Business Roundtable

Environmental Regulations

• GHG Regulations — The Environmental Protection Agency (EPA) announced in December 2010 that it would propose Clean Air Act GHG New Source Performance Standards for electric generating units and petroleum refineries in 2011. EPA recently has announced that it will not propose NSPS for petroleum refineries until 2013. However, on March 27, 2012, EPA released its proposed NSPS for new electric generating units larger than 25 MW. This proposed rule would require all new powerplants to emit no more than 1,000 lbs of carbon dioxide per megawatt hour generated. This emissions level is roughly equivalent to emissions from a new combined cycle natural gas turbine, thus effectively eliminating new coal-fired powerplants unless equipped with carbon capture and sequestration technologies, technologies that today are not commercially or economically available. While EPA has indicated that it has no current plans to extend the NSPS to existing powerplants, the Clean Air Act may make that position untenable, thus calling into question the impact on the existing coal fleet, which is also facing new requirements pursuant to the utility MACT rule, emissions reductions under the Cross-State Air Pollution Rule and possibly new investments pursuant to the upcoming Cooling Water Intake Structures rule (316(b) of the Clean Water Act).

 

EPA should set standards based on various fuel types, i.e., coal, natural gas and possible sub-categorization to recognize various coal types. Work practices are explicitly authorized by section 111 (h) of the Clean Air Act if it is not feasible to propose a standard of performance. While the EPA’s GHG standards initially will be applicable only to the electric and petroleum refining sectors of the U.S. economy, they will establish a precedent that may become applicable to other major manufacturing facilities at a later time. The Clean Air Act was not designed to regulate ubiquitous pollutants such as carbon dioxide. The EPA should exercise its authority to set standards relying on work practices to ensure that market distortions do not occur.

 

• Hydraulic Fracturing — Multiple federal agencies are considering regulating hydraulic fracturing. The EPA has finalized a suite of new regulations for the oil and natural gas industry, including the first federal air standard for wells that are hydraulically fractured. These regulations include a new source performance standard for volatile organic compounds; a new source performance standard for sulfur dioxide; an air toxics standard for oil and natural gas production; and an air toxics standard for natural gas transmission and storage.

 

In addition, the EPA has announced that it intends to propose a rulemaking on disposal of fracturing water and fluids from shale gas extraction operations in 2014. In a related development, the EPA has announced that it intends to propose a rulemaking on the disposal of wastewater from coal bed methane operations in 2013. The EPA also announced a rulemaking on fracturing fluid chemical reporting under the Toxic Substances Control Act and is in the midst of a long-term study on the impact of hydraulic fracturing on ground water and drinking water. Initial results from the study are anticipated in 2012, and a final report is expected in 2014.

 

The Department of the Interior has proposed regulations for hydraulic fracturing on federal lands it administers. These regulations require fracturing fluid ingredient disclosure and new well integrity measures.

 

Over the past four years, U.S. shale oil and gas production has increased dramatically. This increase has resulted from the application of new technology, including horizontal drilling and hydraulic fracturing, to shale formations that were once thought to be uneconomic to produce, unlocking vast new oil and natural gas reserves. These resources, if they are allowed to be developed, promise to dramatically improve U.S. energy security, reduce the balance of payments deficit and accelerate economic growth, particularly in energy-intensive manufacturing sectors of the U.S. economy.

 

Federal regulations must be carefully and thoughtfully tailored to ensure that responsible development of shale resources is allowed to continue. The Administration should work with industry proactively to ensure that any regulations reflect industry best practices and do not unduly burden beneficial development of shale resources. In addition, the Administration needs to take into account the pre-eminent role states traditionally play in regulating oil and gas activity within their borders.

 

• PM2.5 — The Clean Air Act requires the EPA to promulgate primary and secondary National Ambient Air Quality Standards (NAAQS) for six air pollutants, including PM. Primary standards have been established for PM10 (course particles) and PM2.5 (fine particles). A required five-year review of the PM NAAQS is in progress, and a proposal to retain or revise those standards is expected this year. Power plants, forest fires, wood-burning fireplaces and stoves, on-road and off-road vehicles, agriculture, and construction activities are major sources of PM. Substantial reductions in PM have occurred and are likely to continue to decline as a result of a number of existing regulations, including the utility Maximum Achievable Control Technology rule, the Cross-State Air Pollution Rule, Regional Haze Regulations and motor fuel desulfurization efforts. Additional measures to further control for PM are likely to be extremely expensive. The EPA should consider the PM emission reduction benefits from rules already promulgated before deciding whether to lower the PM standard even more. EPA recently announced that it intends to delay proposing changes to the PM2.5 standards until late 2012 and to finalize the regulations by August 15, 2013, one year beyond the scheduled 2012 review. However, a federal court recently ordered EPA to issue its proposed rule in June, 2012, thus calling into question the timing of this rule.

 

Health Care Taxes and Regulations

In implementing the health care reform law, rules should not require costly changes to the offering of employer sponsored coverage or impose duplicative and unnecessary requirements, such as government-created paper forms on benefit coverage options. Implementation rules that affect employer-sponsored coverage and the creation of exchanges must address the impact of these rules on the cost, quality and competition in the health care marketplace.

 

• Health Care Taxes — The health care reform law imposed several taxes on insurance plans, medical devices, pharmaceutical products and employer-sponsored health plans. One such tax is an excise tax on health insurance issuers and sponsors of self-funded group health plans with aggregate expenses that exceed $10,200 for individual coverage and $27,500 for family coverage. The amount of the excise tax is 40 percent of an amount considered to be an excess benefit. The health care reform law also added an annual fee on health insurance providers beginning in 2014. The health care reform law imposed a tax on fully insured and self-insured products to finance comparative effectiveness research (Internal Revenue Service [IRS] Notice 2011-35), imposing the tax in 2012 for most policies and plan sponsors. In addition, the Department of Health and Human Services released a proposed rule requiring all insurance plans and plan sponsors to contribute funding to state exchange reinsurance programs. The final rule is pending at OMB.

 

The health care reform law also imposed an annual fee on certain manufacturers and importers of brand name pharmaceuticals, effective January 1, 2011. The IRS issued Notice 2011-9 in January 2011, which defined the covered entities and fee calculation methodology. The new law also imposed an excise tax of 2.3 percent on the sale of any taxable medical device. The IRS delayed imposition of the tax until 2013. The IRS issued a request for comment regarding this tax in December 2010. These new requirements have a significant impact on the cost of health care coverage. All of these new taxes will be passed through to plan sponsors and their employees. Congress should eliminate unnecessary taxes on medical devices, insurance plans and pharmaceuticals, but unless and until Congress acts, their implementation should be delayed.

 

• Definition of Full-Time and Part-Time Employees —

Starting in 2014, large employers will be assessed a penalty if they fail to provide affordable health insurance, at a minimum value, to any full-time employee who is then found eligible for a tax credit through the Exchange. In May 2011, the IRS proposed that a full-time employee be defined as one who has 130 hours of service in a calendar month, and that this is treated as the monthly equivalent of at least 30 hours of service per week. Treasury and the IRS are also considering a look-back/stability period safe harbor under which an employer would determine each employee’s full-time status by looking back at their hours over a defined period of not less than three, but not more than twelve consecutive calendar months, as chosen by the employer. The employee’s status determined under this look-back would then persist for a stability period of at least six, but not more than twelve months. On February 9, 2012, the Departments issued guidance on determining the status of new employees. According to that guidance, Treasury and the IRS intend to issue proposed regulations or other guidance that will address how to determine whether a newly-hired employee is a full-time employee, which the Departments anticipate will permit an employer to use a reasonable “facts and circumstances” test at the time of hire or after 3 months. BRT commented on the February 9 guidance, and proposed an alternative Cumulative Hours Maximum Standard.

 

Financial Regulations

• Implementation of the Volcker Rule — Section 619 of Dodd-Frank (Volcker Rule) aims to limit proprietary trading by banks. It will introduce new complexities and impose higher costs for businesses while slowing down the creation of new markets. The Volcker Rule is likely to reduce market liquidity by limiting the market-making and underwriting activities of market participants, thus increasing market volatility and costs. Foreign regulatory agencies have raised concern about the implications of these regulations, particularly their impact on market participation and liquidity. Regulatory agencies should exercise their discretion to ensure that bank market-making activities are not curtailed as a result of the Volcker Rule. As a first step, regulators should repropose the Volcker Rule, taking into account the legitimate concerns of market participants and heeding the intent of Congress in drafting the underlying statue.

 

• Derivatives Regulation — While the new regulatory structure for OTC derivatives is not yet completed, concerns are increasing over how the rules could restrict the use of derivatives to manage risks associated with business activities. The proposed new rules will create a burdensome structure that will make it more costly to enter into swaps. They also will create uncertainty in overseas markets. With more cash required to cover the increased costs imposed by regulation (including higher margin requirements), there will be less money for new job creation and growth. Managing and hedging risk is essential for many businesses, particularly with respect to increasingly volatile commodity prices, currencies and interest rates. Yet the proposed regulations do not reflect this reality. Regulators should ensure that derivatives rules provide an unambiguous end-user exemption from clearing, trade execution, margin and capital requirements to allow end users to prudently manage risk. Moreover, interaffiliate derivatives transactions, which pose no risk to the financial system, should not be regulated the same way as market-facing transactions. While it is important that regulators promulgate rules that take into account these concerns, legislative solutions are needed as well to ensure that congressional intent is carried out and to avoid harmful over-regulation.

 

• Conflict Minerals Disclosure — The Securities and Exchange Commission (SEC) proposed rules in December 2010 to implement Section 1502 of the Dodd-Frank Act, which requires public companies to disclose annually whether their products contain “conflict minerals” (i.e., gold, tin, tantalum and tungsten from the Democratic Republic of the Congo [DRC] or adjoining countries). The SEC’s proposed rules provide for a three-step process that requires companies to (1) determine if conflict minerals are necessary to the functionality of a product they manufacture or “contract to manufacture”; (2) undertake a “reasonable country of origin inquiry” to determine if their conflict minerals originated in the DRC or adjoining countries; and (3) provide an audited Conflict Minerals Report if the conflict minerals in its products, or those it contracts to manufacture, originate in the DRC or adjoining countries or it is unable to determine that they do not. As proposed, the SEC has vastly underestimated the costs of conducting the required due diligence, and achieving compliance is extremely difficult, if not impossible. The SEC should promulgate rules that are cost-effective and workable.