U.S. court strikes down EPA rule on coal pollution

WASHINGTON (Reuters) - A U.S. appeals court on Tuesday overturned a key Obama administration rule to reduce harmful emissions from coal-burning power plants, sparking a rally in coal company shares and relief among utility firms.

The U.S. Court of Appeals for the D.C. Circuit said in a 2-1 decision that the Environmental Protection Agency had exceeded its mandate with the rule, which was to limit sulfur dioxide and nitrogen oxide emissions from power plants in 28 mostly Eastern states and Texas.

In the latest setback for the EPA, the court sent the rule back for revision, telling the agency to administer its existing Clean Air Interstate Rule in the interim.

The ruling will likely be cheered by Republicans, who have made the EPA and President Barack Obama's environmental policies a main campaign theme ahead of November elections.

The agency is endangering a fragile economic recovery by saddling U.S. industries with costly new rules, Republicans say.

"Vindicating the state's objections to EPA's aggressive and lawless approach, today's decision is an important victory for federalism and a rebuke to a federal bureaucracy run amok," said Greg Abbott, Texas attorney general.

Power groups, which had argued that they could not meet the timeframe or bear the financial burden of installing costly new equipment, welcomed the court's decision.

"The importance of the ruling cannot be overstated. The court was clear in finding that EPA had overstepped its legal authority in developing the rule," said Scott Segal, director of the Electric Reliability Coordinating Council.

Coal company stocks, which have suffered this year as cheap natural gas undercut demand for coal from power companies, soared. In morning trade on the New York Stock Exchange, Peabody Energy was 6.6 percent higher at $24.46, Arch Coal rose 5.8 percent to $7.58 and Consol Energy added 4.4 percent at $34.53.

U.S. natural gas futures briefly fell more than 10 cents or 3 percent after the ruling's announcement as traders bet it would mean less demand for the cleaner fuel over the coming months. By midday, prices had recovered those losses.

POLLUTION CONTROLS

The EPA's rule was designed to reduce sulfur dioxide emissions by 73 percent and nitrogen oxide by 54 percent at coal-fired power plants from 2005 levels, improving health for over 240 million people, according to the EPA. The reasoning is that unhealthy emissions from those plants, pollutants that cause acid rain and smog, cross state lines.

Two of the three judges ruling on the case said the EPA had exceeded its "jurisdictional limits" in interpreting the Clean Air Act and imposed "massive emission reduction requirements" on upwind states.

They also said the EPA had violated the act by setting "good neighbor" obligations while setting forth EPA-designed Federal Implementation Plans, or FIPs, to implement the obligations at the state level.

"By doing so, EPA departed from its consistent prior approach to implementing the good neighbor provision and violated the (Clean Air Act)," Judge Brett Kavanaugh said in the court's opinion.

The rule, known as CSAPR, also established a cap-and-trade system that enabled power producers to comply with the emission limits by buying, trading and selling pollution permits.

Environmental market participants, who trade SO2 and NOx permits, said they were "surprised and disappointed" by the ruling.

Power generators, such as Southern Co and Energy Future Holdings Corp, had argued that the January 1 implementation date was too soon and allowed too little time to design and install pollution control equipment needed to comply.

Texas, along with the National Mining Association and the International Brotherhood of Electrical Workers, had also challenged the EPA. They said the rule caused undue financial burden on power producers and could make the power market less reliable by forcing companies to shut some older plants.

EPA OVERREACH?

Power industry groups said the opinion underscored that the EPA has overstepped its reach in several pending clear air regulations.

Segal of the Electric Reliability Coordinating Council said the CSAPR, along with other EPA rules, did not show sufficient respect or deference to state programs.

"Today's decision is a stern warning against EPA's recent views," he said.

Luke Popovich, a spokesman for the National Mining Association, which groups coal producers and other miners and challenged the EPA in the case, hailed the ruling.

"This was not entirely surprising because it's the third or fourth ruling by a federal court that shows the EPA to be overriding the authority that the states have and conducting an unlawful regulatory program against coal," he said.

Environmental groups warned that the decision would put lives at risk.

"The court's decision significantly imperils long overdue clean air safeguards for millions of Americans," said Vickie Patton, general counsel of the Environmental Defense Fund.

Patton said the EPA should move in parallel to "swiftly put in place replacement protections" and to ask the three-judge panel and the full court to rehear the case.

(Additional reporting by Stephen James and Eileen O'Grady; Editing by Russ Blinch, Matthew Lewis and Dale Hudson)

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