1 February 29, 2012

Michael Horowitz Office of the General Counsel Air and Radiation Law Office U.S Environmental Protection Agency Ariel Rios Building 1200 Pennsylvania Avenue, N.W. – Mail Code 2344A Washington, D.C. 20460

RE: EnerNOC et al Review of Comments Filed on Proposed Settlement Agreement

Dear Mr. Horowitz:

EnergyConnect, Inc., EnerNOC, Inc., and I nnoventive Power, LLC (collectively the “Companies”) signed a Settlement Agreement w ith the U.S. Environmental Protection Agency (“EPA” or the “Agency”), resolving the Compan ies’ lawsuit against the Agency challenging the
National Emissions Standards for Hazardous Ai r Pollutants for Reciprocating Internal Combustion Engines (the “RICE NESHAP”) in the United States Court of Appeals for the
District of Columbia Circuit: EnerNOC, et al v. EPA , No. 10-1090 (DC Cir.) and EnerNOC, et
al v. EPA , No. 10-1336 (DC Cir.). As required by S ection 113(g) of the Clean Air Act, EPA solicited public comment on the Settlement Ag reement by notice in the Federal Register on January 4, 2012. Under the term s of the proposed Settlement Agreement, by April 20, 2012 EPA will sign a notice of proposed rulemaking th at includes a proposal to revise the RICE NESHAP and the stationary internal combus tion engine new source performance standards (“ICE NSPS”) to allow owners and operators of emergency stationary internal combustion engines (“ICE” or “Engines”) to operate emerge ncy stationary ICE in emergency conditions, as defined in those regulations, as part of an emergency demand response (“DR”) program for 60 hours per year or the minimum hours required by I ndependent System Operator tariff, whichever is less. The notice of proposed rulemaking may also allow for more hours of operation.

The Companies appreciate the time EPA has taken to understand the importance of emergency DR to the integrity of the electric grid in the United States. The Companies fully support the entire propose d Settlement Agreement and urge EP A to finalize it. The Companies further look forward to the proposed rulemaki ng by EPA in April, 2012. The Companies have also reviewed all of the comments submitted in favor and against the proposed Settlement Agreement, and offer this analysis of those comments.2 Commenters Supporting the Settlement Agreement

Forty-two entities submitted comments on the Settlement Agreement. Thirty-one of these support the Settlement Agr eement, with many commenters asking for more flexibility than what is in the Agreement.

 Twenty three Electric Cooperatives suppor t the Settlement Agreement with many asking for 100 hours per year for emerge ncy DR, testing/maintenance, and also they would like to expand the settlem ent beyond emergency DR to include peak shaving;

 Progress Energy and Florida Power and Light (“FPL”) support the Settlement Agreement, but request that emergency DR operation be considered emergency operation with no annual hour limits;

 The Midwest Independent System Operator (“MISO”) confirms that the current 15 hour per year limit is not sufficien t and supports the proposed Settlement Agreement terms;

 The State of Maryland Department of the Environment (“MDE”) notes that emergency DR programs protect public health and safety and supports the Settlement Agreement;

 Four trade Associations, the Edison Elect ric Institute (“EEI”) , American Public Power Association (“APPA”), the Na tional Rural Electric Cooperative Association (“NRECA”), and the Amer ican Coatings Association (“ACA”) support the Settlement Agreement and in some cases request even more flexibility. For example, NRECA reque sts up to 100 hours per year and requests that peak shaving be allowed within that 100 hours and EEI believes the
minimum should be 100 or ev en 120 hours per year.

Commenters Opposing the Settlement Agreement

Eleven entities did not support the Settlement Ag reement. Of these eleven, five are from generators (PSEG, Calpine, GenON Energy) and their trade associations (EPSA, and PJM Power Providers) (“the generators and their trade associ ations”). The other si x are from two states (Delaware and New Jersey), th e American Lung Association (both the National Headquarters and the Mid Atlantic Office), the Clean Air Council, and the Independent Market Monitor (“IMM”) for PJM (collectively, the “Adverse Commenters”).

The generators and their trade associations, along with IMM, claim that the settlement agreement does nothing to promote the reliability of the electric grid; will distort competition in the nation’s energy markets; will result in advers e environmental impacts; and will stifle the3 development of cleaner generati on sources. Delaware and its s upporters claim the settlement agreement will result in adverse environmental impacts. As discussed below, none of these arguments has any merit. Accordingly, EPA s hould reject these comments and finalize the settlement agreement.

Summary of Responses to Arguments Made by Adverse Commenters

As set forth below, the Parties offer the follo wing responses to the arguments made by the
Adverse Commenters:

The Proposed Settlement Promotes Reliability

o ISOs and Utilities Responsible for Grid Reliability Support the Settlement and Demonstrate that the Existing 15 Hour Emergency DR Limit is not Sufficient

o Emergency Generators Can ONLY be Di spatched by the Grid Operator, and Strict Sequencing of Dispat ch Rules Must be Followed

Emergency DR Programs Benefit the Environment

o Emergency DR is Rarely Used and That is Li kely to be the Case in the Future as
Well

o There is No Correlation Between High Ozone Days and Emergency DR

o States Support the Use of Engines fo r Emergency DR Primarily Because Occasional Use of Emergency DR is Superior to Having All Emergency Generators Run in the Event of a Blackout

o Emergency Engines Have Environmental Benefits Compared to Central Station

Generation

o The Proposed Settlement is Not a Departure from EPA Policy

The Proposed Settlement Does Not Stifle th e Development of Cleaner Generation Sources

o Most of the Generator Complaints are A bout Market Structure Issues in PJM, and are thus in the Jurisdiction of PJM and FERC – EPA Should Disregard Them

o This Settlement Cannot Affect Wholesale Energy Markets

o Emergency DR Has Contributed to Lower Pr ices in Capacity Markets But that is a Good Thing and Should Not Prevent EPA from Going Forward with the
Settlement

o Emergency DR Has Not Prevented th e Growth of Renewable Energy

Discussion

The Proposed Settlement Promotes Reliability4 ISOs and Utilities Responsible for Grid Reliability Support the Settlement and Demonstrate that the Existing 15 Hour Emergency DR Limit is not Sufficient

The generators and their trade associations claim that the curre nt 15 hour limit for emergency DR in the NESHAP is sufficient and that there is no justif ication for the increase proposed in the Settlement Agreement 1 . This claim has no foundation. As noted by PJM Interconnection, L.L.C. (“PJM”) in their Febr uary, 2011 letter to the NESHAP docket (see
Attachment 1 for EPA- HQ-OAR-2008-0708-813.1):

The proposed EPA 15-hour limit on RICE un its runs contrary to the minimum PJM requirement that demand response re sources must be available to reduce load a minimum of 60 hours per year. The 60 hour minimum, which is incorporated into the PJM tariff, recognizes that for a resource to be useful to PJM in emergency conditions over a year, a mi nimum of 60 hours of availability is
essential. This does not mean that a C SP could not put together a combination of RICE units to meet the 60 hour requireme nt. That alternativ e, however, creates management and administrative challenges for the CSP and complicates compliance for the CSP and measurement and verifications for both PJM and the
EPA. This outcome in turn frustrates th e intent of the EPA’s regulation, which is to recognize that running such units in em ergencies is justified as an exception to the emissions control requirements ot herwise directed by the RICE rules.

In addition, Craig Glazer, Vice President – Federal Government Policy for PJM -- testified at the EPA Public Meeting on the RICE NESHAP reconsideration (see Attachment 2 for EPA-HQ-OAR-2008-0708-0699 ). EPA su mmarized his comments as follows:

The 15-hour limit is insufficient and precl udes engines from being considered emergency generators under PJM, which requires a unit to be available to operate for at least 60 hours; and regardi ng what role these RICE units play in emergency demand response from PJM’s perspective, Mr. Glazer explained that these units are “behind the meter” and that the RTO simply expects that the system can deliver a certain voltage. As such, the RICE units should remain in the system’s demand response portfolio.

According to Mr. Glazer, the 15 hours lim it in the rule knock s out engines to be able to be used because 60 hours per year is the minimum number of hours required to be considered an emerge ncy resource for purposes of PJM. According to Mr. Glazier, if any engine is restricted to operate for a maximum

1 PSEG Comments, p. 45 of 15 hours, PJM would not even recogni ze the engines as having any value, because planning and dispatch is comp licated and time-consuming, and it is not worth counting an engine as an em ergency resource unless that engine can operate for a certain number of hours. The engine could not be utilized and
furthermore the 15 hours does not matc h with the Independent System Operator-New England (ISO-NE) require ments or PJM requirements. Thus the engine could not qualify for an emergency and Mr. Glazer underscored
that the allowed number of hours is too short. Mr. Glazer pointed out, however, that the number of times emer gencies are declared is very few.

In addition, the Midwest Independent Transmi ssion System Operator, Inc. (“MISO”) also agreed that 15 hours is insufficient to maintain reliability, and MISO therefore supports the Settlement Agreement. (see Attachment 3 for EPA-HQ-OGC-2011-1030-012) MISO stated:

[I]nternal combustion engi nes that seek to be qua lified as Demand Resources within the Midwest ISO Region must be capable of being op erated for a total of at least 20 hours per Planning Year. Othe r RTO/ISOs have similar operational requirements for emergency capacity res ources.... MISO resp ectfully requests that EPA also recognize the importance of balancing environmental concerns with the need to maintain electric grid syst em reliability during emergency conditions by using appropriate and cons istent reliability standard s for emergency stationary internal combustion engines.

Outside of the parts of the country th at are covered by organized wholesale markets such as PJM and MISO, vertically integrated utilities have th e responsibility for maintaining voltage, frequency and preventing outages. Two such utilities, Progress Energy and FPL both support this Settlement, and both request even more hours beyond the 60 hours contemplated in the Settlement.

FPL states:

It is critical that utilities be permitted to use emergency DR resources to maintain grid reliability under any conditions. 2

Progress Energy states:

The Standby Generator Program (SBG) is act ivated to reduce the load on the bulk electric system to a level that can be sa fely maintained until either system load
diminishes or additional resources can be made available. The program supports

2 FPL comments, p. 1.6 our compliance with the North American Reliability Corporation’s (NERC) Emergency Operations Planning sta ndards (EOP) (NERC Standard EOP-002) 3

.

What is telling about the support of companies like FPL and Progress Energy is that like the generators who oppose the settlement, they too own a nd operate fleets of large, central station power plants. However, unlik e the generators who oppose the settlement these utilities also have responsibility fo r maintaining system reliability and they recognize that emergency generators used in an emergency DR program are an important tool to maintaining reliability. For all of these reasons, EPA should reject the claims made by the generators and thei r trade associations regardin g the alleged sufficiency of 15 hours of emergency DR.

Emergency Generators Can ONLY be Dispat ched by the Grid Operator, and Strict Sequencing of Dispatch Rules Must be Followed

A critical flaw in the arguments raised by the Adverse Commenters is that they fail to understand or admit that the EPA Settlement Agreement applies only to engines operating in emergency DR programs . Many of the concerns they raise or allegations they make conflate

emergency DR with other forms of DR based on th e price of energy. The RICE NESHAP defines emergency DR as when “the regional tr ansmission organization or equivalent balancing authority and transmission operato r has determined there are emergency conditions that could lead to a potential elect rical blackout, such as unusually low frequency, equipment overload, capacity or energy deficiency, or unacceptable vo ltage level.” 40 C.F.R. §63.6640(f)(4); 75 Fed. Reg. at 9677. The Adverse Commenters label this generator use as behind the meter (“BTM”)
and then make unfounded comments that the us e of emergency DR does not provide any reliability benefits to the grid. The comments of utilities and system operators, above, clearly
refute this notion.

The Adverse Commenters refuse to acknowle dge that only ISOs, or utilities with responsibility for mainta ining the grid (also known as “Bal ancing Authorities”), may activate emergency DR, typically using North Ameri can Electric Reliability Council (“NERC”) procedures under Energy Emergency Alert Level 2 (EEA Alert 2) procedures. EEA Alert 2 includes demand-side management along with public appeals to reduce demand, voltage reductions, interruption of non-firm end-use loads in accordance with applicable contracts, and utility load conservation measures. Emergency DR is only called when a Balancing Authority determines that projected energy from generation is , or is expected to be, insufficient to meet demand plus prudent operating reserves; the next step is brownouts and blackouts (in fact, ISO New England dispatches emergency DR using emer gency generators concu rrently with the start of voltage reductions). The key feature here is that neither the emergenc y generator owner, nor

3 Progress Energy comments, p. 1.7 its agents, can decide when to operate emer gency DR. Only the entity responsible for maintaining system reliability a nd integrity can make the decisi on. For example, Attachment 4 from the PJM Manual 13 Emergency Operations ; shows graphically the emergency operations

sequence.

One of the generators erroneously claims th at a “Maximum Generation” emergency event was never called in PJM on July 22, 2011; implying th at emergency DR is preventing generators from operating 4 . This is incorrect. As shown in Attachment 5 which is from the PJM’s Emergency Message records, a Maximum Generati on Action was called for PJM’s Mid-Atlantic Region, Duquesne and BGE on July 22, 2011 at 1151, 1153 and 1147 respectively. This preceded the requested Emergency DR loading time of 1200 (Emergency DR is known in PJM as Emergency Load Management Program or EL RP). We also note that a NERC Emergency Action Level 2 (EEA 2) was called at 1007.

Emergency DR Programs Benefit the Environment

Emergency DR is Rarely Used and That is Like ly to be the Case in the Future as Well

For the reasons stated in the section above, emergency DR is rarely dispatched. Some of the generators claim that emergency DR dispatches will become more common in the future. This claim is entirely speculative and is refu ted by the record. In fact, as noted by PJM’s February, 2011 comment letter to EPA (see Attachment 1):

PJM planners model contingency conditions when developing the mandatory Load Management requirements in order to ensure compliance with the loss of load probability planning standard of 1 day in 10 years. As a result, the number of such emergency calls has been limited. Load Management re sources (formerly known as Active Load Management or ALM) have only been cal led by PJM 35 times since the inception of ALM in 1991. It is important to note that many of these Load Management calls involved only a part of the PJM region and/or lasted for fewer than 6 hours. As a result, should EPA tie the definition of emergency to the system operator protocols, based on a large number of historical data it should not be concerned that the occurrences will be frequent or long-lasting.

In Texas, there have only been two em ergency DR events under the Emergency Interruptible Load Service (“EILS”) Program since program inception in 2008. In New England, since the emergency DR Program has been implemented, the use of emergency engines in emergency DR has only been called three times in all of New England. The only system wide call was on August 2, 2006 for a total of 3.75 hours 5

.

4 PSEG Comments, p. 7 PSEG apparently failed to properly filter the Message Types for their screen shot and
omitted the “Max Emerg Gen Action Trans” message
5 http://www.iso

‐ ne.com/sys_ops/op4_action_archiv/2006/index.html8 The first and most important responsibility of a Balancing Authority, to which all other considerations must defer, is the continuing re liability of the electric system. NERC emergencies
are to be avoided at all costs. The notion that PJM, or any other Balanc ing Authority is going to allow emergencies to become more frequent, in e ffect, abdicating its responsibility to maintain reliability, is highly speculative and does such entities a disserv ice. EPA should not base its policy decisions on the assumptions that Balancin g Authorities will be derelict in the fulfillment
of their duties.

Even though these resources have historica lly been rarely called, and even though the grid operators are the only ones who can dispatch them and they are constrained by reliability rules, the generators continue to claim that th e settlement agreement will increase the incidence of these emergency DR dispatches. As mentioned above, it is unlikely that such dispatches will increase in the future, but this proposed settlement, which reduces the number of hours emergency generators can operate fro m the current unlimited level to a maximum of 60 hours cannot possibly be the cause of such an increase. Emergency events may increase due to factors outside the control of Balancing Authorities, such as excessive , unplanned generator outages and failures like those that imperiled th e Texas grid last ye ar, but far from worsening the situation, the settlement agreement will assu re that system operators will have more resources to help correct the system than would otherwise be the case.

One factor that contributes to the fallacious l ogic of the generators is that they believe that the Settlement Agreement is a 300 percent increase in operating hours from the existing regulation’s 15 hours. 6 This is wrong on two counts. First, the Settlement Agreement judiciously allows for the lesser of 60 hours or the minimum numb er of hours required by the Independent System Operator tari ff. MISO indicates in its co mments that it requires a minimum of 20 hours for reliability purposes. 7 ERCOT, the ISO for Texas, requires an emergency DR
resource to be available for 8 hours in a 4 mont h period or a total of 24 hours per year. The generators conveniently ignore this part of the settlement and their rhetoric only references the
60 hour maximum.

Second, the current status quo is no nationw ide restriction on hour s of operation for emergency DR purposes. The new hour restricti ons, whether 15 or up to 60 hours, would not go into effect until mid-2013. Therefore, the allegations of increased use of emergency DR due to
increased hours contained in the settlement agreement ar e logically false. In actuality, if the settlement agreement is approve d, it would still represent a reduction in permissible hours compared to the status quo ante . As the companies have repeatedly demonstrated, the use of emergency DR has been exceedingly rare in the past with no restrictions on hourly usage. There

6 PSEG Comments, p. 9

7 MISO Comments, p. 29 is no reason to assume that adding restrictions on annual operations will lead to increased dispatch of emergency DR by system operators.

There is No Correlation Between High Ozone Days and Emergency DR

In their comments on the settlement nume rous Adverse Commenters allege that emergency DR is dispatched by the ISOs on days of high ozone, thereby implying that the use of emergency generators will increase the number of ozone exceedance days 8 . However, in its comments submitted to EPA in February, 2011, th e Companies submitted a detailed analysis entitled “Analysis of Emergency DR and Ozone Con centrations,” in which we demonstrated that there is no correlation between emergency DR and ozone exceedance days. Although some emergency DR events are called during high oz one days, many DR events occur on non-ozone exceedance days and many more days have ozone alerts but no DR events. The data does not show that the use of emergency engines during the DR events causes high ozone, particularly since in many instances the ozone concentrations are as high or higher on the days preceding an event. For the 2010 PJM ozone analysis, prelim inary ozone data were used for monitoring stations in Maryland. That data base has now been finalized so an addendum to the original analysis is attached (see Att achment 6). In addition, correc tions to some of the 2010 PJM emergency DR dates have been made. The results have not changed from the original analysis.
No data has been introduced into the record that refutes this analysis. Finally, Delaware in its co mments references a technical paper entitled “Using Backup Generators for meeting Peak Electricity Demand: A Sensitivity Analysis for Emission Controls, Location and Health Endpoints” (Gilmore, Adams & Lave, 2010) 9 . Unfortunately, Delaware once again does not differentiate between emergency and non-emergency DR. The referenced paper analyzes the use of generators for non-emergency DR e.g., economic peak shaving. Such operation would not be permitted under the settlement agreement.

States Support the Use of Engines for Em ergency DR Primarily Because Occasional Use of Emergency DR is Superior to Ha ving All Emergency Generators Run in the Event of a Blackout

Delaware and its supporters claim that emer gency DR is bad for the environment. Numerous states disagree with this assertion. The following states either amended their existing regulations (denoted by an *) to allow emerge ncy engines to participate in emergency DR programs or allow its use under existing air re gulations: Maryland*, Vi rginia*, Pennsylvania, Ohio*, West Virginia, Indiana, Illinois, New York, Texas, Florida, Connecticut*, Massachusetts*, New Hampshire*, Vermont*, and Main e. None of these states would have gone through the extensive effort required to amend their regulations or allowed use under existing

8 American Lung Association, p. 4; American Lung Association Mid Atlantic, p. 1

9 Delaware Comments, p. 8

‐ 910 regulations if the use of engine s in emergency DR was found harmful to the environment. These states, unlike Delaware, understand th e importance of having a subset of generators available for a short time to avoid losing the elect ric grid rather than waiting for the electric grid to be lost, thereby causing enormous environmental and heal th and safety damage, to say nothing of the operation of every emergency engine in the affected regi on. There are other states that endorse the use of emergency engines for emergency DR, but the Parties do not operate emergency engines in emergency DR progr ams in those other states.

The Maryland Department of the Environmen t (“MDE”) summarized the position of the majority of states in its comment letter to the settlement docket (see Attachment 7 EPA-HQOGC-2011-1030-0020):

The Department supports the emergency de mand response restriction increase to 60 hours per year contained in the Proposed Settlement Agreement. This is a welcome change to the 15 hour restricti on in the current Final Rule, which may prevent emergency engines from partic ipating in emergency demand response (DR) programs. .... Specifically, the Depa rtment believes that emergency DR programs protect public health and sa fety by calling into action emergency generators to help meet energy demands wh en the main electrical grid is disrupted
or when brown outs are imminent. The Fi nal Rule, as codified in 40 CFR Part 63, §§63.6580 to 63.6675, appropriately explains emergency DR as necessary when “the regional transmission organization or equivalent balanc ing authority and transmission operator has determined th ere are emergency conditions that could lead to a potential elect rical blackout, such as unusually low frequency, equipment overload, capacity or energy deficiency, or unacceptable voltage level.” The current 15 hours per year maximum on emergency DR use in the Final Rule, however, may prevent emerge ncy engines from participating in emergency DR programs since the engines may not be able to meet RTO tariff requirements that specify minimum hours of availability to participate.

The Florida Department of Environmental Pr otection (“FDEP”) in its comments to EPA
filed in the NESHAP docket dated February 9, 2011 (see Attachment 8 EPA-HQ-OAR-2008- 0708.0719.1) fully supports the increase of hours for emergency DR:

[t]he FDEP feels that the use of emerge ncy RICE under the oversight of a demand response program is a beneficial use that should be allowed without additional
constraints.

Under the demand response program, these emergency RICE are only allowed to be called upon when the regional tran smission organization or equivalent11 balancing authority and transmission operator have determined there are emergency conditions that could lead to a potential electrica l blackout, such as unusually low frequency, equipment overloa d, capacity or energy deficiency, or unacceptable voltage level. If the grid fails, every emergency generator in the area will likely operate for many hours or days until the electric grid is restored, while those without an emergency generato r are left completely without power. Allowing some of these emergency RICE to be called upon in order to stabilize the grid and prevent a massive outage would result in much less environmental impact than if all emergency engines were operated in response to the loss of the grid.

The Texas Commission on Environmental Qu ality (“TCEQ”) proposed unlimited hours for emergency DR in its comments to EPA file d in the NESHAP docket (see Attachment 9 EPAHQ-OAR-2008-0708.0764.2):

The TCEQ also agrees with the petiti oners’ assertion that emergency demand response programs provide an environmental benefit. Selected and limited operation of emergency generators to avert a blackout is preferable to the possible operation of thousands of generators if a blackout occurs. The 15 hours allowed by the final rule may not provide adequate flexibility for emergency demand

response programs.

The TCEQ considers the operation of engines in response to an officially declared emergency by the regional transmission au thority to be emergency operation. .... While the 60 hours proposed by the peti tioners may appear reasonable based on historical operation, future demand opera tion for emergency purposes may not be reliably predicted. Therefore, TCEQ s uggests that the EPA revise the rule to specify that operation of an engine under an emergency demand response program is considered emergency operati on and not subject to hourly limitations as provided by 40 CFR §63.6640(f)(1)(i) provided that the operation is in direct response to an official energy emergency declared by the regional transmission or balancing authority.

Emergency Engines Have Environmental Be nefits Compared to Central Station

Generation

In an EPA sponsored study entitled “Mode ling Demand Response and Air Emissions in New England” prepared by Synapse Energy Economic s, Inc. (the “EPA DR Study”), the authors found that by having available quick-start cap acity to handle emergency conditions on the electric grid, there would be less reliance on old, dirty power plants that have to run at 50% load12 or higher all the time so that they can be av ailable when needed (e.g., these are called spinning reserves in New England). The EPA DR Study found that even if one assumes that all DR is from diesel-fired generators, there is a net be nefit in air quality because having quick start resources available, such as emergency DR, wh ether or not those resources are ever called, causes less reliance on spinning reserves. This is a huge benefit to air quality. The best analogy we can think of is this – relying solely on spinni ng reserves is like havi ng a taxi running outside your house 24/7 for the one or two times a week you need it.

PSEG in its comments criticizes this report for several spurious reasons. 10 First, PSEG criticizes the report for only modeling the use of emergency generators for limited hours (90 hours per year) despite the fact that this regulation will limit such generators to 60 hours or less. The criticism then alleges that the study does not take into account an in crease in allowable hours by “a multiple of four”. In fact, as described a bove, this settlement, if approved, would actually
reduce the number of hours that ar e allowable compared to when the study was done because previously there were no national level limit on hours of operation. The st udy is not perfect, but
it is the best one available and it correctly modeled a limited number of hours that is similar to what is proposed in this settlement.

Emergency generators have other environmental a nd economic benefits that are not available to central station power plants. They already exist. Virtually all generators that participate in emergency DR previously existed because their ow ners needed a way to ensure electric supply in the event of a grid emergency. In the experi ence of the Companies, commercial and industrial customers do not go out and install generators so they can participate in emergency DR. They participate in emergency DR if they already ha ve an emergency generator. The alternative of building new central station power plants ra ises siting problems, habitat disruption and environmental impacts from major construction.

The Proposed Settlement is Not a Departure from EPA Policy

The proposed settlement agreement is not a departure from EPA policy. Indeed, in the existing rule, EPA crafted the following flexibilit y for emergency generators – there is no time limit on the use of emergency generators in emer gency situations; emergency generators may be used for up to 100 hours for maintenance checks a nd readiness testing, provided the tests are recommended by the government or the manufacture r or insurer; and emergency generators may be used for up to 50 hours in non-emergency situations. 40 CFR 63.6640(f). In addition, the Settlement Agreement will bring the RICE NES HAP and ICE NSPS in line with another final EPA regulation that allows for the use of emer gency engines in emergency DR programs. In EPA’s Mandatory Reporting of Greenhouse Gases; Final Rule (40 CFR Part 86 et seq.), emergency generator is defined as “[a]n emer gency generator operates only during emergency

10 PSEG Comments, pp.8

‐ 9.13 situations, for training of personnel under simulated emergency conditions, as part of emergency DR procedures, or for standard performance testing pr ocedures as required by law or by the generator manufacturer.” 40 CFR § 98.6, published in the Federal Register at 74 Fed. Reg. 56,387 (October 30, 2009) (emphasis added). In fact, this final regulation does not even restrict the number of hours that generators can particip ate in emergency DR programs as the Settlement Agreement does.

The Proposed Settlement Does Not Stifle the Development of Cleaner Generation Resources

Most of the Generator Complaints are A bout Market Structure Issues in PJM, and are thus in the Jurisdiction of PJ M and FERC – EPA Should Disregard Them

The generators, their trade associations and the IMM make various claims that by implementing this settlement EPA will distort both energy and capacity markets and thereby stifle the construction of new, cleaner generati on. However, upon closer examination, most of these claims stem from policy disagreements with the structure of these markets, policy determinations that are within the purview of the organized wholesale markets (i.e. the ISO/RTOs that cover a portion of the country) and the Federa l Energy Regulatory Commission (“FERC”) which regulates the ISO/RTOs. These disagreements range from how DR resources should be compensated for providing energy (the subject of FERC Order 745 which has been upheld by FERC multiple times), the types of capacity products that one can bid on in PJM (the subject of PJM tariffs approved by FERC 11 ) and what terms and requirements demand side resources generally must be able to meet in order to particip ate in organized markets.

A clear example of this attempt to re-litigate settled issues is contained in the comments of the PJM IMM. They state,

The result of the increased role played by limited DR product is to suppress the price in the PJM capacity markets below the compe titive level, which, among other things, reduces the ability of other generating units to pay for environmental upgrades based on EPA requirements. The limited DR product woul d also displace genera ting units that are required to be available every day of the year. The Market Mon itor has recommended
that the limited DR product be eliminated from the capacity market. 12 (italics added)

The “limited DR product” referenced by the IM M is a new innovation that PJM created and FERC approved. Instead of having only one capacity product in their market they have created three. The limited DR product is much like the traditional DR product in the past which requires a resource to be available up to 60 hours during the summer months. However, in order to create a higher value product that represents the unique value that generators can provide year round,

11 ER11-2288, 134 FERC ¶ 61,066

12 PJM IMM Comments, p. 3.14 PJM also created an unlimited product that presumab ly will be priced higher because of its wider availability. This new product structure is supposed to provide highe r pricing signals to incentivize generators to enter the market. Despite this shift in PJM toward differential incentives for generators, the IMM had recommende d that the limited DR product be eliminated altogether, as stated in their comments above . PJM and FERC did not agree with the IMM and instead kept the limited DR product, presumably because they felt it had value in reliability and/or market structure. The poi nt is not to debate the wisdom of these outcomes but rather to point out that the IMM lost in its attempt to get PJM and FERC to accept its view. Now the IMM is trying to get EPA to overturn t hose other agencies in a matter that is rightly within the purview of those agencies.

EPA should let the ISO/RTOs and FERC make th e determinations as to what is neededboth for reliability and for economic efficiency in their markets and not let the generators relitigate those issues here. In addition, the proposed Settlement woul d affect generators throughout the country, not just in the organized wholesale market s, so EPA should consider the bigger picture, not just the views of disgruntled market part icipants in the organized markets.

Conceivably, EPA might wish to enmesh itsel f in the intricacies of wholesale market design if PJM’s and FERC’s actions were imperili ng the environment, but fortunately they are
not. While it is true that the emissions from em ergency generators are typically higher than those of the new and existing facilities operated by the generators, it is also true that emergency generators providing capacity as emergency DR resources can be expected to operate for far less than 60 hours per year while the generators are lik ely to run for thousands of hours per year.

This Settlement Cannot Affect Wholesale Energy Markets

The generators claim that approving this Se ttlement will do harm to both the energy and capacity markets by reducing prices, thereby redu cing their profits and incentive to build new generation. However, this Settlement ca nnot affect prices in energy markets.

Economic DR is a miniscule portion of the energy marketplace. In PJM, widely
considered the ISO with the most robust DR activity, economic DR delivered just 17,388 MWh of response in all of 2011. 13 This represents just 2.2 one t housandths of a percent (0.0022%) of the 794,000,000 MWh of energy demand in PJM last year 14 . It is almost laughable that this amount of DR, or 10 times this amount of DR, could distor t energy prices.

13 http://www.pjm.com/markets

‐ and

‐ operations/demand

‐ response/~/media/markets

‐ ops/dsr/2011

‐ dsr

‐ activity

‐ report

‐ updated

‐ 20120209.ashx

14 PJM fact sheet. http://www.pjm.com/documents/~/media/about

‐ pjm/newsroom/fact

‐ sheets/pjm

‐ statistics.ashx15 Even in limited hours where, due to high dema nd and scarce resources, small amounts of supply or curtailment can have significant impact on energy pr ices, the FERC in Order 719, has directed organized markets to implement “scarcity pricing” rules to mini mize price distortions. These rules are intended to insure that energy prices remain high in the face of increasing demand – even demand met by voluntary (o r mandatory) load curtailments.

Finally, this settlement only applies to emergency generators participating in emergency DR capacity programs or markets. By participating in an energy market, the DR participant would be participating in an economic DR activit y and, as such, would be subject to installing the non-emergency controls required by the NES HAP, and not subject to the limited exemption contemplated by this settlement.

Emergency DR Has Contributed to Lower Prices in Capacity Markets But that is a Good Thing and Should Not Prevent EPA from Go ing Forward with the Settlement

EPSA claims that the settlement will distor t the “Nation’s Energy Markets” but cites only PJM’s capacity market. EPSA expresses concern that the settlement would “allow BTM (behind the meter) generators to squeeze traditional generators out of the market, and could also result in suppressed prices.” This statement shows clearly that the generators and their trade associations are primarily interested in higher capacity prices at the expense of consumers. Whether lower capacity prices resulting from emergency generato rs participating in PJM capacity auctions are “suppressed” or simply “reasonable” is, of course , a matter of perspective. The PJM Capacity Market model, and similar mechanisms elsewhere, were designed to encourage reliability from a number of sources, including emergency DR. It cannot be concluded that DR participation, even through use of emergency generators, somehow “d istorts the market” me rely by participating. Capacity prices are unquestionably lower than would have been the case without such participation, but it is unclear why anyone would te rm this a “distortion.”

The final arbiter on that question is the FERC, and they have repeatedly supported greater participation of DR in capacity markets in differe nt proceedings precisely because of this benefit to consumers. And, if the balance swings too far in one direction or the other, FERC also has the authority to redress that imbalance.

Going forward in PJM, emergency DR w ill no longer compete with generation in capacity markets because, as noted above, PJM ha s created three capacity products. Emergency DR will only be able to bid into the Limited Capacity product while generation can bid into the Unlimited Capacity product. So, going forw ard emergency DR will not compete against generation in the PJM capacity markets and therefore will not be reducing the price for generation capacity.16 Also, it is important to remember that the proposed Settle ment represents a reduction in allowed hours of operation in emergency operation from the status quo ante of unlimited hours to 60 hours per year or far less in most circumst ances. Therefore, this settlement by itself will not lead to an increase of DR in capacity mark ets and therefore will not further reduce capacity prices.

Emergency DR Has Not Prevented th e Growth of Renewable Energy

Many factors have the potential to drive or inhibit the growth of renewable energy, including’ but not limited to state renewable por tfolio standards, invest ment and production tax credits, and natural gas prices that reduce the costs of competing energy. The claim that emergency DR engines will somehow stunt the growth of renewable resources is unfounded.

For example, in PJM, where DR has grown fa ster than anywhere else, renewable energy resources are growing at an equally furious pa ce. Figure 1 below illustra tes the amount of MW of demand response and renewable capacity that has cleared in the last three Base Residual Auctions for the PJM Capacity Market. While we are not arguing cau sation between the two, judging by this graph and these numbers, it is diffi cult to conclude that renewable energy growth in PJM has been slowed by demand response.

Over the last two auctions in PJM, 1341 MW of renewable resources were offered into the auction, and all 1341 MW cleared the auction. It is not our intent to scrutinize the specifics of PJM auction rules or results, but clearly neither demand response nor any other resource for that matter have prevented renewable energy from securing a commitment in the PJM Capacity
Market. If states or utilitie s wished to build renewable ener gy as part of their Renewable Portfolio Standard (“RPS”) goals, as several states have, it would clear the auction regardless of demand response participation. Also, as long as it is available, renewable energy will always be dispatched by system operator s before emergency DR engines. 15

Nationally, the trend is the same. Accordi ng to the EIA, renewable energy production soared from 5 Billion BTUs in 2001 to 8 billion BTUs in 2010, a 56% increase over the same time period in which demand response partic ipation has also dramatically increased. 16 Again, no causation can be argued, but there is certainly no evidence of DR suppressing the growth of renewable generation outside of PJM either.

15 PJM Base Residual Auction Results: 2012

‐ 2015

16 http://www.eia.gov/energy_in_brief/renewable_energy.cfm17 Figure 1.

Additional detailed backup for the Companie s’ position may be found in the original
Petition for Reconsiderati on submitted to EPA on May 10, 2010. The petition and all
attachments are found in this docke t under EPA-HQ-OGC-2011-003 through 005

Thank you for allowing us to provide comments. The Companies urge EPA to reject the comments of the Adverse Commenters and promul gate the proposed changes to the NESHAP in the Federal Register as provided for in the settlement agreement.

Respectfully submitted,

Richard H. Counihan,
V.P. Government Affairs EnerNOC Inc., on behalf of

EnergyConnect, Inc. EnerNOC, Inc. Innoventive Power, LLC

cc Peter Tsirigotis Melanie King 0 100 200 300 400 500 600 700 800

0.00 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 14,000.00 16,000.00

2012

‐ 2013 2013

‐ 2014 2014

‐ 2015 MW Cleared of DR and Renewable Energy in PJM Auctions

Demand Response

Renewable Energy

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