Reports of Coal’s Death Greatly Exaggerated

On April 29, 2014, the US Supreme Court, in a 6-to-2 ruling in the case of Environmental Protection Agency v. EME Homer City Generation found that the Environmental Protection Agency (EPA) did not overstep its authority when it issued a regulation limiting power plants' emissions that cross state lines.

The US Court of Appeals for the District of Columbia Circuit ruled in 2012 that the EPA overstepped its authority because its regulation, known as the Transport Rule, did not square with Congressional intent to have individual states rather than the EPA set emissions policies to meet federal standards.

In an opinion by Justice Ruth Bader Ginsburg, the Court reversed the DC Circuit’s ruling:

In sum, we hold that the Clean Air Act (CAA) does not command that states be given a second opportunity to file a [state implementation plan] after EPA has quantified the State's interstate pollution obligations. We further conclude that the Good Neighbor Provision does not require EPA to disregard costs and consider exclusively each upwind state's physically proportionate responsibility for each downwind air quality problem. EPA’s cost-effective allocation of emission reductions among upwind states, we hold, is a permissible, work-able, and equitable interpretation of the Good Neighbor Provision.

Justice Antonin Scalia filed a now-much-discussed dissenting opinion, joined by Justice Clarence Thomas. Justice Samuel Alito recused himself from the consideration and the decision of the case.

The Court heard arguments in the case in December 2013 after granting certiorari last June. There were three questions before the Court:

whether the court of appeals lacked jurisdiction to consider the challenges on which it granted relief;whether states are excused from adopting state implementation plan (SIP) prohibiting emissions that "contribute significantly" to air pollution problems in othe! r states until after the EPA has adopted a rule quantifying each state’s interstate pollution obligations;and whether the EPA permissibly interpreted the statutory term "contribute significantly" so as to define each upwind state's "significant" interstate air pollution contributions in light of the cost-effective emission reductions it can make to improve air quality in polluted downwind areas, or whether the act instead unambiguously requires the EPA to consider only each upwind state's physically proportionate responsibility for each downwind air quality problem.

Advocates for utilities and coal producers argued that the EPA's approach was too intrusive and would force power plants to clean up more pollution than necessary to deliver clean air in downwind states.

Attorneys general from 14 states, led by Texas, challenged the EPA's rule along with Southern Company (NYSE: SO), Entergy Corp (NYSE: ETR), Edison International (NYSE: EIX), Peabody Energy Corp (NYSE: BTU), American Electric Power (NYSE: AEP) and the United Mine Workers of America labor union.

The Philadelphia Stock Exchange Utility Index, which includes 20 electric-generation utilities, took the news in stride. The index closed at 556.65 on April 28 at 554.83 on May 1, down just 0.3 percent.

As for the reaction of Utility Forecaster Portfolio Holdings, Southern Company, which generated 44.6 percent of its overall electric output from coal in 2013, did slide from an April 28 closing price of $46.68 to $45.22 as of the close of trade on May 1. But that's likely as much a reaction to the revelation of additional cost overruns and charges related to the construction of Mississippi Power's Kemper integrated gasification combined cycle (IGCC) project.

We have more on Southern Company's first-quarter results in The Roundup for Utility Fo! recaster ! subscribers.

Entergy stock, which actually produced just 10.3 percent of its 2013 total generation using coal, ticked up by 0.2 percent from the close on April 28 to the close on May 1.

Duke Energy Corp (NYSE: DUK), which burned coal to produce 37.8 percent of its 2013 megawatts, dipped by 0.3 percent. Dominion Resources Inc's (NYSE: D) 2012 coal ratio was 29.7 percent; its stock was down 0.4 percent in the immediate aftermath of the Supreme Court's decision.

CMS Energy Corp (NYSE: CMS), which at 47.5 percent had the largest share of coal-fired generation among power producers in the UF Portfolio, was down just 0.1 percent.

Xcel Energy Inc's (NYSE: XEL) coal-fired generation was 42.3 percent of its total 2013output. Xcel was down 0.2 percent.

NRG Energy Inc's (NYSE: NRG) 2013 coal-fired share of generation was 28.8 percent, but it's been actively adding renewable sources. Its stock was up 2.2 percent. NextEra Energy Inc (NYSE: NEE), owner/operator of the largest fleet of renewable generation in the US with just 1.7 percent of its output from coal, was up 2.8 percent.

AES Corp (NYSE: AES), with just 18.6 percent of its capacity fired by coal, surged by 3 percent.

This week's ruling provides significant support for the Obama administration's attempt to combat global warming via a series of new regulations aimed at cutting pollution from coal-fired power plants. This effort, using the Clean Air Act as legal authority, has been widely described as a "war on coal."

Utilities also face a separate EPA rule limiting mercury, arsenic and other toxic emissions from coal plants. While that rule is separate, some of the equipment required to clean up is similar.

The US Court of Appeals on April 15 upheld that regulation, the most expensive rule ever issued on power plants or factories.

Although the EME Homer City Generation decision upholds the rule promulgated by the EPA, its practical implications are uncertain. The Court left open the ! ability o! f states to individually challenge whether they should still be part of the program and whether required reductions are justified given improvements in air quality in downwind states.

In other words, there are a lot of legal challenges for this rule to come. And plants closed because of the mercury rules are the same that would have failed the cross-state rule. So the total additional plant closings from the Supreme Court will likely be very close to zero.  

Indeed it will be years more before utilities feel any pain from new rules as companies, lawyers and regulators wrangle over how to apply restrictions and fresh legal challenges work their way
through lower courts.

In the meantime, power companies already have been upgrading their coal plants to meet stricter pollution limits while phasing out older plants that have no chance of passing muster.
Stretching the "war" analogy, coal is battling on many fronts. The combination of slow growth in electricity demand, competitively priced natural gas and programs encouraging renewable fuel use as well as the implementation of environmental rules dampens future coal use.

And it will be a long struggle.

Coal-fired electricity generation has traditionally been the largest component of electricity generation, representing 37 percent of total generation in 2012.

By 2035, however, the Energy Information Administration projects that natural gas generation will surpass coal generation. According to the EIA, coal and natural gas will each represent 34 percent of total generation in 2035, but by 2040 the coal share drops to 32 percent and the natural gas share increases to 35 percent.

This Supreme Court decision will have a very limited impact on the US coal-fired fleet. Improvements already made to comply with previous pollution limits mean new targets
will almost certainly be met by the time they're implemented.

But taken together, the Supreme Court decision and the US Court of Appeals decision soli! dify effo! rts by the EPA to cut pollutants from coal-fired power plants, the largest source of pollution in the country, and suggest the use of the Clean Air Act to do so could withstand legal challenges.

And that means the EPA may have firmer ground to stand on as it contemplates standards for greenhouse gas emissions from existing power plants that it's expected to issue in June.