In a landmark decision regarding global warming and greenhouse gas emissions that likely will have significant impact on electricity generation facilities, on April 2, 2007, the United States Supreme Court ruled 5-to-4 against Bush administration efforts to avoid regulating greenhouse gas emissions from motor vehicles.

In 1999, a group of 19 private organizations (including many environmental groups) petitioned the U.S. Environmental Protection Agency ("EPA") to regulate emissions of greenhouse gases, including carbon dioxide ("CO2"), under the mobile source provisions of the federal Clean Air Act ("CAA"). EPA denied the petition and concluded that the CAA did not authorize the agency to issue mandatory regulations to address global climate change issues and – even if it had the authority to regulate greenhouse gas emissions – the agency stated it would be unwise to do so at that time because a causal link between greenhouse gas emissions and purported global climate change had not unequivocally been established.

These private organizations – joined by the State of Massachusetts and other state and local governments – appealed EPA’s decision to the United States Court of Appeals for the District of Columbia Circuit. The D.C. Circuit affirmed the EPA’s decision to avoid regulating greenhouse gas emissions.

In a strong rebuke to the EPA, the sharply-divided Supreme Court held that greenhouse gases fall well within the CAA’s definition of air pollutants and held that EPA has the statutory authority to regulate emissions of such gases from new motor vehicles. The Court further held that EPA’s decision that it was unable to regulate greenhouse gases is contrary to the CAA. The Court stated that EPA’s ultimate decision to regulate greenhouse gases must relate to whether such gases cause or contribute to air pollution that might reasonably be anticipated to endanger public health or welfare.

The Court stated that, under the clear terms of the CAA, EPA can avoid taking further action regarding greenhouse gas emissions from vehicles only if it determines that greenhouse gases do not contribute to climate change or if the agency provides some reasonable explanation as to why it cannot or will not exercise its discretion to determine whether such gases do contribute to climate change. The Court found that EPA’s "laundry list" of reasons not to regulate had nothing to do with whether greenhouse gas emissions contributed to climate change and, further, if the scientific uncertainty of that causal effect is so profound that it precludes EPA from making a reasoned judgment, EPA must state so affirmatively.

The Court also concluded that EPA had offered no reasoned explanation for its refusal to decide whether greenhouse gases cause or contribute to climate change and, therefore, was arbitrary and capricious and otherwise not in accordance with the law. This decision is likely to promote further regulation of greenhouse gases on the state level, and will embolden those seeking to pass legislation on the federal level. Further, this decision will allow other cases regarding the regulation of greenhouse gases from the utility sector and greenhouse gas emissions from vehicles to move forward. It is estimated that ½ of all stationary source CO2 emissions in the U.S. currently are emitted from facilities producing electricity from coal.

Companies that have not evaluated their direct and indirect greenhouse gas emissions (a.k.a. "carbon footprint") should view this decision as a strong signal to do so and begin to monitor federal legislative and regulatory developments in this area. In addition, if the EPA does begin regulating greenhouse gas emissions from automobiles, it is likely that there will be increased interest from the auto industry (and others) to broadly regulate such emissions on the federal level throughout the economy. At least four bills – all involving so-called "cap-and trade" regulatory systems – have been introduced in the 110th Congress. Congress is also investigating potential implementation of carbon tax legislation.

FERC Supports Midwest ISO Regional Expansion Criteria And Benefits Proposal

On March 15, 2007, the Federal Energy Regulatory Commission ("FERC") issued an order conditionally accepting the Midwest ISO’s cost allocation methodology for Regionally Beneficial Projects, (i.e., "economic projects") and implementing tariff revisions, effective April 1, 2007, as requested ("March 15 Order").

In a February 1, 2006 order, FERC directed the Midwest ISO to develop procedures for the cost allocation method for Regionally Beneficial Projects ("RBP") that reduced congestion costs on the grid, but were not required for reliability purposes. On November 1, 2006, the Midwest ISO proposed procedures for the allocation of costs for RBP ("RECB II Filing").

FERC’s March 15 Order conditionally accepted the tariff revisions proposed by the Midwest ISO and directed the Midwest ISO to make a compliance filing within 30 days of the order. FERC explained that its order focused on two major areas of dispute: (1) the criteria for determining whether a particular project’s benefits are sufficient to qualify for regional cost allocation; and (2) the method for allocating the costs of those projects that do meet the criteria. The Midwest ISO proposed various metrics to determine whether a project will have regional economic benefits that would merit regional cost sharing. FERC explained that the Midwest ISO left room for other avenues for sharing costs, for example, via mutually-agreeable arrangements among market participants. FERC held that this approach is "consistent with our finding in Order No. 890 that ‘[a]s a general matter, we believe that the beneficiaries of [an economic] project should agree to support the costs of such projects."

On March 15, 2007, FERC also issued an Order on Rehearing and Clarification of the Midwest ISO’s RECB I Filing ("RECB I Order") regarding Network Upgrades required for reliability ("Baseline Reliability Projects"). On November 29, 2006, FERC had issued an order finding that the Midwest ISO’s proposed methodology for cost allocation for high-voltage Baseline Reliability Projects as described in the Midwest ISO’s RECB I Filing was just and reasonable. Several parties filed requests for rehearing and clarification, which FERC addressed in its RECB I Order. FERC granted in part and denied in part the requests for rehearing and clarification.

FERC denied the requests for rehearing and reaffirmed its acceptance of the Midwest ISO’s 20% postage stamp cost allocation for high-voltage Baseline Reliability Projects proposal. Despite commenters’ assertions that the postage stamp rate should be higher, FERC found that based on the studies the Midwest ISO provided, it was satisfied that the 20% postage stamp rate was a reasonable starting point. However, FERC reiterated its November 29 directive that the Midwest ISO revisit the postage stamp rate when the Midwest ISO and the transmission owners review the rate design for existing transmission facilities.

FERC Issues Final Rule Approving 83 NERC Reliability Standards

On March 16, 2007, FERC issued a Final Rule in Docket No. RM06-16 approving 83 reliability standards proposed by the North American Electric Reliability Corporation ("NERC"). FERC had previously certified NERC as the Electric Reliability Organization ("ERO") with responsibility for developing these standards. In addition to the 83 reliability standards, FERC also approved six of the eight proposed regional differences, as well as the Glossary of Terms submitted by NERC. These are mandatory reliability standards applicable to users, owners and operators of the bulk power system designated by NERC through its compliance registry procedures. Violations of these standards may be met with both monetary and non-monetary penalties.

While granting approval for these 83 reliability standards, FERC found that some of the proposed reliability standards will require significant improvements; including those needed to address the recommendations of the U.S.-Canada report on the August 2003 blackout.

Therefore, FERC directed the ERO to submit significant improvements to 56 of the 83 reliability standards that are being approved as mandatory and enforceable. The remaining 24 standards will remain pending at FERC until further information is provided.

The Final Rule adds a new part to FERC’s regulations, which states that this part applies to all users, owners and operators of the Bulk-Power System within the United States (other than Alaska or Hawaii) and requires that each reliability standard identify the users, owners and operators to which that particular standard is applicable. The new regulations also require that each standard that is approved by FERC will be available on the ERO’s Internet website for public inspection.

The Final Rule will become effective either 60 days from the date Congress receives the agency notice of the rule or the date the rule is published in the Federal Register, whichever is later.

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