Bernstein Research said Feb. 10 that it considers the U.S. Supreme Court decision to postpone implementation of the U.S. Environmental Protection Agency’s Clean Power Plan ‘highly unusual’ and could be a sign that the court’s five conservative members doubt its legality.
The development should also give states more time to draft carbon reduction plans – even if the EPA rule is upheld by the courts.
“The Supreme Court’s 5-4 decision to stay the Plan is highly unusual – the Court rarely stays federal regulations prior to a decision on the merits by a federal court of appeals – and may reveal doubts among the Court’s five conservative judges as to the Plan’s legality,” Bernstein said in its analysis.
“As a result of the stay, the compliance deadlines stipulated by the Plan cannot be enforced until petitioners’ challenges to the Plan have been heard and a final decision handed down by the D.C. Circuit Court of Appeals or, if the Circuit Court’s decision is appealed, by the Supreme Court,” the firm said.
The Clean Power Plan, published in the Federal Register in October 2015, was immediately appealed by nearly half of the states – led by West Virginia and Texas. The EPA rule would have states draft implementation plans to cut power sector carbon dioxide (CO2) emissions 32% by 2030.
The petitioners have argued that the Clean Power Plan is unlawful for two primary reasons:
- First, Section 111 (d) of the Clean Air Act allegedly prohibits EPA from regulating the CO2 emissions of power plants; and
- Second, even if the EPA has such authority, the Clean Air Act does not authorize the sweeping regulatory approach contemplated by Clean Power Plan, including a radical re-dispatch of the U.S. fossil fuel generating fleet. Rather, the petitioners argue, EPA’s regulatory authority is limited to measures that can be implemented by individual sources of emissions, or in this case inside the fence line of fossil fueled power plants.
Even if the plan is ultimately upheld by the courts, the two-to-three years required to litigate the case will likely push the plan’s compliance deadlines back commensurately. As a consequence, any re-design of the Clean Power Plan required in response to the final decision of the courts will fall to the next administration. “We expect these considerations to put a halt to states’ preparations of implementing regulations (State Implementation Plans) to meet the EPA’s emissions reductions targets,” Bernstein said.
Ruling is bad news for nuclear and renewable power interests
Among those hurt most by the stay will be owners or developers of renewable or nuclear power plants, such as Exelon (NYSE: EXC) and NextEra Energy (NYSE: NEE), “whose stock prices may have benefited from investor expectations of state government support for these non-emitting sources as a means of meeting the requirements of the Clean Power Plan,” Bernstein said.
American Electric Power (NYSE: AEP) could actually benefit from a reduction in the regulatory risk faced by the coal-fired power plants in its competitive generating fleet, according to Bernstein.
The Clean Power Plan requires states to submit their SIPs by September 2016 to the EPA for its review and approval. Alternatively, states are permitted to submit to the EPA a draft SIP by September 2016 and request an extension of the deadline to submit a final SIP to September 2018. If a state fails timely to submit a SIP, or submits a SIP that in the view of the EPA does not achieve the emissions reductions required of the state, the EPA may impose upon the state a federal implementation plan.
The report on the Supreme Court action was drafted for Bernstein clients primarily by Senior Analyst Hugh Wynne.
Bernstein Research and Sanford C. Bernstein are affiliated with Alliance Bernstein. Bernstein is a major global investment-management and research firm.