Supreme Court Rulings Threaten Utilities

April 1, 2007

By Lewis Tagliaferre

The editorial buzz on newswires this month was full of commentary about two rulings issued by the U.S. Supreme Court on Monday, April 2, 2007. The Court handed environmentalists some hope, which some pundits called "the most important environmental decision in years." They could become historic decisions that affect your bottom line, because electric utility costs will likely go up.

At the crux of them is the federal policy on selective law enforcement. As you probably realize, law enforcement is more a political art than a legal science. It just is not feasible to completely enforce all the laws on all the books in all the legal jurisdictions. Local law enforcement, for example, could not possibly employ enough cops to catch all traffic-law violations (think how many times you got away with one). At the federal level, one must factor in the effect of politics and policies of the Administration currently running the Department of Justice. The present Administration has been more reluctant than some others to vigorously enforce laws it does not enthusiastically support. Among them is the Clean Air Act that is assigned to the Environmental Protection Agency (EPA) for implementation. The Administration obviously favors corporate interests over environmentalists and is soft on regulations that would increase costs and, possibly, throttle back the economic growth engine. This is the issue that the Supreme Court confronted in its recent rulings, although the cases related to emissions of electric power plants and automobiles.

In one case, the Court ruled 5-4 that the EPA has the authority to regulate heat-trapping gases in automobile emissions. Although not applied to utilities as such, this case is crucial - when combined with the other one - to your bottom line. The Court ruled that the EPA could not sidestep its authority to regulate the greenhouse gases that contribute to global climate change unless it can provide a scientific basis for its refusal.

The decision appeared to be a strong message to the Administration, which has maintained that it does not have the right to regulate carbon dioxide and other greenhouse gases under the Clean Air Act; even if it did, it would not use the authority. The ruling does not force the EPA to regulate auto emissions, but, editors note, it probably would face further legal action at taxpayer expense if it fails to do so.

Writing for the majority, Supreme Court Justice John Paul Stevens said the only way the EPA could avoid taking further action is if it determines that greenhouse gases do not contribute to climate change or if it provides a good explanation why it cannot or will not find out whether they do.

Judge Stevens, who was joined by Justices Anthony M. Kennedy, David H. Souter, Ruth Bader Ginsburg, and Stephen G. Breyer, said that, by providing nothing more than a "laundry list of reasons not to regulate," the EPA had defied the Clean Air Act's "clear statutory command." He said a refusal to regulate could be based only on science and "reasoned justification." He added that, although the statute left the central determination to the "judgment" of the agency's administrator, "the use of the word 'judgment' is not a roving license to ignore the statutory text." The Court criticized use of semantics and word games to defy the law.

In a second and closely related Clean Air Act case, the Court unanimously endorsed authority of the EPA over factories and power plants that add generating capacity or that make renovations, increasing emissions of air pollutants. In this case, the Court reopened a Clinton Administration federal enforcement effort against Duke Energy Corp. under the Clean Air Act's "New Source Review" provision. In the unanimous decision, the justices ruled against Duke Energy Corp. in a lawsuit originally brought by the Clinton Administration as part of its enforcement effort targeting more than a dozen utilities. Most companies settled with the government, but several cases involving more than two dozen power plants in the South and the Midwest still are pending. The remaining suits demand fines for past pollution that, if levied in full, some editors say would amount to billions of dollars in costs to utilities. That is where your bottom line comes in, because such costs likely are passed on to consumers rather than absorbed by stockholders. The Supreme Court ruled that a U.S. appeals court overstepped its authority by implicitly invalidating EPA regulations and interpreting them in a way that favored Duke Energy. The appeals court's decision "seems to us too far a stretch," wrote Justice David Souter.

The underlying issue was whether emissions increases should be measured on an annual basis, an approach favored by the EPA under President Clinton. Duke and other utilities argued that the standard for triggering Clean Air Act requirements is an hourly rate increase in emissions. That way, companies can run coal-fired plants without having to install additional pollution controls, as long as the hourly emissions rate does not rise. Annual pollution would rise, however, when the modernized plants operate for longer hours. Utilities argued for an approach allowing them to expand capacity annually without triggering requirements for expensive new pollution controls. The state of Alabama filed a brief supporting the utilities saying that consumers would benefit from reduced power bills. But, the Court rejected that argument. "What these provisions are getting at is a measure of actual operations averaged over time, and the regulatory language simply cannot be squared with the regime" that Duke favors, Judge Souter wrote.

The Clean Air Act is aimed at reducing power plant emissions of nitrogen oxide and sulfur dioxide that contribute to smog and acid rain. The utility industry has been resisting costs of installing pollution controls under provisions of EPA's "New Source Review" regulations, which require utilities to install scrubbers and other pollution controls when upgrading their plants. They have vigorously fought campaigns against the program since the 1980s, most recently when EPA regulators sued in federal courts, by attempting to classify new generator installations in existing plants merely as maintenance procedures rather then new sources.

The fight is not over because the Court left open a key issue. Both sides agreed that the two key questions in the case were how emissions increases would be measured and what kinds of modifications would trigger the law. The second question - when improvements could be classified as routine maintenance instead of major modifications triggering "New Source Review" - remains unresolved.

Duke vowed to continue the battle in the lower courts, saying in a news release that the question it lost on in the Supreme Court was a narrow one. The company expressed confidence it will be able to demonstrate that its plants are not subject to the requirements of the "New Source Review" program. "We continue to believe we have solid defenses against the government's claims," says Marc Manly, Duke Energy group executive and chief legal officer.

Environmentalists are not counting their eggs just yet either. Frank O'Donnell, president of the Clean Air Watch, said the Supreme Court ruling will only translate into cleaner air if the Bush Administration "actually begins aggressive enforcement of the Clean Air Act. There is great doubt the Administration will do that." The Administration has recently proposed to relax "New Source Review" requirements for power plants using the guidelines sought by Duke.

Taken together these new actions by the Supreme Court and utilities seem to suggest that users will incur some new costs in the future. Utilities will either incur attorney fees and court costs to defend their positions, or costs to reduce their emissions under the Clean Air Act. The bottom line either way: You will pay.

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