Just Say ‘OK’: Why It Makes Sense For States and Other Stakeholders to Participate in Planning and Implementation of the Clean Power Plan

With a self-imposed deadline of mid-summer 2015, EPA is pushing hard to complete its Clean Power Plan, a bold and broad initiative to reduce energy demand, and hence carbon dioxide emissions, from the country’s aging fleet of coal-fired power plants.

But Congressional leaders critical of the proposed rule are calling for states to “just say no,” to resist beginning any of the planning that will likely be required under a final rule, and even to avoid working with EPA on the rule until it’s been adjudicated in the courts. While this debate rages on the political front, a number of states and other stakeholders are taking a more pragmatic approach: engaging with EPA and the Obama administration in order to make making their problems – and potential litigation intentions – clear.

Setting the stage

EPA issued its proposed Clean Power Plan in June 2014, setting carbon dioxide emission rates for most states based on a complex calculation estimating each state’s ability to reduce emissions through on-site plant heat rate improvements and “beyond the fence-line” strategies such as re-dispatch of natural gas generation, increased renewable and nuclear power generation and energy efficiency.

Under the proposal, states are to submit implementation plans to meet these targets to EPA within one to two years (depending on regional planning or extension requests) after the rule is finalized, and are to begin meeting slightly lower interim targets over a decade of averaging beginning as early as 2020. Compliance with final targets begins in 2030. A federal plan (to be released in late summer 2015) will be imposed on states that fail to submit plans on time or submit plans EPA deems inadequate.

This is an ambitious schedule, and it’s full of uncertainties. First of all, the Clean Power Plan is still just a proposal and is likely to change, maybe significantly. EPA has received critical comments from a wide variety of stakeholders, including states and companies that have supported the agency’s efforts to control carbon emissions from the power sector. Last fall, EPA published a notice of data availability identifying certain issues for which it sought more information, including how targets might be changed based on additional factors and how interim target compliance might be pushed back. Since that time, EPA has met with a wide range of interests and participated in hearings with the Federal Energy Regulatory Commission. The FERC hearings focused on extending interim compliance dates to allow adequate time for planning and infrastructure and the need for mechanisms to ensure reliability and efficient market operation. EPA has promised that it is “looking hard” at these issues. Indeed, it is fairly likely that the final rule will look different than the current proposal, though EPA may not significantly revise the overall architecture or cumulative reductions sought.

The schedule and uncertainties leave states and their utilities in a bit of a quandary. The 2020 deadline is approaching quickly, and states need to begin to develop strategies for compliance before the rule is final (and certainly before a final rule is adjudicated by the courts). It is safe to assume that when the rule is finalized, it will be challenged—it has already been challenged in its proposed form, and a case is now pending in the D.C. Circuit. Multiple challenges to the final rule are anticipated, but they are unlikely to be decided by the relevant court, the D.C. Circuit, for several years. Assuming the challenges make it to the Supreme Court, as other key air pollution rules under the Obama administration have, a final adjudication may not occur until fairly close to the 2020 implementation date. This has led Senate majority leader Mitch McConnell (R-Ky.) and other critics of EPA to advise states to do nothing and wait until the courts rule. Similar efforts are underway in Congress to bar EPA from regulating until a ruling is reached on the agency’s authority.

There are a number of good reasons why states and utilities should not heed such advice but instead work with EPA and each other as the rule is finalized, and prepare to submit plans in compliance with the final rule, even if they plan to challenge the final rule in court.

1. What you don’t know…you don’t know

The Clean Power Plan is a proposal (albeit a detailed one) that demands fairly rapid planning to ensure timely compliance. The final rule could change significantly, and in ways that might benefit states and utilities. While such uncertainty makes it difficult to plan with finality, it gives stakeholders a chance to begin evaluating what is and is not possible in terms of emission reductions and reducing demand. Taking steps now and after rule finalization can only put states ahead of the game and give them a sense of what is realistic. EPA, and potentially FERC, may be more amenable to modifications where a state has clearly thought through the process and anticipated issues.

2. Better to be a hammer than a nail

Related to the first point, it is likely better to participate in the process and help modify the rule, rather than simply sitting it out. EPA has taken the unusual step of seeking additional input for the rule after the comment period has ended, and it has reached out to states and utilities to address concerns and seek creative ways to improve the rule. While further input does not guarantee change, a state or stakeholder cannot expect any change if it never presses its case. Furthermore, if a state ultimately decides not to submit a plan until after the rule is finalized, it forfeits its fate to EPA, which will then issue a federal plan crafted for all states. Such a federal plan is far less likely to offer the same flexibility of the general rule. EPA (as opposed to states) may not have the authority to directly regulate any entity beyond the power plant. This means that the natural gas, renewable/zero-emission technologies and other energy efficiency opportunities across the system may not be available. A federal rule would not likely be tailored to the state’s specific energy mix and reliability needs.

3. Are you feeling lucky?

It is always a gamble to assume one side will prevail in litigation. The outcomes are uncertain, regardless of whether a state feels it has the better argument. There are certainly clear and strong legal arguments in support of and in opposition to the Clean Power Rule as currently drafted. The same is true of arguments regarding EPA’s authority. Indeed, EPA has anticipated many legal attacks and has taken the unprecedented step of issuing a lengthy legal memorandum with the draft rule.

Ultimately, one never knows how a panel might rule, and the D.C. Circuit and the Supreme Court are known for issuing decisions that leave key problems less than crystal clear, or unresolved altogether. Petitioners may seek to stay the rule, but stays are rarities in rule challenges, especially with compliance deadlines well into the future. And timing will be the key factor, as any legal ruling on the legality of the final rule may not be known until 2018 or even later. By that time, a state unwilling to comply may already be subject to a federal plan, and will then need to decide whether to subject itself and its utilities to further uncertainty or significant penalties. If the rule is ultimately upheld, a recalcitrant state may have to start from scratch in order to submit a plan to escape from being subject to the federal plan. This compliance may be more difficult and more expensive for all involved.

Ultimately, there is nothing wrong with planning for compliance while litigating key issues. This is business-as-usual for many rulemakings, with regulated industries and environmental advocates inevitably challenging every major environmental rule from either side. Litigation is basically expected by EPA, but so is good faith compliance. EPA will not—and cannot—reject legitimate comments and efforts to make a rule better simply because a party is litigating or plans to do so. It is worth noting that of the many states participating in the Midcontinent States Environmental and Energy Regulators’ effort to explore regional compliance with the Clean Power Plan, a large number have filed comments critical of the rule, or even joined the initial efforts to challenge the proposed rule in court. Even Senator McConnell’s home state of Kentucky has disregarded his advice and sought to work with EPA to improve the rule and initiate planning discussions, all while strongly criticizing many aspects of the proposal.

4. The cost of being a stone in the stream of progress

Even if a state is opposed to EPA’s rule, it cannot change what is happening in the electricity sector. Utilities are moving towards re-dispatch or new dispatch of natural gas and increased use of renewables for economic and policy reasons. They are looking for the most effective ways to increase efficiency and distribute energy resources to lower costs to themselves and consumers. And they are looking to provide certainty in an uncertain world. As a recent report by the Analysis Group, Electric System Reliability and EPA’s Clean Power Plan: Tools and Practices, states, “Given the significant shifts already underway in the electric system, the industry would need to adjust its operational and planning practices to accommodate changes even if EPA had not proposed the Clean Power Plan.”

Without a doubt, EPA aims through its Clean Power Plan to accelerate these developments and the planning process and to take advantage of changing generation patterns that favor cleaner and more efficient energy. But these developments are also happening across the U.S., causing states, their regulating agencies and their utilities to plan for a changing future. Thus, refusing to plan might be considered a powerful political statement – but it’s also a risky regulatory or business strategy for the long term. Indeed, the changing nature of the power sector supports the idea that states should assess their future needs and seek to ensure that the final rule allows them to meet those needs in the most cost-effective way possible. That can only be done by participating in the process.

Ultimately, just saying “no” is really just a political statement, not a legal strategy. It’s a political statement that does not justify the economic risk of staying at the sidelines while EPA works with other states and utilities to plan for a more carbon-constrained future. Refusing to participate has the potential to impede progress and ultimately make things more uncertain and expensive for states, utilities and customers.

Jim Rubin is counsel at Denton U.S. LLP.