State utility regulators won’t need to file compliance plans for the Obama administration’s Clean Power Plan this year after the Supreme Court put a judicial stay on the regulatory package last week. But even so, the plan was the main focus of the winter meeting of the nation’s utility regulators in Washington, D.C.
It’s easy to see why. While the stay, imposed on Feb. 9, gives stakeholders at least temporary relief from compliance deadlines, it also injected a new degree of uncertainty into planning process.
The death of Justice Antonin Scalia, a conservative stalwart on the high court, on Feb. 13 only added to that uncertainty. An air of anxiety hung around the meeting rooms at the Renaissance Hotel as members of the National Association of Regulatory Utility Commissioners contemplated how to proceed.
“It's a double whammy,” NARUC President Travis Kavulla told Utility Dive during an interview at the conference. “If it had just been the stay that would have been one thing, but the passing of Antonin Scalia complicates matters.”
Before last week, the trajectory for the Clean Power Plan seemed set. The D.C. Circuit would hear oral arguments on the merits of the plan on June 2 and the losing side would appeal to the Supreme Court, which would likely take the case. The widely held expectation was that the court’s four liberal justices would side with the EPA, the four conservatives would back the petitioning states, and Justice Anthony Kennedy would be the likely swing vote.
That all changed last week when the Supreme Court took the unexpected move of halting implementation of the rule until all court challenges are exhausted. Then, only four days later, Scalia was found dead in Texas, creating a vacancy on the court and throwing all the legal calculus into question. In just four days, the conventional knowledge about how the Clean Power Plan would move forward was thrown out the window.
Reactions to the events were mixed. Clean energy advocates decried the stay but expressed hope that Scalia’s passing would help the CPP’s chances of survival. States opposing the plan rejoiced at being able to pause or abandon compliance planning activities. Everyone wondered how long it might take to get clarity on the plan’s legality.
The NARUC conference helped bring some of that into focus. While some states and utilities will continue to pursue decarbonization, the stay introduced a new level of uncertainty that could deter some from making long-term investments. Although Scalia’s death could increase the significance of the D.C. Circuit’s eventual ruling on the plan’s merits, the entire package will likely need to be pushed back about two years, even if it is upheld.
Timeline and legal implications
In the aftermath of the judicial stay, a key question for states and utilities across the country has been how long the EPA’s regulatory package will be delayed, if it is upheld by the Supreme Court. Before the court’s action last week, states were working to meet a September 2016 deadline to file their first compliance plans with the EPA to implement the carbon regulations, and final compliance plans were due in September 2018.
After the stay, “the one thing that we know for sure is that the deadlines will change,” NARUC General Counsel Brad Ramsay told the conference on Tuesday. “The deadlines that are further out — the 2030 and 2022 deadlines — may change less than the nearer-term ones … but you know there has to be some sort of delay.”
It could well be 2018 before the EPA and states have to think about new deadlines, Ramsay said. The D.C. Circuit Court is slated to hear oral arguments on the merits of the CPP on June 2. Regardless of the ruling, the EPA or petitioning states are expected to appeal to the Supreme Court for a writ of certiorari, which the justices issue when they decide to hear a case. The high court usually takes about three to four months to decide, “so the earliest that I think it’s likely that you would get a ruling on a petition for certiorari … would be the very end of this year,” Ramsay said.
“I think it’s far more likely to be first quarter 2017,” he added, saying it could go three to four months beyond that if one of the parties asks for a rehearing at the D.C. Circuit.
Whatever the ruling out of the D.C. Circuit, Ramsay said, it is likely the Supreme Court will take the case. Only four of the justices must vote to take a case for certiorari to be granted, and four of them on the present court voted to stay the regulatory package, indicating that they may be skeptical of the plan's legal merits.
“If you were just basing your judgement call on the way they split on the stay, you would say the odds are probably pretty good that you’re going to get four votes to hear the case on the merits,” Ramsay said.
After the court decides to hear the case, there’s another round of briefings, then oral arguments, and the court issues a decision about three months after that, Ramsay said. That means the earliest we will know the fate of the Clean Power Plan would be the middle of 2017, though the year after is more likely.
“If they can get the merits briefing done and the oral argument time set during the first part of 2017, in theory, and I think it would go longer than this, the earliest you could see a decision on the merits would be in June,” Ramsay said. “I think it’s more likely that the timing goes in the normal course of events … that you see a decision in the second half of the year, maybe in the first quarter of 2018.”
After a final ruling on the plan by the Supreme Court, the EPA will have two options, Ramsay said. If all or part of the CPP is remanded, the agency will likely initiate another regulatory proceeding on carbon regulations, and new deadlines would be a part of that process. If the rule is upheld, the agency could simply move the deadlines for compliance back by the same intervals that existed before the stay.
But no matter what, states aren’t required to continue compliance planning for the 2016 and 2018 deadlines. After a ruling by the Supreme Court, the EPA will be required to give “adequate notice” before any deadline is enacted, Ramsay said.
With the exception of the unexpected stay, most of the legal details surrounding the plan are relatively routine for contentious regulatory packages. The EPA’s Mercury and Air Toxics Standards, for instance, went through a similar process before the Supreme Court issued a ruling remanding the rules back to the agency last year.
Scalia’s death throws another twist into the process. The conservative justice was widely expected to vote against the rule and was one of the five votes to stay the regulations. With his death, Ramsay said, it appears likely that the court would be headed for a split vote, “which is what you would expect based on the stay request.”
In the case of a tie vote, the D.C. Circuit’s ruling on the plan would stand as law, injecting greater significance into the upcoming oral arguments in June. That may benefit the EPA, legal scholars have noted in the past week, as the three-judge panel that will hear the arguments is expected to be receptive to the agency’s legal justification.
Increased uncertainty in the industry
In the aftermath of the stay, observers have debated the consequences the delay will have on decarbonization in the power sector.
The EPA, for its part, announced it would continue planning with receptive states, and a number of sector observers doubted the stay would have a large impact on the trajectory of the U.S. utility industry. Just this week, analysts told Utility Dive that the stay “means nothing” for energy efficiency planning, and that the extension of key tax incentives for renewable energy projects will mean that wind and solar continue to build out rapidly regardless of the situation with the CPP.
Those comments build on one line of thinking in the power sector that the CPP is not the primary driver of clean energy growth and carbon emissions reductions in the U.S. economy. Other factors, like the low price of gas and renewables compared to coal, are already pushing the country toward a cleaner power mix, meaning the federal carbon regulations don’t matter as much.
There’s likely some truth to that narrative, NARUC President Kavulla, a Montana utility regulator, told Utility Dive at the conference, but the stay could still have a big effect on how utilities model for the Clean Power Plan in their integrated resource planning processes.
In states where power providers are still vertically integrated — owning both generation plants and power lines — utilities use modeling software to put together their integrated resource plans (IRPs) and submit those to regulators for approval. Before the stay, when the rule was still in effect, utilities would include the CPP requirements as certainties in their IRP processes. But now, what was previously a determined factor in those models will now be less than certain, Kavulla said.
“Given the uncertainty of the rule, you take what had been baked into modeling software and you expose it to what's called stochasticity — you broaden the range of uncertainty of the subject variable,” Kavulla said. “So, rather than saying we know that in 2022 carbon has to reduce by this much, you say in 2022 we introduce an element to this model that suggests carbon will have to reduce from X% to Y%, and then you run that through the model in a kind of simulation that results in thousands of iterations.”
“In other words,” he said, “you incorporate risk uncertainty into the model rather than a determined direction of where you're going based on a law that's actually in effect.”
The result of these IRP models can have a significant impact on utility planning processes, Kavulla said. When uncertainty increases, utilities are discouraged from making hard capital investments, and that could affect their decision-making around new renewables, gas plants, transmission and other grid infrastructure and technologies.
While the IRP process applies mostly to vertically-integrated utilities, generators in restructured markets like PJM or ISO-New England are unlikely make big investments either.
“Those guys have a completely different market, and for the generators out there I doubt they'd make any capital investments anyways because market prices are so low at the moment,” Kavulla said. “They're completely depressed.”
The injection of uncertainty gets at the heart of one of the main benefits offered by the Clean Power Plan, according to its backers. After the plan was finalized in August 2015, representatives from the Natural Resources Defense Council, which helped craft the plan, explained that one of its biggest upsides would be providing certainty to utilities and clean energy investors about what carbon reductions would be required, and when.
With that certainty removed, even power providers that want to offer a cleaner product may hesitate to make any big moves. But it also could be the case that the modesty of the CPP targets could mean many states meet them through clean energy investments even before the original compliance period was set to begin in 2022. The Rhodium Group expects 30 GW of renewable energy capacity growth from 2016 to 2021 by virtue of the tax credit extensions, and this will likely “enable the power sector to meet CPP compliance solely through this near- and mid-term renewables build,” Director John Larsen told Utility Dive.
The theory that other policies — like tax credits or state renewables standards — are teaming up with market forces to push the clean energy transition faster than the CPP envisioned is probably correct, Kavulla said.
“Inasmuch as the statement is that the Clean Power Plan isn't even the primary driver of this and either policies or market fundamentals are — that's probably true,” he said. “I mean, people were planning to incorporate the risk of there being a carbon price into their utility planning models even before there was a Clean Power Plan, so I assume that continues.”
Even so, the CPP stay could have a chilling effect on investments after the renewable tax credits wind down in the early 2020s. In general, Kavulla said sector leaders need to be more specific in talking about how the likely two-year delay of the plan will affect compliance planning and investment decisions. Too often, he said, leaders at the EPA and supportive state regulatory agencies speak in “very general terms, like, ‘We’re still going to plan for it.’”
“If people are going to talk intelligently about planning and what it means for the utility industry, you need to talk about the modeling software and the actual planning process that informs utilities' judgements,” he said. “The big question within that is whether you bake in an assumption that a carbon reduction is law and needs to be planned for regardless of the cost, or whether that carbon reduction is maybe just something that could happen.”
“Even if it's weighted to an 80% probability,” he said, “it's still an uncertainty.”