1

Legal Memorandum for Proposed Carbon Pollution Emis sion Guidelines for Existing Electric Utility Generating Units

Introduction The purpose of this memorandum (Legal Memorandum) i s to supplement the preamble by providing background for the legal issues discussed in the preamble for this pro posed

rule 1 and further discussion of some, but not all, of th ose issues. This memorandum is intended to be read in conjunction with, and assumes familiarity with, the preamble. I. Background

A. Clean Air Act section 111 Clean Air Act (CAA) section 111, which Congress enacted as part of the 1970 CAA Amendments, establi shes mechanisms for controlling emissions of air polluta nts from stationary sources. This provision requires EPA to promulgate a list of categories of stationary sourc es that the Administrator, in his or her judgment, finds “c auses, or contributes significantly to, air pollution whic h may reasonably be anticipated to endanger public health or

welfare.” 2 EPA has listed more than 60 stationary source

1 The proposed rule is the “Carbon Pollution Emissio n Guidelines for Existing Stationary Sources: Electri c Utility Generating Units.” 2 CAA section 111(b)(1)(A).2

categories under this provision. 3 Once EPA lists a source category, EPA must, under CAA section 111(b)(1)(B), establish “standards of performance” for emissions of air pollutants from new sources in the source category. 4 These standards are known as new source performance stand ards (NSPS), and they are national requirements that app ly directly to the sources subject to them.

When the EPA establishes NSPS for new sources in a particular source category, the EPA is also require d, under CAA section 111(d)(1), to prescribe regulations for states to submit plans regulating existing sources in that source category for any air pollutant that, in general, is not regulated under the CAA section 109 requirements fo r the national ambient air quality standards (NAAQS) or r egulated under the CAA section 112 requirements for hazardou s air pollutants (HAP). In contrast with CAA section 111( b), which provides for direct federal regulation of new sources, section 111(d)’s mechanism for regulating existing sources provides that states will submit plans that establish “standards of performance” for the affect ed sources and that contain other measures to implemen t and

enforce those standards.

3 See 40 CFR 60 subparts Cb – OOOO. 4 CAA section 111(b)(1)(B), 111(a)(1).3 The term “standard of performance” is defined under CAA section 111(a)(1) as a “standard for emissions of air pollutants” that “reflects the degree of emission limitation achievable” from the “best system of emi ssion reduction,” considering costs and other factors, th at “the Administrator determines has been adequately demons trated.” CAA section 302(l) also defines “standard of perfor mance” as “a requirement of continuous emission reduction, including any requirement relating to the operation or maintenance of a source to assure continuous emissi on reduction.” Under the EPA’s implementing regulations for CAA section 111(d)(1), the EPA must determine the best system of emission reduction for the sources, and then app ly that best system to determine the required level of emis sions or emission reduction, which the regulations refer to as the “emissions guideline.” 5 Under section 111(d)(1), the states must then adopt state plans that establish standard s of performance and measures that implement and enforce those standards. In the case of an air pollutant that EP A has determined may cause or contribute to endangerment of public health, the states’ standards of performance must

5 40 CFR 60.22(b)(5).4

not be less stringent than the EPA’s emission guide line. 6 CAA section 111(d)(1) grants states the authority, in applying a standard of performance to particular so urces, to take into account the source’s remaining useful life or

other factors. The state must submit its plan to the EPA for approval, and, under CAA section 111(d)(2), the EPA must approve the state plan if it is “satisfactory.” 7 If a state does not submit a plan, the EPA must establis h a federal plan for that state. 8 Once a state receives the EPA’s approval for its plan, the provisions in the plan become federally enforceable against the entity res ponsible for noncompliance, in the same manner as the provis ions of an approved state implementation plan (SIP) under C AA

section 110. B. Legislative history The legislative history of the 1970 Clean Air Act Amendments indicates that at that time, Congress gr ouped air pollutants from existing stationary sources int o three categories: (i) air pollutants that affected the N ational Ambient Air Quality Standards (NAAQS), which would be regulated under CAA section 110 state implementati on plans

6 40 CFR 60.24(c). 7 CAA section 111(d)(2)(A). 8 Id

.5

(SIPs), (ii) hazardous air pollutants (HAPs), which would be regulated under EPA-promulgated national emissio n standards pursuant to CAA section 112, and (iii) al l other air pollutants. The House bill did not address this third group of air pollutants, but the Senate bill did: it termed them “selected air pollution agents” and pro posed to require the EPA to promulgate national emission sta ndards pursuant to proposed CAA section 114. The 1970 Hous e-Senate

Conference Committee that was formed to resolve dif ferences

between the House and Senate versions of the CAA Am endments did not adopt the Senate bill’s proposed CAA sectio n 114, but did adopt section 111(d), which covers the same nonNAAQS, non-HAPs air pollutants. Under section 111(d )(1) as included in the 1970 CAA Amendments, the states wer e required to submit to the EPA state plans that “est ablish[] emission standards” for their existing sources. Alt hough the legislative history of the 1970 CAA Amendments does not contain statements that directly discuss the specif ic provisions included in section 111(d), the legislat ive history of the Senate bill’s proposed section 114 i s relevant to the meaning of section 111(d), and we r efer to parts of that legislative history below.6 For new sources, section 111(b)(1)(B) required the EPA to promulgate “standards of performance,” and defin ed that term, under section 111(a)(1), as— a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction) the Administrator determines has been adequately demonstrated. The legislative history discusses, among other thin gs, the meaning of the term “standard of performance,” 9 which we

refer to below. In the 1977 CAA Amendments, Congress made several changes to section 111, including section 111(d). Congress substituted “standards of performance” for “emissio n standards,” which, as noted above, the states are r equired to establish in their state plans. In addition, Con gress added to section 111(d)(1) the requirement that the EPA’s regulations “permit the State in applying a standar d of performance to any particular source under a [secti on 111(d)] plan ... to take into consideration, among ot her factors, the remaining useful life of the existing source to which such standards applies.” Congress added to section 111(d)(2) a similar requirement applicable to feder al plans. In addition, Congress revised the definition of

9 See, e.g ., Senate Comm. Rep. No. 91-1196 at 16.7

“standard of performance” in section 111(a)(1) to distinguish among different types of sources, and t o require that for fossil fuel-fired sources, the sta ndard (i) be based on, in lieu of the “best system of emi ssion reduction ... adequately demonstrated,” the “best technological system of continuous emission reducti on ... adequately demonstrated;” and (ii) require a percen tage reduction in emissions. In addition, in the 1977 CA A Amendments, Congress expanded the parenthetical req uirement

that the Administrator consider the cost of achievi ng the reduction to also require the Administrator to cons ider “any nonair quality health and environment impact a nd energy requirements.” Congress also added the defin ition of “standard of performance” in section 302(l), which defines the term to require a “continuous emission reductio n.” In the 1990 CAA Amendments, Congress made further amendments to section 111, including section 111(d) . Among other things, Congress again revised the definition of “standard of performance” under CAA section 111(a)( 1), this time repealing the requirements that the standard o f performance be based on the best technological syst em and achieve a percentage reduction in emissions, and re placing those provisions with the terms used in the 1970 CA A Amendments’ version of section 111(a)(1) that the s tandard8

of performance be based on the “best system of emis sion reduction ... adequately demonstrated.” In addition, in section 111(d)(1)(A)(i), Congress revised the descr iption of which air pollutants are subject to section 111( d) but, as discussed below, left the provision ambiguous wi th respect to its applicability to the air pollutant e mitted from the sources at issue in this rulemaking: CO 2 emissions

from fossil fuel-fired EGUs . CAA section 111 has n ot been

revised since the 1990 CAA Amendments. C. Regulatory history and case law The EPA issued regulations implementing CAA section 111(d) in 1975, 10 and has revised them in the years since. 11 (We refer to the regulations generally as the imple menting regulations.) These regulations provide that, in promulgating requirements for sources under CAA sec tion 111(d), the EPA first develops regulations known as “emission guidelines,” which establish binding requ irements that states must address when they develop their pl ans. 12

10 “State Plans for the Control of Certain Pollutants From Existing Facilities,” 40 FR 53,340 (Nov. 17, 1975). 11 The most recent amendment was in 77 Fed. Reg. 9304 (Feb. 16, 2012). 12 40 CFR 60.22. In the 1975 rulemaking, the EPA exp lained that it used the term “emissions guidelines” – inst ead of emissions limitations – to make clear that guidelin es would not be binding requirements applicable to the sourc es, but instead are “criteria for judging the adequacy of S tate plans.” 40 Fed. Reg. at 53,343.9

The implementing regulations also establish timetab les for

state and EPA action. The default rule is that stat es must submit state plans within nine months of the EPA’s issuance of the guidelines, 13 but the regulations provide the EPA with authority to extend the deadlines for those

submissions. 14 The regulations also provide that the EPA must take final action on the state plans within fo ur months of the due date for those plans. 15 In the present rulemaking, the EPA is following the requirements o f the implementing regulations, except that the EPA is ex tending certain timetables, as described in the preamble. 16 Over the last forty years, under CAA section 111(d) , the agency has regulated four pollutants from five source categories (i.e., phosphate fertilizer plants (fluo rides), sulfuric acid plants (acid mist), primary aluminum plants (fluorides), Kraft pulp plants (total reduced sulfu r), and municipal solid waste landfills (landfill gases)). 17 In

13 40 CFR 60.23(a)(1). 14 See id.; 40 CFR 60.27(a). 15 40 CFR 60.27(b). 16 The EPA is not re-opening the existing regulations , although it is revising the deadline for action on state plan submittals. The EPA is proposing additional re gulatory requirements, which are contained in proposed subpa rt UUUU. 17 See “Phosphate Fertilizer Plants; Final Guideline Document Availability,” 42 Fed. Reg. 12,022 (Mar. 1 , 1977); “Standards of Performance for New Stationary Source s; Emission Guideline for Sulfuric Acid Mist,” 42 Fed. Reg. 55,796 (Oct. 18, 1977); “Kraft Pulp Mills, Notice o f10

addition, the agency has regulated additional pollu tants under CAA section 111(d) in conjunction with CAA se ction

129. 18 The agency has not previously regulated CO 2 or any other greenhouse gas under CAA section 111(d) (alth ough because landfill gases include methane, the agency’ s regulation of landfill gases reduced emissions of t hat greenhouse gas).

The D.C. Circuit has never handed down a decision t hat interpreted, or reviewed EPA’s interpretation of, s ection 111(d). The D.C. Circuit has, however, reviewed rulemakings under CAA section 111 on numerous occas ions during the past four decades, handing down decision s dated

from 1973 to 2011. 19 These decisions concerned various aspects of section 111, primarily the interpretatio n of the

Availability of Final Guideline Document,” 44 Fed. Reg. 29,828 (May 22, 1979); “Primary Aluminum Plants; Availability of Final Guideline Document,” 45 Fed. Reg. 26,294 (Apr. 17, 1980); “Standards of Performance for New Stationary Source s and Guidelines for Control of Existing Sources: Municip al Solid Waste Landfills, Final Rule,” 61 Fed. Reg. 9905 (Ma r. 12, 1996). 18 See, e.g., “Standards of Performance for New Stationary Sources and Emission Guidelines for Existing Source s: Sewage Sludge Incineration Units, Final Rule,” 76 F ed. Reg. 15,372 (Mar. 21, 2011). 19 Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973), cert. denied, 417 U.S. 921 (1974); Essex Chemical Corp. v. Ruckelshaus , 486 F.2d 427, (D.C. Cir. 1973), cert. denied, Appalachian Power Co. v. EPA, 416 U.S. 969 (1974); Portland Cement Ass’n v. EPA , 665 F.3d 177 (D.C. Cir. 2011).11

term “standard of performance.” Relevant aspects of these

cases are discussed below. D. Summary of section 111 proposals The EPA is in the process of conducting three rulemakings to regulate CO 2 from fossil fuel-fired electricity generating units (EGUs), including both fossil fuel-fired electric utility steam generating units and natural gas-fired stationary combustion turbines (a ffected sources or affected EGUs). The first, published in January, 2014, proposes standards of performance under CAA s ection 111(b) for affected sources undertaking new constru ction. The second is the present rulemaking, under CAA sec tion 111(d), which proposes emission guidelines for stat es to follow in adopting state plans that regulate existi ng affected EGUs. In the third rulemaking, which we ex pect to propose concurrently with the present one, the EPA is proposing standards of performance under section 11 1(b) for

affected EGUs that undertake modifications or

reconstructions.

II. Summary of legal basis The following summarizes the main features of the EPA’s legal rationale for this proposed rulemaking. All of this rationale is discussed in the appropriate sect ions of12

the preamble for this rulemaking. This Legal Memora ndum elaborates on some, although not, all of these feat ures. Today’s proposed action is consistent with the requirements of CAA section 111(d) and the implemen ting regulations. As an initial matter, the EPA reasonab ly interprets the provisions identifying which air pol lutants are covered under CAA section 111(d) to authorize t he EPA to regulate CO 2 from fossil fuel-fired EGUs. Specifically, an ambiguity in the provisions of section 111(d)(1) (A)(i), arising from Congress’s simultaneous enactment of t wo separate versions of this provision, has led some stakeholders to argue that the fact that the EPA ha s regulated hazardous air pollutants from EGUs preven ts the EPA from regulating CO 2 emissions from EGUs. As explained below, however, the EPA reads the provision to auth orize regulation of CO 2 emissions from EGUs and this interpretation is both reasonable and entitled to

deference.

In addition, the EPA recognizes that CAA section 111(d) applies to sources that, if they were new so urces, would be covered under a CAA section 111(b) rule. T he EPA intends to complete two CAA section 111(b) rulemaki ngs regulating CO 2 from new fossil fuel-fired EGUs and from13

modified and reconstructed fossil fuel-fired EGUs b efore it finalizes this rulemaking, and either of those sect ion 111(b) rulemakings will provide the requisite predi cate for this rulemaking. A key step in promulgating requirements under CAA section 111(d) is determining the “best system of e mission reduction ... adequately demonstrated” (BSER). In promulgating the implementing regulations, the EPA explicitly stated that it is authorized to determin e BSER; 20 accordingly, in this rulemaking, the EPA is determi ning

BSER. The EPA is proposing two alternative approaches for the “best system of emission reduction ... adequate ly demonstrated” for fossil fuel-fired EGUs, each of w hich is based on methods that have employed for reducing em issions of air pollutants, including, in some cases, CO 2 , from these

sources. The first identifies the combination of th e four building blocks as the BSER. These include operati onal improvements and equipment upgrades that the coal-f ired steam-generating EGUs in the state may undertake to improve their heat rate (building block 1) and increases in , or retention of, zero- or low-emitting generation, as well as

20 The EPA is not re-opening that interpretation in t his rulemaking.14

measures to reduce demand for generation, all of wh ich, taken together, displace, or avoid the need for, ge neration from the affected EGUs (building blocks 2, 3, and 4 ). All of these measures are components of a “system of em ission reduction” for the affected EGUs because they eithe r improve the carbon intensity of the affected EGUs i n generating electricity or, because of the integrate d nature of the electricity grid and the fungibility of elec tricity and electricity services, they displace or avoid th e need for generation from those sources and thereby reduc e the emissions from those sources. Moreover, those measu res may be undertaken by the affected EGUs themselves and, in the case of building blocks 2, 3, and 4, they may be re quired by the states. Further, these measures meet the criteria in CAA section 111(a)(1) and the case law as the “best” sy stem of emission reduction because, among other things, the y achieve the appropriate level of reductions; they a re of reasonable cost, including when viewed through a na tionwide lens; they are consistent with trends in the e nergy sector; and they encourage technological developmen t and expansion that is important to achieving further em ission reductions. Moreover, the measures in each of the building blocks are “adequately demonstrated” because they a re each15

well-established in numerous states, many of them h ave already been relied on to reduce air pollutants, in cluding

CO 2 , from fossil fuel-fired EGUs and, as noted, they m ay be undertaken by the affected EGUs or, in general, req uired by

the states. For the alternative approach for the BSER, the EPA is identifying the “system of emission reduction” as including, in addition to building block 1, the red uction

of affected fossil fuel-fired EGUs’ mass emissions achievable through reductions in generation of spec ified amounts from those EGUs. Under this approach, the m easures in building blocks 2, 3, and 4 would not be compone nts of the system of emission reduction, but instead would serve as bases for quantifying the reduction in emissions resulting from the reduction in generation at affec ted EGUs. In light of the available sources of replacem ent generation through the measures in the building blo cks, this approach also meets the criteria for being the “best” system because of, among other things, the emission reductions it would achieve, its reasonable cost, i ts promotion of technological development, as well as the fact that under this approach, the reliability of the electricity system would be maintained. The approac h of reduced generation is also “adequately demonstrated ”16

because of the ability of affected EGUs to adjust t heir own generation, the authority of the state to impose requirements, and the fact that other entities that operate in the various types of markets in the states can b e expected to respond to the reduction in generation from the fossil-fuel fired EGUs by undertaking the measures in the building blocks or other actions that would assure reliability. After determining BSER, the EPA is authorized under the implementing regulations, as an integral compon ent to setting emission guidelines, to apply the BSER and determine the resulting emission limitation. The EP A is proposing to apply the BSER to the affected EGUs on a statewide basis. In this rulemaking, the EPA terms the resulting emission limitation the state goal. The E PA is formulating each state goal as an average emissions rate. The state goals form the EPA’s emission guidelines.

With the promulgation of the emission guidelines, e ach state must develop a plan to achieve an emission performance level that corresponds to the state goa l. The state plans must establish standards of performance for the affected EGUs and include measures that implement a nd enforce those standards. Based on requests from sta tes and17

other stakeholders, the EPA is proposing that state s be authorized to submit state plans that do not impose legal responsibility on the affected EGUs for the entiret y of the emission performance level, but instead, by adoptin g what this preamble refers to as a “portfolio approach,” impose requirements on other affected entities -- e.g., re newable energy and demand-side energy efficiency measures - - that

would reduce CO 2 emissions from the affected EGUs. (In the preamble and the regulatory text for this proposed rulemaking, we refer to the affected EGUs and other entities with obligations under the state plan as “ affected entities.”) As noted in the preamble for this rulem aking, a possible basis for this approach is that those requ irements on affected entities other than affected EGUs may b e authorized as standards of performance or implement ing measures. In the preamble, the EPA proposes that th is is an appropriate flexibility and solicits comment, but a lso solicits comment on whether state plans must impose all of the legal responsibility for achieving the required emission performance level on the affected EGUs. It should be noted that an important aspect of the BSER for affected EGUs is that the EPA is proposing to apply it on a statewide basis. The statewide approa ch also underlies the required emission performance level, which,18

as noted, is based on the application of the BSER t o a state’s affected EGUs, and which the suite of measu res in the state plan, including the emission standards fo r the affected EGUs, must achieve overall. The state has flexibility in assigning the emission performance obligations to its affected EGUs, in the form of st andards of performance -- and, for the portfolio approach, in imposing requirements on other affected entities -- as long as, again, the required emission performance level is met. This state-wide approach both harnesses the efficiencies of emission reduction opportunities in the interconnected electricity system and is fully cons istent with the principles of federalism that underlie the Clean Air Act generally and CAA section 111(d) particular ly. That is, this provision achieves the emission performanc e requirements through the vehicle of a state plan, a nd provides each state significant flexibility to take local circumstances and state policy goals into account i n determining how to reduce emissions from its affect ed sources, as long as the plan meets minimum federal requirements. This state-wide approach, and the standards of performance for the affected EGUs that the states w ill19

establish through the state-plan process, are consi stent with the applicable CAA section 111 provisions. The preamble further notes that even if the state p lan imposes all of the obligations to achieve the requi red emission performance level on the affected EGUs, th e state plan could nevertheless include requirements on oth er affected entities in order to facilitate the reduce d utilization of, and CO 2 emissions from, the affected EGUs – and the practical effect for the EGUs would be the same as under the proposed portfolio approach. The preamble solicits comment on other issues concerning state p lans, including whether a state may include in its plan a mechanism to achieve a specified portion of the req uired emission performance level on behalf of the affecte d EGUs, and thereby limit the obligations of the affected E GUs. The EPA emphasizes that in developing the state pla ns, the states have substantial discretion in designing the standards of performance, as long as the plans redu ce emissions from the affected sources to achieve the required emission performance level. Moreover, the states ma y require sources to implement specific measures that the EPA does not identify as part of the BSER, and may incl ude other approaches such as, for example, emission tra ding programs. By the same token, states may allow sour ces, in20

complying with their applicable standards of perfor mance, to rely on any measures that will reduce their CO 2 emissions, regardless of whether the EPA identifies those measures as part of BSER, as long as, again, the st ate plan achieves the requisite level of emissions reduction from

the affected entities. In this rulemaking, the EPA proposes reasonable deadlines for state plan submission and the EPA’s a ction. The proposed deadline for the EPA’s action on state play submittals varies from that in the implementing regulations, and the EPA is proposing to revise tha t provision in the regulations accordingly. Under CAA section 111(d)(2), the state plans must be “satisfactory” f or the EPA to approve them, and in this rulemaking, the EP A is proposing the criteria that the state plans must me et under that requirement. III. Authority to regulate CO 2 from EGUs CAA section 111 authorizes EPA to regulate CO 2 emissions. The Supreme Court has held that greenho use gases (including CO 2 ) are an “air pollutant” under the CAA.

Massachusetts. v. EPA

. 21 Furthermore, the U.S. Supreme Court’s holding in American Electric Power Co. v.

Connecticut , 131 S. Ct. 2527, 2537-38 (2011), that “the

21 549 U.S. 497 (2007).21

Clean Air Act and the EPA actions it authorizes dis place any federal common law right to seek abatement of c arbondioxide emissions from fossil fuel-fired power plan ts” was premised on the Court’s understanding that section 111, including section 111(d), applies to carbon dioxide

emissions from those sources. The fact that EPA has regulated EGU emissions of mercury and other hazardous air pollutants under CA A section 112 does not deprive EPA of the authority t o regulate CO 2 emissions from EGUs under CAA section 111(d) under the Agency’s established construction of the ambiguous provisions in CAA section 111(d)(1)(A)(i) that identify the air pollutants subject to CAA section 111(d). The ambiguities stem from apparent drafting errors that occurred during enactment of the 1990 CAA Amendment s, which revised section 111(d). The confusion arises becau se two different amendments to section 111(d) were enacted in the 1990 CAA Amendments – one in title I of the bill, t he other in title III of the bill (both amendments were to b e codified in section 111(d)). The confusion is exac erbated because the U.S. Code does not accurately reflect w hat was enacted – it presents only one of the two amendment s. However, the enacted law signed by the President (a s22

recorded in the U.S. Statutes at Large), not the U. S. Code, is controlling. As presented in the U.S. Code, section 111(d)(1)(A) requires states to submit standards of performance for existing sources “for any air pollutant (i) [1] for which air quality criteria have not been issued or which is not included on a list published under [CAA section 108 (a)] or [2] emitted from a source category which is regulated u nder [section 112] .” (Emphasis added.) This provision has two components that exclude from section 111(d) two typ es of air pollutants. The first component, which we call the NAAQS Exclusion, excludes NAAQS pollutants. The sec ond component, which we call the Section 112 Exclusion, presents the ambiguities. As presented in the U.S. Code, the Section 112 Exclusion appears by its terms to p reclude from section 111(d) any pollutant if it is emitted from a source category that is regulated under section 112 . The U.S. Code version of 111(d) can be read to provide that the provision would not cover GHGs because GHGs are emi tted from EGUs and EGUs are a source category regulated under

section 112. 22

22 By the same token, GHGs are emitted by many other source categories, such as refineries, that are regulated under section 112. Indeed, the text as presented in the U.S. Code could be read to exclude virtually every pollu tant23 The text of section 111(d) as presented in the U.S. Code, however, does not accurately reproduce the Se ction

112 Exclusion as enacted in the 1990 CAA Amendments . The

correct statement of the Section 112 Exclusion – th e one that was enacted by Congress and signed by the Pres ident, and which therefore is controlling – is found in th e U.S. Statutes at Large. This text incorporates two versi ons of the Section 112 Exclusion, one passed by the U.S. H ouse of Representatives and one passed by the U.S. Senate. The two versions were never reconciled, and both were enact ed as part of the 1990 CAA Amendments. The two versions c onflict

with each other and thus render the Section 112 Exc lusion ambiguous. Under these circumstances, the EPA may reasonably construe the Section 112 Exclusion to au thorize the regulation of GHGs under section 111(d). To understand the different amendments by the House and Senate, one must start with section 111(d)(1) a s it

read before the 1990 CAA Amendments: The Administrator shall prescribe regulations which shall establish a procedure similar to that provided by section 7410 of this title under which each State shall submit to the Administrator a plan which (A) establishes

from regulation under Section 111(d), because it wo uld be difficult to identify any pollutant that is not emi tted from at least one source category that is regulated under 112. We do not need to address this ridiculous res ult, however, for the reasons discussed in the text abov e.24 standards of performance for any existing source for any air pollutant (i) for which air quality criteria have not been issued or which is not included on a list published under section 7408(a) or 7412(b)(1)(A) of this title, but (ii) to which a standard of performance under this section would apply if such existing source were a new source. * * * 42 U.S.C.A. 7411(d)(1) (West 1977); Public Law 95–9 5 (emphasis added). In this version, the Section 112 Exclusion, by its terms, applied to section 112 pol lutants, and not to categories of sources that emit those pollutants. It should also be noted that in the 199 0 CAA Amendments, Congress amended section 112 to include a statutory list of hazardous air pollutants for EPA to regulate, instead of relying on EPA to develop its own list.

The 1990 Senate bill amended revised section 111(d)(1)(A)(i) by striking the term to ‘‘112(b)(1) (A)’’ and inserting in its place the term ‘‘112(b).’’ Und er this amendment, the text would read as follows (with cha nges shown in strikeout):

The Administrator shall prescribe regulations which shall establish a procedure similar to that Provided by section 7410 of this title under which each State shall submit to the Administrator a plan which (A) establishes standards of performance for any existing source for any air pollutant (i) for which air quality criteria have not been issued or which is not25 included on a list published under section 7408(a) or 7412(b) (1)(A) of this title, but (ii) to which a standard of performance under this section would apply if such existing source were a new source. The 1990 House bill amended section 111(d)(1)(A)(i) of the 1977 CAA by striking the phrase ‘‘or 112(b)(1)( A)’’, and inserting in its place the phrase ‘‘or emitted from a source category which is regulated under section 11 2.’’ Under this amendment, the text would read as follow s (with changes shown in underline and strikeout): The Administrator shall prescribe regulations which shall establish a procedure similar to that Provided by section 7410 of this title under which each State shall submit to the Administrator a plan which (A) establishes standards of performance for any existing source for any air pollutant (i) for which air quality criteria have not been issued or which is not included on a list published under section 7408(a) or 7412(b)(1)(A) emitted from a source category which is regulated under section 7412 of this title, but (ii) to which a standard of performance under this section would apply if such existing source were a new source.

The House-Senate Conference Committee did not reconcile these two conflicting amendments, and bot h were included in the 1990 CAA Amendments as reported by the Conference Committee, approved by both the House an d the Senate, and signed by the President. As presented i n the Statutes at Large, the Section 112 Exclusion is the refore ambiguous.26 The EPA discussed these different amendments in the preamble to “Revision of December 2000 Regulatory F inding

on the Emissions of Hazardous Air Pollutants From E lectric Utility Steam Generating Units and the Removal of C oal- and Oil-Fired Electric Utility Steam Generating Units F rom the Section 112(c) List,” 70 FR 15994, 16029-32 (March 29, 2005). There, the EPA concluded that the Section 11 2

Exclusion could be read as follows: Where a source category is regulated under section 112, a section 111(d) st andard of performance cannot be established to address any HAP listed under section 112(b) that may be emitted fro m that particular source category. The EPA explained that this approach reasonably interprets the Section 112 Excl usion to give some effect to both amendments. The EPA emphas ized that it is not reasonable to give full effect to th e House language because a literal reading of that language would mean that the EPA could not regulate any air pollut ant from a source category regulated under section 112, a re sult that would be inconsistent with (i) Congress’ desir e in the 1990 CAA Amendments to require the EPA to regulate more substances, and not to eliminate the EPA’s ability to regulate large categories of air pollutants, and (i i) the fact that the EPA has historically regulated non-ha zardous air pollutants under section 111(d), even where tho se air27

pollutants were emitted from a source category actu ally regulated under section 112. See 70 FR 16031-32. The EPA continues to view this interpretation of the Sectio n 112 exclusion as reasonable, for the reasons just state d. Applying this interpretation of the Section 112 Exclusion to this rule, we conclude that section 11 1(d) authorizes the EPA to establish section 111(d) guid elines for GHG emissions from EGUs. Although EGUs are a so urce category that is regulated under CAA section 112, G HGs are not a HAP regulated under section 112. Therefore, t he Section 112 exclusion in section 111(d) does not ap ply to GHGs, and 111(d) does not preclude the EPA from establishing guidelines covering GHGs from EGUs. IV. Rational basis, endangerment finding In response to the January 2014 Proposal for stand ards of performance for GHGs emissions from newly constr ucted fossil fuel-fired EGUs, 23 some stakeholders raised concerns that the EPA could not promulgate those standards w ithout first issuing a finding that GHGs from those source s cause or contribute significantly to air pollution which may reasonably be anticipated to endanger public health or welfare, under CAA section 111(b)(1)(A). In that pr oposal, the EPA stated that it is rational to regulate GHGs from

23 79 Fed. Reg. 1,430 (Jan. 8, 2014).28

fossil fuel-fired EGUs because the EPA has previous ly found that GHG emissions endanger public health and welfa re, and because the electric generating industry emits a significant amount of GHGs. The EPA added that CA A section 111 does not require that EPA issue a forma l endangerment finding, and that even if section 111 did require such a finding, the EPA’s rational basis wo uld qualify as one. 24 The EPA is taking the same position in the section 111(b) rulemaking proposal to establish sta ndards of performance for GHG emissions from modified and

reconstructed fossil fuel-fired EGUs.

The EPA will finalize either or both of the Januar y 2014 Proposal and the rulemaking for modified and reconstructed EGUs by the time that it finalizes th is proposed rulemaking. In that event, the EPA would not be required to further address the rational basis or endangerment finding in this rulemaking. In any eve nt, these questions are properly addressed and resolved in the context of the parallel rulemakings under section 1 11(b), not in this rulemaking. Thus, the EPA is not seeki ng comment in the preamble to this proposal on any iss ues related to a rational basis or endangerment finding

.

24 See 79 FR at 1,452/3 – 1,456/1.29

V. Authority for EPA to determine BSER and emission guidelines In this section we describe the authority, as set out in the EPA’s implementing regulations under CAA sec tion 111(d), for the EPA to determine the “best system o f emission reduction ... adequately demonstrated” and t he amount of required emission reduction that is based on the BSER. We also describe how, in this rulemaking, the EPA proposes to apply the BSER to each state, and on th at basis, to determine the amount of emission limitati on achievable by each state, which we refer to as the state goal. The state goal is the “emissions guideline” that the implementing regulations require the EPA to promulg ate. CAA section 111(d) directs the EPA to – prescribe regulations which shall establish a procedure similar to that provided by [CAA section 110] under which each State shall submit to the Administrator a plan which (A) establishes standards of performance for any existing source for [certain air pollutants] ... and (B) provides for the implementation and enforcement of such standards of performance. As noted above, the EPA promulgated the implementin g regulations for section 111(d) in 1975, and has rev ised parts of them since. The regulations set out a mult i-step process for the development and approval of state p lans, and assign responsibility for the various steps in the process to the EPA or the states. The EPA has follo wed30

these regulations in promulgating previous rulemaki ngs under section 111(d). 25 In the present rulemaking, EPA continues to follow them, except that EPA is establ ishing a different deadline for submission of state plans th an what the regulations would otherwise require. 26 Under the implementing regulations, at the same tim e or after the EPA proposes and then finalizes standa rds of performance for sources in a source category under section 111(b), the EPA must propose and then finalize a “g uideline document” with information pertinent to state plans under section 111(d): Concurrently upon or after proposal of standards of performance for the control of a designated pollutant from affected facilities, the Administrator will publish a draft guideline document containing information pertinent to control of the designated pollutant form [sic: from] designated facilities. Notice of the availability of the draft guideline document will be published in the Federal Register and public comments on its contents will be invited. After consideration of public comments and upon or after promulgation of standards of performance for control of a designated pollutant from affected facilities, a final guideline document will be published and notice of its availability will be published in the Federal Register.” 27 The regulations go on to describe the contents of t he “guideline document” as including, among other thin gs, an

25 These rulemakings are cited above. 26 The EPA is not re-opening these regulations, altho ugh it is revising the deadline for EPA action on state pl ans. 27 40 CFR 60.22(a).31

“emission guideline” that incorporates the “best sy stem of emission reduction ... adequately demonstrated”: Guideline documents published under this section will provide information for the development of State plans, such as: * * * * (5) An emission guideline that reflects the application of the best system of emission reduction (considering the cost of such reduction) that has been adequately demonstrated for designated facilities, and the time within which compliance with emission standards of equivalent stringency can be achieved.* * * * (6) Such other available information as the Administrator determines may contribute to the formulation of State plans. 28 The implementing regulations define the “emission guideline” as – A guideline set forth in subpart C of this part, or in a final guideline document published under section 60.22(a) which reflects the degree of emission reduction achievable through the application of the best system of emission reduction which (taking into account the cost of such reduction) the Administrator has determined has been adequately demonstrated for designated facilities. 29 In addition, the implementing regulations mandate t hat for air pollutants that adversely affect public health, the “emission guidelines” must be proposed and finalize d with the draft and final guideline document: [For air pollutants that have been demonstrated to adversely affect public health], the emission

28 Id . at 60.22(b). 29 40 CFR 60.21(e).32 guidelines and compliance times referred to in paragraph (b)(5) of this section will be proposed for comment upon publication of the draft guideline document, and after consideration of comments will be promulgated in subpart C of this part with such modifications as may be appropriate. 30 With this proposed rulemaking, the EPA is complyin g with these regulatory provisions. This proposed rul emaking follows the proposal of standards of performance fo r newly constructed affected sources in the January 2014 Pr oposal, and is concurrent with the proposal of standards of performance for modified and reconstructed affected sources. This proposed rulemaking – including the preamble and the supporting documents -- comprise the “draft guideline document.” The documents contain the “inf ormation for the development of State plans” described in th e regulations. This information includes descriptions as well

as technical and economic evaluations of the four b uilding

blocks. This information also includes the EPA’s application of the BSER to each state, and the EPA’ s calculation of the resulting proposed state goals. These state goals comprise the proposed “emission guideli nes.” In addition, the preamble and supporting documents propose the “time within which compliance with emission sta ndards

30 Id. at 60.22(c).33

of equivalent stringency can be achieved,” which ar e the periods of 2020-2029 for interim compliance, and th e subsequent period for final compliance, and provide other

information. VI. Best system of emission reduction adequately demonstrated and standards of performance In this section we discuss our interpretation of th e CAA section 111(d)(1) and (a)(1) provisions that re quire the state plans to establish, for “any existing sou rce,” “standards of performance,” and that define the lat ter term to mean, in general, emission standards that “refle ct the degree of emission limitation achievable through th e application” of the “best system of emission reduct ion ... adequately demonstrated” (BSER).

In subsection A of this section, we explain these section 111(d)(1) and 111(a)(1) provisions and summ arize key parts of the applicable case law. In subsection B, we describe our proposed two

alternative determinations for the BSER. We note th at each alternative includes two main components. One comp onent, for each alternative, is efficiency improvements th at coalfired power plants can make to their operations and equipment (which we call building block 1). For th e first34

type of BSER, the remaining component is, in genera l, increased zero- or low-emitting generation in speci fied amounts (building blocks 2 and 3), and increased de mandside energy efficiency in specified amounts (buildi ng block 4), all of which have the effect of displacing gene ration from the higher-emitting affected sources. For the alternative type of BSER, the remaining component i s reduced generation from higher-emitting affected so urces in specified amounts, which is the amount that can be replaced by, in general, increased zero- or low-emitting gen eration and eliminated by increased demand-side energy effi ciency. After we explain these alternatives, we go on to di scuss why each alternative is a “system of emission reduc tion,” and why we propose to determine that each system is the “best” that is “adequately demonstrated.”

In subsection C, we discuss our interpretation of t he requirement that each state must develop a plan tha t establishes for “any existing source” “standards of performance,” that is, emission standards that “ref lect the degree of emission limitation achievable through th e application of the [BSER].” We explain that once th e EPA determines the BSER, it undertakes “the application of the [BSER]” to each state’s set of sources on a state-w ide35

basis, and thereby determines the “emission limitat ion achievable,” which we term the state goal, and whic h in turn becomes the required emission performance leve l that the state plan must achieve. The state must then de velop its plan by identifying emission standards for its affected EGUs -- and, in the case of a state that adopts the portfolio approach, by identifying other obligation s on other affected entities -- that in total, achieve t he required emission performance level. Through this p rocess, the state plan may meet the requirements of section s 111(d)(1) and (a)(1) to “establish[] standards of performance for any existing source” because it imp oses, on each of its affected sources, emission standards th at “reflect [that is, embody or represent] the degree of [that is, the part of] emission limitation achievable thr ough the application of the best system of emission reductio n ... adequately demonstrated” [that is, the state’s requ ired emission performance level].

A. CAA requirements for standards of performance and BSER In this subsection, we explain the relevant provisi ons of sections 111(d)(1) and 111(a)(1) and summarize k ey parts of the applicable case law.36

The EPA’s explanation for this BSER proposal begin s with the key statutory provisions in CAA sections 1 11(d)(1) and 111(a)(1). Section 111(d)(1) requires that a st ate plan “(A) establish[] ... standards of performance for any existing source” and “(B) provide[] for the impleme ntation and enforcement of such standards.” Section 111(a)( 1) defines a “standard of performance” as -- a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of achieving such reduction and any nonair quality health and environmental impact and energy requirements) the Administrator determines has been adequately demonstrated. Several points should be made about the BSER. By i ts terms, it is a “system of emission reduction” that is both the “best” and “adequately demonstrated.” The CAA d oes not define the term, “system,” and as a result, that te rm should be given its ordinary, everyday meaning: “a set of things working together as parts of a mechanism or interconnecting network; a complex whole.” 31 In addition, the U.S. Court of Appeals for the D.C. Circuit (D.C

. Circuit or Court) has handed down case law over a 4 0-year period that interprets the requirements that the “s ystem of

31 Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreference.com.mutex.gmu.edu/view/1 0.1093/a cref/9780199571123.001.0001/acref-978019957112337

emission reduction be the “best” and be “adequately

demonstrated.” 32 Under this case law, the criteria for the EPA to use in determining whether the system is the “best” include the following key considerations, among oth ers:

• The system of emission reduction must be technicall y feasible. 33

• The EPA must consider the amount of emissions reductions that the system would generate.

• The costs of the system must be reasonable. The EPA may consider the costs on the source level, the industry-wide level, and, at least in the case of t he power sector, on the national level in terms of the overall costs of electricity and the impact on the national economy over time. 34

32 Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973), cert. denied, 417 U.S. 921 (1974); Essex Chemical Corp. v. Ruckelshaus , 486 F.2d 427, (D.C. Cir. 1973), cert. denied, Appalachian Power Co. v. EPA , 416 U.S. 969 (1974); Sierra Club v. Costle , 657 F.2d 298 (D.C. Cir. 1981); Portland Cement Ass’n v. EPA , 665 F.3d 177 (D.C. Cir. 2011). 33 The case law may be read to treat technical feasib ility as the measure for whether the standard of performa nce is “achievable,” Essex Chemical Corp. v. Ruckelshaus, 486 F.2d at 427, not as a criterion for whether the system o f emission reduction is the “best system of emission reduction ... adequately demonstrated.” However, for present purposes, we refer to technical feasibility as anot her of the criteria for the BSER. 34 See Sierra Club v. Costle , 657 F.2d 298, 330-31, 337-39 (D.C. Cir. 1981). As discussed in the January 2014 Proposal, the D.C. Circuit’s case law formulates th e cost consideration in various ways: the costs must not b e “exorbitant[]”, Essex Chemical Corp. v. Ruckelshaus , 486 F.2d 427, 433 (D.C. Cir. 1973) cert. denied, Appalachian Power Co. v. EPA, 416 U.S. 969 (1974), see Lignite Energy Council v. EPA , 198 F.3d 930, 933 (D.C. Cir. 1999); “greater than the industry could bear and survive,” Portland Cement Ass’n v. EPA , 513 F.2d 506, 508 (D.C. Cir. 1975); or “excessive” or “unreasonable.” Sierra Club v.38

• The EPA must also consider that CAA section 111 is designed to promote the development and implementat ion of technology. 35

• The EPA must also consider energy impacts, and, as with costs, may consider them both on the source le vel and on the nationwide structure of the power sector over time. Importantly, the EPA has discretion to weigh these various considerations, may determine that some merit great er weight than others, and may vary the weighting, dep ending on the source category. In determining whether a system is “adequately demonstrated,” the EPA is to look forward toward wh at may fairly be projected for the regulatory future, rath er than determining what is available now. In the D.C. Cir cuit’s first decision under section 111, Portland Cement Ass’n v.

Ruckelshaus , 486 F.2d 375, 391 (D.C. Cir. 1973), the Court explained: Section 111 looks toward what may fairly be projected for the regulatory future, rather than the state of the art at the present . . . . The Senate Report made clear that it did not intend that the technology “must be in actual routine

Costle , 657 F.2d 298, 343 (D.C. Cir. 1981). In the Januar y 2014 Proposal, EPA stated that “these various formu lations of the cost standard ... are synonymous,” and, for convenience, EPA used “reasonableness” as the formu lation. EPA takes the same approach in this rulemaking. 35 See 79 Fed. Reg. at 1,465/1-2 (discussing case law and legislative history that includes technological dev elopment as a consideration in the determination of BSER, in cluding Sierra Club v. Costle , 657 F.2d 298 (D.C. Cir. 1981)).39 use somewhere.” . . . The Administrator may make a projection based on existing technology, that that projection is subject to the restraints of reasonableness and cannot be based on “crystal ball” inquiry. . . . [T]he question of availability is partially dependent on “lead time”, the time in which the technology will have to be available. 36 The forward looking nature of determining whether a system is adequately demonstrated is particularly r elevant for this proposal given the lengthy period for impl ementing state plans that the EPA is proposing. The EPA dis cussed the CAA requirements and Court interpretations of t he BSER at length in the January 2014 Proposal, 37 and incorporates by reference that discussion in this rulemaking. It should be noted that the EPA may identify as th e best system of emission reduction adequately demons trated as the BSER a system that would form the basis for emission standards that could be achieved by some, but not necessarily all, of the existing sources in the sou rce category. This approach is consistent with the tech nologyforcing purposes of section 111, as well as the fac t that under section 111(d)(1), the state retains authorit y, “in applying a standard of performance to any particula r source

36 Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375, 391- 92 (D.C. Cir. 1973) (citations omitted). 37 See 79 Fed. Reg. at 1,462/1 – 1,467/3.40

... to take into consideration, among other factors , the remaining useful life of the ... source....” 38

B. Best system of emission reduction adequately demonstrated In this subsection, we describe our two alternative proposed determinations for the BSER and explain wh y each

38 The EPA discussed this issue in connection with ne w sources in the recently proposed NSPS for CO 2 emissions from fossil fuel-fired EGUs, 79 Fed. Reg. 1430, 1466/3 ( Jan. 8, 2014). With respect to existing sources, a commenta tor has stated: There is no statutory provision or direct precedent under § 111(d) requiring EPA to demonstrate that emission limits are achievable by every source subject to an [standard of performance for existing sources]. Moreover, since the trigger for implementing § 111(d) is an NSPS under § 111(b), Congress arguably contemplated that, once EPA has identified BSER for new plants, it should raise the performance of the existing fleet with the goal of approaching new source levels at existing plants.In this reading, 111(d) would have a technologyforcing thrust, tempered by the performance and cost constraints at existing plants but nonetheless raising the bar significantly for the existing fleet. From this perspective, EPA could argue that “adequately demonstrated” means achievable at a reasonable cost by the more modern, better performing coal and gas units, not by all plants [citing Reinforcing this approach is the fact that cost is not determinative in defining a “standard of performance” under § 111(a) but only must be “taken into account” .... Sussman, R., “Power Plant Regulation Under the Clea n Air Act: A Breakthrough Moment for U.S. Climate Policy? ,” Virginia Environment Law Journal , 32:97 (2014), at 123 (citations omitted).41

is a “system of emission reduction,” and why each s ystem is the “best” that is “adequately demonstrated.”

1. Introduction and overview The EPA’s BSER proposal in this rulemaking recogniz es, and is based in part on, the interconnected nature of the electrical generating system, which, among other th ings, means that generation at one EGU can substitute for generation at another. The importance of the interconnected nature of the grid in facilitating C O 2 emissions reductions is evident in the long history of reliance on it to provide least-cost dispatch, the more recent history of implementing air pollutant emissi ons reductions, and the still more recent history of implementing CO 2 emissions reductions at the company, state, and regional level.

In this rulemaking, the EPA proposes to determine t he “best system of emission reduction ... adequately demonstrated” on a state-by-state basis. Moreover, the EPA proposes to determine the BSER based on four “build ing blocks,” some of which rely on the interconnected n ature of the electricity generating grid: Building block 1: Reducing the carbon intensity of generation at individual affected EGUs through heat rate improvements.42 Building block 2: Reducing emissions from the most carbon-intensive affected EGUs in the amount that results from substituting generation at those EGUs with generation from less carbon-intensive affected EGUs (including NGCC units under construction). Building block 3: Reducing emissions from affected EGUs in the amount that results from substituting generation at those EGUs with expanded low- or zero

carbon generation. Building block 4: Reducing emissions from affected EGUs in the amount that results from the use of demand-side energy efficiency that reduces the amou nt of generation required. As discussed in the preamble, with these building blocks in mind, we are proposing two alternatives f or the BSER, each of which is based on methods for reducin g fossil fuel-fired EGUs’ air pollutants that states and sou rces have already implemented. The first approach is th at the BSER is the combination of building blocks 1 throug h 4. Building block 1 is a set of operational improvemen ts and equipment upgrades that the affected sources may un dertake to improve their efficiency and reduce their emissi ons rate. Building blocks 2, 3 and 4 are sets of measu res that, in general, increase zero- or low-emitting ge neration in specified amounts and increased demand-side ener gy efficiency in specified amounts, all of which, due to the interconnected nature of the grid, result in drawin g utilization away from higher-emitting fossil fuel-f ired43

EGUs, thereby lowering those EGUs’ emissions. The second approach is that the BSER is building block 1 (heat rate improvements) combined with reduced generation from fossil fuel-fired EGUs in the amount, calculated on a stat ewide basis, that can be replaced by, in general, increas ed zeroor low-emitting generation and avoided by increased demandside energy efficiency. The EPA proposes that each of these alternatives may be considered to be a “syste m of emission reduction,” and that each meets the criter ia, set out in CAA section 111(a)(1) and the case law, to qualify as the “best” system that is “adequately demonstrat ed.”

2. Background: Interconnected nature of the electricity system

Central to our BSER determination is the fact that the nation’s electricity needs are being met, and h ave for many decades been met, through a grid formed by a n etwork connecting groups of EGUs with each other and, ulti mately, with the end-users of electricity. We discuss this nature of the electricity system at length in the preamble and, for convenience, summarize that discussion here. Through the interconnected grid, fungible products – electricity and electricity services – are produced and delivered by a diverse group of EGUs operating in a coordinated fashion in response to end-users’ deman d for44

electricity. Because the electricity grid operates through the interconnection of multiple EGUs and favors lea st-cost generation, owners and operators of generators have been able to assure the stability of electricity generat ion and the reliable delivery of electricity to users at le ast cost (subject to certain reliability, environmental and other constraints). The fact that generation at one EGU can be substituted for generation at another allows operat ors to utilize their least-cost assets first, and hold the ir higher-cost assets in reserve, thereby assuring tha t the system achieves the objectives of providing reliabl e and least-cost electricity service. In recent years, the ability to shift between different generation assets on the grid has also facilitated the achievement of environmental object ives, including the reduction of emissions of nitrogen ox ides, sulfur dioxide, and particulate matter -- which, am ong them, worsen acid deposition and jeopardize the att ainment and maintenance of national ambient air quality sta ndards – as well as hazardous air pollutants. Regulation of those air pollutants tends to increase the relative cost of electricity from higher-emitting generation assets. Because EGU operators have the ability to use the grid as a n interchange for shifting levels of generation among several45

facilities, the higher costs of higher-emitting ass ets must be considered, along with fuel costs and other marg inal costs, in determining the extent to which those ass ets are

utilized. The amount of their utilization affects t he

amount of their emissions. Most recently, states and companies seeking specifically to achieve CO 2 emissions reduction objectives have also relied on the shifting of generation betw een and among EGUs to achieve those emissions reduction obj ectives. In fact, as the preamble notes, there are many case s in which companies have reduced emissions through shif ting generation away from higher emitting units to lower - or zero-emitting units, or through reducing overall el ectric demand through demand-side energy efficiency measur es. In some cases, this has occurred in response to goals set at the company level: some companies have established a single, company-wide emission target, and then have used combinations of strategies such as fuel switching, increased renewable or nuclear generation, and incr eased energy efficiency, to achieve those goals. In othe r cases, this has occurred in response to goals set at the s tate level: for example, California enacted its Global W arming Solutions Act in 2006 (AB 32), requiring the state to reduce its GHG emissions to 1990 levels by 2020 and 8046

percent below 1990 levels by 2050, 39 through a suite of mechanisms that include energy efficiency programs, renewable energy programs and an economy-wide cap a nd trade program, along with other programs. 40 Similarly, nine northeast and mid-Atlantic states participate in th e Regional Greenhouse Gas Initiative (RGGI), a market -based emissions budget trading program that sets an aggre gate

limit on CO 2 from fossil fuel fired power plants in the participating states. These examples demonstrate t hat it is appropriate to base the BSER at least in part on the combination of measures in building blocks 2, 3, an d 4, and that this component of such a system is adequately

demonstrated. In all of these instances, companies’ choices and policies implemented by states may impact decisions about dispatching of lower instead of higher emitting gen erating units both as part of the short term dispatch proce ss and as part of longer term business planning processes. The proposed emission guidelines, including the tempora l

39 State of California Global Warming Solutions Act o f 2006, Assembly Bill 32, Chapter http://www.leginfo.ca.gov /pub/05- 06/bill/asm/ab_0001-0050/ab_32_bill_20060927_chapte red.pdf 40 See Cal. Air Res. Bd., Climate Change Scoping Plan 31-3 2, 41-46 (2008), available at: http://www.arb.ca.gov/cc/scopingplan/document/adopt ed_scopi ng_plan.pdf.47

flexibility that the guidelines incorporate, allow states and EGUs to implement a variety of mechanisms that can reduce emissions both as part of those shorter term dispatch decisions and as part of longer term busin ess planning processes. In this rulemaking, the EPA is building on these company, state, and regional approaches by continui ng to rely on the interconnected nature of the grid to ac hieve, on a nationwide basis, the important objective of significant amounts of CO 2 reductions from fossil fuel-fired EGUs. The EPA is doing so by proposing that the BSE R should be based on a combination of the implementation of heat improvement measures for fossil fuel-fired steam ge nerating units (building block 1) to reduce their emissions, as well as the implementation of other measures that are as sociated

with reduced emissions from those EGUs. The latter include substituting generation at higher emitting sources with increasing generation at less carbon-intensive EGUs , using expanded amounts of low- or zero-carbon generating capacity connected to the electric grid, and using electrici ty more efficiently to reduce the total demand for electric ity (building blocks 2, 3 and 4, respectively). In determining the BSER, it is significant that CO 2 is a global pollutant, and therefore the location of t he48

emissions (or emission reductions) does not affect the impact on climate change of an amount of emissions generated at any given source in any one location. 41 The

fact that CO 2 becomes well-mixed in the atmosphere means

that CO 2 emissions may be reduced anywhere within the electricity grid and still achieve the intended cli mate

benefits. This allows the EPA to determine that a system is the “best” system based on the total emission re ductions the system would achieve, rather than basing the

determination on the emission reductions achieved a t each

individual affected source.

3. First Approach to the BSER: Building blocks 1, 2, 3, and 4 in combination Under the EPA’s first approach to determining the BSER, the EPA is proposing that the BSER is the com bination of building blocks 1 through 4. As discussed in th e

41 By analogy, because the problem of acid deposition is caused by EGU emissions of nitrogen oxide and sulfu r dioxide over a wide geographic area, Title IV of th e Clean Air Act established a national emissions trading pr ogram that addresses that problem by reducing the total a mount of those emissions, but without regard to the particul ar location of those emissions (or emissions reduction s). In contrast, other air pollutants have adverse health and welfare effects in the locality where they are emit ted, and as a result, geographic constraints on emissions tr ading are necessary. See CAA section 173(c)(1) (limiting offsets for air pollutants subject to new source review requirements to emissions reductions from sources i n certain nonattainment areas).49

preamble, under the EPA’s proposed approach to dete rmining the BSER, the measures in building block 1, which e ntail improvements in the efficiency of the affected EGUs ’ equipment or processes, meet the criteria to qualif y as a part of the BSER. Further elaboration of this point here is not necessary. In addition, in the preamble, we exp lain why all four building blocks in combination meet the cr iteria to qualify as the BSER, and further elaboration of this latter point here is also not necessary. Instead, t his discussion will focus on building blocks 2, 3, and 4. Under this first approach to the BSER, the “best system of emission reduction ... adequately demonstra ted” also includes the measures in building blocks 2, 3 and 4 for the affected fossil fuel-fired steam generating boilers, and building blocks 3 and 4 for the fossil fuelfired combustion turbines. In this section, we fir st explain why the measures in these building blocks a re part of a “system of emission reduction,” and then why t hat system is the “best” system that is “adequately

demonstrated.” In brief, building blocks 2, 3, and 4 are part of a “system of emission reduction” because that phrase, in the context in which it is used in section 111 and by i ts terms, is broad enough to apply to the measures in the50

building blocks, in light of the integrated nature of the electricity grid. Through the integrated grid, the measures reduce overall demand for, and therefore utilization of, higher emitting, fossil fuel-fired EGUs, which, in turn, reduces CO 2 emissions from those EGUs. The measures in the building blocks are part of the “be st” system that is “adequately demonstrated” because th ey meet the criteria in section 111(a)(1) and the case law for BSER and they are well-established.

a. “[S]ystem of emission reduction” The EPA’s proposal that in this rulemaking, the “system of emission reduction” includes the measure s in building blocks 2, 3, and 4 is grounded in the EPA’ s interpretation of the key CAA provisions: section 111(d)(1), which requires that each state plan “est ablish[] standards of performance for any existing source” f or certain types of air pollutants; and section 111(a) (1), which defines a “standard of performance” as “a sta ndard for emissions ... which reflects the degree of emissi on limitation achievable through the application of th e best system of emission reduction ... adequately demonstra ted.” As explained next, the EPA’s interpretation may be justified under either a Chevron step 1 or Chevron step 2 interpretation.51 i. Chevron step 1 interpretation The starting point for our analysis is the phrase, “system of emission reduction,” which serves as the basis for the “standard for emissions.” As noted above, the CAA does not define the term, “system,” and as a result , that term should be given its ordinary, everyday meaning : “a set of things working together as parts of a mechanism or interconnecting network; a complex whole.” 42 This definition is broad. It encompasses virtually any “set of thi ngs” that reduce emissions. Moreover, no other provision s in the definition of “standard of performance” include any other constraints on the type of “things” that may serve as the basis for the standard for emissions. The only cons traints are the qualifiers “best” and “adequately demonstra ted,” but these do not constrain the type of “things” tha t could be a “system of emission reduction,” only whether a particular “thing” qualifies as the “best” “system of emission reduction” that is “adequately demonstrate d” (it must be, among other things, technically feasible a nd of reasonable cost). Thus, the “system of emission re duction” may include anything that reduces emissions, rangin g from

42 Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreference.com.mutex.gmu.edu/view/1 0.1093/a cref/9780199571123.001.0001/acref-978019957112352

add-on controls applied to the affected sources’ smokestacks to control emissions, to measures that replace production or generation at the affected sources an d thereby reduce emissions from those sources. Moreover, the context in which “standard of performance,” which includes “system of emission reduction,” is found does not add additional constr aints. As noted above, section 111(d)(1) requires that sta te plans establish “standards of performance for any existin g source,” and in the preamble, we solicit comment on the interpretation of that phrase. Among other things, we solicit comment on whether the standards of perform ance must apply directly to the affected sources and onl y to the affected sources, in which case the affected source s would bear the legal liability for the entire amount of e mission reduction requirements; or whether, instead, the st andards of performance may apply to other entities whose ac tions would reduce generation, and thus emissions, from t he affected sources. Under either of those interpretat ions, there is nothing in that phrase that limits the typ e of “system of emission reduction” that, if it is the “ best” that is “adequately demonstrated,” may furnish the basis for the standards for emissions. That is, even if that phrase -- “standards of performance for any existin g53

source” -- is interpreted to mean that the standard s of performance must apply directly to, and only to, th e affected sources, that application of the standards of performance does not limit the scope of the type of “system of emission reduction” that may serve as the basis for the standards for emissions. Any “system of emission re duction”

that reduces the emissions of the affected sources may serve as the basis for the standards for emissions, as long as, again, it is the “best” that is “adequately demonstrated.” For these reasons, the scope of the type of “system of emission reduction” that may be consider ed is

broad. Interpreting the “system of emission reduction” in this manner is also consistent with the scope of th e state plans. Under section 111(d)(1), a state plan must “establish[] standards of performance” and “provide [] for the implementation and enforcement of such standard s of performance.” At the state’s discretion, measures i n building blocks 2, 3, and 4 may be included in stat e plans either through the portfolio approach or as measure s that “provide[] for the implementation” of standards of performance that limit emissions from affected EGUs

. Based on these interpretations, for existing source s in the electric utility industry, we propose that t he term54

“system of emission reduction” is sufficiently broa d to include the measures in building blocks 2, 3, and 4 because they are part of the interconnected electricity sec tor and result in reduced utilization, and therefore reduce d emissions, from the higher emitting fossil fuel-fir ed power plants. This proposed reading is clear as a matter of

Chevron step 1 because of the breadth of the term, “system,” in the context in which it is found. ii. Chevron step 2 interpretation Moreover, even if the term, “system of emission

reduction” is not considered to be clear as a matte r of

Chevron step 1 to include the measures in building blocks 2, 3, and 4, then the EPA’s interpretation of the t erm to

include those measures is valid as reasonable const ruction

under Chevron step 2. There are several reasons for interpreting “system of emission reduction” in this way. 43 (I). Legislative history of “standard of performance”

43 See EPA v. EME Homer City Generation, L.P., No. 12-1182, slip op. at 22 (U.S. April 29, 2014) (after explain ing why the text of the CAA "did not answer" the largely te chnical question of how EPA should allocate each state's responsibility for the tangle of potentially "signi ficant" upwind-to-downwind air pollution contributions, stating: "Under Chevron , we read Congress' silence as a delegation of authority to EPA to select from among reasonable options.")55 First, the legislative history of the definition of “standard of performance,” including the phrase “be st system of emission reduction ... adequately demonstra ted,” makes clear that the “system of emission reduction” is broader than a technological system. As enacted by Congress in the 1970 CAA Amendments, section 111(a)(1) defin ed the term “standard of performance” as, in relevant part -- a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction ... adequately demonstrated. In the 1977 CAA Amendments, Congress changed this definition to require that for new sources, the sta ndard must, in relevant part, “reflect the degree of emis sion limitation ... achievable through application of the best technological system of continuous emission reduction ... adequately demonstrated;” and for existing sources , the standard must, in relevant, “reflect[] the degree o f emission reduction achievable through the applicati on of the best system of continuous emission reduction ... adequately demonstrated....” (Emphasis added.) 44 In the 1990 CAA Amendments, Congress again changed this definit ion,

44 The 1977 CAA Amendments also revised section 111(a )(1) to require that the standards of performance for fossi l fuelfired sources require a percentage reduction in emi ssions (the “percentage reduction” requirement).56

this time to reinstate the definition as found in t he 1970 CAA Amendments (with some revisions not here releva nt). That is, Congress repealed the requirements added i n the 1977 CAA Amendments that the “system” be, in the ca se of new sources, “technological.” These amendments make clear that the “system[s] of emission reduction” upon which the section 111(d) s tandards of performance may be based are not limited to technological systems. Even when, in the 1977 CAA Amendments, Congress limited the systems that could provide the basis for the standards of performance for new sources to technological systems, Congress did not establis h that limit on the systems for existing sources. Moreove r, the 1977 House-Senate Conference Committee report state d that for existing sources, the standards of performance were to

be based on the “best available means of emission c ontrol (not necessarily technological)....” 45 (II). Pollution prevention In addition, interpreting the term “system of emiss ion reduction” broadly to include the building blocks i s

45 “Joint Explanatory Statement of the Committee of Conference,” reprinted in Congressional Research Service, A Legislative History of the Clean Air Act Amendments of 1977 , vol. 3 at 502, 509 (1978) ( 1977 Legislative History ). The House Committee Report included the same statem ent. See H. Rep. 95-294 at 195, reprinted in 1977 Legislative History, vol. 4 at 2465, 2662.57

consistent with a primary purpose of the CAA, which is encouraging pollution prevention, including assurin g that states fulfill their role in developing pollution prevention measures. CAA section 101(c) states that “[a] primary goal of [the Clean Air Act] is to encourage or otherwise promote reasonable Federal, State, and lo cal governmental actions, consistent with the provision s of this chapter, for pollution prevention.” CAA secti on 101(b)(4) adds that one of “the purposes of [title I of the CAA, which includes section 111] are ... (b) to encou rage and assist the development and operation of regional ai r pollution prevention and control programs.” Indeed, in the U.S. Code, in which the CAA is codified as chapter 85, the CAA is entitled, “Air Pollution Prevention and Cont rol.” CAA section 101(a)(3) describes “air pollution prev ention” as “the reduction or elimination, through any measu res, of the amount of pollutants produced or created at the source,” and adds: “The Congress finds -- ... (3) tha t air pollution prevention ... and air pollution control at its source is the primary responsibility of States and local governments.” The measures in building blocks 2, 3, and 4 all qualify as types of “pollution prevention” because they are “measures” that “reduc[] or eliminate[e] ... the amou nt of58

pollutants produced or created at the [fossil fuel- fired affected] source[s].” It is reasonable to interpre t the section 111 provisions at issue in this rulemaking in light of these section 101 provisions, and this supports the reasonableness of interpreting the broad term found in section 111(a)(1), “system of emission reduction,” to include the pollution prevention measures in buildi ng blocks 2, 3, and 4. (III). Title IV The breadth of the term, “system of emission reduction” is further confirmed by reference to cer tain provisions of CAA Title IV. In Title IV, Congress established the program that regulates fossil fuel- fired power plants to reduce their emissions of the precu rsers to acid deposition, including reducing sulfur dioxide (SO 2 ) emissions in two phases, and reducing nitrogen oxid es (NOx) emissions. Congress enacted Title IV as part of the 1990 CAA Amendments, at the same time that Congress revi sed the definition of “standard of performance” to generall y return it to its 1970-vintage reading. In certain respects , section 111 and Title IV are related because both a pply to59

fossil-fuel fired EGUs, and Congress recognized the relationship in several Title IV provisions. 46 One contrasting provision in Title IV is section 407(b)(2), which requires the EPA to base the NOx e mission limits for certain types of boilers “on the degree of reduction achievable through the retrofit application of the best system of continuous emission reduction... ;” and further requires the EPA to revise previously promu lgated emission limits for certain types of boilers “to be more stringent if the [EPA] determines that more effective low NOx burner technolog y is available.” (Emphasis added.) These narrower specifications for the basis of the Title IV emissions limits make clear that Congress knew how to

constrain the basis for emission limits to the resu lts of certain technology, and that its choice to base the section 111(d) standards of performance on a “system of emi ssion

46 See, e.g., CAA section 402(8), 405(c)(2). In fact, in the 1990 CAA Amendments, Congress based its decision to repeal the percentage reduction requirements added in the 1977 CAA Amendments to the section 111(a)(1) definition of “ standard of performance” for new fossil fuel-fired sources a t least in part on the grounds that provisions of Title IV would cap SO 2 emissions from fossil-fuel fired EGUs, and, furthe r, Congress conditioned that repeal on the continued applicability of the SO 2 cap, so that if the cap were eliminated, the repeal would, by operation of law, be eliminated. See Pub. L. 101-549 section 403(b), S. Rep. 101-228, at 338, reprinted in 1990 Legislative History 8338, 8678 (1990 Senate Committee Report).60

reduction” indicates its intent to authorize a broa der

basis for those standards. Other provisions in Title IV and their legislative history provide further support for interpreting th e term, “system of emission reduction” to include building blocks 2, 3, and 4. In designing Title IV, Congress recogn ized the integrated nature of the electricity sector and how that integration could be harnessed to reduce air pollut ant emissions; and, in fact, Congress included provisio ns to encourage re-dispatch to lower emitting sources, re newable energy, and demand-side energy efficiency, all of w hich are measures in those building blocks. Specifically, C ongress added into the “purposes” provision of Title IV, th e statements that in addition to the reducing the adv erse effects of acid deposition –

It is also the purpose of [Title IV] to encourage energy conservation, use of renewable and clean alternative technologies, and pollution prevention as a long-range strategy, consistent with the provisions of [Title IV], for reducing air pollution and other adverse impacts of energy production and use....” 47

47 CAA section 401(b). See H. Rep. 101-490 Part 1 at 369-70 (1990 House Comm. Rep.), reprinted in “A Legislative History of the Clean Air Act Amendments of 1990,” Congressional Research Service (1993) (1990 Legislative History), vol. II, at 3021, 3393-94.61

Congress recognized that the very structure of Titl e IV – which imposed a marketable trading system under whi ch affected sources were required to have an allowance for

each ton of SO 2 emitted and could buy and sell allowances on the open market -- encouraged such measures as dema nd-side energy efficiency and re-dispatch by lower-emitting sources. The 1990 Senate Committee Report explaine d: [T]he incentives created by the allowance market should stimulate innovations and the technologies and strategies used to reduce emissions.... [T]he allowance market should encourage sources to exploit energy efficiency , enhanced emissionreduction or control technologies....; fuelswitching and least-emissions dispatching in order to maximize emission reductions.” 48 In addition, Congress incorporated into Title IV specific incentives to further encourage electric u tilities (defined as entities that sell electricity 49 ) to reduce their emissions through demand-side energy efficien cy and renewable energy: Section 404(f)-(g) provided a spe cial

reserve of allowances to be allocated to electric u tilities

“for each ton of SO 2 emissions avoided by an electric utility ... through the use of ... energy conservation measures or ... renewable energy.” In fact, in adopting these provisions, Congress explicitly recognized the inte grated

48 1990 Senate Committee Report at 316, reprinted in 1990 Legislative History, vol. V, at 8656 (emphasis adde d). 49 CAA section 404(f)(1)(C).62

nature of the electricity sector: As one of the co nditions for eligibility for this special reserve of allowan ces, the utility must “ha[ve] adopted and is implementing a least cost energy conservation and electric power plan wh ich evaluates a range of resources, including new power supplies, energy conservation, and renewable energy resources, in order to meet expected future demand at the lowest system cost.” 50 These CAA provisions and the accompanying statemen ts in the legislative history make clear that in enact ing the Title IV provisions to reduce SO 2 and NO x emissions from fossil fuel-fired EGUs, Congress viewed the electri city sector as interconnected and considered re-dispatch to lower emitting sources, renewable energy, and deman d-side energy efficiency as methods to reduce those emissi ons. All this supports the reasonableness of the EPA’s p roposed interpretation that the “system of emission reducti on” that serves as the basis for “standards of performance” for CO 2 emissions from fossil fuel-fired EGUs may include t hose same measures, that is, building blocks 2, 3, and 4 (redispatch; low- or zero-emitting generation, includi ng renewables; and demand-side energy efficiency, respectively.)

50 CAA section 404(f)(2)(B)(iii)(I).63 (IV). EPA Precedent In the past, the EPA has promulgated rules under C AA section 111(d), in conjunction with CAA section 129 , that

were based on measures that are similar to some of the measures in the building blocks that EPA proposes as the basis for the regulatory requirements in this rulem aking. For example, the EPA has authorized states to allow large municipal waste combustors to average their emissio n rates and trade NOx emission credits, 51 and have required the

owners of certain waste incineration facilities to take steps to reduce the amount of waste that the facili ties

combust. 52

51 See “Standards of Performance for New Stationary Sourc es and Emission Guidelines for Existing Sources; Munic ipal Waste Combustors,” 60 Fed. Reg. 65,387 (Dec. 19, 19 95) (trading rules codified in 40 C.F.R. section 60.33b (d)(1)- (2)). EPA also authorized an emission trading progr am in the Clean Air Mercury Rule. See “Standards of Performance for New and Existing Stationary Sources: Electric U tility Steam Generating Units, Final Rule,” 70 Fed. Reg. 2 8,606 (May 18, 2005) vacated on other grounds by New Jersey v. EPA , 517 F.3d 574 (D.C. Cir. 2008), cert denied sub nom

. Util. Air Reg. Grp. v. New Jersey , 555 U.S. 1169 (2009); “Standards of Performance for New Stationary Source s and Emission Guidelines for Existing Sources; Municipal Waste Combustors,” 60 Fed. Reg. 65,387 at 28616-24, (Dec. 19, 1995). 52 See, e.g. , Standards of Performance for New Stationary Sources and Emission Guidelines for Existing Source s: Hospital/Medical/Infectious Waste Incinerators, 62 Fed. Reg. 48,348, 48359 (Sept. 15, 1997); Standards of Performance for New Stationary Sources and Emission Guidelines for Existing Sources: Commercial and Ind ustrial64 (V). Other considerations

It should also be noted that a number of commentato rs in the private sector and academia have indicated s upport for interpreting the term, “system of emission redu ction” to incorporate measures such as re-dispatch, renewa ble energy, and demand-side energy efficiency. 53 Some

stakeholders have as well. 54

Solid Waste Incineration Units, 65 Fed. Reg. 75338, 75341 (Dec. 1, 2000). 53 See Nordhaus R., Gutherz I., “Regulation of CO 2 Emissions from Existing Power Plants Under section 111(d) of the Clean Air Act: Program Design and Statutory Authori ty,” Environmental Law Reporter, 44: 10366, 10384 (May 2014) (“strong arguments for” interpreting “system” to in clude measures such as the addition of new zero-carbon ge nerating capacity and increases in end-user energy efficienc y); Sussman R., “Power Plant Regulation Under the Clean Air Act: A Breakthrough Moment for U.S. Climate Policy? ” Virginia Environment Law Journal , 32:97, 119 (2014) (“EPA would seem to have discretion to define ‘system’ to include any mix of strategies effective in reducing emissio ns.”); Konschnik K., Peskoe A., “Efficiency Rules: The Cas e for End-Use Energy Efficiency Programs in the Section 1 11(d) Rule for Existing Power Plants,” Harvard Law School Environmental Law Program – Policy Initiative 4 (March 3, 2014) (EPA is authorized to “consider[] ... the entir e [electricity grid] system when setting performance standards.”); Monast J., Profeta T., Pearson B., Do yle J., “Regulating Greenhouse Gas Emissions From Existing Sources: Section 111(d) and State Equivalency,” Environmenta l Law Reporter, 42: 10206, 10209 (March 2012) (“Demand-si de energy-efficiency programs and renewable energy gen eration may fit within the section 111 framework, however, because both reduce the utilization of power plants .... Acco rding to this reasoning, emission reductions are occurring w ithin the source category, because of changes in generati on at the power plant.”). 54 Ceronsky M., Carbonell T., “Section 111(d) of the Clean Air Act: The Legal Foundation for Strong, Flexible & Cost-65 In addition to the just-discussed reasons why interpreting the term, “system of emission reductio n” to include those measures is a reasonable interpretati on under the CAA, that interpretation also is reasonable as a matter of policy, as we discuss extensively in the preambl e. To reiterate briefly, including those measures is cons istent with the industry’s long-standing methods of operat ing to assure reliability at the least cost, how states ha ve more recently reduced non-greenhouse gas air pollutants from the industry, and, how states and segments of the indus try have, still more recently, reduced CO 2 emissions.

b. “Best system of emission reduction ... adequately demonstrated” For the reasons described next, the measures in eac h of building blocks 2, 3, and 4 qualify as component s of the

Effective Carbon Pollution Standards for Existing P ower Plants,” Environmental Defense Fund, at 9 (Oct. 2013), available at http://www . edf .org/sites/default/files/111- clean_air_act-strong_flexible_cost-effective_ carbon_pollution_standards_for_existing_power_plant s .pdf ; Doniger D., “Questions and Answers on the EPA’s Leg al Authority to Set ‘System Based’ Carbon Pollution St andards for Existing Power Plants under Clean Air Act Secti on 111(d),” NRDC [Natural Resources Defense Counsel] Issue Brief (Oct. 2013); “Comments of the Attorneys General of New York, California, Massachusetts, Connecticut, D elaware, Maine, Maryland, New Mexico, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia on the Des ign of a Program to Reduce Carbon Pollution from Existing Po wer Plants” (Dec. 16, 2013).66

“best system of emission reduction ... adequately demonstrated.” As noted elsewhere, the D.C. Circui t has interpreted the BSER as “[a]n adequately demonstra ted system,” and explained that such a system is one th at can “be[] shown to be reasonably reliable, reasonably efficient, and ... reasonably ... expected to serve the interests of pollution control without becoming exorbitantly costly in an economic or environmental way.” 55 In fact, the measures in the building blocks do mee t the criteria established by the Court in the section 11 1 case law. In addition, the measures are “adequately demonstrated” because they have already been implem ented in many states, and because they may be undertaken by the affected EGUs in the regulated markets in which the y operate, or may be implemented by the states in the state plans.

i. Criteria for the BSER The measures in building blocks 2, 3, and 4 meet th e criteria for inclusion as components of the BSER be cause they are individually and together technically feas ible, and together they achieve significant emission redu ctions, are not unreasonably costly, and will promote the development and implementation of technology improv ements

55 Essex Chemical Corp. v. Ruckelshaus , 486 F.2d at 427.67

for continued emission reductions. 56 The bases for these conclusions are discussed in detail in the preamble and briefly summarized below. Building block 2, which entails substituting generation at higher emitting units (fossil fuel-fi red steam generating units) by shifting to generation a t loweremitting affected sources (existing NGCC units) is technically feasible because the NGCC units are alr eady providing electricity to the grid and have sufficie nt capacity to generate the additional amount of elect ricity that would substitute for the generation at fossil fuelfired steam generating units. Re-dispatch is alread y widely used (usually more in response to fuel price signal s than

as a CO 2 mitigation measure), including by companies that own both coal- and natural-gas-fired EGUs. It shoul d be noted that there are several mechanisms through whi ch states could cause re-dispatch to occur. First, a s tate could use its permitting authority to impose limits on the hours of operation (or emissions) of individual ste am generating units over a given time period. Second, a state

56 As noted above, we are proposing to determine BSER as the combination of all four building blocks, and becaus e we discuss in the preamble the reasons why building bl ock 1 meets the criteria for inclusion in the BSER,and wh y the BSER is the combination of all four building blocks , we are not further discussing those points here.68

could change the relative costs of generation for m ore carbon-intensive and less carbon-intensive generati ng units by imposing a cost on carbon emissions. A state cou ld do so through any of several market-based mechanisms. One would be to adopt an allowance-based system. An example i s the Regional Greenhouse Gas Initiative, an allowance-ba sed system in which sources purchase allowances in peri odic auctions. Another way would be through a tradable emission rate system, under which the state would impose an emission rate on the steam generating unit that the unit cou ld meet only by purchasing the right to average its emissio n rate with a unit with a lower rate, such as an NGCC unit . Most broadly, an allowance system would provide the grea test

incentive for the most carbon-intensive affected so urces to reduce emissions as much as possible so as to reduc e their need to purchase allowances (or to allow them to se ll unneeded allowances), and the same would be true for a tradable emission rate system. As discussed in the preamble, building block 3, whi ch entails use of new low- and zero-emitting generatio n, as well as preservation of nuclear capacity that might otherwise be retired, is also technically feasible. The technology for renewable energy is well-established and in use now, and the amount of renewable energy contemp lated by69

the proposal would not impair the reliability of th e grid. The nuclear capacity at issue either is already in operation or, in the case of new nuclear capacity u nder construction, has long been known to grid operators for planning purposes. The measures in building block 3 may be implemented in different ways, including market mec hanisms. In particular, markets for renewable energy certifi cates, which facilitates investment in renewable energy, a re already well-established. In addition, as noted abo ve with re-dispatch, an allowance system or tradable emissi on rate system would provide incentives for sources to redu ce their emissions as much as possible, including by substit uting their generation with generation from renewable ene rgy. As for building block 4, as discussed in the preamb le, numerous state and utility programs have demonstrat ed that improvements in demand-side energy efficiency are technically feasible at the levels contemplated in the proposal. An allowance system or tradable emission rate system would provide incentives that promote the me asures in building block 4 in the same manner as just disc ussed for other building blocks. For the reasons discussed in the preamble, the combination of building blocks 2, 3, and 4, along w ith building block 1, also meet the criteria to qualify as the70

BSER. The level of CO 2 emissions reduction they achieve is significant, which is appropriate because of the se verity of the risk to public health and the environment of climate change, and the magnitude of both the amount of emi ssions

reductions needed and the amount of CO 2 emissions from fossil fuel-fired power plants. In addition, based on the measures in building bloc ks 2, 3, and 4 combined, the proposed levels of reduce d generation are not unreasonably costly for the affe cted source category or the nation-wide electricity syst em.

These levels do not have adverse effects on the ove rall energy system. Electricity consumers would continu e to have access to the electricity they need under thes e building blocks, although they would need less ener gy for the same amount of economic activity as a result of the measures in building block 4. Additionally, the me asures in building blocks 2, 3, and 4 would improve the electricity system by reducing its carbon intensity , as well as other pollutants, allowing consumers to get the same amount of electricity for less environmental h arm. Together, these measures would also promote the dev elopment and implementation of technology that is important for

continued emissions reductions.71 ii. Basis for “adequately demonstrated” finding The measures in building blocks 2, 3, and 4 are “adequately demonstrated” because each of the indiv idual measures is adequately demonstrated, and because it has been adequately demonstrated that the measures can be taken

in combination with each other in a manner consiste nt with the criteria for determining the BSER. The measures in building block 1 are adequately demonstrated because they are based on the real-wor ld experience of individual power plants in recent yea rs, as more fully described in the preamble and a technica l support document. The measures in building blocks 2, 3, and 4 are “adequately demonstrated” because, as discussed in the preamble, due to the integrated nature of the elect ricity system, they have long been relied on to reduce cos ts in general, assure reliability, and implement pre-exis ting pollution control requirements in the least cost ma nner. As also noted in the preamble, some utilities, states and regions are already relying on these measures for t he specific purpose of reducing CO 2 emissions from EGUs. At the same time, as discussed in the preamble, measures in building blocks 2, 3, and 4 may be unde rtaken,72

and in fact have been undertaken, by the affected E GUs themselves, which further indicates that these meas ures are “adequately demonstrated.” To achieve the re-dispat ch described in building block 2, operators of the aff ected fossil fuel-fired steam-generating EGUs may reduce generation, while operators of the affected NGCC un its may increase generation to replace that avoided at high eremitting facilities. Operators of the affected EGUs may invest in, or otherwise acquire power from, the new low- or zero-carbon intensive generation described in build ing block 3, as well as in many of the demand-side ener gy efficiency measures described in building block 4. More specifically, many states maintain a utility regulatory structure under which the utilities that serve end users in the state are vertically integrated, a nd not only own the EGUs, but often also own renewable ene rgy resources and provide service directly to retail cu stomers. Operators of EGUs, in those circumstances, are well

positioned to undertake the measures in building bl ocks 3 and 4. In fact, as noted in the preamble, numerous states have already imposed renewable portfolio standards and demand-side energy efficiency requirements on those utilities. As a result, as also noted in the preamb le, many companies have already developed integrated resourc e plans73

that include re-dispatch from higher-emitting fossi l fuelfired generation to lower-emitting generation, the purchase of renewable capacity or the development of renewab le generation assets, and the implementation of demand -side energy efficiency measures. 57 Other states have de-regulated their electricity

markets 58 and as a result, in some instances, the EGUs in those states are merchant generators that sell to t he wholesale electricity market. The EPA believes that markets for acquiring renewable energy resources and for de livering demand-side energy efficiency services are sufficie ntly well-developed that operators of these EGUs could u ndertake or acquire those measures as well. For example, mer chant generators can invest in NGCC capacity, invest in r enewable capacity or purchase renewable energy or renewable energy certificates (representations that a certain amount of energy was produced from renewable sources), as wel l as purchase demand-side energy efficiency services fro m energy

57 Moreover, in many de-regulated states, forward cap acity auctions are used to ensure the ability to meet fut ure demand, and generators may bid into those auctions based on all of their resource portfolio, including renewable energy assets and demand-side e nergy efficiency projects. This has encouraged generators to undertake the measures in building blocks 3 and 4. 58 Some states, such as Ohio, have hybrid model that includes elements of a regulated market and a de-re gulated market.74

service companies. The fact that the affected sourc es may themselves implement or invest in the measures in b uilding blocks 2, 3, and 4 -- which, again, reduce their em issions -- supports treating those measures as components o f the

BSER. Another reason that the measures in building blocks 2, 3, and 4 should be considered “adequately demonstra ted” – and wholly apart from the fact that the EGUs may un dertake

those measures themselves – is based on the fact th at CAA section 111(d)(1)(A) provides, by its terms, that t he standards of performance that are based on the BSER must be established by the states in state plans. As a resu lt,

emissions reduction measures that the states themse lves have the authority under state law to put in place may be considered to be part of the BSER. While EGU owners and operators may effectuate such measures directly or indirectly, the states also have authority to enact measures such as dispatch limitations, renewable po rtfolio standards that require investment in renewable ener gy resources, as well as demand-side energy efficiency

measures. 59 As noted in the preamble, many states have already done so. 60

59 It should be noted that under the portfolio approa ch to the state plan, discussed in the preamble, the enti ties75 Finally, we note that during the public outreach sessions, stakeholders generally recommended that s tate plans be authorized to rely on, and that affected s ources be authorized to implement, re-dispatch, renewable energy measures and demand-side energy efficiency measures , in

order to meet the states’ and sources’ emissions re duction obligations. The EPA agrees that state plans may in clude these measures, at least under certain circumstance s discussed in the preamble, and that sources may rel y on them to achieve required reductions. It is clear t hat these types of measures are well-accepted by the

stakeholders as means to reduce emissions from affe cted sources. The fact that state plans and sources wou ld be expected to use these types of measures to reduce e missions supports the view that these measures are part of a “system

that undertake some of the measures in, for example , building block 4 may not be the affected EGUs. Reg ardless of which entities undertake the measures in the bui lding blocks, those measures have the effect of reducing CO 2 emissions from fossil fuel-fired EGUs, and therefor e each of the building blocks remains part of a “system” o f emission reduction for those EGUs. 60 More than half the states have established renewab le portfolio standards (RPS) that require minimum prop ortions of electricity sales to be supplied with generation from renewable generating resources. More than 20 states have energy efficiency resource standards (EERS) that re quire utilities to effectuate a certain amount of savings in electricity demand each year or cumulatively. Datab ase of State Incentives for Renewables & Efficiency (DSIRE ), http://www.dsireusa.org/summarymaps/index.cfm?ee=0& RE=0.76

of emission reduction” for those sources that the E PA may evaluate against the appropriate criteria to determ ine whether they comprise the “best system of emission reduction ... adequately demonstrated.”

c. Stakeholder concerns As noted above, some stakeholders have argued that section 111(a)(1) authorizes the EPA to identify re

dispatch, low- or zero-emitting generation, and dem and-side energy efficiency measures (building blocks 2, 3, a nd 4) as components of the “best system of emission reductio n ... adequately demonstrated.” However, other stakeholde rs have disagreed that this approach is consistent with CAA section 111(d). According to these latter stakeholders, as a legal matter, the BSER is limited to measures that may be undertaken at the affected electric generating unit s (EGUs), including on-site controls, activities, or work practices, and cannot include measures that are bey ond the affected units. These stakeholders take the positio n that although efficiency improvements at the affected EG Us may be included in the BSER,the measures in building bl ocks 2, 3, and 4 are “beyond-the-unit” measures because the y are implemented outside of the affected EGUs and outsid e of the77

control of their owners or operators. 61 Some stakeholders have also argued that section 111(d)(1) requires th at the performance standards established by the states mus t reflect what is achievable at each existing unit. 62 As the preamble notes, we welcome comment on these issues. As discussed above, we propose that the pr ovisions of section 111 allow the BSER to include those type s of measures. In addition, as discussed above, under ou r proposed approach, affected sources may themselves

61 “Response of the Utility Air Regulatory Group to EPA’s ‘Considerations in the Design of a Program to Reduc e Carbon Pollution from Existing Power Plants” (Oct. 2013); “Existing Source Performance Standards for Greenhou se Gas Emissions from Electrical Generating Units: Creatin g a Regulatory Framework Under Clean Air Act section 11 1(d) – A whitepaper from the Coalition for Innovative Climat e Solutions” (Feb. 26, 2014); “Perspective of 18 Stat es on Greenhouse Gas Emission Performance Standards for E xisting Sources under §111(d) of the Clean Air Act,” includ ed in “Testimony before the Subcommittee on Energy and Po wer of the House Committee on Energy and Commerce – ‘EPA’s Proposed GHG Standards for New Power Plants and H.R . __, Whitfield-Manchin Legislation’” (Nov. 14, 2013) (s tatement of E. Scott Pruitt), http://democrats.energycommerce.house.gov/sites/def ault/files/documents/Testimony-Pruitt-EP-EPA-GHG-StandardsWhitfield-Manchin-Legislation-2013-11-14.pdf. See National Climate Coalition, “Discussion Background Paper: Be st System of Emission Reduction” (Oct. 16, 2013)(“BSER approach that mandates reductions based on actions outside the control of the regulated source would involve l egal uncertainty. There is nothing in the CAA that autho rizes EPA to issue guidelines that require a standard to be based on something that is outside the fence and outside the control of the source.”) 62 “Response of the Utility Air Regulatory Group to EPA’s ‘Considerations in the Design of a Program to Reduc e Carbon Pollution from Existing Power Plants” (Oct. 2013).78

implement the measures included in building blocks 2, 3, and 4, so that those measures are within their cont rol. Moreover, under our proposed alternative approach, the “system of emission reduction” includes reductions in

utilization at the affected sources themselves. 63 It

63 Commenters have critiqued this “at-the-unit” and beyondthe-unit” distinction as follows:There is an argument that the at-the-unit/beyondthe-unit distinction is not a meaningful one. Specifically, it could be argued that thedistinction between at-the-unit and beyond-theunit measures is largely artificial, because all of the emission reductions under consideration—whether from at-the-unit measures (e.g., fuelswitching or efficiency upgrades) or from beyondthe-unit measures—are, in fact, emission reductions at or from electric generating units on the interconnected electric grid. For example, neither the addition of renewable generation nor the reduction of end-user demand directly reduces atmospheric emission of CO2; rather these measures permit fossil EGUs to reduce their own output and emissions. It can be argued that all of the systems of emission reduction here contemplated—whether they involve end-use energy efficiency, displacing high-emission generation with lower emission generation, fuel-switching,heat-rate improvements, etc.—are effectively atthe-unit measures that ultimately reduceemissions solely from regulated EGUs. If energyefficiency programs, added renewable energy, and redispatch from higher emitting facilities tolower emitting facilities are viewed as at-theunit systems of emission reduction, the at-theunit/beyond-the-unit distinction arguably becomes irrelevant—at least from a legal perspective. Nordhaus R., Gutherz I., “Regulation of CO 2 Emissions from Existing Power Plants Under section 111(d) of the C lean Air79

should also be noted that, as discussed above, the redispatch measures in building block 2 are limited t o affected sources. In addition, we discuss below tha t the performance standards that the states may establish under our approach meet the requirements of section 111(d )(1) and section 111(a)(1) because they would reflect the de gree of the required emission performance level (which, in turn, is based on the BSER, as the EPA has applied it to the state’s sources) that the state assigns to the affe cted EGUs. Thus, the proposed approach and alternative d escribed next respond to these stakeholder concerns.

4. Second approach: Heat rate improvement measures inbuilding block 1 plus reduced utilization at levels commensurate with building blocks 2, 3 and 4 The EPA is also proposing an alternative approach t o the BSER: heat rate improvements (building block 1 ) combined with reduced utilization in specified amou nts of the affected fossil fuel-fired EGUs, commensurate with the amount of low- and zero-emitting generation and avo ided generation in building blocks 2, 3, and 4. The reas ons why the measures in building block 1 qualify as a compo nent of this approach to BSER, and the reasons why the comb ination

Act: Program Design and Statutory Authority,” Environmental Law Reporter, 44: 10366, 10383 n. 133 (May 2014).80

of building block 1 with the reduced generation qua lify as

the BSER are the same as discussed above in connect ion with the first approach to BSER and in the preamble, and will

not be discussed further in this subsection 4. Inst ead, this subsection will discuss the reduced generation component of this second approach to BSER. Under this approach, the measures in building block s 2, 3, and 4 would not be components of the system o f

emission reduction but instead would serve as bases for quantifying the reduced generation (and therefore emissions) at affected EGUs, and assuring that the amount of reduced generation meets the criteria for the “b est” system that is “adequately demonstrated” because, a mong other things, the reduced generation can be achieve d while the demand for electricity services can continue to be met in a reliable and affordable manner. Specifically, the amount of generation from the increased utilization of NGCC units would determine a portion of the amount of th e generation reduction component of the BSER for affe cted fossil fuel-fired steam EGUs; and the amount of gen eration from the use of expanded low- and zero-carbon gener ating capacity that could be provided, along with the amo unt of generation from fossil fuel-fired EGUs that could b e avoided through the promotion of demand-side energy81

efficiency, would determine a portion of the amount of the generation reduction component of the BSER for all affected

EGUs. For the reasons discussed below, reduced generatio n in the specified amounts is a “system of emission reduction,” and meets the criteria to qualify as th e “best” that is “adequately demonstrated.”

a. “System of emission reduction” Reduced generation is encompassed by the terms of t he phrase “system of emission reduction” in CAA sectio n 111(a)(1), as a matter of Chevron step 1, because, in

accordance with the above-discussed definition of “ system,” reduced generation is a “set of things” – which inc lude reduced use of generating equipment and therefore r educed fuel input – that the affected source may take to r educe

its CO 2 emissions. If the phrase “system of emission reduction” is not considered clear by its terms, then it may reasonab ly be interpreted under Chevron step 2 to include reduced generation, for several reasons. First, Congress h as recognized reduced utilization in several contexts as a method to reduce air pollution. Beginning with the 1970 CAA Amendments, Congress has recognized that SIPs u nder CAA section 110, in order to assure reductions in NAAQS82

pollutants to meet attainment requirements, may nee d to impose emission limits on industrial sources that t hose sources could meet only by retiring. 64 Similarly, in adopting CAA section 112, which directed the EPA to promulgate emission standards for sources of hazard ous air pollutants to a level of stringency that provides a n “ample margin of safety to protect the public health,” 65 Congress was clear that the standards could be sufficiently stringent so that “effectively, ... a plant would be required to close because of the absence of control techniqu es.” 66

64 See CAA section 110(g) (authorizing temporary emergenc y suspensions of SIP revisions if needed to prevent t he closing of a source of air pollution), enacted as C AA section 110(f) in the 1970 CAA Amendments; 116 Cong . Rec. 42384 (Dec. 18, 1970), reprinted in 1970 Legislative History, vol. 1, at 132-33 (statement of Sen. Muski e) (discussing criteria for sources to receive complia nce date extensions). Similarly, Congress recognized that to achieve the NAAQS, it was necessary to reduce emissions fro m motor vehicles, and that an important method of doing so could be restricting the use of motor vehicles in urban area s that were already highly polluted. For this reason, Cong ress included in the 1970 CAA Amendments authorization f or SIPs under section 110 to include “transportation contro ls.” CAA section 110(a)(2)(B), as approved in the 1970 C AA Amendments. Sen. Edmund S. Muskie (D-ME), who led t he proponents for the Amendments in the Senate, explai ned that for some areas to attain the NAAQS, “[c]entral city use of motor vehicles may have to be restricted.” 116 Cong . Rec. 42384 (Dec. 18, 1970), reprinted in 1970 Legislative History, vol. 1, at 132 (statement of Sen. Muskie). 65 CAA section 112(b)(1)(B), as enacted in the 1970 C AA Amendments. 66 116 Cong. Rec. 42385 (Dec. 18, 1970), reprinted in 1970 Legislative History, vol. 1, at 133 (statement of S en. Muskie). Sen. Muskie added that the emission stand ards set83

Congress’s recognition that closing plants is a met hod of reducing pollution necessarily encompasses reduced utilization as a system of reducing pollution. As a result, it is reasonable to interpret the term “sys tem of emission reduction,” which Congress mandated as the basis for controls on section 111(d) air pollutants, to i nclude reduced production. Other examples of reduced utilization as a means of reducing emissions to comply with CAA requirements are found in settlement agreements between the EPA and fossil fuel-fired EGUs to resolve alleged violations of th e CAA new source review (NSR) requirements. These agreeme nts typically allow the EGUs to choose one of several m eans to comply with their emission reduction obligations, i ncluding retiring units. 67

Reduction of, or limitation on, the amount of generation is already a well-established means of r educing emissions of pollutants in the electric sector,

by the EPA “could include emission standards which allowed for no measureable emissions,” id., which further suggests that, as a practical matter, the standards could re sult in reduced production. 67 See, e.g., Consent Decree, USA v. Wisconsin Power and Light Co., Civil Action No. 13-cv-266 (WWi.DC), at 18, section IV, available at http://www2.epa.gov/sites/production/files/document s/wiscon sinpower-cd.pdf84

notwithstanding the fact that as a practical matter , some facilities may have to operate, or remain available , to ensure system reliability. For example, reduced gen eration by higher-emitting sources is one of the compliance options available to, and used by, EGUs to comply with the Clean Air Act acid rain program in CAA title IV, as well as the transport rules that we refer to as the NOx SIP Cal l 68 and the Clean Air Interstate Rule (CAIR). 69 Reduction in generation is also a possible means by which an EGU can achieve compliance with its requirements under RGGI

.

b. “Best system of emission reduction ... adequately demonstrated” Reduced generation in specified amounts meets the criteria to be the “best” system of emission reduct ion that is “adequately demonstrated.” Reduced generation is technically feasible due to the source’s ability to limit its own operations. Moreover, because the amount of reduced generation may be substituted with the building blo ck 2, 3, and 4 measures for increased generation from low- o r zeroemitting sources and increased demand-side energy efficiency, that amount may be determined with prec ision and may be accomplished in a manner that assures th e reliability of the electricity grid.

68 63 FR 57356 (Oct. 27, 1998). 69 70 FR 25162 (May 12, 2005).85 Specifically, through this reduced generation approach, the amount of emission reduction achieved is appropriate, as discussed above. In addition, the cost of the levels of reduced generation are reasonable for the affected source category and the nation-wide electr icity system and do not jeopardize reliability. This is b ecause the measures in building blocks 2, 3, and 4 are alr eady in widespread use in the industry, and it is reasonabl e to expect that these measures will develop to achieve the levels proposed as part of this approach and thereb y ensure an adequate and reliable supply of electricity. Mor eover, reduced generation from fossil fuel-fired EGUs and its replacement through the measures in building blocks 2, 3, and 4 is consistent with trends in the energy secto r and offer promise to reduce the carbon intensity of the system over the near- and long-term. This approach also p romotes the development and implementation of technologies that are important for continued emissions reductions by inc reasing the demand for those technologies. This is because of the interconnected nature of the electrical grid and th e fungibility of electricity, which allows decreases in utilization at one facility to be seamlessly offset by increased utilization elsewhere (building blocks 2 and 3) or by decreased demand (building block 4), and ther eby86

makes reduced utilization a viable approach for emi ssions reductions by EGUs. Further, this fungibility incre ases over longer timeframes with the opportunity to inve st in infrastructure improvements, and as noted elsewhere , this proposal provides an extended state plan and source compliance horizon. Thus, this approach is consiste nt with the case law, which authorizes the EPA to determine the BSER by “balanc[ing] long-term national and regiona l impacts,” and by “using a long-term lens with a bro ad focus on future costs, environmental and energy effects o f different technological systems....” 70 Reduced generation in those amounts is also “adequately demonstrated.” As noted above and discu ssed further in the preamble, the measures in building b locks 2, 3, and 4 are already in widespread use in the indus try. At the levels proposed, they have the technical capabi lity to substitute for reduced generation at some or all af fected EGUs at reasonable cost. The NGCC capacity necessar y to accomplish the levels of generation reduction propo sed for building block 2 is already in operation or under construction. Moreover, it is reasonable to expect that the incremental resources reflected in building blocks 3 and 4

70 Sierra Club v. Costle , 657 F.2d 298, 331 (D.C. Cir. 1981).87

will develop at the levels requisite to ensure an a dequate and reliable supply of electricity at the same time that affected EGUs may choose or be required to reduce t heir CO 2 emissions by means of reducing their utilization. T here are several reasons for this. First, the affected sourc es themselves could invest in new renewable energy res ources and demand-side energy efficiency, as discussed in the preamble. 71 Second, the states, as part of their plans, have mechanisms available to put these substitutes in pl ace: they could establish requirements or incentives tha t would result in new renewable energy and demand-side ener gy efficiency programs, as also discussed in the pream ble. 72 Third, as also discussed in the preamble, regional entities in the electricity system can accommodate these

substitutes. Most broadly, with respect to the measures in build ing blocks 2, 3, and 4, provided there is sufficient le ad time

71 It should be noted that in light of the low current and projected near term prices for natural gas, market forces may lead investors to choose to build new NGCC unit s, rather than new renewable resources. This result wo uld not call into question the technical feasibility of a B SER that included reductions in fossil fuel-fired generation by the amount of a specified amount of new renewable resou rces. This is because under these circumstances, the foss il fuelfired generators could still reduce their generatio n without causing reliability or other problems in th e electric power system. 72 The nuclear generating capacity reflected in build ing block 3 is already in operation or under constructi on.88

for planning, mechanisms are in place in both regul ated and deregulated electricity markets to assure that subs titute generation will become available and/or steps to re duce demand will be taken to compensate for reduced gene ration by affected EGUs. These mechanisms are based on, am ong other things, the integrated nature of the electric ity system coupled with the availability of capacity in existing NGCC units, the growing institutional capa city of entities that develop renewable energy and demand-s ide energy efficiency resources, and the ability of sys tem operators and state regulators to incentivize furth er development of those resources.

7. Re-dispatch and sources in the regulated source categories. As described in the preamble, building block 2 consists of reductions in generation from fossil fu el-fired steam generating units, and corresponding increases in generation by NGCC units. The amount of this re-dis patch is the amount that the steam generating units may redu ce, and that NGCC units may increase, up to an average of 7 0% capacity utilization of the NGCC units. Accordingly, this component of the BSER involves tw o sets of affected sources. The first (the steam gene rating units) decreases their emissions. The second (the l ower-89

emitting NGCC units) may increase their emissions i f increased operations are necessary to ensure the on going reliability of the integrated electricity system, o f which both sets of source are a part, as emissions and ge neration reduction is occurring at steam generating units an d net reductions are being achieved. Both these sets of sources are affected sources because they are in source cat egories that are covered by this rulemaking. As noted in th e preamble, the fossil fuel-fired steam generating bo ilers are in a source category that the EPA listed under CAA section 111(b) in 1971, and the NGCC units are in a source category that EPA listed in 1979. The NGCC units ( as well as the steam-generating units) are subject to reduc tion requirements through other components of the BSER, specifically, building blocks 3 and 4 (low- and zer oemitting energy and demand-side energy efficiency, respectively). In addition, as noted in the preamb le, the EPA is co-proposing to combine the two source categ ories into a single source category, covering fossil fuel -fired

EGUs. 8. Building blocks 2, 3, and 4: intra-state and

inter-state compliance In this section, we discuss the issue of whether CA A section 111(d) limits the EPA to applying the re-di spatch90

component (building block 2) of the BSER, based on the assumption that each state will comply with that co mponent on a purely intra-state basis, or instead, whether the EPA could base building block 2 on an assumption that t he states will comply with that component through the interstate region with which they share the grid. As the preamble describes, in evaluating building block 2, we have assumed that each state would impl ement it on a state-by-state basis, without relying on a mul ti-state regional grid. In particular, we have assumed that each state would increase generation of its own NGCC uni ts to as close to the proposed average 70% capacity utilizat ion as possible, given the amount of generation from in-st ate fossil fuel-fired steam generating units, and we as sumed the corresponding amount of reduction in generation from those steam generators. We have determined the cost s of that re-dispatch, and propose to find that they are

reasonable. 73 Because we know that dispatch systems operate over multi-state regions, however, we have also det ermined the costs of the re-dispatch if each state that is part of a multi-state grid implements re-dispatch by taking into account the multi-state grid in which it operates.

73 It should be noted that we also evaluated region-w ide redispatch, for which the costs are less.91 We found that based on the intra-state approach, so me states could not increase their average NGCC unit utilization to 70% because they have limited fossil fuelfired steam generation. In contrast, based on the regionwide approach, more of the states could increase th eir average NGCC utilization to 70%. In addition, the costs of the intra-state approach are demonstrably higher than the costs of the region-wide approach. In fact, we expect that because all of the lower-48 states, with the e xception of Texas, are part of a multi-state, regional grid each state’s implementation of building block 2 would, a s a practical matter, necessarily occur on an interstat e, and not an intrastate, basis. CAA section 111(d)(1), by its terms, applies requirements on a state-by-state basis. It requires that “each State shall submit to the Administrator a pla n” that includes standards of performance as well as implem enting and enforcing measures. Further, it allows “the Sta te in applying a standard of performance to any particula r source under a [state] plan” to take into consideration fa ctors such as the source’s remaining useful life. These provisions raise the issue of whether section 111(d) may be interpreted so that the re-dispatch c omponent of the BSER may be applied on the assumption that e ach92

state would implement that component on a purely in trastate basis, or whether section 111(d) may be inter preted so that the re-dispatch component may be applied on the assumption that each state would implement through the operation of the interstate grid in which it partic ipates. This issue may also apply to building blocks 3 and 4.

C. Application of the BSER; achievability of the emissions standards

1. Introduction and Overview In this subsection C, we discuss our interpretation of the CAA sections 111(d)(1) and 111(a)(1) requiremen ts that each state must develop a plan that establishes for “any existing source” 74 “standards of performance,” which are defined as emission standards that “reflect the deg ree of limitation achievable through the application of th e best system of emission reduction ... adequately demonst rated.” We explain why our state-wide approach to applying the BSER

and the emission standards that result from the sta te plan process we require are consistent with these sectio n 111 provisions.

74 It should be recalled that although in this subsec tion C. we refer to “any existing source” or “each existing source” in the state, or we use similar terms, CAA section 111(d) applies to only those existing sources that would b e covered by a section 111(b) standard if they were n ewly constructed or if they modified or reconstructed.93 These provisions make clear that an important aspec t

of the state’s establishment of the standards of performance is “the application of” the BSER. In th is rulemaking, the EPA is proposing to apply the BSER for

affected EGUs on a statewide basis. The statewide a pproach also underlies the required emission performance le vel, which is based on the application of the BSER to a state’s affected EGUs, and which the suite of measures in t he state plan, including the emission standards for the affe cted EGUs, must achieve overall. The state has flexibili ty in assigning the emission performance obligations to i ts affected EGUs, in the form of standards of performa nce -- and, for the portfolio approach, in imposing requir ements on other entities -- as long as, again, the require d emission performance level is met.

This state-wide approach both harnesses the efficiencies of emission reduction opportunities in the interconnected electricity system and is fully cons istent with the principles of federalism that underlie the Clean Air Act generally and CAA section 111(d) particular ly. That is, section 111(d) achieves the emission performanc e requirements through the vehicle of a state plan, a nd provides each state significant flexibility to take local94

circumstances and state policy goals into account i n determining how to reduce emissions from its affect ed sources, as long as the plan meets minimum federal requirements. For convenience, we set out the requirements of CAA sections 111(d)(1) and 111(a)(1) here: under CAA se ction 111(d)(1), the state must adopt a plan that “establ ishes standards of performance for any existing source.” Under CAA section 111(a)(1), a “standard of performance” is a “standard for emissions ... which reflects the degree of emission limitation achievable through the applicat ion of the best system of emission reduction ... adequately demonstrated.” The EPA proposes to interpret these provisions as set forth in this sub-section.

The first step is for the EPA to determine the “bes t system of emission reduction ... adequately demonstra ted.” As discussed at length elsewhere, the EPA is proposing two

alternative BSER. The first is the measures in buil ding blocks 1 through 4 combined. This includes operatio nal improvements and equipment upgrades that the coal-f ired steam-generating EGUs in the state may undertake to improve their heat rate by, on average, six percent and inc reases in, or retention of, zero- or low-emitting generati on, as95

well as measures to reduce demand for generation, a ll of which, taken together, displace, or avoid the need for, generation from the affected EGUs. This BSER is a s et of measures that impacts affected EGUs as a group. The alternative approach to BSER is building block 1 co mbined

with reduced utilization from the affected EGUs in the state as a group, in the amounts that can be replac ed by an increase in, or retention of, zero- or low-emitting generation, as well as reduced demand for generatio n. After determining the BSER, the EPA then applies th e BSER to each state’s affected EGUs, on a state-wide basis. Building block 1 is applied to the coal-fired steam

generating EGUs on a statewide basis; building bloc k 2 is applied to increase the generation of the NGCC unit s in the state up to certain amounts, and decrease the amoun t of generation from steam-generating units accordingly; and the measures in building blocks 3 and 4 are applied to reduce, or avoid, generation from affected EGUs on a state- wide

basis. Under the alternative formulation of the BS ER, the total amount of reduced generation from the affecte d EGUs in the state, associated with the measures in build ing blocks 2, 3, and 4, is determined on the basis of e ach state’s affected EGUs as a group.96 This statewide approach to applying the BSER is consistent with the CAA section 111(a)(1) definitio n of “standard of performance,” which, as quoted above, refers to “the application of the [BSER],” for the purpose of determining “the degree of emission limitation achi evable,”

but does not otherwise constrain how the BSER is to be applied. As a result, we, as the administering agen cy, have discretion under Chevron step 2 to fashion an interpretation that is a reasonable construction of the CAA provisions. 75 Similarly, the implementing regulations give the EPA broad discretion to identify the group of s ources to which the BSER is applied. The regulations provi de that the EPA “will specify different emission guidelines or compliance times or both for different sizes, types , and classes of designated facilities when costs of cont rol, physical limitations, geographical location, or sim ilar factors make subcategorization appropriate.” In this rulemaking, the EPA is applying the BSER to the affected EGUs in each state as a group. As we h ave noted, for this industry, a state-wide approach har nesses the efficiencies of emission reduction opportunitie s in the interconnected electricity system, including the

75 Chevron U.S.A. Inc. v. NRDC , 467 U.S. 837, 842-844 (1984).97

opportunities to reduce emissions from all affected EGUs through reasonable cost, lower-emitting replacement generation. Accordingly, under the implementing reg ulations just quoted, it is “appropriate” to apply the BSER to the affected EGUs in each state as a group. As part of applying the BSER, the EPA, to return to provisions of CAA section 111(a)(1), calculates the “emission limitation achievable through the applica tion of the [BSER].” In this rulemaking, we refer to this amount as the state goal. As noted, the EPA expresses the state goal in the emission guidelines as an emission rate

. The state must develop a state plan that achieves t he state goal, either in the form of an emission rate, as specified for the state in the emission guidelines, or a translated mass-based version of the rate-based goa l. We refer to the state goal, in the form used by the st ate as the foundation of its plan, as the required emissio n performance level. As part of its state plan, the state must establish “standards of performance” for its affected EGUs. T o do so, the state may consider the measures the EPA identif ied as part of the BSER or other measures that reduce emis sions from the affected EGUs. Moreover, the state has the flexibility to establish emission standards in the degree98

of stringency that the state considers appropriate. 76 The primary limitation on the state’s flexibility is th at the emissions standards applied to all of the state’s a ffected EGUs -- and, in the case of states that adopt the p ortfolio approach, the requirements imposed on other affecte d entities -- taken as a whole, must be demonstrated to achieve the required emission performance level. I n addition, the state may make the emission standards for any of its affected EGUs sufficiently stringent, so tha t the standards and any requirements imposed on other aff ected entities (if relevant), taken as a whole, achieve a level of emission performance that is better than the req uired emission performance level. See CAA section 116, 40 CFR 60.24(g). 77

Under these circumstances – that the emission

standards that the state establishes for its affect ed EGUs

76 Looked at another way, through our proposal, consi stent with the EPA’s authority in determining the BSER to subcategorize sources on the basis of costs and oth er factors, see 40 CFR 60.22(b)(5), the state has the opportunity in effect to subcategorize its sources on the basis of their costs and other considerations assoc iated with their position in the interconnected electrici ty grid, and to assign responsibilities for achieving the em ission performance level accordingly. 77 By comparison to state implementation plans (SIPs) under CAA section 110, although section 111(d) state plan s differ from SIPs in that the latter are designed to achiev e a NAAQS, section 111(d) plans that are designed to ac hieve a required emission performance level incorporate man y of the same flexibilities as SIPs.99

and any other requirements for the other affected e ntities, as relevant, taken together, are at least as string ent as necessary to achieve the required emission performa nce level for the state’s affected EGUs - each emission s standard that the state adopts for each of its affe cted

EGUs will meet the definition of a “standard of performance” under CAA section 111(a)(1). Specifica lly, the “standard of performance” for each source will cons titute, to return to the provisions of CAA section 111(a)(1 ), “a standard for emissions which reflects [that is, emb odies, or represents] 78 the degree [that is, the portion] of emission limitation achievable through the applicat ion of the [BSER]” [that is, as noted above, the required emission performance level for all affected sources in a sta te]. That “degree” or portion of the required emission performance level is, in effect, the portion of the state’s obligation to limit its affected sources’ emissions that the state has assigned to each particular affected source. An emissions standard meets this definition of the term “standard of performance” regardless of whether it is part of a plan that adopts the portfolio approach (in wh ich

78 See Oxford Dictionary of English (3rd ed. 2010 (on line version 2013)) (defining “reflect” as, among other things, “embody or represent (something) in a faithful or appropriate way”).100

case, the standard will reflect a relatively smalle r part of the emission performance level) or one that impo ses the plan’s emission limitation obligations entirely on the affected EGUs (in which case, the standard will ref lect a relatively larger part of the emission performance level). 79 These proposed interpretations of the provisions of CAA sections 111(d)(1) and (a)(1) are fully consist ent with the EPA’s overall approach in this rulemaking to determining and applying the BSER and identifying t he appropriate level of emission performance for the a ffected EGUs. As noted, this approach entails applying the BSER on a state-wide basis and, based on the BSER, identify ing the emission performance level that each state must ach ieve, so that each state may then assign responsibilities fo r achieving that performance level among its sources. As

79 The EPA’s approach may also be characterized as (i ) determining the BSER for the affected EGUs, (ii) establishing as the emission guideline the standard for emissions that the affected EGUs in the state can a chieve on average through the application of the BSER, and (iii) as part of the emission guideline, authorizing each state to establish as the applicable standard for each af fected EGU, the standard that the state considers appropri ate and that when totaled with the standards established fo r the other EGUs (and as may be adjusted to account for t he portfolio approach, if that approach is adopted by the state) is at least as stringent as the average stan dard in the emission guideline. As noted in the accompanyi ng text, a state has many ways to establish standards that m eet the CAA requirements, including, for example, following the BSER or authorizing emission rate averaging or trad ing.101

noted, this approach is fully consistent with the interconnected nature of the electricity system and with the principles of federalism that form part of the foundation of the Clean Air Act, and that find expr ession in section 111(d) through its provisions implementi ng the required emission controls through the vehicle of s tate plans. We also note that, as part of our proposal for BSER, applying the “best system of emission reducti on ... adequately demonstrated” on a statewide basis in th is manner is consistent with interpreting the term “be st” to include those principles of federalism. That is, on e reason why each of our proposed two alternative approaches for BSER qualifies as the “best” system is that, in eff ect, each can be implemented in an efficient manner by a state – through its obligation to assure achievement of the emission performance level that is based on the BSE R -- which may mean assigning greater responsibility for

emission limitations to some affected EGUs than to others. It should be emphasized that each state has many options for assigning the emission limitation oblig ations among its affected sources. 80 For example, the state could

80 One of the advantages of the flexibility states ha ve under the EPA’s approach is that state officials ma y utilize their knowledge of the electricity sector i n their102

impose emission standards that directly flow from t he BSER. Under these circumstances, the state may assign to

different affected sources emission standards with different levels of stringency because the state wi ll have

determined that those standards are consistent with the extent to which the low- or zero-emitting generatio n in building blocks 2, 3, and 4 will displace the sourc e’s generation and thereby lower the source’s emissions . The state may establish a relatively less stringent emi ssion

standard for a source that the state considers will not have much of its generation displaced than the stat e may for a source that the state considers will have mor e of its generation displaced. 81 The state could base this approach on the recognition that the increased zero- and low

emitting generation displaces generation from affec ted sources in different amounts, depending on the affe cted

state and of the entities involved in fashioning th e standards of performance and other requirements. 81 It should be noted that if the state wished to pat tern the emissions standards after the way that the sour ce was affected by the BSER, the state would also need to consider the extent to which the source can implement the he at rate improvements in building block 1, but for purposes of simplifying this example, we will set that consider ation aside. It should also be noted that this example as sumes that the state, in assigning emission rates to its sources, credits reductions in emissions due to reductions i n generation against the emission rate.103

sources’ costs and on other factors, such as transm ission line capacity. In addition, the state could authorize emission trading as part of the emission standards for affec ted sources. Under these circumstances, if an affected source’s emissions level was higher than the standard the st ate established for it, the source could achieve the st andard by purchasing additional emission rights through th e trading program. It bears emphasis that each state has flexibility i n establishing the standards of performance for its e xisting sources as long as, on a state-wide basis, those st andards (and, in the case of the portfolio approach, any ot her permissible measures in the state plan) achieve the state’s required emission performance level. This flexibil ity is in keeping with the nature of the BSER that we have

determined and the state-wide manner in which we ha ve applied it to each state’s existing sources. This flexibility is also consistent with the interconnec ted nature of the electricity system, through which the fossil fuel-fired EGUs are connected to, and affect, each other, and are all affected by other sources of generation

. Finally, it should be noted that states retain authority under CAA section 116 and 40 CFR 60.24(g) to104

impose standards of performance that, cumulatively, are more stringent than the emission performance level.