The EPA's Golden Rule: No Good Neighbor Goes Unpunished

25 March 2014 Renewable Energy Outlook Blog

Have you ever wondered what all those additional charges are on your electric bill? This month my bill lists a “Customer Charge,” a “2013 Fuel Adjustment” and a “State-Wide Low-Income Assistance Fee,” which add up to about $10, or $120 a year. I’m a utility lawyer, and even I don’t know what all of these charges are or how they were calculated.

Soon the Environmental Protection Agency may be adding a new charge to your monthly bill, but it won’t be itemized. This one I’m very familiar with because I’ve spent the past two years challenging it in court. I call it the EPA’s “good-neighbor fee” since it comes from a part of the Clean Air Act called the good neighbor provision. It’s the amount that the EPA says you need to pay to clean up the pollution that blows from your state into neighboring states.

The fee originates from an EPA regulation adopted in July 2011, called the Cross-State Air Pollution Rule, that tells 27 states and the District of Columbia how much cross-state pollution they must reduce from their power plants. The more pollution, the higher the good-neighbor fee.

Most Americans are probably fine with paying a fee to clean up their state’s harmful interstate pollution. I live in the Midwest, and I know my state’s emissions get blown east and raise air pollution levels that could cause health problems in other states. It seems fair that I should pay to fix that problem, particularly since my state likely benefits from the economic activity related to the pollution.

But the EPA’s good-neighbor fee comes with some fine print that many states and utility companies find unfair. If you live in a lesser-polluting state—such as New York, Iowa, South Carolina or my home state of Wisconsin—your good neighbor fee is higher than it would be if the EPA were simply comparing cross-state emission levels. Why? So that more-polluting states—such as Illinois, Ohio, Missouri and Louisiana—don’t have to spend as much.

On Dec. 10, the Supreme Court heard oral arguments in EPA v. EME Homer City Generation, in which more than a dozen states as well as private companies are challenging the Cross-State Air Pollution Rule and how its fees are determined. The court agreed to hear the case after the D.C. Circuit Court of Appeals struck down the rule in 2012, determining that “Congress did not authorize EPA to simply adopt limits on emissions as EPA deemed reasonable.”

Industry lawyers like me (my firm represents one of the utility companies in the case) and the D.C. Circuit Court agree that the law requires an “air-quality only” approach based solely on how much pollution a state sends to neighboring states. The EPA, however, looks at how much it would cost various states to reduce their emissions. To lower the overall cost of reducing cross-state pollution, the EPA says it can decide the amount each state has to pay, even if it requires some states to pay more than their fair share.

During oral arguments, Justice Antonin Scalia made it clear that he viewed the EPA’s cost-based approach as illegal under the Clean Air Act because a number of lesser polluting states are forced to clean up more than they would under an air-quality only approach. Justices Stephen Breyer and Elena Kagan, however, seemed to side with the EPA, repeatedly pointing out that the agency’s cost-based approach is rational because it minimizes overall costs.

No one—not Justice Scalia or the state and industry challengers—questioned the fundamental logic of the EPA’s cost-based approach. They should have, because it ignores a critical factor: the cost of electricity.

The EPA’s rule covers 27 states. Of those states, the 10 most-polluting pay an average electric rate of 8.6 cents per kilowatt hour (kWh), or about 20% less than the nationwide average. The 10 least-polluting states pay an average rate of 10.7 cents per kWh, or about 5% higher than the nationwide average. So, although the EPA’s approach might cost less overall, its rule will cause the lesser polluting states to subsidize the more-polluting states, even though the more-polluting states are already paying some of the lowest electric rates in the country. This seems like bad policy to me.

Let’s look at an example using my home state of Wisconsin. Illinois power plants emit twice as much harmful cross-state pollution as Wisconsin plants. Yet the EPA’s rule would require Wisconsin plants to reduce their emissions by 70% and Illinois plants to reduce by only 10%—all because EPA thinks Wisconsin plants are cheaper to clean up. This means that my good-neighbor fee in Wisconsin will be higher than it would be under an air-quality only approach because I have to offset some of Illinois’s pollution. But my electric rate in Wisconsin is already about 10.5 cents/kWh, while Illinois’s citizens pay about 8.5 cents/kWh. Surely Illinois can afford the higher costs.

Unfortunately we don’t know how much more expensive an air-quality only approach would be for the more polluting states because the EPA never did those calculations. So it’s difficult to say from a policy perspective how much of the compliance costs, if any, should be shifted between the states.

One thing is clear. Regardless of whether the EPA’s cost-based approach is legal, it’s definitely not sensible. Unless, of course, you live in a more polluting state.

This post originally ran in the Wall Street Journal on December 20, 2013.

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