The U.S. Environmental Protection Agency's (EPA) compliance office appears to be preparing guidance for utilities to ask for an extension of the three-year deadline, FBR Capital Markets said in a note to the clients.

On a case-by-case basis, the Clean Air Act grants an additional year for units unable to install environmental controls. EPA has repeatedly argued that states have sufficient authority to grant needed extensions, effectively creating a four-year deadline, said Benjamin Salisbury, an analyst at FBR Capital Markets.

Utilities have asked for a broad interpretation, providing clarity to install controls, build transmission, or construct replacement power, even beyond the fourth year, said Salisbury. The President Barack Obama has authority to issue a further extension in the interests of national security.

Salisbury said operators have also focused on the narrow time frame as a complicating factor in scheduling compliance-related construction outages. One option would offer a broad blanket exemption or broadly delegated authority under the President's authority.

EPA appears to favor a strategy of dealing with extensions on a case-by-case basis. Units required to run for reliability reasons would need to enter into a consent decree, with EPA likely deferring penalties but, possibly, requiring mitigation.

At an FERC technical meeting on reliability, operators emphasized that this pathway effectively forces utilities to violate the law and seek leniency, potentially opening the door to litigation.

Salisbury still expects EPA to address utility concerns about reliability and rate spikes in the final rule, including potential modifications to start-up and shutdown regulation and regulation of filterable PM, versus total PM (sum of filterable PM and condensable PM), as a surrogate for non-mercury metals.

Salisbury said it appears unlikely the final rule will include significant changes to EPA's pollutant-by-pollutant approach or further sub-categorization.

Several members of the Congress have raised questions about the adequacy of the Administration's reliability assessments, especially the sufficiency of EPA's consultation with the Federal Energy Regulatory Commission.

The Department of Energy recently released an analysis projecting resource adequacy and reiterating DOE authority to order a plant to continue to operate for reliability.

Salisbury still believes Congress is unlikely to intervene in maximum achievable control technology (MACT) regulation, which includes politically popular mercury controls.

Salisbury said his view is reinforced by the relatively low level of commentary on inclusion of utility MACT delay among other environmental riders (such as boiler MACT) in high-priority legislation, like the payroll tax cut and omnibus fiscal 2012 spending bill.

We expect Dec. 9 to mark the end of filings in the multiple suits seeking a stay of the January 1 Cross-State Air Pollution Rule (CSAPR) start date. Following a review of the filings, a three-judge panel will either schedule oral arguments or rule on the petition for a stay, likely before year-end, said Salisbury.

Salisbury expects EPA to make some additional small adjustments to state budgets under CSAPR, but his conversations suggest any adjustments would still represent less than 1 percent of covered emissions.

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