Pushed by the Supreme Court, EPA issues MATS cost estimates

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In response to an adverse U.S. Supreme Court decision from this past June, the U.S. Environmental Protection Agency will publish in the Dec. 1 Federal Register a proposed finding that takes into account costs to comply with the Mercury and Air Toxics Standards.

With this notice, the EPA will be soliciting comment on a proposed supplemental finding that consideration of cost does not alter the agency’s previous conclusion that it is appropriate and necessary to regulate coal- and oil-fired electric utility steam generating units under section 112 of the Clean Air Act.

In light of the U.S. Supreme Court decision earlier this year in Michigan v. EPA, the EPA has taken cost into account in evaluating whether such regulation is appropriate. In this Dec. 1 document, the EPA sets forth its proposed supplemental finding and requests comment on all aspects of that finding and the supporting legal memorandum in the docket for this action.

This proposed supplemental finding, if finalized after consideration of comments, will conclude that coal- and oil-fired EGUs are properly included on the CAA section 112(c) list of sources that must be regulated under CAA section 112(d).

Comments on this proposal must be received within 45 days of publication in the Federal Register.

The EPA issued national emission standards for hazardous air pollutants (NESHAP) for coal- and oil-fired electric utility units, known as the Mercury and Air Toxics Standards (MATS) in February 2012. Almost 12 years earlier, on December 20, 2000, the EPA determined, pursuant to CAA section 112(n)(1)(A), that it was appropriate and necessary to regulate coal- and oil-fired EGUs under CAA section 112 and added such units to the CAA section 112(c) list of sources that must be regulated under CAA section 112(d).

The appropriate and necessary finding was based primarily on consideration of the Utility Study Report to Congress (Utility Study), the Mercury Study Report to Congress (Mercury Study), the National Academies of Science’s Toxicological Effects of Methyl-mercury (NAS Study) and mercury data collected from coal-fired EGUs after completion of the studies.

After consideration of this information, the EPA found that it was appropriate to regulate HAP emissions from EGUs because such emissions pose significant hazards to public health and the environment and also because the EPA determined that there were available controls to effectively reduce mercury and other HAP emissions from EGUs.

The EPA found that it was necessary to regulate HAP emissions from EGUs because implementation of the other requirements of the CAA would not adequately address the serious hazards to public health and the environment posed by HAP emissions from EGUs and because CAA section 112 is the authority intended to regulate HAP emissions from stationary sources. In May 2011, the EPA reaffirmed the 2000 appropriate and necessary finding and listing of EGUs, and proposed MATS pursuant to CAA section 112(d).

Industry, states, environmental organizations, and public health organizations challenged many aspects of the EPA’s appropriate and necessary finding and the final MATS rule in the U.S. Court of Appeals for the District of Columbia Circuit (D.C Circuit Court), and the court denied all challenges.

Some industry and state petitioners sought further review of the final MATS rule, and the Supreme Court granted certiorari to determine whether the EPA erred when it concluded that the appropriate and necessary finding under CAA section 112(n)(1)(A) could be made without consideration of cost. On June 29, 2015, the Supreme Court ruled that the EPA acted unreasonably when it determined cost was irrelevant to the appropriate and necessary finding.

Specifically, the Supreme Court held that the agency must consider cost before deciding whether regulation is appropriate and necessary, noting also that it will be up to the agency "to decide, within the limits of reasonable interpretation, how to account for cost."

Said the Dec. 1 proposed rule: "The EPA, in response to the Supreme Court’s direction, has now added consideration of cost to the appropriate and necessary finding as detailed in this document. In this document, the EPA concludes that including such consideration of cost does not alter the agency’s previous determination that it is appropriate to regulate HAP emissions from EGUs."

EPA looked at costs from various angles. For example, revenues from retail electricity sales increased from $277.2 billion in 2000 to a peak of $356.6 billion in 2008. As would be expected, the general increase in sales (in dollar terms) over this time period is partly due to increases in electricity sales (in electricity sold) and increases in prices over the same time period.

The $9.6 billion in annual compliance costs of MATS projected for 2015 (the first year of compliance under the rule) would represent about 2.7 percent of 2011 power sector revenues from retail electricity sales. The projected annual compliance costs of MATS represent a small fraction of the value of overall sales, EPA said.

Another way in which cost can be evaluated is by comparing the annual capital expenditures required by MATS to the range of variation in capital expenditures from year to year. The EPA estimated the incremental capital expenditures to be $2.4 billion for 2015, which represent about 3 percent of 2011 power sector-level capital expenditures.

"The increased capital expenditures estimated to be required under MATS represent a small fraction of the power sector’s overall capital expenditures in recent years," said EPA. "Additionally, the EPA notes that the projected $2.4 billion in incremental capital costs is well within the range of annual variability over the 2000-2011 period."

EPA had projected net changes in generation capacity under MATS, as compared to the base case. Relative to the base case, about 4.7 GW of additional coal-fired capacity was projected to retire by 2015 as the result of MATS. These projected retirements reflect less than 2 percent of all coal-fired generation capacity projected in 2015 (310 GW in the base case without MATS) and less than 0.5 percent of total projected capacity (1,026 GW in the base case without MATS).

This projection was based on assumptions about a number of factors that affect the power sector (e.g., other available capacity, demand for electricity, fuel supply and fuel prices) and unit attributes (e.g., efficiency). In addition, the units that were projected to retire under MATS are, on average, older, smaller in terms of capacity, and less frequently used as indicated by capacity factors.

"This analysis indicates that the vast majority of the generation capacity in the power sector directly affected by the requirements of MATS would be able to absorb the anticipated compliance costs and remain operational," the agency said. "In order to ensure that any retirements resulting from MATS would not adversely impact the ability of affected sources and electric utilities from meeting the demand for electricity, the EPA conducted an analysis of the impacts of projected retirements on electric reliability. These resource adequacy analyses found that reserve margins could be maintained over a three-year MATS compliance period indicating that reliability could be maintained as the power sector complied with MATS. After considering the potential impacts of MATS on power sector generation capacity, the EPA concludes that the costs to the power sector are reasonable."

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