By Tom Kleckner

AUSTIN, Texas — Environmental Protection Agency Administrator Gina McCarthy ventured into somewhat unfriendly territory last week at the National Association of Regulatory Utility Commissioners’ annual meeting to defend the Clean Power Plan and urge continued dialogue.

Calling the CPP the “biggest single step America has taken to deal with climate change and carbon pollution,” McCarthy told her keynote audience she fully expects the plan to be implemented.

“We know this rule will stand the test of time because it’s grounded in facts and science and firmly rooted in the Clean Air Act,” she said. “We’re confident we’ll withstand the litigation.”

More than two dozen states filed challenges in federal court after EPA’s Oct. 23 publication of the final rule in the Federal Register. (See Legal Debate over Clean Power Plan Takes Center Stage.)

“If you think we go into a corner when someone sues us, that’s not how we do it,” said McCarthy, her thick Boston accent making “corner” sound like “conner.”

“We will be sitting down with the states and the regions, and we’ll be working together. We’ll be answering questions the best we can. Every state knows that when they work with us to develop a state plan, we’ll come up with a plan that best meets their needs … while litigation continues elsewhere.”

EPA’s final rule calls for reducing power plant carbon dioxide emissions by 32% from 2005 levels by 2030. It calculates individual state targets ranging from a 7% reduction for Connecticut to a 47% cut for Montana. States would have to comply with interim goals between 2022 and 2030, but they have the option of asking for a two-year extension by Sept. 6, 2016.

Encouraging Extensions

McCarthy said the extension option was why the first step was specifically designed not to be a “heavy lift.”

“We are looking for states requesting extensions,” she said. “That lets us know which states are actively working this issue and what their timelines are. We’re confident the states have the flexibility and options to meet their goals. While we needed to recognize state targets, we also needed to recognize that electrons flow out of those state boundaries all the time.”

McCarthy encouraged state officials to continue working with EPA. “By doing that,” she said, “we will have done great justice to this rule and aligned our common missions going forward.

“Your part, in my opinion, remains an essential part of our success: to ensure the plan maintains reliability, to ensure our consumers are well served and to ensure energy remains affordable.”

Pushback

When the floor was opened to questions, McCarthy received pushback from several NARUC members.

Julie Fedorchak, chair of the North Dakota Public Service Commission, pointedly said the final rule was “anything but thoughtful,” noting her state’s emissions target went from an 11% reduction to a 45% reduction in the final plan.

McCarthy agreed North Dakota’s targets are “challenging” but said the final plan gives states a wider range of compliance options, such as regional trading programs.

“We’ve opened tremendous opportunities for flexibilities,” she said. “We hope that those flexibilities make this easier.”

Ryan Sitton, a first-term commissioner on the Railroad Commission of Texas, asked McCarthy what she thought was Congress’ role.

“It’s two-fold,” she responded, first pointing to the Clean Air Act and the authority it gave to EPA to regulate pollution. Secondly, McCarthy said, “Congress has an ability to provide solutions to climate change today, if they choose to do that.

“The president has made it clear if Congress wants to provide more flexibility than we’re working under [now], he would welcome that. Right now, that doesn’t seem to be where we’re at.”

Leakage

McCarthy and Joe Goffman, EPA’s associate assistant administrator and general counsel, nearly made it out of town without discussing “leakage,” in which states might use new gas plants to compensate for retired older plants without achieving the state’s emission reductions.

The concern for states is that stricter requirements for new plants may not allow them to build the newer plants. States that do build the new plants can set aside emissions allowances (for renewable energy and gas plants), but the plants would not be eligible for trading programs.

Appearing on a panel discussing multi-state solutions to the CPP, Goffman thanked the moderator and the audience for not asking about leakage before he left the stage early.

McCarthy was asked about leakage after her keynote address and jokingly responded, “Next question.”

Turning serious, she then said, “The short answer is my eyes glaze over when people start talking about leakage.”

McCarthy said she believes it’s important to “maintain the integrity of the reductions so they’re achievable. We don’t want to prejudge how it’s handled. We’re looking for continued engagement on this, so unfortunately, I don’t have a silver bullet on how this might be resolved.”

Michael Nasi, a partner with Jackson Walker, said the CPP incents the construction of combined-cycle gas turbines. However, as he pointed out, new fossil generation would “not be consistent” with the federal administration’s carbon-reduction goals.

“What’s to keep them from coming back to undercut [new-emissions standards]?” he asked. “How do you integrate new [intermittent] renewables when you need gas to balance them out?”

Mass-Based vs. Rate-Based

Goffman did contribute to his panel discussion on multi-state options, saying that whether to take a rate-based approach or a mass-based approach won’t be the first question asked.

“Don’t devise cures that induce disease,” he said. “Making the system work will take priority.”

A mass-based approach expresses the state’s goal as the maximum number of tons of CO₂ that can be emitted during a specific time period. The rate-based approach sets the state goal based on pounds of CO₂ per megawatt-hour of generation from covered plants. The mass-based approach limits total emissions.

The panel generally agreed a mass-based approach with a trading program offers more benefits than a rate-based approach. The latter can be more complex, and thus more expensive.

“It behooves all state interests, your regulators’ office and your governor’s office, to figure out what works best for your state,” said Doug Scott, vice president of strategic initiatives with the Great Plains Institute.

“The EPA did a remarkable job putting this together,” said Latham & Watkins’ Bob Wyman. “They didn’t take a position on which one they preferred.”

That said, Latham did note, “Rate-based looks backwards, it creates more transaction costs … in every other way, it’s less effective.”