Energy Insights: An Update from the Second Quarter of 2015

In this edition of Seyfarth Shaw’s Energy Insights Newsletter our Energy and Clean Technologies team covers important developments in Q2 2015 for the energy industry including 1) court protection for companies using hydraulic fracturing chemicals, 2) states’ dwindling support for renewable energy programs, and 3) Supreme Court’s requirement that the EPA consider cost when implementing regulations.

 

Hydraulic Fracturing Chemicals Not Protected…or Known

 

In two unrelated events, the Pennsylvania Appeals Court in April 2015 in Stacey Haney et al. v. Range Resources-Appalachia Inc. declined to review a trial court’s order directing Range Resources to produce proprietary information on chemicals supplied by third parties to its Marcellus Shale drilling site.  The case involved a dispute over alleged personal injuries and property damage caused by contamination at the site.  Even though the trial court had initially issued an order directing such third party manufacturers to disclose constituent ingredients of their products, few complied.  It then subsequently issued another order directing Range Resources to secure that information, which was appealed.  The appellate court panel concluded that Range Resources had no standing to assert that it had sufficient “interest” in the chemical’s proprietary information. Rather, only the manufacturers of those chemicals had a right to assert such protection, even though Range Resources was tasked with the order of obtaining such information.

 

Separately in July 2015, the California Council on Science and Technology released its Independent Scientific Assessment of Well Stimulation in California and concluded, among other things, that current record-keeping on composition of ingredients used in hydraulic fracturing is insufficient to (i) assess the direct and indirect impact on human health or the environment from “fracking,” (ii) determine which and the level of hazardous chemicals are used in water used for fracking and their interaction with each other, and (iii) determine the effects and impact on the waste water disposal methods.

 

So what did Range Resources seek to protect if current record-keeping on composition of ingredients is insufficient?  Conversely, how could a court order Range Resources to obtain information on chemicals that not even government-funded regulators have?  It appears the sizeable disconnect is ongoing and further thought should be put into how private business and government can work together to resolve this issue.

 

Texas and Other States Recoil from REC Programs and RPS

 

Despite the booming solar and wind energy businesses in Texas, the Texas state senate in April 2015 voted to end its renewable energy credits (REC) program and mandatory renewable portfolio standards (RPS), which provided guidance as to how much of the state’s electricity would be generated from renewable sources.  Texas is just another example of state legislatures curtailing or ending renewable energy programs.  Senator Troy Fraser has stated that because Texas has been so successful in developing wind and solar power that it no longer needs a renewable energy requirement.  Proponents of renewable energy in Texas, including environmental and renewable energy association groups, however, believe the termination of the program would destroy the value of RECs, and halt the completion of the Competitive Renewable Energy Zone network of power transmission lines, which has been a substantial impediment to further growth and transportation of the energy from low population centers with large renewable projects, to high population centers, where the need for energy is greater.

 

Other states, such as Indiana, Ohio, Oklahoma and Kansas have taken or are contemplating taking similar actions, but for different reasons, such as RPS standard leads to electric rate increases, or that renewable energy should be able to compete in the free market without subsidies.  West Virginia eliminated its RPS entirely.

 

Proponents argue that keeping RPS standards signals to the market that those states are open for renewable energy business.  What may be less clear to certain state legislatures is whether subsidizing renewable energy projects and growth in the short term has substantial economic benefits in the long term.

 

Supreme Court: EPA Must Consider Cost Of Implementing Regulations

 

In a 5-4 ruling, the U.S. Supreme Court on June 29, 2015 ruled that the Environmental Protection Agency (EPA) acted unreasonably when it refused to consider the cost of implementing its Mercury and Air Toxics Standard (MATS).  The MATS rule, issued in 2012, established emissions limits from power plants for mercury, filterable particulate matter, and hydrogen chloride.  U.S. power plants were required to come into compliance with the MATS rule by April 16 of this year, but 170 coal-fired power plants received a one year extension to either install control technology or shut down.

 

The EPA estimated that it would cost the power industry nearly $9.6 billion per year in compliance costs while providing a pollution reduction benefit of only $4 million to $6 million per year.  However, the EPA said that Section 112 of the Clean Air Act only required it to consider compliance costs when establishing an appropriate emission level but not when deciding whether to regulate in the first place.

 

Justice Scalia, writing for the majority, found that the words “appropriate and necessary” under Section 112 required the EPA to consider the costs of the regulation at the initial stages and that “EPA must consider cost—including cost of compliance—before deciding whether regulation is appropriate and necessary.”  Justice Scalia further said “Against the backdrop of [] established administrative practice, it is unreasonable to read an instruction to an administrative agency to determine whether ‘regulation is appropriate and necessary’ as an invitation to ignore costs.”  Justice Scalia continued on to conclude that Section 112 required the EPA to consider “all of the relevant factors” and that “agencies must operate within the bounds of reasonable interpretation. EPA strayed far beyond those bounds when it read §7412(n)(1) to mean that it could ignore cost when deciding whether to regulate power plants.”

 

Writing for the minority, Justice Kagan said that Congress had allocated broad authority to the EPA to determine whether to regulate an industry and that the EPA had properly considered costs at a later stage in the regulation, something the EPA has done in other rules.  

 

Whether this line of reasoning will spill over into other agencies implementing other regulations remains to be seen.