Attorney predicts court will rule against CAIR over SO2 credit valuation

A Clean Air Act lawyer predicted on May 1 that the US Environmental Protection Agency may be forced by a federal court to scrap a provision under litigation in the upcoming Clean Air Interstate Rule because it violates the law by discounting the value of sulfur dioxide allowances in the later years of the program.

Allison Wood, a partner with Hunton & Williams, said Title IV of the Clean Air Act specifies that EPA can allocate one allowance for one ton of emissions.

Wood participated in a panel discussion on CAIR, the Clean Air Mercury Rule and climate change legislation along with Daniel Chartier, air quality programs manager at Edison Electric Institute; and Patrick Traylor, a Hogan & Hartson attorney, at the spring conference of the Environmental Markets Association in Miami.

Under CAIR, utilities in the 28 participating states and the District of Columbia will have to cut SO2 emissions, starting with the first phase that runs 2010-2014, and make further cuts, beginning 2015.

Despite the clear language of the Clean Air Act, Wood said EPA is requiring states to adopt an allocation formula that mandates utilities retire two allowances for every ton they emit during the first phase of SO2 cuts and 2.86 allowances during the second phase.

Utilities said they find the allocation approach inequitable.

The Court of Appeals for the District of Columbia Circuit has been asked to rule on whether this allocation is valid, among other aspects of the CAIR rule that are being challenged.

The court held oral arguments March 25, but Wood said EPA's rationale "did not appear to fly well with the judges."

She based her perception on the repeated questioning of EPA attorneys to explain the rationale behind its allocation approach.

She said EPA was taking the position that a clause in Title IV does not consider an allowance to be a property right and hence allows the US government to change the value of the allowance for public health benefit.

A day earlier at the EMA conference, Sam Napolitano, director of EPA's Clean Air Markets Division, said EPA remains confident that it has developed a strong written record that backs its positions.

Napolitano did not touch upon the oral arguments at all, saying agency officials are not allowed to comment on pending litigation.

He did say, however, that EPA is on track to move forward with its trading program under CAIR.

Wood, in her own presentation, essentially agreed with Napolitano that the trading program as a whole would remain unaffected. The court's ruling, which is expected in June, would affect only the allocation aspects of the trading program, Wood said.

Ruling against EPA would change market

When asked how the market would react to a court ruling that goes against EPA, Chartier, who is a principal cofounder of EMA, said there is already a lot of uncertainty in the emissions market, but he said utility traders and brokers would be better at answering that question.

Gary Payne, emissions trader with Dominion Energy Marketing, said utility traders have never had to engage in risk owing to regulatory litigation uncertainty.

They have to deal with all types of risk, but "this is certainly a first."

A utility trader with a southern utility told Platts that a court ruling against EPA in this instance would cause traders to regret not selling SO2 allowances that are currently assessed at $350/short ton.

On the other hand, if the court upholds EPA's allocation approach, then utilities would be questioning the wisdom of having sold allowances.

Genscape has estimated that there are about 13 million unused SO2 allowances of 2008 and previous vintages in the marketplace that are causing the spot price to decline.

Despite the excess of unused allowances, the trader said utilities would much rather have the allowances in the bank than come up short if the court does rule in EPA's favor.

"Both 2:1 and 2.86:1 allocation ratios could draw down the bank" despite excess allowances, the trader said.

Aside from the SO2 program, Wood also talked about the future of the Clean Air Mercury Rule that the DC court struck down February 8.

he mercury rule would have set up a trading program along the lines of the CAIR program.

Wood said the mercury trading program is "dead" for all practical purposes because the court vacated the entire rule, a move that nobody in the utility industry expected.

Created: May 2, 2008

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