Texas Fight with EPA Grows with Power-plant Rule

* Texas already at odds with EPA over air-quality rules

* State says not given adequate notice of rule change

By Eileen O'Grady

HOUSTON, (Reuters) - Texas Governor Rick Perry and two top state regulators on Thursday blasted the U.S. environmental agency for including Texas in a rule to slash sulfur dioxide emissions from power plants, warning that the last-minute action could threaten the state's electric supply.

The Environmental Protection Agency finalized a rule to reduce air pollution from coal-fired power plants in states east of the Rocky Mountains. [ID:nN1E7660XM]

"Today's EPA announcement is another example of heavy-handed and misguided action from Washington, D.C., that threatens Texas jobs and families and puts at risk the reliable and affordable electricity our state needs to succeed," said Perry, a potential Republican presidential contender, in a statement.

The state's environmental agency and EPA Administrator Lisa Jackson have been battling over air quality rules related to Texas refineries for more than a year.

Thursday, the battle shifted to the electric sector. Owners of coal-fired power plants in Texas have invested billions to reduce emissions of nitrogen oxide and sulfur dioxide in recent years, said officials with Luminant and NRG Energy Inc, the two largest power producers in the state.

The challenge from the new rule, known as the Cross State Air Pollution Rule, is that stricter limits take effect next year, giving power-plant owners little time to comply.

Texas was not included in the EPA's draft rule related to sulfur dioxide cuts because EPA modeling had shown little downwind impact from Texas power plants on other states.

On Thursday, however, the EPA said Texas would be required to meet lower SO2 limits to avoid allowing the state to increase emissions.

Five states -- Connecticut, Delaware, Florida, Louisiana, Massachusetts, along with the District of Columbia -- were dropped from the final EPA rule.

"The late decision to apply the rule to Texas and the modeling for the rule have resulted in wholly unreasonable mandates and unrealistic timelines," said Luminant, owner of Texas' largest generating fleet including a dozen coal plants with a capacity of 8,000 megawatts.

Dallas-based Luminant said it has cut SO2 emissions by 21 percent since 2005 while boosting electric output.

Luminant said the rule would have a "highly disproportionate impact on Texas" which will account for one-quarter of the total SO2 emission reductions under the rule.

Environmental groups hailed the EPA action as long overdue to protect the health of Texas residents and downplayed any possible threat to the state's electric grid.

"We are especially pleased with EPA's decision to include Texas in its proposal and to include SO2 as Texas coal plants are at the top of the list of worst polluters in the nation," said Neil Carman, director of the Sierra Club's clean-air program in Texas.

Texas Public Utility Commission Chairman Barry Smitherman said power plants could be forced to add pollution control equipment, adjust their fuel supply to include more costly coal, reduce output or "worse case, prematurely shut down."

Texas, which operates as an electric "island" with limited ability to import power from other states, is looking for ways to encourage power-plant construction given growing electric demand and shrinking power reserves.

Bryan Shaw, chairman of the Texas Commission for Environmental Quality, said EPA's move to include Texas was "not based on sound science" and will result in regulations "that are not necessary for public health protection."

Shaw said the federal agency also failed to give Texas adequate notice that it would be included in the final rule related to SO2 emissions.

(Additional reporting by Timothy Gardner; editing by Lisa Shumaker)