The Supreme Court, the Mercury Rule and Chicken Little

Last week, the United States Supreme Court heard oral arguments in a challenge to the Environmental Protection Agency’s (EPA) Mercury and Air Toxics Standard (MATS), set to go into effect next month. The MATS rule, finalized in December 2011, requires coal-fired power plants to reduce emissions of toxic air pollutants through the installation of pollution control technologies.

Just like our old friend Chicken Little, challengers of the MATS rule took up a “sky is falling!” approach, arguing that costs to comply with the rule were so astronomical that it would put coal plants and coal companies out of business. Ironically, many utilities have already spent the majority of the capital expenses needed to comply with the MATS rule – expenses that were far less than industry predicted when first challenging the rule.

The road to the MATS rule began 25 years ago, when Congress passed the 1990 Clean Air Act amendments.  The 1990 amendments required EPA to regulate 189 Hazardous Air Pollutants (HAPs) that were not previously controlled, including mercury. Power plants are responsible for about 50% of mercury emissions and over 75% of acid gas emissions in the United States. Mercury and other hazardous air pollutants can contribute to respiratory illnesses, birth defects and developmental problems in children.

The MATS rule sets standards for all HAPs emitted by coal- and oil-fired EGUs with a capacity of 25 MWs or greater. In accordance with Clean Air Act requirements, EPA set emission reduction standards under the MATS rule that were as stringent as emission reductions achieved by the average of the top 12% best controlled sources.

Since the MATS rule was released in draft form, industry has claimed that it’s a debilitatingly expensive rule that will bring the electricity grid to a grinding halt and cause electricity rates to skyrocket. On the contrary, as pointed out by attorney Paul Smith during oral arguments:

“It’s important to recognize that something like 90% of that $9.6 billion — 90 percent of the capital cost, which is most of that $9.6 billion — has now already been spent,” he said. “And the industry has not experienced the kinds of upheavals that are being described. The rule takes effect in the middle of April, and so the idea that the result here was somehow ludicrous or outlandishly expensive is belied by the fact that the industry is bringing itself into full compliance.”

Southeastern utilities are also complying with MATS at a much lower cost than anticipated:

Originally, Southern Company estimated “that in order to comply with EPA rules it will have to spend between US$13 billion and US$18 billion through 2020.” However, actual costs were much lower: ”Based on our current analysis, our projection for MATS compliance for 2012 through 2014 now totals $1.8 billion, representing a reduction of $900 million from our previous estimates.” Art Beattie, CFO, Southern Company, 2012 Q2 earnings call.

“As we enter 2013 and 2014, we expect to begin increasing our environmental spending…. To comply with the new regulations, as well as potential rules, which have not yet been finalized, including air emissions, coal ash and water intake, we could spend around $5 billion over the next 10 years. This is at the low end of our previous $5 billion to $6 billion range.”  Lynn Good, CFO, Duke Energy, 2011 Q4 earnings call.

Another key issue in this debate is the rationale behind Congress’ decision to treat power plants differently from other air pollution sources. For example, the Acid Rain Program required regulations for sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions from coal-fired power plants.  At that time, Congress ordered EPA to study whether the Acid Rain Program along with other air pollution reduction programs addressed all public health concerns caused by electric generators. If EPA found that additional regulations were “appropriate and necessary” to address all public health concerns, Congress granted EPA the authority to enact additional regulations. EPA points to this Congressional mandate as its basis for moving forward with the decision to set emission limits for HAPs, resulting in the MATS rule.

Before making its way to the Supreme Court, the U.S. Court of Appeals for the District of Columbia upheld the MATS rule after concluding that the EPA’s interpretation of the Clean Air Act was plausible and entitled to deference. The Supreme Court agreed to review the case and determine whether or not the Clean Air Act requires EPA to consider costs before setting emission standards. EPA estimated that the rule would cost industry about $9.6 billion a year to implement and will reap health benefits valuing $37 billion.

During oral arguments, Justices Ginsburg, Sotomayor and Kagan seemed the most willing to agree with the lower courts finding that EPA’s interpretation of the Clean Air Act was acceptable. Chief Justice Roberts expressed skepticism, along with Justices Scalia, Breyer, Alito and Kennedy, that EPA is allowed to establish pollution control standards irrespective of compliance costs. The Supreme Court is expected to make a decision on this case in June. Meanwhile, the MATS rule goes into effect on April 15, 2015.

Most recently, fossil fuel companies and their political allies are again engaging in a rhetoric campaign that would make Chicken Little proud – this time around the Clean Power Plan. As we wait for EPA to finalize this rule sometime in mid-summer, we will see more dubious claims that the Clean Power Plan will make electric rates skyrocket (nope), cause the electric grid to collapse (not likely) and even kill people (of course not!).  So keep in mind – Chicken Little is alive and well and he wants you to believe that the sky is falling!

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2 Comments

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Re the quote: “Originally, Southern Company estimated “that in order to comply with EPA rules it will have to spend between US$13 billion and US$18 billion through 2020.” However, actual costs were much lower: ”Based on our current analysis, our projection for MATS compliance for 2012 through 2014 now totals $1.8 billion, representing a reduction of $900 million from our previous estimates.” Art Beattie, CFO, Southern Company, 2012 Q2 earnings call.”

If the original estimate was $13-18 billion and the actual cost is $1.8 billion the disparity is $11.2 – 16.2 billion, not $0.9 billion (equivalent of $900 million.) Was Southern Co.’s estimate that far off, or do the two sets of figures refer to different time spans (costs over a decade perhaps vs. costs over the 2012-14 period)? I’m definitely on Clean Energy’s side, but I need to know the quote is accurate and fair if I’m going to use it.


Comment by Dave Cullen on April 2, 2015 11:28 am


Thanks for the question, Dave. You are correct that the monetary amounts refer to different time frames – the first referring to total costs from 2011-2020 and the second amount referring to the costs from 2012-2014. Despite the differences in time, it is still clear that Southern Company is not going to incur costs anywhere near their original estimates of $13B to 18B.


Comment by Angela Garrone, Esq. on April 2, 2015 12:19 pm


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