NEWS

July 18, 2008

Consultant: 'Irresponsible' ruling on CAIR creates uncertainty
over investments

July 18, 2008 9:18 AM ET
By Wayne Barber

Regulatory clarity seems to be the first victim of a federal appeals court's decision to throw out the Clear Air Interstate Rule, said E3 Consulting Senior Vice President and COO Jim Short.

"We are really back to the drawing board," Short said. Denver-based E3 Consulting advises owners, developers and lenders involved with power plants and other energy infrastructure projects.

"There are so many unknowns about what will replace CAIR and how long it will take," Short said. "Will the replacement build on the work that has been done and the money that has been spent?"

The CAIR program was the regulatory offspring of the Clear Skies Act. That legislation, pushed hard by the Bush administration, was designed to regulate three of the four major pollutants associated with coal plants – SO2, NOx and mercury. Clear Skies, however, did not regulate carbon, and that was one reason it died in a Senate committee in 2005. The administration then turned to CAIR and the Clean Air Mercury Rule.

The U.S. Court of Appeals for the District of Columbia Circuit threw out the CAIR program in its entirety on July 11, declaring it fatally flawed. This came months after the same court ruled against CAMR.

While not fluent in the legal grounding of the rule, Short was stunned to see CAIR thrown out now. "I'm just incredulous," he said. Short credits CAIR with helping spark major infrastructure spending on scrubbers and other air controls. As a result, it also helped revitalize coal production in some of the higher-sulfur mining regions.

"It's also pretty clear that billions have been spent on NOx and SO2 controls, and that the tenor of the implementation of the rule has had a definite and significant impact on the cost of new construction of all types of power plants nationwide, not just the CAIR states," Short said.

"Now it's uncertain as to whether or not that [financial investment] was a wise decision," Short said. For the moment at least, none of the major coal-burning utilities have suggested they might cancel any previously announced environmental controls.

A spokesman for a major turnkey contractor, Fluor Corp., said July 17 that his company has yet to see any companies dropping environmental projects. "We have not seen any pullback on anything we are currently working on," said Fluor spokesman Brian Mershon, who added that it is still too early to tell what the impact might be.

Perhaps the most uneasy parties might be independent power companies that cannot recoup their scrubber or NOx control expenses from a rate base, Short said, commenting, "Those guys have to be nervous." PPL Corp. has said it could take a third-quarter impairment charge because of the CAIR ruling's impact on emissions markets.

As for scrubbers and emissions control projects, most are already in the pipeline. However, "if somebody is at a place where they can stop," they might delay until they know what the rules will be, Short said.

In 2006, E3 Consulting predicted that an estimated 9,000 MW of the oldest (1950s vintage) and smallest (100 MW or less) coal units could be retired soon as a result of CAIR and the Clean Air Mercury Rule. With CAIR's demise, some of those units could run a little longer than first expected, but their days are numbered, Short said.

Overall, Short said he wished that if the courts were going to invalidate CAIR, it would not have happened this late in the game.

"'Nuts' and 'irresponsible' are two words that come to mind when considering this ruling from a practical point of view," Short said.

"Had they ruled in 2005, or maybe even 2006, the industry could have avoided at least some the economic impact and the new uncertainties, but to wait until 2008 to rule on a program that begins in 2009 and that requires significant lead time to meet is crazy," Short said. "I don't have an opinion on the law, only the implications of what has been done. I think there should have been more consideration given to the fact that the train had left the station a long time ago."