Politically, the EPA’s Clean Power Plan is a highly divisive regulation. Only four states — Idaho, Pennsylvania, Tennessee and Nevada — have refused to sign on to court filings either supporting the regulatory package, or asking that it be thrown out. 

But in the world of utility regulators, consensus is strengthening around the rule, even among those who would rather see it off the books. While 27 states may be suing the EPA, the vast majority of those states are also simultaneously working to draft compliance plans for the rule in case it survives legal challenges. 

The fact that most of the states opposed to the regulation are considering filing compliance plans has been reported by many media outlets for months. But now, some states that previously indicated they would refuse to draw up a state plan — such as Texas or Indiana — are backtracking, saying they now may file one. And other regulators from across the country seem to be changing their tune as well.

The growing consensus around compliance was on clear display at the annual meeting of the National Association of Utility Regulatory Commissioners (NARUC) in Austin, Texas, this week. While in past meetings, many commissioners from opposed states criticized the proposed rule, the publication of the final rule in August seems to have shifted the conversation. Now that they know exactly what they’re dealing with, many state commissioners appear to have compliance at the front of their minds.

But a natural question arises: Why would states so staunchly opposed to the rule spend significant time and effort trying to comply?

Joshua Epel, chair of the Colorado Public Utilities Commission put it succinctly: “For the same reason I own insurance on my house, when I don’t expect it to catch on fire.”

Doug Scott, vice president for strategic initiatives at the Great Plains Institute, a nonprofit that has been convening state regulators to discuss regional CPP compliance, said the timetable for compliance has pushed regulators to think now — and not later — about how they will comply.

“We work with a lot of states that are not supporters of the CPP and are engaged in litigation against the plan, but a lot of those states are looking at it and saying ‘There are a couple of things that are important here. No, I don’t want to have to do this, but if I do have to do this, I need to understand right now what the best way is for me to proceed, and to start that planning process because a lot of this takes an awfully long time.”

Speakers at the conference indicated that utilities and generators across the nation are pressuring state regulators to devise compliance plans, looking to avoid the imposition of a Federal Implementation Plan (FIP) that the EPA would apply to states that do not submit acceptable compliance proposals.  

One of those figures was EPA Administrator Gina McCarthy, who delivered the keynote address to regulators during the conference. After her speech, McCarthy responded affirmatively to a question about whether utilities have become an ally for the agency in states that have threatened to not file a plan.

“I think we’ve been working really well with utilities, and we traditionally do, because when a rule gets finalized, they want to find the best way forward,” she said. “They’ve been working collaboratively with us individually, and I assume they’re having conversations in their own states.”

"I think utilities have been very grateful,” she added, “for the efforts that we’ve taken to provide them additional time and look at how to be trading-ready and give them maximum opportunities, but it’s up to them how they express their interests at the state level.”

Scott, who served on the Illinois Commerce Commission until earlier this year, echoed those sentiments, saying that “it’s prudent as a former state official to be working on that even as I'm litigating, and I think you’re seeing a lot of states that are doing just that.”

"They want to be in a position if they do have to comply, they want to be ready to comply in a timely manner and not be subject to a federal plan, because a lot of the utilities or generators in particular states are telling their state officials that we’re hearing in public meetings, ‘Please don’t subject us to a federal plan.’”

“What we’re hearing,” he concluded, “is a lot of those generators are engaging with their state officials and I think that is very positive because … to figure out where to go, you have to figure out where you are.”

EPA chief stresses cooperation and dialogue

The EPA administrator struck a conciliatory tone in her keynote before the roughly 1,200 regulators and their staffs in the audience. 

“My message is just one of thanks,” she said, telling the regulators they have been “key partners” in the finalization of the Clean Power Plan and its coming implementation.

“I think we’ve learned from one another and tried to bridge the gap between how we regulate the environmental world and how utilities are regulated in a way that’s incredibly important and serves both of our interests extraordinarily well,” McCarthy said. 

EPA officials have been crisscrossing the country since the publication of the draft rule in June 2014, listening to suggestions and critiques from stakeholders in each region. McCarthy said that kind of outreach should characterize how EPA approaches every rule. 

Beyond simply realizing environmental and health benefits, the EPA administrator said her agency “must understand how the rules are done in a complex of arenas of responsibilities that we need to provide the public that we serve.” 

McCarthy said convening stakeholders allowed them to craft a plan that will reduce pollution while fitting into the way the power sector operates today. 

“The solutions to pollution in [the utility] sector need to flow the same way that energy does and need to be managed appropriately,” she said. “While we needed to recognize state targets, we also needed to recognize that electrons flow out of those state boundaries all the time.”

McCarthy said the EPA has shown it is listening closely to stakeholders with changes in the final plan, such as delaying the compliance period until 2022, instead of 2020, as was originally proposed.

And comments were essential, she said, in making sure that standards were “fair and consistent” for coal and gas plants across the country. 

“We did make changes," she said. "We did listen.”

It seemed that at least on that point, most utility commissioners agreed.

Stan Wise, a commissioner from Georgia, one of the states challenging the rule, stood up during the Q&A session to thank the administrator. 

“It is extraordinary the extent you will go to interact with us,” he said.

Not everyone was pleased with the comment process, however. Julie Fedorchak, chair of the North Dakota PUC, rose to tell the administrator that from her state’s perspective the finalization process was “anything but thoughtful,” because North Dakota’s emissions target went from an 11% reduction in the draft proposal to a 45% reduction in the final plan. 

McCarthy acknowledged Fedorchak’s frustration, but said that “part of the challenge we have is to recognize that the final rule is very different from the proposal.”

Under the final rule, she said, states like North Dakota are given more options on how they can comply, such as using emissions trading schemes to help generators in their states draw down emissions gradually. 

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

While the EPA administrator stressed continued cooperation and dialogue throughout her speech, she also made clear the agency and the Obama administration are not going to back down in the face of legal challenges. 

“We’re really confident,” she said. “We know this rule will stand the test of time because it is grounded in facts … and firmly rooted in the Clean Air Act.”

Leakage issues

The rule may be finalized, but that doesn’t mean there aren’t outstanding issues waiting to be resolved. In particular, a number of stakeholders raised the issue of emissions “leakage” for states that choose a mass-based approach to compliance. 

At the core of the issue is that emissions standards for new power plants under the agency’s New Source Performance Standards (NSPS) are less stringent than those articulated for existing and modified plants under the CPP. That discrepancy troubled some who worried states would comply by building new gas plants under the NSPS, allowing them to retire older, dirtier plants, but not achieving the level of emissions reductions envisioned under the Clean Power Plan.

Addressing leakage is “essential” to “maintain the integrity of [emissions] reductions,” McCarthy said during her address. 

EPA gave states three options for dealing with leakage in compliance, Scott of the Great Plains Institute explained. The first is to include new units under the Clean Power Plan standards along with existing and modified ones. If states choose not to include them, they must set aside a certain number of emissions allowances for both renewable energy and gas plants – essentially taking them off the market and not allowing them to be traded by generating units. The number of allowances to be set aside is different for each state. 

The third option is to demonstrate to the EPA that leakage is simply not an issue, but Scott said that may be less appealing to states because of the level of understanding it requires of generating units not only in one state, but in an entire region or RTO footprint. 

The reason for all of this, he explained, “is that you don’t want new units to blow through the cap and obviate gains that are made under the proposed rule. By building a lot of new units you might actually harm that if those new units aren’t covered. So there has to be a way to not disadvantage existing units in favor of new units.”

The leakage fix has some states concerned, however. They worry that the stricter requirements for new plants will not leave enough headroom for them to build new gas plants to meet demand if an accelerating economy spurs load growth for utilities. 

Commissioner Asim Haque of Ohio asked McCarthy about those issues with the leakage fix after her speech. In particular, he wanted to know if the EPA would request comments on this “hot button issue” in the process of crafting a federal implementation plan, due out in summer 2016.

“Next question,” the administrator joked to laughs throughout the audience.

Leakage is an issue that “makes my eyes glaze over” with its complexity, she explained, but the agency is working to address it.

“I think we’ve teed up this issue pretty effectively when we put the model rule FIP out,” she said. “We don’t want to prejudge how it’s handled. We’re trying to have the same back-and-forth as we had [on the Clean Power Plan]." 

“We’re looking for continued engagement on this,” she concluded. “I don’t have a silver bullet for how this will be handled.”