The first step in the nonribosomal peptide synthetase (NRPS)-based biosynthesis of chloramphenicol is the β-hydroxylation of the precursor l-p-aminophenylalanine (l-PAPA) catalyzed by the monooxygenase CmlA. The active site of CmlA contains a dinuclear iron cluster that is reduced to the diferrous state (WTR) to initiate O2 activation. However, rapid O2 activation occurs only when WTR is bound to CmlP, the NRPS to which l-PAPA is covalently attached. Here the X-ray crystal structure of WTR is reported, which is very similar to that of the as-isolated diferric enzyme in which the irons are coordinately saturated. X-ray absorption spectroscopy is used to investigate the WTR cluster ligand structure as well as the structures of WTR in complex with a functional CmlP variant (CmlPAT) with and without l-PAPA attached. It is found that formation of the active WTR:CmlPAT-l-PAPA complex converts at least one iron of the cluster from six- to five-coordinate by changing a bidentately bound amino acid carboxylate to monodentate on Fe1. The only bidentate carboxylate in the structure of WTR is E377. The crystal structure of the CmlA variant E377D shows only monodentate carboxylate coordination. Reduced E377D reacts rapidly with O2 in the presence or absence of CmlPAT-l-PAPA, showing loss of regulation. However, this variant fails to catalyze hydroxylation, suggesting that E377 has the dual role of coupling regulation of O2 reactivity with juxtaposition of the substrate and the reactive oxygen species. The carboxylate shift in response to substrate binding represents a novel regulatory strategy for oxygen activation in diiron oxygenases.