Bloomberg News

Coal Plants’ Victory Over EPA Is Muted by Low Gas Prices

August 22, 2012

Southern Co. (SO:US), Edison International (EIX:US) and rival power companies won a legal fight with the Environmental Protection Agency, gaining more time and leeway to cut pollution from burning coal. The bigger challenges from cheap natural gas may make it a muted victory.

“This really is a black eye for the EPA,” James Lucier, managing director at Capital Alpha Partners LLC in Washington, said in an interview. “But for the industry, the critical factor overall has been the low price of natural gas,” which is “the great destroyer.”

The U.S. Court of Appeals in Washington yesterday struck down the EPA’s cross-state air pollution rule, saying the agency illegally usurped state authority for air-pollution programs and imposed caps on sulfur dioxide and nitrogen oxide lower than necessary to clean up the air in neighboring states.

While Edison and American Electric Power Co. (AEP:US) say that gave them a needed reprieve, the trouble is that other EPA requirements are looming and cheap natural gas is making coal- fired electricity generation increasingly uncompetitive.

“At the end of the day the older, dirtier coal plants are going to close,” Sam Brothwell, a senior utility analyst at Bloomberg Industries, said in a telephone interview. “It’s an economic decision.”

Stock Performance

AEP fell 46 cents to $42.65 yesterday, after initially rising on the news. Southern fell 15 cents to $45.82, reversing an initial decline once the court decision was announced. Peabody Energy Corp. (BTU:US), the largest U.S. coal producer, rose 85 cents to $23.79 in New York trading.

The cross-state rule, issued in July 2011, is just one of a suite of regulations the EPA has proposed to curb pollution from coal-fired power plants. While the other rules won’t go into effect soon, and also face legal challenges of their own, together they are forcing power producers to install control technologies and cut the pollution they emit.

In yesterday’s ruling, the court ordered the agency to continue to enforce a similar rule issued in 2005 until a viable replacement can be issued. The EPA has already begun to do this; however, a different panel of appeals court judges in 2008 ordered the EPA to rework that rule, saying it was too weak.

Conflicting Mandates

The government may need to go back and ask the full Court of Appeals or Supreme Court to sort out these conflicting legal mandates, said David Marshall, a senior counsel at the Clean Air Task Force, who represented environmental groups in this case.

AEP, the largest U.S. coal consumer, said the air-quality goals that cross-state rule targeted would be achieved by the 2005 rule. The earlier regulation’s emission limits aren’t as tough as the Obama-era rule, and it allows producers to trade pollution credits, easing the burden on some smaller plants.

“We are willing to move forward to make additional emission reductions, but we believe it can be done in a more reasonable way,” Pat Hemlepp, a spokesman for Columbus, Ohio- based AEP, said in an e-mail.

Sulfur dioxide can lead to acid rain and soot emissions harmful to humans and ecosystems, and nitrogen oxide is a component of ground-level ozone, a main ingredient of smog. Coal accounts for 98 percent of sulfur dioxide and 92 percent of nitrogen oxides released into the air by power plants, according to the EPA.

Undue Burden

Among the power companies challenging the rule were Southern, EME Homer City Generation LP, a unit of Edison International, and Energy Future Holdings Corp. units in Texas. The state of Texas and the National Mining Association joined in parallel cases, saying the rule, which was issued last year, would put an undue financial burden on power producers and threaten electricity reliability. The cases were consolidated by the court.

For Republican lawmakers, who have accused President Barack Obama’s EPA for waging a “war on coal,” the ruling was welcomed as a much-needed reprieve.

The cross-state rule “is just one of several new EPA rules targeting America’s power sector that together will cost our economy tens of billions of dollars and put thousands of jobs at risk,” Fred Upton, the Michigan Republican chairman of the House Energy and Commerce Committee, said in a statement. “The EPA is an agency out of control.”

Mercury Rules

AEP and Southern say they will need to spend billions of dollars complying with the EPA rule issued in December that forces them to curb mercury and other air toxic emissions. That rule is one of the most expensive regulations ever issued, and applies to every coal plant in the country.

Southern, based in Atlanta, already spent more than $8 billion on pollution controls and plans to invest at least $1.5 billion more through 2015, Southern spokesman Tim Leljedal said in a phone interview. Southern now burns more natural gas than coal.

Any future EPA rule on cross-state pollution, “may have minimal regulatory impact” given related requirements from the mercury standard, Christine Tezak, managing director of ClearView Energy Partners LLC, said in a research note.

The EPA also proposed rules for greenhouse gases from power plants, a regulation that power companies warn will preclude the construction of new coal-fired power plants.

Gas Prices

Natural gas matched coal as the primary fuel for U.S. power generation in April for the first time since the government started collecting data, as natural gas prices reached a 10-year low that month. Electricity generated from natural gas is expected to increase 23 percent this year in the U.S., while coal-fueled power falls 12 percent, according to an Aug. 7 Energy Department report.

Energy Future Holdings Corp., the biggest power generation owner in Texas, said in September 2011 the cross-state rules would force its Luminant division to shut two coal-fired units that produce 1,200 megawatts, close nearby coal mines and fire 500 workers.

After the cross-state rule was stayed in December, the company put those plans on hold.

“There will be no layoffs or facilities closures,” Allan Koenig said in an e-mailed statement yesterday. “We will continue to face pressure created by other regulations affecting power plants, as well as low power prices in the state.”

The case is EME Homer City Generation LP v. U.S. Environmental Protection Agency, 11-1302, U.S. Court of Appeals for the District of Columbia (Washington).

To contact the reporters on this story: Mark Drajem in Washington at mdrajem@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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Companies Mentioned

  • SO
    (Southern Co/The)
    • $44.4 USD
    • 0.17
    • 0.38%
  • EIX
    (Edison International)
    • $59.14 USD
    • 0.67
    • 1.13%
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