Utilities May Shut Dirtier Plants Under New EPA Rules

ClearView Energy Partners LLC Managing Director Kevin Book
“U.S. producer of coal-fueled electricity, going to have to buy new technology, switch the fuel they use or shut down plants.” Kevin Book said. Photographer: Stephanie Kuykendal/Bloomberg

The Obama administration proposed tougher air pollution rules for 31 states from Massachusetts to Texas that may lead energy companies to shut some power plants.

American Electric Power Co., the biggest U.S. producer of coal-fueled electricity, and Southern Co., the second largest, are among companies that may be affected by the regulations announced yesterday by the Environmental Protection Agency to curb smog and acid rain. The rules would take effect in 2012.

“It’s generally a negative for all of them,” Kevin Book, managing director at ClearView Energy Partners LLC, a Washington-based policy analysis firm, said in an interview. “They are either going to have to buy new technology, switch the fuel they use or shut down plants.”

The rules, tightening those issued by the Bush administration five years ago for pollution that crosses state lines, would add $2.8 billion in annual costs for utilities, the EPA said yesterday.

The regulations will probably trigger the closing of the “smallest and dirtiest coal plants” when coupled with new limits expected from the EPA for mercury emissions from coal-fired generators, K. Whitney Stanco, a Washington-based analyst with Concept Capital, said in a research note to clients yesterday before the rules were announced.

The agency doesn’t know whether the regulations would result in shutting plants, Gina McCarthy, the EPA’s assistant administrator, said on a conference call yesterday with reporters.

Health Benefits

The EPA said the regulations would result in more than $120 billion in annual health benefits in 2014, protecting Americans against illnesses from asthma to heart attacks that have been linked to air pollution.

“Millions of people continue to breathe unhealthy air,” McCarthy said.

The Obama regulations would cut sulfur dioxide, which produces acid rain, by 71 percent by 2014 from 2005 levels, according to the EPA. It would reduce nitrogen oxide, the cause of smog, by 52 percent over the same period.

A federal court rejected in 2008 the regulations issued under President George W. Bush, saying the EPA sought to create an unlawful emissions-trading program. The Obama administration’s proposed rewrite of those rules would limit trading of pollution rights while slashing permitted levels of pollutants.

The standard for sulfur dioxide is more stringent than Bush’s and starts earlier than had been expected, an industry group said.

‘Very Short Timeline’

“EPA’s new proposal would require dramatic reductions in power-sector emissions, on top of major reductions to date, on a very short timeline,” Dan Riedinger, a spokesman for the Edison Electric Institute, a Washington-based trade association representing utility companies including AEP, Southern and Duke Energy Corp., said in a statement yesterday. The standard “leaves the power sector exposed to a great deal of regulatory uncertainty.”

The new regulations, known as transport rules, would protect the public from the health dangers better than those issued under Bush, and the requirements would achieve “greater reductions more quickly,” McCarthy of the EPA said.

“This rule represents an important and necessary step to cut the harmful air pollution that forms smog and deadly soot pollution from the industrial sector most responsible for these emissions,” the Natural Resources Defense Council, a New York- based environmental group, said in a statement.

Emissions Markets

The proposal caused the sulfur-dioxide emissions market to trade lower yesterday, in part because the rules appear to eliminate the ability to use surplus sulfur-dioxide trading permits, Paul Tesoriero, director of environmental trading at Evolution Markets LLC in White Plains, New York, said in an interview.

The EPA is proposing that emissions be reduced through a limited cap-and-trade system among the states and Washington, D.C., letting companies that exceed their pollution limits buy credits from those that pollute less.

The EPA also proposed two alternative approaches, one that would permit emissions trading only within a state and another that would enable a company to trade pollution rights among its own power plants.

“These are pretty aggressive cuts,” Tesoriero said. “Companies are going to have to figure out a way to meet the reductions. They will have to put in controls faster than they possibly thought they would have to.”

Duke Commenting Later

Duke Energy spokesman Tom Williams said the Charlotte, North Carolina-based company would respond during the EPA’s 60-day public comment period for the rules. Duke, the third-largest operator of U.S. coal-burning power plants, had sued to overturn a part of the Bush administration’s rule that based emissions-trading allowances on 20-year-old data.

Southern, the second-biggest U.S. utility owner, is reviewing the rule, spokeswoman Valerie Hendrickson said today. The Atlanta-based company had been waiting for the rule to make “important compliance decisions,” though yesterday’s proposal doesn’t provide the “regulatory certainty” needed because EPA will be proposing more rules, she said.

AEP, based in Columbus, Ohio, also is reviewing the EPA statement, said Melissa McHenry, a spokeswoman.

Under Bush’s rules, the cap on sulfur dioxide would have been about 4.66 million tons a year, while the proposed regulations would permit about 3.4 million tons a year, Book said.

“This is another example of the Obama administration trying to be very aggressive in satisfying their environmental constituency,” Jeff Holmstead, a former assistant administrator at the EPA and now a partner at Bracewell & Giuliani LLP in Washington, said in an interview. “The industry will be surprised just how tight the sulfur dioxide caps are.”

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