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WEDNESDAY, January 4, 2012
Everyone that cares about the coal and utility market is now aware that the Cross States Air Pollution Rule (CSAPR) was stayed at the 11th hour on Friday, December 30, 2011 by the U.S. Court of Appeals in DC. The court’s stay came as a surprise to us because this was this same court that had invalidated CAIR and subsequently stated that it would not tolerate a delay. It also surprised us simply due to the burdens that needed to be overcome by the plaintiffs that brought suit challenging the rule. Historically, stays of similar rulemakings were few and far between. However, it certainly speaks volumes as to the lack of quality of CSAPR, something that had become clear given the faulty analysis used by the EPA and all the subsequent revisions that followed.
So this is now the new reality, at least for the time being, that investors, coal corporates and utilities are living in. Here are some of our initial thoughts:
- Coal Demand to Increase in 2012: We see a direct positive impact on 2012 coal demand as a result of the CSAPR stay, something we had written about several times in the past when speculating the potential impact of a stay. Utilities have been more conservative in their 2012 coal purchases due to the generation limitations that CSAPR would have forced, so spot coal sales will likely increase. This will become more pronounced during the shoulder periods, at least until CSAPR is revised or replaced.
- CSAPR Credit Prices Collapsed: How can a market value a commodity when the rules of that market are unclear? CSAPR SO2 credits collapsed last Friday intraday (the day the stay was announced), from around $340 in the early afternoon to a bid/ask if $100/$150. There was some buying when trading resumed in the New Year, but we suspect that is simply short covering.
- CSAPR or CAIR Credits? Following the theme of the last bullet, the EPA has painted itself into a corner with respect to how it will handle the emissions trading aspect of CSAPR. Because CSAPR was stayed, not vacated, CSAPR credits technically still exist. However CAIR credits, which were removed by the EPA in October 2011, are back in play. CAIR credits will remain marked as “CAIR Termination” on the EPA website until the EPA reinstates those credits, which it said it would do the week of January 9th. So, depending on what happens after the court’s expected hearings in April 2012, either credit could conceivably be required for 2012 compliance. Note that the allowance submission date for 2012 occurs in March 2013.
- Command and Control Coming? How this ultimately shapes up is still uncertain, but the EPA is legally required to address interstate emissions transport. Could the court be leaning away from validating ANY emissions-trading program like CSAPR given the challenges of creating a system to effectively and legally handle interstate emissions transport? We can’t rule out the possibility that a command-and-control regime is a more likely replacement. Ominous!
- SIP versus FIP Would Cause a Major Delay: The timing of implementing a revised CSAPR (or a replacement to CSAPR), would be impacted if the reason for the court’s stay was based on the enactment of a federal implementation plan (FIP) versus the implementation of a state implementation plan (SIP). If federalism was indeed the reason for the stay, having the EPA approve all the SIPs, along with the required comment periods for each proposed SIP, would result in a very long process, possibly the 2-year delay some have opined.
So what’s the bottom line? This is clearly a positive for the coal markets in 2012, albeit a temporary positive. We believe 2012 coal burn should rise above expectations, particularly during the shoulder periods. This would remain the case until a revised CSAPR is implemented, or a replacement is enacted. However, the Mercury and Air Toxics Standard (MATS) is still coming as planned in 2015, at least at this point, and that is a plant-specific rule meaning that either a utility/power company remediates its plants to achieve MATS guidelines, or it shuts them. So, regardless of how CSAPR is revised, or when a replacement is enacted, the reprieve is real, but temporary.
So buckle your seat belts and (try to) enjoy the ride…
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