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D.C. Circuit Reverses 100-Hour Exemption for Backup Generators

On May 1, 2015, the U.S. Court of Appeals for the District of Columbia Circuit struck down the 100‑hour exemption from air pollution controls that EPA granted to emergency backup generators in 2013. The unanimous decision in Delaware Department of Natural Resources v. EPA affects the use of backup generators, which often run on diesel fuel, to reduce consumption of electric energy from the grid during times of high pricing and heavy loading, but it leaves untouched the use of backup generators in remote, low density areas, during emergency situations, or for routine testing and maintenance. See Delaware Department of Natural Resources v. EPA No. 13-1093, (D.C. Cir. 2015).

The court found that EPA acted arbitrarily and capriciously when it modified the National Emissions Standards and the Performance Standards for stationary internal combustion engines to allow backup generators to operate for up to 100 hours per year without emissions controls as part of an emergency demand-response program. The court remanded the rule to EPA for further action, but the mandate will not take effect until seven days after the disposition of any petition for rehearing.

Rulemaking

The reciprocating internal combustion engine (“RICE”) rule promulgated by EPA in 2013 allowed backup generators to operate without emissions controls for 100 hours per year as part of a demand-response program, whereby consumers use backup generators to reduce their consumption of electric energy from the grid during times of high demand and high pricing. EPA promulgated this rule in response to petitions for reconsideration following a 2010 rule that initially allowed for a 15-hour exemption. The larger exemption window was supported by aggregators of generator power who have, as the court explained, “adopted the practice of grouping backup generators together to form ‘virtual power plants’ of considerable size” that are not subject to costly emissions controls and are therefore able to produce electricity at cheaper rates. Electric generators and environmental groups, however, objected during the rule’s notice and comment period and argued that the 100-hour exemption would incent “behind-the-meter generation,” resulting in greater air emissions and threatening the reliability of power grid by distorting the capacity markets.

Arbitrary and Capricious

The court held that EPA’s promulgation of the 100-hour exemption was arbitrary and capricious for four reasons. First, the agency failed to properly respond to petitioners’ “well-founded concerns” regarding the negative consequences the exemption would have on the efficiency and reliability of the energy markets, with EPA giving only “wan responses” to such concerns. In fact, EPA’s response to these comments focused on a perceived concern of the rule’s potential to encourage the use of backup generators in place of cleaner alternative energy sources. In this regard, the Court stated that EPA “missed the forest for the trees: the overriding concern of these comments was the perverse effect the 100-hour exemption would have on the reliability and efficiency of the capacity and energy markets, not the specific clean energy alternatives that could supply the grid instead of backup generators.” Second, EPA relied on faulty evidence when justifying the 100-hour exemption; it assumed that 100 hours were needed for backup generators to participate in demand-response programs, when the operator of the largest program—and the one that the exemption was designed to address—made clear that no individual engine needed to operate for that long to participate. Third, EPA did not consider an alternative to applying the rule nationwide, despite suggestions toward this end from various commenters on the draft rule, who suggested that EPA only apply the exemption where organized capacity markets were not available to otherwise assure that reliability would be maintained. And fourth, EPA did not consult with either the Federal Energy Regulatory Commission (FERC) or the North American Electric Reliability Corporation (NERC) regarding the grid reliability considerations, which was a source of justification for EPA’s exemption, even though FERC is the federal entity actually responsible for reliability of the electric grid and NERC is FERC’s designated electric reliability organization.

Who Will Be Affected

The reversal of the 100-hour exemption will most affect those using backup generators during peak times to provide demand response—including non-utilities like large commercial or industrial customers who have depended on the exemption to reduce their power costs—and aggregators who bid demand response as capacity resources in Base Residual Auctions based upon the presumed availability of backup generators. The decision will not affect the use of backup generators during emergencies or routine maintenance. It also will not affect those who operate backup generators pursuant to the 2013 rule’s 50-hour exemption for “non-emergency” demand-response, a provision allowing backup generators to be used for 50 hours per year without emissions controls when such operation is deemed necessary to mitigate local transmission or distribution limitations that could lead to an interruption of power supply. This 50-hour exemption is currently being litigated separately in the D.C. Circuit (Conservation Law Foundation v. EPA, No. 13-1233 (D.C. Cir.)). Lastly, for now the Court left intact the operation of backup generators in remote, low density areas, such as engines located offshore or along remote oil and gas pipelines.

Within days of the issuance of this decision, the U.S. Supreme Court granted cert to hear a case that also significantly affects the future of demand-response programs and distributed generation. The Court will hear the appeal of a D.C. Circuit decision that struck down FERC Order No. 745, which established certain rules accepted by FERC that governed demand response in wholesale power markets, on the grounds that FERC lacked authority to regulate those transactions. Supporters of demand-response programs hailed the Supreme Court’s action and have warned that the wholesale markets would be disrupted and distributed generation will be thwarted if the D.C. Circuit’s decision rejecting FERC’s rules was not overturned. The Supreme Court stated it will consider two issues: (i) whether FERC reasonably concluded that it has authority to regulate demand response in wholesale markets and (ii) whether the D.C. Circuit erred when it concluded that FERC acted arbitrarily and capriciously in requiring that demand-response providers be paid similarly to generators.

Timing of Reversal

In reversing the 100-hour exemption, the court instructed that “[i]f vacating these portions of the 2013 Rule will cause administrative or other difficulties, ‘EPA (or any of the parties to this proceeding) may file a motion to delay issuance of the mandate to request either that the current standards remain in place or that EPA be allowed reasonable time to develop interim standards.’” The court also stayed the mandate until seven days after disposition of any petition for rehearing. Petitions for panel rehearing and rehearing en banc must be filed within 45 days of the court’s judgment. Assuming such a petition were filed, then it could be several months before the reversal actually takes effect.

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