-- Appeals Court sends Cross-State Air Pollution Rule back to EPA to revise

-- Ruling is victory for coal-plant owners that sought more time for emissions cuts

-- Unclear how ruling affects other coal plants that compete against low natural gas prices and face separate pollution limits

(Adds comments from American Electric Power in the eighth paragraph, Edison Mission Energy in the 14th, 15th and 16th paragraph and other details)

 
   By Ryan Tracy and Cassandra Sweet 
 

WASHINGTON--A federal appeals court Tuesday vacated the Environmental Protection Agency's latest rule limiting soot and smog-forming air pollution that crosses state lines.

The U.S. Court of Appeals in the District of Columbia said the rule affecting power plants "exceeds the agency's statutory authority" and sent the rule back to the EPA to revise. The decision was backed by two judges on a three-judge panel that heard the case. A third judge dissented.

The decision stops the clock on the EPA's Cross-State Air Pollution Rule, a set of regulations that limit emissions of nitrogen oxide and sulfur dioxide--a key component of acid rain. The rule was a revision of a Bush-era regulation that set state-by-state limits on the pollutants in an effort to keep them from blowing across state lines.

The same appeals court suspended the rule in late December, a few days before it was set to take effect early this year, bolstering the confidence of some states and power companies who argued that the rule is heavy-handed and illegal.

The indefinite suspension of the Cross-State Air Pollution Rule is a victory for utilities and other companies that own aging coal-fired power plants and have sought to weaken or postpone federal air pollution limits. But the reprieve may not be enough to protect those plants from fierce market forces and a separate set of EPA pollution rules that together could force many aging coal plants to shut down.

A U.S. natural gas production boom, coupled with slow demand growth, has driven down natural gas and power prices to historic lows, making coal expensive by comparison and giving gas-fired power plants a competitive edge. The EPA Cross-State Air Pollution Rule and a second set of regulations that limit emissions of mercury and other toxic substances from power-plants has increased pressure on coal plants, particularly older, less efficient plants that emit more pollution than newer plants.

American Electric Power Co. (AEP), which owns a large fleet of coal plants in Ohio and neighboring states, has installed pollution control equipment at several of its plants and the company plans to shut down about 6,000 megawatts of aging coal plants over the next few years. The driving force for those plans is the EPA's Mercury and Air Toxics Standards rule, finalized last year, which requires power plants to cut mercury and other emissions by 2015.

AEP spokeswoman Melissa McHenry said it was too early to say how Tuesday's court ruling would affect AEP's plans. The company is focused on complying with the mercury rule, which "has a significant impact on our fleet of coal-fueled power plants and is driving much of the capital investment that we need to make at our facilities," Ms. McHenry said.

Tuesday's court decision is good for owners of older coal plants in Texas, which the court found should have lower emissions limits, but it won't help companies that operate cleaner gas-fired and nuclear power plants, or coal plants with pollution-control equipment, said Julien Dumoulin-Smith, an analyst at UBS AG (UBS).

Energy Future Holdings of Texas is likely to benefit from the decision, but the ruling is negative for gas-fired power-plant operator Calpine Corp. (CPN), nuclear-power giant Exelon Corp. (EXC) and companies that already have cleaned up their coal fleets, such as FirstEnergy Corp. (FE), PPL Corp. (PPL), Public Service Enterprise Group Inc. (PEG) and NRG Energy Inc. (NRG), Mr. Dumoulin-Smith said.

It was unclear how the court ruling might help Edison Mission Energy, a unit of California-based Edison International (EIX), which was the first to sue the EPA to block the Cross-State Air Pollution Rule. Edison Mission owns about 45 power plants across the U.S., including six aging coal plants in Illinois that will need to install costly pollution-control equipment or be shut down to comply with both state pollution limits and the federal mercury rule.

But those plants have been losing money for more than a year, as wholesale power prices have plunged to historically low levels, driven by low natural-gas prices and relatively weak demand, while coal prices have gone up.

Edison Mission lost control of the unprofitable Homer City coal-fired power plant in Pennsylvania after the company was unable to make a lease payment under a complex sale-leaseback agreement with a unit of General Electric Co. (GE) and other property owners.

Edison Mission filed the lawsuit on behalf of Homer City, which the company is still operating until GE finds another operator, said Douglas McFarlan, a spokesman with Edison Mission unit Midwest Generation.

Edison is overseeing construction of pollution-control equipment at Homer City to comply with the Cross-State rule. GE is financing the project, which has been estimated to cost about $700 million. Edison sued the EPA over the Cross-State rule, not to block the emissions reductions themselves, but in a bid for more time to comply, Mr. McFarlan said.

"We weren't arguing whether additional emissions reductions are appropriate over time, but we vigorously opposed the timeline," Mr. McFarlane said.

Edison Mission has been working to restructure $3.7 billion of debt and has been negotiating with bondholders in hopes to avoid bankruptcy, Edison International executives said last month.

In June, Standard & Poor's cut its credit rating for Edison Mission to "triple-C," or eight notches below investment grade, from "triple-C plus," saying it expected lower cashflow that would likely increase the business unit's risk in refinancing.

During oral arguments in April, the EPA and its backers--which include other states and power companies along with environmental and public health groups--argued that the rule follows the directions laid out by the same court in previous cases.

The court said Tuesday that the Bush-era version of the interstate pollution rule remains in effect until the agency revises it.

Write to Ryan Tracy and Cassandra Sweet at ryan.tracy@dowjones.com

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