Gregory K. Lawrence, Partner
McDermott Will & Emery LLP
(Contributing Editor)

The American Clean Energy and Security Act of 2009 (ACES), which contained cap-and-trade and GHG reduction mechanisms, languishes in the Senate after its narrow House of Representatives approval last June. But the Environmental Protection Agency (EPA), Securities and Exchange Commission (SEC) and Federal Energy Regulatory Commission (FERC) have each launched regulatory initiatives that assume GHG reduction will be enforced. Such enforcement will shift even greater emphasis to renewable energy production – with the transmission grid in the crosshairs.

Uncertainty in Congress

After the House’s ACES bill went to the Senate, two Senate committees passed their own climate change bills that contain differing GHG regulation provisions. Despite such differences, the House and Senate proposals share much common ground, including identical mid- and long-term emissions reduction goals, comparable treatment of voluntary reductions and offsets, and similar methods of providing price stability and certainty to market participants. However, action on all three bills has stalled as the Copenhagen conference failed to agree on climate and GHG initiatives to replace the Kyoto Protocol, and as the Senate fixated on health reform legislation. The Obama Administration’s 2011 budget proposal added to the uncertainty by dropping the 2010 budget’s emphasis on cap-and-trade as a significant source of new government revenue.

It is increasingly unlikely – as the President himself has admitted – that Congress will enact comprehensive energy and climate change legislation in 2010. Instead, members of the House and Senate may try to pass a smaller, simpler and theoretically less controversial bill. Senator Bingaman’s renewable

energy proposal (which omits cap-and-trade provisions), a streamlined cap-and-trade program similar to the model proposed by Senators Cantwell and Collins, or even a more modest carbon tax could move forward, provided that Congress finds the time to focus on this issue.

Full Speed Ahead at EPA

As Congress waits and debates, the EPA is moving ahead with its own GHG regulatory program. On December 7, 2009, the agency released its finding that current and projected concentrations of emissions combining six GHGs, including carbon dioxide, threaten public health and welfare. The EPA’s action responded to the 2007 U.S. Supreme Court decision Massachusetts v. EPA, which found that the EPA had the statutory authority to make such a finding. While the endangerment finding itself does not impose any emissions reduction requirements, it sets in motion a series of regulatory events that will lead to federal GHG regulation in various forms unless Congress or the courts intervene.

Most immediately, the EPA is expected to finalize proposed GHG standards for light-duty vehicles that are expected in March 2010.

After the proposed new standards for light-duty vehicles take effect, the EPA will be required to proceed with a proposed rule that requires operating permits and technology based emissions standards for certain stationary sources of GHG emissions. To reduce the administrative burden associated with the new regulations, the EPA has proposed “tailoring” the rule so that it only applies to stationary sources such as power plants, refineries, and medium to large industrial facilities that produce 25,000 tons of GHGs or more per year.

Nevertheless, EPA estimates that at least 3,000 sources could be subject to a new permitting requirement, including many in the energy services industry. The endangerment decision may open the door to other EPA regulations of GHG emissions, whether or not Congress acts on climate change legislation.

EPA’s endangerment finding parallels a recent trend of administration activity aimed at curtailing GHG emissions. In late September 2009, the EPA published the Final Mandatory Reporting of Greenhouse Gases Rule, which requires certain facilities and industries to begin collecting GHG emissions data on January 1, 2010, and to begin annual GHG emission reporting by March 31, 2011, for 2010. Similarly, in October 2009, President Obama issued an Executive Order “to make reduction of greenhouse gas emissions a priority for Federal agencies” through energy efficiency, and enhanced monitoring of direct and indirect emissions.

Disclosure Guidance at SEC

Expanded GHG emission reporting and compliance will have significant impact on any company. For those that are publicly held, the SEC on January 27, 2010, released initial interpretive guidance (and followed up February 12 with more details) on existing SEC disclosure requirements relating to climate change, ostensibly to facilitate consistency in disclosure and to enhance clarity to investors. The SEC’s interpretative guidance highlighted examples where regulation may trigger disclosure requirements in a company’s risk factors, business description, legal proceedings, and management discussion and analysis:

• The extent to which pending or approved climate change laws and regulations, as well as related international accords and treaties, will have a material impact on companies operations or financial performance.
   
• The new opportunities or risks (including actual or potential indirect consequences) that legal, technological, political and scientific developments regarding climate change may create for companies.
   
• Evaluation of the material impact that climate change or other environmental matters will have on business performance.

The SEC emphasized that its guidance did not change standard determinations of materiality, and that the agency was not offering an opinion on global warming itself. But commentators have suggested that the guidance signals the SEC intends to scrutinize compliance with existing disclosure rules when considering the adequacy of companies’ climate-related disclosures in their SEC filings. The clear implication is that regulation on GHGs and other climate change matters is coming, and companies should prepare to assess and disclose the impact.

Planning at FERC

Connecting these dots, FERC on January 21, 2010 issued a Notice of Inquiry (NOI) seeking public comment on whether to reform any of its rules or procedures as the nation’s generation portfolio expands to include more renewable energy resources such as wind, solar or non-storage hydro generating plants. Such expansion is inevitable with the advance of GHG regulation and state and federal renewable energy portfolio standards, and FERC Chairman Jon Wellinghoff’s comments on the NOI pointed out that 18,000 MW of renewable energy generation came online in 2008 and 2009 alone.

In an understatement, Chairman Wellinghoff admitted that expanded renewable energy output will “have some operational characteristics which present challenges to system operators. Therefore, it is important that the Commission examine the most efficient ways to effectively integrate these resources into the electric grid, while maintaining reliability and operational stability.”

FERC emphasized that the NOI would not immediately change its regulation of the transmission grid. But by singling out possible issues for NOI comments – scheduling flexibility, reliability commitments, reserve products, capacity reforms, curtailment practices – FERC indicated the enormous impact that expanded renewable energy output, spurred by GHG regulation, will have on the grid. Combined with the EPA and SEC actions, the implication is clear: whatever Congress does, now is the time for business to prepare for GHG and climate change regulation.

[Jonathan Flynn also contributed to this article and is an associate in the Energy and Commodities Practice Group of global law firm McDermott Will & Emery.]

About the Author

Gregory K. Lawrence is a partner in the Energy and Derivatives Markets Group of global law firm McDermott Will & Emery, and leads the firm’s Global Renewable Energy, Emissions and New (GREEN) Products group. Mr. Lawrence focuses his practice on regulatory proceedings, negotiations, govern­mental affairs and agency litigation relating to the wholesale and retail electricity and natural gas industries.