ask Michael to jump in. Yeah, the Section 112 exclusion argument to which you're referring is something that was one of our bases for contesting the Clean Power Plan. It was briefed and it was argued in that case. It's not clear what reception it was going to get in a final decision. I will note that then-judge, now-Justice Kavanaugh called it a hall of mirrors. I was a bit disappointed with his characterization of it as that because we thought we had written a pretty strong argument that you cannot regulate a source under 111 if it's in a category regulated under 112.
To date, no one has challenged the ACE rule on the basis that it cannot be promulgated as long as MATS exists, though I do expect that at least one or maybe more petitions will be filed on that before the filing window closes in early September. I won't say more about that argument there. I think you do correctly note that there are some tensions between what happens with this rule and what happens with the Mercury and Air Toxics Standards, or MATS, where EPA has proposed to reconsider and reverse its appropriate and necessary finding. For those who aren't as familiar with Section 112, before EPA may regulate power plants under Section 112, it's required to conduct a study and then make a determination based on the results of that study that it is both appropriate and necessary to regulate emissions of hazardous air pollutants under that section.
At the moment, what EPA has proposed to do with MATS is reverse its appropriate and necessary determination but retain MATS itself pursuant to a D.C. Circuit decision called New Jersey v. EPA that had invalidated the Clean Air Mercury Rule. But EPA did also accept comment on whether, without an appropriate and necessary finding, it would be required to vacate MATS itself. And it's not clear whether EPA is going to go down that road. If EPA does go down that road and actually vacates MATS itself, then one consequence is that Section 112 exclusion argument would no longer apply to the Affordable Clean Energy Rule because there would be no standard under Section 112 applicable to the source category. So that's a very long-winded answer, but it's a very complicated issue.
Michael Nasi: Yeah, that's a very good summary of it, Tom. And I would just simply add that I think we both have heard tell of some that might litigate that point on this rule, but it is an interesting strategic question because given that the retrofits that MATS drove, either drove retirements or drove installations, and much of what you might say the damage is done, or the good was done, depending on how you look at it, it is interesting to note that if this rule, the ACE rule, were bounced on that ground whether it could be quickly cured by an administration seeking to make maybe a worse rule, or even the same rule, by doing exactly what Tom just said under the theory that there's not actually much lost if they do that.
Anyway, that's just a blind speculation by me. It's an interesting dialogue, but it's certainly a very good comment to raise because it is one of the fundamental statutory construction issues that was at stake in the Clean Power Plan and I expect to be fleshed out even more during the litigation on ACE.
Wesley Hodges: Well, very good. Caller, thank you so much for your question. Tom, I'd like to turn the mike back to you in case you have any words. I noticed that we didn't give you a chance to respond after Michael's remarks. Is there anything you'd like to talk about at this time?
Thomas Lorenzen: Not on Michael's remarks. I think he covered that very well. I do want to explore a little bit further what Michael was just talking about in terms of the investments that utilities have made in installing those Mercury and Air Toxics Standards pollution control technologies. These are mainly scrubbers that cost hundreds of millions of dollars to install on each unit. Whether you believe MATS was a lawful rule or a real stretch on EPA's authority, the fact is that most utilities did either retire coal-fired units or made those investments to install those technologies. And for many of the vertically integrated utilities, right now, they are recovering the costs of those investments through their public utility commission approved rates.
One of the utilities' great fears right now is that if MATS goes away and they are no longer required to operate those scrubbers and other emission controls, environmental groups may start to pursue proceedings before the PUCs to argue that the investments were not reasonable, that they were not prudent. And if they are not prudent, then the costs cannot be recovered in the rates. And this could have the somewhat perverse outcome of actually forcing a number of coal-fired units to shutter prematurely because they can no longer recover the costs that they expended to install those pollution controls.
So it's sort of an interesting fact that most of the utilities now, though they screamed bloody murder at MATS when it was promulgated, because of their investments now, are somewhat leery of seeing MATS go away. So while you would normally expect to see utilities challenging this, that may not be the case. Michael, do you want to comment some more on that?
Michael Nasi: Yeah. This is actually a really critical issue because there's been some reporting on it, and frankly, the reporting has missed the boat in terms of what the real substantive issue is. I'm active in utility regulatory matters across the country, and it really would be a surreal experience indeed to see an environmental group pursue an action that would try to keep a utility from being able to recover costs on installations. And the big difference here is the difference between the capital cost of installing the equipment, which Tom was referencing, which was significant.
And I think any detractor of a utility's decision to do so would be hard pressed to ever demonstrate that an action to install that equipment was not prudent, given that they did it pursuant to a fully applicable regulatory regime that had no basis to go away. I mean, if you have a final and effective rule with a hard requirement, the utility commissions and regulated markets across the country have recognized that. I've been in several cases as an expert witness and verified that in support of the utility's decision. The trickier question is the ongoing operation and maintenance of that equipment.
And so I think, again, getting a little far afield from the ACE rules, so if we have questions, we can stop and talk about that, but I'll make a comment about the O&M associated with MATS compliance can be significant. And it's not just an all or nothing game. The real question and dilemma EPA has to deal with is there are serious questions about the way the MATS rule was finalized in terms of averaging periods and the way it regulated not just mercury but acid gasses. And depending on how that rule might be able to be retooled, not eliminated, but retooled, the compliance obligations might be significantly lessened. Not in any way removing the need to have installed the equipment, but in a significant way might be lessening the O&M costs that these facilities have to deploy in what are very tight, competitive marketplaces where every dollar matters.
And so it's been a difficult thing for EPA to navigate because utilities are rightly concerned about being attacked on prudence grounds, as Tom has mentioned. And the understanding of the issue has been less than impressive in terms of the press because they tend to think that's the big issue. But the real issue is how much does a utility have to go on spending on things when the rule might actually be retooled to make it less stringent? It would still cost money. The equipment would still have been prudently installed, but the assumed cost of operating that unit might be able to be addressed in a favorable way, both for competitiveness and for, ultimately, rate payers.
Wesley Hodges: Wonderful. Well, thank you, Michael, and thank you Tom. It does look like we do have one more question from the audience. Let's go ahead and go to that caller.
Donald van der Vaart: Yeah, this is Don van der Vaart again. Sorry to wear you out. And that was a very good discussion on, I think, what is, in my opinion, probably an overly worrisome view that the vertically integrated utilities have. And they're really sort of the tail wagging the dog.
But to go on to another issue which is pseudo-SIP -- the 111 process is not a real SIP process. It's a quasi-SIP process that directs you to -- it's just like 108, but it's not exactly. And because of this issue with MATS, I'd just like to hear your thoughts on this. States have developed -- you remember, for the EPA to consider a 111(d) plan, it's got to be, just like in the SIP, it's got to be enforceable before it goes to -- the EPA's taken the position that it's got to be enforceable for them to consider it. And then they wait for however long as they want to, and this creates this thing called a SIP gap, which is a real problem for states, actually. You can run into problems like we were just talking about.
So in response to that, some states have developed, in Section 111 especially, they've developed a rule that is enforceable, but only upon approval by the EPA in whatever context that might be. Do you have any thoughts about that?
Michael Nasi: This is the world I live in daily. I'll certainly take the lead in that, and Tom can weigh in here. Very good point. This is a pseudo-SIP. I often use plan and not SIP, just so people understand there's a difference. But the differences don't mean much to my teenage kids, but they mean a lot to air quality lawyers. But the question, really, is one of preference by the state. There are practical benefits to the improvements that one would install under ACE. They improve the efficiency and, ultimately, the competitiveness of a facility, which is an interesting aspect of this rule. It is rare, indeed, for a pollution control installation to actually improve the competitiveness of the facility. Scrubbers, bag houses, mercury control, carbon injection systems, etc., they all have parasitic load. They all have efficiency impacts to the adverse, whereas heat rate improvements, if they're done in a cost effective way at the right facility in the right manner, can actually improve the competitiveness. So it creates a very interesting dilemma in some states.
A classic example would be regulated from a utility standpoint where a utility might be able to rate base this. It could have a legitimate cost recovery opportunity for efficiency improvements because of the legal requirement and simultaneously improve the competitiveness of the facility and, ultimately, the ability to produce cost effective power. It's a little off topic from what you were asking, but I think I'd make that observation because I think it's going to drive how a state might actually view the compliance timeline. States can do things to avoid SIP gaps, like you've said, but in this rule, there might be actually an inclination to say, "Hey, we want this to go fast. These improvements are going to benefit the marketplace. Let's do it."
And assuming the state does their job right and uses the flexibilities that EPA has provided to it, it can be a remedy or be a program that a series of utilities can implement in a very cost effective way. There's been a lot of doom and gloom potential talked about, about how this rule might be burdensome. I don't think the people who are saying those things have really studied all the flexibility mechanisms and figured out what a state might be able to do to make this rule quite easy to comply with, yet still improve the efficiency of the unit. Now, there are states where efficiency improvements have already been made across significant components of the fleet, and that becomes a trickier question. But yeah, I think each state's going to have to make a decision about it.
EPA did not speak to that issue too much. It made some commentary about whether a state who looks to make a more stringent plan than contemplated by the proposed rule, or by the final rule, they reserved judgement about whether or not they would approve it. They certainly reminded everybody you need to stay inside the fence when deriving the standard, and you need to stay inside the fence when complying with the standard. But other than that, they've kind of left it open. And I think it'll be something that will probably be discussed between and among states and the EPA moving forward about whether states that are looking to actually prevent a SIP gap will have the flexibility to do so.
Thomas Lorenzen: Maybe this is the final comment here. One thing we hadn't really pointed out before as an element of this rule -- the proposed Clean Energy Rule had actually contained provisions that would have reformed new source review so that making energy efficiency improvements to a plant with consequent greater utilization of that plant would not trigger new source review that could impose its own burdensome permitting requirements. EPA decided, in the end, largely due to comments from industry and other industrial sectors, not to finalize that portion of the rule but to undertake it as part of a separate, probably broader NSR reform docket so that the NSR reforms would apply to multiple different industries.
And what EPA did in the ACE rule in lieu of finalizing that was it included amongst the factors that states could consider in deciding whether particular BSER elements would apply to a unit was to take into account whether making the improvement would trigger new source review and what the costs of that new source review would entail. And the states have authority to exclude a measure from BSER if those costs are unreasonable. So there's a whole element of this rule that got split off, and we'll see a future rulemaking on that.
Michael Nasi: Yeah, I'm glad that Tom brought that up. Very important consideration, both generally in terms of the legal viability of the rule, and also state of limitation, and how the EPA might evolve that component of the program if the NSR reforms are actually finalized.
Wesley Hodges: Well, very good. By my eye, the top of the hour is upon us, so I just want to turn the mike one more time back to Michael and Tom to see if they have any closing thoughts before we wrap up today.
Thomas Lorenzen: All right. It is -- the EPA's rule is a very ambitious rule legally because of its desire to foreclose future administrations from going down the Clean Power Plan road again. That raises some potential legal risks but also some potentially huge benefits if we can persuade the Supreme Court to agree with EPA's interpretation of the law. That is going to take some time to work itself out, possibly a year to two years. So as usual with these sorts of complex cases, don't expect a resolution in the near term.
Michael Nasi: Yeah, and my only final comment would be to make a comment that I signaled earlier, and that is that in order to actually benefit or enhance the legal position of getting some finality and support of the Chevron Step One analysis, it may be beneficial for some subset of the states that are looking to implement ACE to move sooner, to actually give the EPA and the advocates in the courthouse some specific examples of how this rule can, in fact, be implemented at the state level and deliver improvements within the proper construction of the Clean Air Act, and maybe even create a little bit of a reliance interest when in comes to those that would seek to upend the ACE rule. So just a comment to keep in mind that some states may move fast for strategic and practical reasons as well as legal ones.
Wesley Hodges: Fantastic. Well, Tom and Michael, it has been a wonderful hour, and we really do appreciate the time you've put into this. So on behalf of The Federalist Society, I would like to thank you both for the benefit of your valuable time and expertise. We welcome all listener feedback by email at email@example.com. Thank you all for joining us for the call today. We are now adjourned.
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