1. BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. What’s Next for EPA? How Should Our Industry Respond? Roger R. Martella, Jr. rmartella@sidley.com (202) 736-8097

2. BEIJING BRUSSELS CHICAGO DALLAS FRANKFURT GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE SYDNEY TOKYO WASHINGTON, D.C. The Transition toward a Carbon Constrained Economy: The EPA Approach Roger R. Martella, Jr. rmartella@sidley.com (202) 736-8097

3. 3 Who is liable for greenhouse gases? March 15, 2010

4. 4 U.S. GHG Emissions

5. 5 Who is liable for greenhouse gases? March 15, 2010 Nobody!

6. 6 Who is liable for greenhouse gases? March 15, 2011

7. 7 U.S. GHG Emissions ?

8. (1) Who? (2) What? (3) When? The Transition to a Carbon Constrained U.S. Three Key Questions for the Next Six Months 8

9. The Transition to a Carbon Constrained U.S. Who will get there first? EPA’s path is a virtual certainty. President Obama has committed to finalizing the first GHG regulations EPA is presently pursuing three climate change rulemakings simultaneously Environmental NGOs will use courts to force action Quick developments in the House, but less certain future. House of Representatives has passed American Clean Energy and Security Act Passage by Senate appears more challenging And then there’s Copenhagen… 9

10. The Transition to a Carbon Constrained U.S. What will carbon controls look like? EPA will use command and control approach Will try to adapt existing Clean Air Act provisions to regulate energy use Will develop micro-sector-specific approaches Will aim to control energy by requiring technology redesign and workplace standards Will lead to unintended consequences under Clean Air Act Congress will develop market based system Focus has been on cap and trade, but carbon tax is favored by some Will impose industry-wide restrictions on GHGs In theory, should be comprehensive and preempt Clean Air Act command and control approach, but ACESA leaves much Clean Air Act authority on the table 10

11. The Drivers of Environmental Law NIMBY GROUPS

12. The Strategy Frustrated with prospects of legislation and pace of regulation, priority of NGOs is on litigation to achieve their results. Multi-faceted litigation approach pursues several goals: Forcing new rulemakings Implementing new policies Opposing new projects Halting existing activities NGOs traditional playbook is to orchestrate a two step petition/litigation strategy to force action where they believe government is not aggressive enough Recently, NGOs have been skipping EPA entirely and proceeding straight to litigation. Risk of national precedent “sneaking up” on regulated community through district and appellate courts Government frequently has mixed motivations in defending such cases, ultimately placing burden on intervenors and national trade associations

13. The Strategy: Forcing New Regulations Recent developments with greenhouse gases under New Source Performance Standards demonstrate the patient, persistent, and multi-faceted approach of environmental groups. NSPS developments reflect a patient and to date successful strategy to impose Clean Air Act controls over coal combustion Four step process: Develop idea to achieve goal: NSPS to phase out coal fired power Pursue advocacy strategy: Weave idea into complex legislation Pursue regulatory strategy: Force EPA action under cover of darkness Litigate: Enforce new regulations

15. The Strategy: Forcing New Regulations Waxman Draft Section 116 Sets performance standard of 1,100 CO2/MWh as of 2015 and 800 CO2/MWh as of 2020. Effectively required fuel switching to natural gas. Required facilities permitted after January 1, 2009 to adapt to carbon capture and sequestration. Preserved lawsuits against existing coal fired power plants, even after bill is passed. Preserved EPA’s authority to regulate existing plants.

16. The Strategy: Forcing New Regulations NSPS Consent Decree Deadlines Utilities Proposed RuleJuly 26, 2011 Final RuleMay 26, 2012 Refineries Proposed RuleDecember 10, 2011 Final RuleNovember 10, 2012 * EPA will hold teleconference with States/ NGOs only regarding status

17. The Strategy: Forcing New Regulations Countering the NGO strategy on NSPS has created challenges: “Back door” agreement with the government with no standing by industry Lack of education/interest among key industry stakeholders Fractured utility sector in the lead Litigation and issue “fatigue” among trade associations; crying wolf/sky is falling scenarios Reliance on technical teams by trade associations may diminish concerns by legal teams

18. The Strategy: Forcing New Regulations Despite challenges, industry is mobilizing for response: Objections to consent decrees Active role in listening sessions Strategic planning for regulatory process Assessment of utility impacts to other industries Proactive litigation strategy Advocacy strategy

19. The Strategy: Opposing New Projects NGO Citizen Suits NGOs long have prioritized Clean Air Act citizen suit provisions to block projects they oppose. More recently, NGOs have looked to litigation as critical part of strategy to achieve policy goals. Sierra Club’s “Beyond Coal” campaign is highest profile effort to date and effectively has stopped dozens of new facilities; likely to spread to other sectors New GHG regulations providing significant new tools in the toolbox for environmental groups given breadth and scope of regulations NGOs increasingly are nondiscriminatory in the projects they challenge, including renewable energy

20. The Strategy: Opposing New Projects Opposition to: Natural gas drilling; Transmission lines; Coal power; Wind and solar; Nuclear power

21. The Strategy: Challenging Existing Projects NGO Citizen Suits The Clean Air Act Citizen Suit provisions are among the most powerful citizen action provisions of any law. The mere threat of challenges has been sufficient to lead industry to provide significant concessions to environmental groups; “Stockholm syndrome” in environmental context. Risk is that settlements create precedent-setting nature for setting the floor of future determinations of BACT, etc.

23. EPA Greenhouse Gas Regulatory Eras 2010Mobile Sources/Title II 2011Stationary Sources/Title I 2012Market Based Controls? 23

24. Key Regulatory Milestones for 2011 24 PSD January 2, 2011 Initial trigger for “anyway sources” July 1, 2011 First phase in of thresholds at 75K/100K Biomass emissions Not counted toward threshold for 3 years New Source Performance Standards Promulgation of NSPS for GHGs for utility and refinery sectors Utility MACT To be signed Wednesday, March 16

25. NSPS Timeline 25 Utilities Proposed Rule…………………………………………………July 26, 2011 Final Rule………………………………………………………May 26, 2012 Refineries Proposed Rule………………………………………….December 10, 2011 Final Rule………………………………………………..November 10, 2012 * EPA will hold teleconference with States/ NGOs only regarding status

26. NSPS: Five Key Distinctions with PSD 26 (1)NSPS are organized by source categories (2) NSPS are based on “Best Demonstrated Technology” (BDT) (3) NSPS apply at the time of proposal (4) NSPS requires endangerment from “source category” (5) NSPS can reach existing sources through 111(d)

27. NSPS: A Section 111(b) Primer 27 Requires EPA to issue NSPS for categories of sources determined to cause, or contribute significantly to, air pollution reasonably be anticipated to endanger public health or welfare. EPA may distinguish among classes, types, and sizes within categories of sources. Performance-based standards Apply to any affected source constructed, reconstructed, or modified after the date of proposal (beginning upon promulgation). Existing sources trigger new source standards if they: Modify: Make a physical or operational change and increase hourly maximum emission rate achievable in the last 5 years. Reconstruct: Defined as spending more than 50% of cost to replace affected facility.

28. NSPS 111(d): Addressing Existing Sources 28 Section 111(d) applies to source categories that EPA would have regulated if new. Directs EPA to establish a SIP approval procedure similar to NAAQS SIPs; states must submit a plan to EPA to establish standards of performance for any existing source for any air pollutant (1)for which there is no NAAQS; and (2)is not emitted from a source category regulated under Section 112. If a state does not develop a plan, EPA has the same authority as it does for SIPs to impose a plan on the state. Standards of performance must take into consideration “among other factors, the remaining useful life of the existing source to which such standard applies.” EPA has used 111(d) for municipal solid waste landfills, municipal waste combustors, sulfuric acid plants, primary aluminum reduction plants, and the phosphate fertilizer manufacturing.

29. Best Demonstrated Technology 29 BDT Standard Reasonableness standard. Costs considered. Requirement for “adequately demonstrated.” Allows EPA/state plans to distinguish among types of sources. For Existing Sources Regulations allow states/EPA to set less stringent standards or longer compliance schedule for existing sources considering: cost of control; useful life of the facilities; location or process design at a particular facility; physical impossibility of installing necessary control equipment; or other factors make less stringent limits or longer compliance schedules appropriate.

30. Issues with NSPS Approach 30 The settlement agreements commit EPA to an aggressive NSPS schedule despite: Lack of time to consider ramifications Pre-judging endangerment determination Ongoing burdens and backlog with PSD permitting program Lack of information regarding emissions Other regulatory deadlines Lack of state resources Accelerated timelines compared to eight year scheduled Ongoing uncertainty for industry

31. Cap and Trade: Legislation vs. NSPS 31 Market based vs. sector based New vs. existing sources Treatment of offsets Distribution of allowances Dual regimes of market and command and control systems Market based system “would not stand alone; it would be accompanied by source-specific or sector-based requirements as a result of other CAA provisions.” ANPR at 44411. Resources/implementation International trade/leakage issues

32. The Challenges of a Response Resources Monitoring challenges “Issue creep” Industry fatigue Emphasis on defensive strategy over offensive strategy Mixed, unpredictable government motivations Limited opportunities Deference/Standard of Review

33. Vulnerabilities in the NGO Strategy Passion over strategy Frequently thin legal arguments and strategy Overreaching/pushing the envelope on legal issues Lack of consensus/accord/inconsistent positions Venue

34. Discussion Topics Impacts of existing EPA approach on GHGs PSD NSPS Role of NGOs Defensive strategy Offensive strategy Role of Congress