Ken Silverstein
EnergyBiz Insider
Editor-in-Chief


American Electric Power's long legal battle has ended. It has agreed to pay billions to cut pollutants regulated under the Clean Air Act by two-thirds over the next decade. The $4.6 billion settlement comes amidst a U.S. Supreme Court decision last April - a ruling that now forces utilities with older coal fired plants to pony up for new technologies if they upgrade to produce more power.

The lower courts were mixed on this issue, with some ruling that the utilities were just performing routine maintenance and should not have to make expensive investments. The overall trend, though, has been against utilities. Now that the Supreme Court has weighed in against Duke Energy, the writing is on the wall. AEP's latest move will likely motivate the remaining utilities that have not reached settlements to do so before President Bush leaves office and a possible Democratic administration would enter.

"Where it is possible, coal-fired utility owners may settle pending environmental violations or litigation over the next year or so," says Christine Tezak, regulatory analyst with Standford Group in Washington, D.C.

Of the $4.6 billion settlement, AEP says that most of that money had already been dedicated to installing pollution control equipment. It said that the present value of the additional installations is $1.6 billion and that the 10-year investment will not affect its current bond rating or its projected capital expenditure program. AEP has also agreed to pay another $60 million to mitigate its ecological footprint as well as a $15 million civil fine. Altogether, it must cut its nitrogen oxide emissions by 69 percent within a decade. It admits no wrong doing.

AEP's settlement may well clear the bases with respect to these lawsuits involving the New Source Review provision of the Clean Air Act. That stipulation says that utilities making major modifications to their coal facilities must install new pollution controls or else they are in violation of the law. The Clinton administration filed suit in 1999 against 51 separate facilities in an effort to force compliance. But in 2003, the Bush administration rewrote the law in an effort to avoid future litigation and to maximize coal generation capacity.

The showdown began in earnest in 2003 when the first case involving Akron, Ohio-based FirstEnergy Corp. went to trial. The judge ruled that the utility had to install $1.2 billion in pollution control equipment. It is the same judge who has been presiding in the AEP case, which is also a factor in the most recent agreement.

Since 1999, "We have remained firm in our belief that we operated our plants in compliance with the New Source Review provisions," says Michael Morris, AEP's CEO. "That remains our position today," he adds, noting that the settlement "eliminates the potentially significant financial risk of pursuing the litigation to its conclusion while still achieving the environmental improvements that both we and the government want."

Bargaining Table

When the original 1970 Clean Air Act passed, it was thought that those coal plants constructed in the 1950s would close well before the birth of the 21st century. As such, those facilities were granted "routine maintenance" exemptions from the act. But the northeastern states along with California have long protested that those plant operators abused their privileges and instead, made "major modifications" without making the necessary investments.

That prompted the rash of suits in 1999. In AEP's case, eight states, the EPA and several environmental organizations filed legal papers accusing the utility of running afoul of the New Source Review at 30 of its 46 coal plants.

President Bush argues that the nation needs the additional generation capacity and the restoration of the older coal-fired power plants is an effective source. By loosening the New Source Review restrictions, he reasons that plant operators would spend less money on lawsuits and more on installing pollution controls.

Ben Zeismer, with Jacobs Consultancy in Houston, agrees with that position. He says that the EPA has intentionally misconstrued the definition of "repairs" and renamed them as "modifications" or "upgrades" in its pursuit to require prior approval of anything power plants do. "When you get a brake job done on your car, do you tell people that you upgraded or modified your car?"

But, the Higher Court has taken the position that if the "work" results in more output and subsequently more emissions, then the New Source Review applies. Environmentalists agree, arguing that the adherence to the law as written will affect air quality in dozens of states. They point to studies that link pollution from coal-fired plants to as many as 20,000 premature deaths in the United States.

Green groups are applauding the AEP decision. They say that the $4.6 billion settlement is the largest settlement in the history of the Clean Air Act and that it is the most money an energy company has ever agreed to allocate toward new pollution controls.

"The size of the settlement means that we will be able to keep 813,000 tons of harmful pollution out of the atmosphere, improving air quality and public health around these plants and beyond," says John Walke, director of NRDC's clean air program.

The resolution should also bring the remaining holdouts to the table. While some thought that a strict interpretation of the New Source Review deterred technological advances, practical experience has shown that such a position appears to be necessary. Utilities with older coal fleets will now have to clean up their act and start investing increasing amounts in modern technologies.



 

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