### From: Higgins, Cortney [mailto:Cortney_Higgins@omb.eop.gov]

Sent: Monday, May 19, 2014 9:03 PM

To: Wayland, Robertj

Cc: Culligan, Kevin
Subject: RE: Legal Memo/TSD

Thank you!

From: Wayland, Robertj [mailto:Wayland.Robertj@epa.gov]

Sent: Monday, May 19, 2014 9:00 PM

To: Higgins, Cortney

Cc: Culligan, Kevin

Subject: Legal Memo/TSD

Cortney -

Attached are: 1. Current version of Legal Memo 2. Red-line showing changes from the version of the Legal Memo that we sent OMB a few weeks ago 3. Responses to OMB comments (indicated in replies to comment bubbles) to the version of the Legal Memo that we sent OMB a few weeks ago.

Please let Kevin or me know if you have any questions/concerns.

bob Robert J. Wayland, Ph.D. Leader, Energy Strategies Group U.S. Environmental Protection Agency Office of Air Quality Planning and Standards Sector Policies and Programs Division
Mail Code D243-01 Research Triangle Park, North Carolina 27709

Office: (919) 541-1045 Cell: (919) 306-2290 Fax: (919) 541-5450

Email: wayland.robertj@epa.gov

**************************************
DRAFT/Deliberative Document - FOIA EXEMPT

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### << Leg-Mem_05-19-14.docx >> << Leg-Mem_05-19-14_red-line-from-OMB.docx >> << Leg Mem_OMB comm_Resp_05-19.docx >>

### 1 Legal Memorandum for Proposed Carbon Po llution Guidelines for Existing Power

Plants

Introduction

This memorandum provides background for, and further discussion of, legal issues raised in the propo sed rule, “Carbon Pollution Guid elines for Existing Power

Plants: Emission Guidelines for Greenhouse Gas Emissions from Existing Stationary Sources: Electric Utility Generating Units.” Th is memorandum is intended to be read in conjunction with, and assumes familiarity w ith, the preamble for this proposed rule.

I. Background

A. Clean Air Act section 111

Clean Air Act (CAA) section 111, which Congress enacted as part of the 1970 CAA Amendments, establishes mechanisms fo r controlling emissions of air pollutants from stationary sources. This provision requires EPA to promul gate a list of categories of stationary sources that the Administrator, in his or her judgment, finds “causes, or contributes significantly to, air pollution which may reason ably be anticipated to endanger public health or welfare.” 1 

### EPA has listed more than 60 stationary source categories under this provision. 2 

### Once EPA lists a source category, EPA must, under CAA section 111(b)(1)(B), establish “standard s of performance” for emissions of air pollutants from new sources in the source categories. 3 

### These standards are known as new source standards of performance (NSPS), and they are national requirements that apply directly to the sources subject to them.

When the EPA establishes NSPS for new s ources in a particular source category, the EPA is also required, under CAA section 111 (d)(1), to prescribe re gulations for states to submit plans regulating existing sources in that source category for any air pollutant that, in general, is not re gulated under the CAA section 109 requirements for the national ambient air quality standards (NAAQS) or regulated under the CAA section 112 requirements for hazardous air pollutants (HAP ). In contrast with CAA section 111(b), which provides for direct fede ral 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 affected s ources and that contain other measures to implement and enforce those standards.

The term “standard of performance” is defined under CAA section 111(a)(1) as a “standard for emissions of air pollutants” th at “reflects the degree of emission limitation achievable” from the “best system of emissi on reduction,” considering costs and other factors, that “the Administ rator determines has been adequately demonstrated.” CAA

1 

### CAA §111(b)(1)(A).

2 

### See 40 CFR 60 subparts Cb – OOOO.

3 

### CAA §111(b)(1)(B), 111(a)(1).

### 2 section 302(l) also defines “standard of pe rformance” as “a requirement of continuous emission reduction, including any requirement relating to the operation or maintenance of

a source to assure contin uous emission reduction.”

Under the EPA’s implementing regulations for CAA section 111(d)(1), the EPA must determine the best system of emission re duction for the sources, and then apply that best system to determine the required level of emissions or emission reduction, which the regulations refer to as the “emissions guideline.” 4 

### Under section 111(d )(1), the states must then adopt state plans that establish standards of performance and measures that implement and enforce those standards. In the case of an air pollutant that EPA has determined may cause or contribute to e ndangerment of public health, the states’ standards of performance must not be less stringent than the EPA’s emission guideline. 5


### CAA section 111(d)(1) grants states the author ity, in applying a standard of performance to particular sources, to take into account the source’s rema ining 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.” 6 

### If a state does not submit a plan, the EPA must establish a federal plan for that state. 7 

### Once a state receives the EPA’s approval for its plan, the provisions in the plan become federally enforceable against the entity responsible for noncompliance, in the same manner as the provisions of an approved state implementation plan (SIP ) under CAA section 110. In the case of a tribe that has one or more affected EGUs on its lands, 8 

### the tribe would have the opportunity, but not the oblig ation, to establish a CO 2 

### performance standard and a plan

for its tribal lands.

B. Legislative history

The legislative history of the 1970 Clean Air Act Amendments indicates that at that time, Congress grouped air pollutants fr om existing stationary sources into three categories: (i) Air pollutants that affected the National Ambient Air Quality Standards (NAAQS), which would be regulated unde r CAA §110 state implementation plans (SIPs), (ii) hazardous air pollutants (HAP s), which would be regulated under EPApromulgated national emission standards pur suant to CAA §112, and (iii) all 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 pollu tion agents” and proposed to require the EPA to promulgate national emission standa rds pursuant to proposed CAA §114. The 1970

House-Senate Conference Committee that was fo rmed to resolve differences between the

House and Senate versions of the CAA Amen dments did not adopt the Senate bill’s proposed CAA section 114, but did adopt section 111(d), wh ich covers the same non-

4 

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

5 

### 40 CFR 60.24(c).

6 

### CAA section 111(d)(2)(A).

7 

### Id

. 8 

### The EPA is aware of at least thre e affected sources located in Indian Country located in Indian Country, two on [Navajo] lands – the Navajo Generating Station and the Four Corners Generating Station – and one on [Ute] lands – the Bonanza Generating Station. All three are coal-fired EGUs.

### 3 NAAQS, non-HAPs air pollutant s. Under section 111(d)(1) as included in the 1970 CAA Amendments, the states were required to s ubmit to the EPA state plans that “establish[] emission standards” for their existing sour ces. Although the legislative history of the

1970 CAA Amendments does not contain statemen ts that directly discuss the specific provisions included in section 111 (d), the legislative history of the Senate bill’s proposed section 114 is relevant to meaning of sect ion 111(d), and we refer to parts of that legislative history below.

For new sources, section 111(b)(1)(B) requi red the EPA to promulgate “standards of performance,” and defined that term, under section 111(a)(1), as—

a standard for emissions of air po llutants which reflects the degree of emission limitation achievable through th e application of the best system of emission reduction which (taking in to account the cost of achieving such reduction) the Administrator determines has been adequately

demonstrated.

The legislative history discusses, among other things, the meaning of the term “standard of performance,” 9 

### which we refer to below.

In the 1977 CAA Amendments, Congress ma de several changes to section 111, including section 111(d). Congress substitu ted “standards of performance” for “emission standards,” which, as noted above , the states are required to es tablish in their state plans. In addition, Congress added to section 111(d)(1) the re quirement that the EPA’s regulations “permit the State in applying a st andard of performance to any particular source under a [section 111(d)] plan ... to take into consideration, among other factors, the remaining useful life of the existing source to which such standards applies.” Congress added to section 111(d)(2 ) a similar requirement appli cable to federal plans. In addition, Congress revised the definition of “standard of performance” in section 111(a)(1) to distinguish among di fferent types of sources, and to require that for fossil fuel-fired sources, the standard (i) be based on, in lieu of the “best system of emission reduction ... adequately demonstrated,” the “best technological system of continuous emission reduction ... adequately demonstrated ;” and (ii) require a percentage reduction in emissions. In addition, in the 1977 CAA Amendments, Congress expanded the parenthetical requirement that the Administrator consider the cost of achieving the reduction to also require the Administrator to consider “a ny nonair quality health and environment impact and energy requirements.” Congress also added the definition of “standard of performance” in section 302(l) , which defines the term to require a

“continuous emission reduction.”

In the 1990 CAA Amendments, Congress ma de further amendments to section 111, including section 111(d). Among other things, Congress again revised the definition of “standard of performance” under CAA sec tion 111(a)(1), this time repealing the requirements that the standard of performance be based on the best technological system and achieve a percentage reduction in emissions , and replacing those provisions with the

9 

### See, e.g ., Senate Comm. Rep. No. 91-1196 at 16.

### 4 terms used in the 1970 CAA Amendments’ vers ion of §111(a)(1) that the standard of performance be based on the “best syst em of emission reduction ... adequately demonstrated.” In addition, in section 111(d )(1)(A)(i), Congress revised the description of which air pollutants are s ubject to section 111(d) but, as discussed below, left the provision ambiguous with respect to its applicab ility to the air pollutant emitted from the sources at issue in this rulemaking: CO 2 

### emissions from fossil-fuel-fired EGUs . CAA

section 111 has not been revised since the 1990 CAA Amendments.

C. Regulatory history

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 implementing regulations.) These regulations provide that, in promulgating requirements for sources under CAA section 111(d), the EP A first develops regulations known as “emission guidelines,” which establish binding requirements that st ates must address when they develop their plans. 12 

### The implementing regulations also establish timetables

for state and EPA action. The default rule is that states 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 four months of the due date for those plans. 15 

### In the present rulemaking, the EPA is following the requirements of the implementing regulations , except that the EPA is extending certain timetables, as described in the preamble. 16



### Over the last forty years, under CAA s ection 111(d), the agen cy has regulated four pollutants from five sour ce categories (i.e., phosphate fe rtilizer plants (fluorides), sulfuric acid plants (acid mist), primary al uminum plants (fluorid es), Kraft pulp plants (total reduced sulfur), and municipa l solid waste landfills (landfill gases)). 17 

### In addition, the agency has regulated additional polluta nts under CAA section 111(d) in conjunction

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 explained that it used the term “emissions guidelines” – instead of emissions limitations – to make clear that guidelines would not be binding requirements applicable to the sources, but instead are “criteria for j udging the adequacy of State plans.” 40 Fed. Reg. at 53,343.

13 

### 40 CFR 60.23(a)(2).

14 

### See id.; 40 CFR 60.27(a).

15 

### 40 CFR 60.27(b).

16 

### The EPA is not re-opening these regulations, although it is revising The deadline for action on state plan

submittals.

17 

### See “Phosphate Fertilizer Plants; Final Guideline Docume nt Availability,” 42 Fed. Reg. 12,022 (Mar. 1, 1977); “Standards of Performance for New Stationa ry Sources; Emission Guideline for Sulfuric Acid Mist,” 42 Fed. Reg. 55,796 (Oct. 18, 1977); “Kraft Pulp Mills, Notice of 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 Sources and Guidelines for Control of Existing Sources: Municipal Solid Waste Landfills, Final Rule,” 61 Fed. Reg. 9905 (Mar. 12, 1996).

### 5 with CAA section 129. 18 

### The agency has not previously regulated CO 2 

### or any other greenhouse gas under CAA section 111(d) (a lthough because landfill gases include methane, the agency’s regulat ion of landfill gases reduced emissions of that greenhouse gas). .

D. Case law

The D.C. Circuit has never handed down a decision that interpreted, or reviewed EPA’s interpretation of, section 111(d). The D.C. Circuit has, however, reviewed rulemakings under CAA section 111 on numer ous occasions during the past four decades, handing down decisions dated from 1973 to 2011. 19 

### These decisions concerned various aspects of section 111, primarily the interpretation of the term “standard of performance.” Relevant statements of these cases are discussed below.

E. 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 natu ral gas-fired stationary combustion turbines (affected sources or affected EGUs). The first, published in January, 2014, proposes standards of performance under CAA section 111(b) for affected sources undertaking new construction. The second is the pres ent rulemaking, under CAA section 111(d), which proposes emission guidelines for states to follow in adopting state plans that regulate existing affected EGUs. In the th ird rulemaking, which we expect to propose concurrently with the present one, the EPA is proposing standards of performance under section 111(b) for affected EGUs that unde rtake modifications or reconstructions.

II. Summary of legal basis

Today’s proposed action is authorized by the requirements of CAA section 111(d) and is consistent with the implementing regulations. As an initial matter, the CAA authorizes the regulation of greenhouse gases (including CO 2 

### ) under section 111. We discuss below an ambiguity in the provision s of section 111(d)(1)( A)(i), arising from Congress’s simultaneous enactment of two sepa rate version of this provision, has led some stakeholders to argue that the fact that EPA has regulated hazardous air pollutants from EGUs prevents EPA from regulating CO 2 

### emissions from EGUs. As explained below in detail, however, EPA reads the provision to author ize regulation of CO 2 

### emissions from EGUs and this interpretation is both reasonable and en titled to deference. Moreover, although section 111(d) applies only to sources that , if they were new sources,

would be covered under a secti on 111(b) rule, the EPA intend s to complete the section 111(b) rulemakings regulating CO 2 

### from newly constructed EGUs and from modified and

18 

### See, e.g., 

### “ Standards of Performance for New Stationary Sources and Emission Guidelines for Existing Sources: Sewage Sludge Incineration Units, Final Rule,” 76 Fed. Reg. 15,372 (Mar. 21, 2011).

19 

### Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973); Essex Chemical Corp. v.

Ruckelshaus , 486 F.2d 427, (D.C. Cir. 1973); Portland Cement Ass’n v. EPA , 665 F.3d 177 (D.C. Cir. 2011).

### 6 reconstructed EGUs by the time we finalize th e section 111(d) rule, and either of those rulemakings will provide the requisite predicate for this rulemaking.

A key step in promulgating requirements under CAA section 111(d) is identifying the “best system of emission reduction which ... the Administrator determines has been adequately demonstrated” (BSER). The 1975 im plementing regulations , are explicit that under section 111(d), the EPA determines the BSER in promulgating emission guidelines under that provision. 20 

### Accordingly, in this rulemaking, the EPA is determining the

BSER.

In the preamble, the EPA lays out in deta il its proposed determination of BSER,

which includes a set of measures that constitu te a system of emission reduction that has been adequately demonstrated by fossil- fuel-fired sources across the country. Specifically, the EPA proposes that that the BS ER includes measures that can be sorted into four building blocks: (1) heat rate improvements, (2) re-dispatch from fossil-fuelfired steam-generating boilers to NGCC units, (3) new low- or zero-emitting generation, and (4) demand-side energy efficiency measur es. Under the EPA’s proposed approach to determining the BSER, the EPA identifies as a component of BSER the heat rate improvements in building block 1 that could be made at coal-fired steam generating units to reduce their carbon intensity ( i.e ., to decrease the amount of carbon emitted per unit of energy generated). Importan tly, the EPA’s proposed approa ch views the measures in building blocks 2, 3, and 4 in light of the fact that the electricity syst em is an integrated system with fungible products (electricity a nd electricity services). Under this approach, the BSER includes building blocks 2, 3, and 4 because they result in reductions in emissions from those sources. In addition, the EPA is also iden tifying an alternative basis, under which the BSER includes limitations in utilization of the fossil-fired EGUs,

which reduce mass emissions from those EGUs , and building blocks 2, 3, and 4 provide the basis for applying those limitations. In bot h cases, the EPA reasonably identifies the sets of measures as components of BSER base d on the factors that the EPA is required to

consider and the EPA’s authorit y to weigh those factors.

As noted above and explained in the preamble and various Technical Support Documents, the measures in each of the buildi ng blocks are both technically feasible and “adequately demonstrated.” Heat rate im provement measures (identified in building block 1) are well-recognized as feasible within the industry. Under the EPA’s approach to BSER, the measures that entail dispatch chan ges from fossil-fuel-fired steam-generating EGUs to NGCC units, investments in rene wable and nuclear energy, and demand-side energy efficiency (measures in building blocks 2, 3 and 4) are each well-established in numerous states, and many of them ha ve already been relied on to reduce CO 2 

### and other air pollutants from fossil-fuel-fired EGUs. Further, all of the measures achieve an important degree of emission reduction. In a ddition, they are not unreasonably costly, including when considered through a nation-wi de lens. In addition, and importantly, the measures encourage the development and e xpansion of technology and practices to

reduce CO 2 

### and are consistent with current trends in the electricity sector. By the same token, under the alternative approach to BSER , generation reduction from the fossil-fired

20 

### The EPA is not re-opening that interpretation in this rulemaking.

### 7 EGUs is technically feasible and adequately demonstrated because of the characteristics, just described, of the measures in building blocks 2, 3, and 4.

The implementing regulations provide that , in establishing an emission guideline under section 111(d), EPA both determines BSER and the emission limitation that results from application of the BSER to the affect ed sources. In this rulemaking, the EPA is taking the approach of applyi ng the BSER to covered EGUs on a state-by-state basis and determining the resulting emission limitation – termed the “state goal” – for each state. The EPA is formulating each state goal as an average emissions rate. The state goals form the EPA’s emission guidelines.

Once the EPA promulgates the emission gui delines, each state must develop a plan that identifies and achieves its em ission performance level. The emissions performance level must be at least equivalent to (that is, no less st ringent than) the state goal that the EPA has determined. This means, among other things, that the states may adopt mass emission limits, instead of rate-based emissions levels, provided such mass emission limits achieve equivalent emission reductions to those that would be achieved by application of the rate that is the state goal. In addition, the state plans must establish standards of performance a nd include measures that implement and enforce those

measures.

As the preamble for this rulemaking disc usses, based on suggestions from states and other stakeholders directing the EPA to consider measures that in some cases are established by entities other th an EGU owners or operators, the EPA is proposing that states be authorized to submit state plans th at do not impose legal responsibility on the affected EGUs for the entirety of the emissi ons performance level. Instead, the proposal would allow for compliance plan s that impose or entail re quirements on other parties (which we will refer to as affected entities) – such as renewable energy and demand-side energy efficiency measures - that would provi de a means or basis for reducing utilization of, and therefore CO 2 

### emissions from, the affected E GUs. As noted in the preamble for this rulemaking, a possible basis for this a pproach is that those requirements on other affected entities may be authorized as standards of performance or implementing measures. The EPA proposes that this is an appropriate flexibility and solicits comment,

but also solicits comment on whether st ate plans must impos e all of the legal responsibility for achieving the emissions performance level on the affected EGUs.

The preamble further notes that even if state plan imposes all of the legal obligations on the affected EGUs, the st ate plan could nevertheless include the requirements on other affected entities in order to facilitate the redu ced utilization of, and

CO 2 

### emissions from, the affected EGUs – and th e practical effect for the EGUs would be the same as that under the proposed appro ach. The preamble solicits comment on other issues concerning state plans, including whet her a state may include in its plan an enforceable commitment by the state to assu re some amount of emissions reduction from the affected sources, but not include the sp ecific measures that would achieve that

amount of reduction.

### 8 The EPA emphasizes that in developing the state plans, as long as the plans

reduce emissions from the affected sources to achieve the emissions performance level,

the states have substantial discretion in designing the standards of performance. Moreover, the states may require sources to implement specific measures that the EPA did not identify as BSER, and may include other approaches such as, for example, emission trading programs. By the same toke n, states may allow sources, in complying with their applicable standard s of performance, 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 state plan achie ves the requisite level of emissions reduction

from the affected sources.

In this rulemaking, the EPA proposes reasonable deadlines for state plan submission and the EPA’s action. The proposed deadline for the EPA’s action varies from that in the implementing regulations, a nd the EPA is revising that provision of the implementing regulations accordingly.

III. Authority to regulate CO 2 

### from EGUs

CAA section 111 authorizes EPA to regulate CO 2 

### emissions. The Supreme Court has held that greenhouse 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 Clean Air Act and the EPA actions it authorizes disp lace any federal common law right to seek

abatement of carbon-dioxide emissions from fo ssil-fuel-fired power plants” was premised on the Court’s understanding that §111, incl uding §111(d), applies to carbon dioxide

emissions from those sources.

The fact that EPA has regulated EGU em issions of mercury and other hazardous air pollutants under CAA section 112 does not deprive EPA of the authority to regulate

CO 2 

### emissions from EGUs under CAA secti on 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 occurr ed during enactment of the 1990 CAA Amendments, which revised section 111(d). The confusion arises because two different amendments to section 111(d) were enacted in the 1990 CAAA – one in title I of the b ill, the other in title III of the bill (both amendments were to be c odified in section 111(d)). The confusion is

exacerbated because the U.S. Code does not accurately reflect what was enacted – it presents only one of the two amendments. In this circumstance, the enacted law signed by the President (as recorded in the U.S. St atutes at Large), not the U.S. Code, is controlling.

As presented in the U.S. Code, secti on 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 wh ich is not included on a list published under [CAA section 108(a)] or [2] emitted from a source category which is regulated under

21 

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

### 9 [section 112] .” (Emphasis added.) This provision has two components that exclude from section 111(d) two types of air pollutants. The first component, which we call the NAAQS Exclusion, excludes NAAQS pollutants. The second component, which we call the Section 112 Exclusion, presents the ambigui ties. As presented in the U.S. Code, the Section 112 Exclusion appears by its terms to preclude 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 prov ide that the provision would not cover GHGs

because GHGs are emitted from EGUs and EG Us are a source category regulated under

section 112. 22



### The text of section 111(d) as presente d in the U.S. Code, however, does not accurately reproduce the Section 112 Ex clusion as enacted in the 1990 CAA

Amendments. The correct statement of the Section 112 Exclusion – the one that was enacted by Congress and signed by the President, and which therefore is controlling – is found in the U.S. Statutes at Large. This text incorporates two vers ions of the Section 112 Exclusion, one passed by the U.S. House of Representatives and one passed by the U.S.

Senate. The two versions were never reconc iled, and both were enacted as part of the

1990 CAA Amendments. The two versions conflic t with each other and thus render the Section 112 Exclusion ambiguous. Under these circumstances, the EPA may reasonably

construe the Section 112 Exclusion to author ize the regulation of GHGs under section 111(d). Under the U.S. Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v. NRDC

, to interpret how a statute applies to a part icular question, an agency must, at Step 1, determine whether Congress’s intent as to th e specific question is clear, and, if so, the agency must give effect to that intent. If c ongressional intent is not clear, then the agency, at Step 2, has discretion to fashion an interp retation that is a reas onable construction of

the statute. 1 

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

To understand the different amendments by the House and Senate, one must start with section 111(d)(1) as it read before the 1990 CAA Amendments:

The Administrator shall pres cribe regulations which sh all 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 whic h 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 appl y if such existing source were a new

source. * * *

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 pollutant from regulation under Section 111(d), because it would be difficult to identify any pollutant that is not emitted from at least one source category that is regulated under 112. We do not need to address this ridiculous result, however, for the reas ons discussed in the text above.

### 10 42 U.S.C.A. 7411(d)(1) (West 1977); Public Law 95–95 (emphasis added). In this version, the Section 112 Exclusion, by its term s, applied to section 112 pollutants, and not to categories of sources that emit those pollu tants. It should also be noted that in the 1990 CAA Amendments, Congress amended sec tion 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 secti on 111(d)(1)(A)(i) by striking the term to ‘‘112(b)(1)(A)’’ and insert ing in its place the term ‘‘112( b).’’ Under this amendment, the text would read as follows (w ith changes shown in strikeout):

The Administrator shall pres cribe regulations which sh all 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 whic h is not included on a list published under section 7408(a) or 7412(b) (1)(A) of this ti tle, but (ii) to which a standard of performance under this section would a pply 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 in serting in its place the phrase ‘‘or emitted from a source category which is regulated under section 112.’’ Unde r this amendment, the text would read as follows (with ch anges shown in underline and strikeout):

The Administrator shall pres cribe regulations which sh all 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 whic h 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 ti tle, but (ii) to which a standard of performance under this section would appl y if such existing source were a new

source.

The House-Senate Conference Committee di d not reconcile these two conflicting amendments, and both were included in th e 1990 CAA Amendments as reported by the Conference Committee, approved by both the House and the Senate, and signed by the President. As presented in the Statutes at Large, the Section 112 Exclusion is therefore ambiguous.

The EPA discussed these different amendm ents in the preamble to “Revision of December 2000 Regulatory Finding on the Emi ssions of Hazardous Air Pollutants From Electric Utility Steam Generating Units and th e Removal of Coal- a nd Oil-Fired Electric Utility Steam Generating Units From the Section 112(c) List,” 70 FR 15994, 16029-32 (March 29, 2005). There, the EPA concluded that the Section 112 exclusion could be

### 11 read as follows: Where a source category is regulated under secti on 112, a section 111(d) standard of performance cannot be establis hed to address any HAP listed under section 112(b) that may be emitted from that partic ular source category. The EPA explained that this approach reasonably interprets the Secti on 112 exclusion to give some effect to both amendments. The EPA emphasized that it is not reasonable to give full effect to the House language because a lite ral reading of that language would mean that the EPA could not regulate any air pollu tant from a source category re gulated under section 112, a result that would be inconsistent with (i ) Congress’ desire 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 (ii) the fact that the EPA has historically regulated non-hazardous ai r pollutants under section 111(d), even where those air pollutants were emitted from a source category actually regulated under section 112. See

70 FR 16031-32. The EPA continues to view this interpretation of the Section 112 exclusion as reasonable, for the reasons just stated.

Applying this interpretation of the Sec tion 112 Exclusion to this rule, we conclude that section 111(d) authorizes the EPA to establish secti on 111(d) guidelines for GHG emissions from EGUs. Although EGUs are a source category that is regulated under CAA section 112, GHGs are not a HAP regul ated under section 112. Therefore, the Section 112 exclusion in section 111(d) doe s not apply 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 standards of performance for GHGs emissions from newly constructed fossil-fuel-fired EGUs, 23 

### some stakeholders raised concerns that the EPA could not promulgate those standards without first issuing a finding that GHGs from those s ources cause or contribute si gnificantly to air pollution which may reasonably be anticipated to e ndanger public health or welfare, under CAA §111(b)(1)(A). In that proposal, the EPA stated that it is rational to regulate GHGs from

fossil fuel-fired EGUs because the EPA has previously found that GHG emissions endanger public health and welfare, and b ecause the electric gene rating industry emits a significant amount of GHGs. The EPA a dded that CAA section 111 does not require that EPA issue a formal endangerment finding, and that even if s ection 111 did require such a finding, the EPA’s rationa l basis would qualify as one. 24 

### The EPA is taking the same position in the section 111(b) rulemaking proposal to establish standards of performance for GHG emissions from modified and reconstructed fossil-fuel-fired EGUs.

The EPA will finalize either or both of the January 2014 Proposal and the rulemaking for modified and reconstructed EGUs by the time that it finalizes this proposed rulemaking. In that event, the EPA wo uld not be required to further address the rational basis or endangerment finding in this rulemaking. In any event, these questions are properly addressed and resolved in th e context of the parallel rulemakings under

23 

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

24 

### See 79 FR at 1,452/3 – 1,456/1.

### 12 section 111(b), not in this rulemaking. Thus , the EPA is not seeking comment in this proposal on any issues related to a rational basis or endangerment finding.

V. Authority for EPA to determin e BSER and emission guidelines

In this section we describe the author ity, as set out in the EPA’s implementing regulations under CAA section 111(d), for the EPA to determine the “best system of emission reduction ... adequately demonstrat ed” and the 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 that basis, to determine the amount of emission limitation achievable by each state, wh ich we refer to as the state goal. The state goal is the “emissions guideline” that the implementing regulations require the EPA to promulgate.

CAA §111(d) directs the EPA to –

prescribe regulations whic h 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) es tablishes standards of performance for any existing source for [certain ai r pollutants] ... and (B) provides for the implementation and enforcement of such standards of performance.

As noted above, the EPA promulgated the impl ementing regulations for section 111(d) in 1975, and has revised parts of them since. The regulations set out a multi-step process for the development and approval of state plans, and assign responsibil ity for the various steps in the process to the EPA or the states . The EPA has followed these regulations in promulgating previous rule makings under section 111(d). 25 

### In the present rulemaking, EPA continues to follow them, except that EP A is establishing a different deadline for submission of state plans than what th e regulations would otherwise require. 26



### Under the implementing regulations, at th e same time or after the EPA proposes and then finalizes standards of performa nce for sources in a source category under section 111(b), the EPA must propose and th en finalize a “guide line document” with information pertinent to stat e 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 dr aft 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

25 

### These rulemakings are cited above.

26 

### The EPA is not re-opening these regulations, although it is revising the deadline for EPA action on state plans.

### 13 pollutant from affected facilities, a final guideline document will be published and notice of its availabilit y will be published in the Federal Register.” 27



### The regulations go on to describe the contents of the “guideline document” as including, among other things, an “emission guideline” th at incorporates th e “best system of

emission reduction ... ade quately 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 desi gnated 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 defi ne the “emission guideline” as –

A guideline set forth in subpart C of this part, or in a final guideline document published under §60.22(a) which reflects the degree of emission reduction achievable through the app lication 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 manda te that for air pollutants that adversely affect public health, the “emission guidelines” must be proposed and finalized with the draft and final guideline document:

[For air pollutants that have been de monstrated to adversely affect public health], the emission guidelines and compliance times referred to in paragraph (b)(5) of this secti on will be proposed for comment upon publication of the draft guideline do cument, and after consideration of comments will be promulgated in subpart C of this part with such modifications as may be appropriate. 30

27 

### 40 CFR 60.22(a).

28 

### Id . at 60.22(b).

29 

### 40 CFR 60.21(e).

30 

### Id. at 60.22(c).

### 14 With this proposed rulemaking, the EPA is complying with these regulatory provisions. This proposed rulemaking follows the proposal of standards of performance for newly constructed affected sources in the January 2014 Proposal, and is concurrent with the proposal of standard s of performance for modified and reconstructed affected sources. This proposed rulemaking – in cluding the preamble and the supporting documents -- comprise the “draft guidelin e document.” The documents contain the “information for the development of State pl ans” described in the regulations. This

information includes the four building 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 guidelines.” In addition, the preamble and supporting documents propose the “time within which compliance with emission standards of equiva lent stringency can be achieved,” which are the periods of 2020-2029 for interim complian ce, and the subsequent period for final compliance, and provide other information.

It should be noted that the preamble discusses the EPA’s proposal in this rulemaking to adopt state-specific goals base d on a single, consistent methodology, rather than to adopt nationally uniform emission rate s for particular types of affected EGUs. The preamble explains that this state-by-stat e approach ensures that the proposed goals reflect opportunities to reduce CO 2 

### emissions by shifting generation among different types of EGUs and accounts for the differences among the generating fleets in the various

states.

VI. Best system of emission re duction adequately demonstrated

We discuss in the preamble our interpre tation of the section 111(d)(1) and (a)(1) provisions that require the state plans to es tablish “standards of performance” for existing sources, and that define that term. In th is section of this Legal Memorandum, we

elaborate on that discussion.

As background, it should be recalled that important to the BSER are the measures in the four “building blocks,” which the preamble describes at length and

summarizes as follows:

Building block 1: Reducing the carb on intensity of generation at individual affected EGUs through heat rate improvements.

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 genera tion at those EGUs with expanded low- or zero-carbon generation.

### 15 Building block 4: Reducing emissions from affected EGUs in the amount

that results from the use of demand-si de energy efficiency that reduces the amount of generation required.

A. General approach for determining the best system of emission reduction adequately demonstrated

The EPA’s explanation for this BSER proposal begins with the statutory definition of a “standard of performance”:

The term “standard of performance” means a standard for emissions of air pollutants which reflects the degr ee of emission limitation achievable through the application of the best system of emission reduction which (taking into account the cost of ach ieving such reduction and any nonair quality health and environmental im pact and energy requirements) the

Administrator determines has b een adequately demonstrated.

CAA section 111(a)(1).

The CAA does not define the term, “syste m,” 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.” 31



### The U.S. Court of Appeals for the D.C. Ci rcuit (D.C. Circuit or Court) has handed down case law over a 40-year period that inte rprets this CAA provi sion, including its component elements. 32 

### In one of the earliest cases, Essex Chemical Corp. v. Ruckelshaus

, in 1973, the Court stated that because the standard must be “achievable,” the emission limits must be technically feasible, and added that “[a]n adequately demonstrated system

is one which has been shown to be reasonabl y reliable, reasonably efficient, and which can reasonably be expected to serve the in terests of pollution c ontrol without becoming exorbitantly costly in an economic or environmental way.” 33



### Under this case law, the EPA determin es the BSER based on the following key considerations, among others:

 The system of emission reduction must be technically feasible. 34

31 

### Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreferen ce.com.mutex.gmu.edu/view/10.1093/ acref/9780199571123.001.0001/acref9780199571123

32 

### Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973); 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 

### Essex Chemical Corp. v. Ruckelshaus , 486 F.2d at 427.

34 

### As noted in the text, the case law may be read to treat technical feasibility as the measure for whether the standard of performance is “achievable,” not as a crite rion for whether the system of emission reduction is

### 16  The EPA must consider the amount of emi ssions reductions that the system would

generate.

 The costs of the system must be reasona ble. The EPA may consider the costs on the source level, the indust ry-wide level, and, at least in the case of the power sector, on the national level in terms of the overall costs of electricity and the impact on the national economy over time. 35



###  The EPA must also consider that CAA s ection 111 is designed to promote the development and implementation of technology. 36



### Other considerations are also important , including that the EPA must also consider energy impacts, and, as with costs, may consider them both on the source level

and on the nationwide structure of the power sector over time. Importantly, the EPA has discretion to weigh these various consideratio ns, may determine that some merit greater weight than others, and may vary the we ighting, depending on the source category.

The EPA discussed the CAA requirements a nd Court interpretati ons of the BSER at length in the January 2014 Proposal, 37 

### and incorporates by reference that discussion in this rulemaking.

B. Application of the BSER criteria

1. Introduction and overview The EPA’s BSER proposal in this rulemaki ng recognizes, and is based in part on,

the interconnected nature of the electrical generating system, which, among other things, means that generation at one EGU can subs titute for generation at another. The importance of the interconnected natu re of the grid in facilitating CO 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 emissions reductions, and the still more recent history of implementing CO 2 

### emissions reductions at the company, state, and regional level.

The EPA proposes an approach to dete rmining the “best system of emission reduction ... adequately demonstr ated” that includes several components, some of which

are based on the interconnected nature of the electricity generating grid. The first

the “best system of emission reduction ... adequately demonstrated.” However, for convenience, we may refer to technical feasibility as anot her of the criteria for the BSER.

35 

### 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 the cost consid eration in various ways: the costs must not be “exorbitant[]”, Essex Chemical Corp. v. Ruckelshaus , 486 F.2d 427, 433 (D.C. Cir. 1973), 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. Costle , 657 F.2d 298, 343 (D.C. Cir. 1981). In the January 2014 Proposal, EPA stated that “these various formulations of the cost standard ... are synonymous,” and, for convenience, EPA used “reasonableness” as the formulation. EPA takes the same approach in this rulemaking.

36 

### See 79 Fed. Reg. at 1,465/1-2 (discussing case law and legislative history that includes technological development as a consideration in the determination of BSER).

37 

### See 79 Fed. Reg. at 1,462/1 – 1,467/3.

### 17 component is building block 1, which entails measures that the affected sources may undertake to improve their efficiency.

The remaining components are based on th e interconnected nature of the grid. Because the grid is interconnected, CO 2 

### emissions reductions can be achieved in either of two ways: (i) Instituting measures in bu ilding blocks 2, 3, and 4, which, due to the interconnected nature of the grid, result in drawing utilization aw ay from higher-emitting fossil-fuel-fired EGUs, thereby lowering thos e EGUs’ emissions. (ii) Reducing utilization from higher-emitting fossil-fuel-fired EGUs, wh ich due to the interc onnected nature of the grid and its operation in the regulated markets, result in replacement generation, such as that identified in the building blocks 2, 3, and 4. Thus, each of these approaches may be considered to be a “system of emission reduction.”

Accordingly, the EPA proposes that th e “best system of emission reduction ... adequately demonstrated” also includes the measures in building blocks 2, 3 and 4, which would substitute generation at higher-emitting EGUs with increases in generation at lower- or zero-emitting sources and in end- use efficiency in ways that reduced CO 2 

### emissions at fossil-fuel-fired EGUs. In additi on, as an alternative approach, the EPA also proposes that BSER includes reduced utiliza tion of the higher-emitting fossil-fuel-fired EGUs, with the measures in building blocks 2, 3, and 4 serving to provide replacement generation. Each of these appro aches assures reliabil ity of electricity supply and avoids

unreasonable costs and meets all of the criteria to qua lify as BSER.

It is also significant that CO 2 

### is a global pollutant, a nd therefore th e location of the emissions (or emission reductions) does not affect the environmental consequences of an amount of emissions generated at any given source in any one location. 38 

### The global

nature of CO 2 

### means that CO 2 

### emissions may be reduced anyw here within the electricity grid and still achieve the in tended environmental benefits.

2. Interconnected nature of the electricity system

As we observe in the preamble, the natio n’s electricity needs are being met, and have for many decades been met, through a grid formed by a network connecting groups of EGUs with each other and, ultimately, with the end-users of el ectricity. Through this interconnected grid, fungible products – electrici ty and electricity services – are produced and delivered by a diverse group of EGUs opera ting in a coordinated fashion in response

to end-users’ demand for elec tricity. Because the electric ity grid operates through the interconnection of multiple EGUs and favors l east-cost generation, owners and operators

38 

### By analogy, because the problem of acid deposition is caused by EGU emissions of nitrogen oxide and sulfur dioxide over a wide geographic area, Title IV of the Clean Air Act established a national emissions trading program that addresses that problem by reducing the total amount of those emissions, but without regard to the particular location of those emissions (or emissions reductions). In contrast, other air pollutants have adverse health and welfare effects in the locality where they are emitted, and as a result, geographic constraints on emi ssions trading are necessary. See CAA §173(c)(1) (limiting offsets for air pollutants subject to new source review requirements to emissions reductions from sources in certain nonattainment areas).

### 18 of generators have been able to assure th e stability of electricity generation and the reliable delivery of electricity to users at least cost (subject to certain reliability, environmental and other constraints). The fact that generation at one EGU can be substituted for generation at another allows operato rs to utilize their least-cost assets first, and hold their higher-cost assets in reserve, thereby assuring that the system achieves the objectives of providing reliable and l east-cost electricity service.

In recent years, the ability to shift betw een different generation assets on the grid

has also facilitated the achiev ement of environmental object ives, including the reduction of emissions of nitrogen oxides, sulfur di oxide, and particulate matter -- which, among them, worsen acid deposition and jeopardize th e attainment and maintenance of national ambient air quality standards – as well as h azardous air pollutants. Regulation of those air pollutants tends to increase the cost of electricity from higher-emitting generation assets. Because EGU operators have the ability to use the grid as an interchange for shifting levels of generation among several faci lities, the higher-emitting assets tend to be utilized relatively less, and, as direct result, emit less pollution and reduce cost.

Most recently, states and companies seeking specifically to achieve CO 2 

### emissions reduction objectives ha ve also relied on the shifti ng of generation between and among EGUs to achieve those emissions reducti on objectives. In fact, as the preamble notes, there are many cases in which compan ies have reduced emissions through shifting generation away from higher emitting units to lower- or zero-emitting units, or through reducing overall electric demand through demand -side energy efficiency measures. 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 re newable or nuclear generation, and increased energy efficiency, to achieve those goals. In other cases, this has occurred in response to goa ls set at the state level: for example, California enacted its Global Warming Solutions Act in 2006 (AB 32), requiring the state to reduce its GHG emissions to 1990 levels by 2020 and 80 percent below 1990 levels by 2050, 39 

### through a suite of mechanisms that include energy e fficiency programs, renewable energy programs and an economy-wide cap and trade program, along with other programs. 40 

### Similarly,

nine northeast and mid-Atlantic states participate in the Regional Greenhouse Gas Initiative (RGGI), a market-based emissi ons budget trading program that sets an aggregate limit on CO 2 

### from fossil fuel fired power plants in the participating states.

In all of these instances, companies’ c hoices and policies implemented by states may impact decisions about dispatching of lower instead of higher emitting generating units both as part of the short term dispatch process and as part of longer term business planning processes. We believe that the proposed emission guidelines, including the temporal flexibility that the guidelines incorp orate, allow states and EGUs to implement a

39 

### State of California Global Warming Solutions Act of 2006, Assembly Bill 32, Chapter http://www.leginfo.ca.gov/pub/05-06/bill/asm/a b_0001-0050/ab_32_bill_20060927_chaptered.pdf

40 

### See Cal. Air Res. Bd., Climate Change Scoping Plan 31-32, 41-46 (2008), available at: http://www.arb.ca.gov/cc/sc opingplan/document/adopted_s coping_plan.pdf.

### 19 variety of mechanisms that can reduce emi ssions both as part of those shorter term dispatch decisions and as part of long er term business planning processes.

In this rulemaking, the EPA is buildi ng on these company, state, and regional approaches by continuing to rely on the interc onnected nature of the grid to achieve, on a nationwide basis, the important obj ective of significant amounts of CO 2 

### reductions from fossil-fuel-fired EGUs. The EPA is doing so by proposing the implementation of heat improvement measures for fossil-fuel-fired st eam generating units (b uilding block 1) to reduce their emissions, as well as the implemen tation of other measur es that associated

with reduced emissions from those EGUs. Th e latter include substituting generation at higher emitting sources through increasing ge neration at less carbon-intensive EGUs, expanding the amount of low- or zero-car bon generating capacity connected to the electric grid, and using electricity more efficiently to reduce the total demand for electricity (building blocks 2, 3 and 4, respectively).

3. Heat rate improvements

As discussed in the preamble, under the EPA’s proposed approach to determining BSER, the measures in building block 1, which entail improvements in the efficiency of the affected EGUs’ equipment or processes, meet the criteria to qualify as a part of the BSER. Further elaboration here is not necessary.

4. Measures in building blocks as BSER

Under the first approach, the “best sy stem of emission reduction ... adequately

demonstrated” includes the measures in build ing blocks 2, 3 and 4 for the affected fossilfuel-fired steam generating boilers, and buildin g blocks 3 and 4 for the fossil-fuel-fired

combustion turbines. In this section, we first explain why th e measures in these building blocks are a “system of emissi on reduction,” and then why they are the “best” system that is “adequately demonstrated.”

In brief, the building blocks are part of a “system of emission reduction” because that phrase, in the context in which it is used in section 111 and by its terms, is broad enough to apply to the measures in the building blocks, in light of the integrated nature of the electricity grid. Through th e integrated grid, the measur es 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 “best” system that is “adequately demonstrated” becau se they meet the criteria in section 111(a)(1) and the case law for BS ER and they are well-established.

a. “[S]ystem of emission reduction”

The EPA’s proposal that in this rulema king, the “system of emission reduction” includes the measures in building blocks 2, 3, and 4 is grounded in the EPA’s interpretation of the key CAA provisions: se ction 111(d)(1), which requires that each state plan “establish[] standards of performa nce for any existing source” for certain types

### 20 of air pollutants; and section 111(a)(1), whic h defines a “standard of performance” as “a

standard for emissions ... which reflects the degree of emission limitation achievable through the application of the best system of emission reduction ... adequately demonstrated.” As explained next, the EPA’ s interpretation may be justified under either

a Chevron step 1 or Chevron step 2 interpretation.

i. Chevron step 1 interpretation

The starting point for our analysis is th e 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 re sult, that term should be given its ordinary, everyday meaning: “a set of things worki ng together as parts of a mechanism or interconnecting network; a complex whole.” 41 

### This definition is broad. It encompasses virtually any “set of things” that reduce emissions. Moreover, no other provisions in definition of “standard of performance” incl ude any other constraints on the type of “things” that may serve as the basis for the standard for emissions. The only constraints are the qualifiers “best” and “adequately de monstrated,” but thes e do not constrain the type of “things” that could be a “system of emission reduction,” only whether a particular “thing” qualifies as the “best” “system of emission reduction” (it must be, among other things, technically feasible and of reasonabl e cost) that is “adequately demonstrated.” Thus, the “system of emission reduction” may include anything that reduces emissions, ranging from add-on controls applied to the affected sources’ smokestacks to control emissions, to measures that replace production at the affected sources and 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 constraints. As noted above, section 111(d)(1) requires that state pl ans establish “standards of performance for any existing source,” and in the preamble, we solicit comment on the interpretation of that just quoted phrase. Among other th ings, we solicit comment on whether the standards of performance must apply directly to the affect ed sources and only to the affected sources, in which case the affected s ources would bear the legal liability for the entire amount of emission reduction requireme nts; or whether, inst ead, the standards of performance may apply to other entiti es on the grounds that even under those circumstances, the standards of performan ce would still have the effect of reducing

emissions from the affected sources. Under either of those interpretations, there is nothing in that phrase that limits the type of “system of emissions reductions” 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 existing source” -- is interpreted to mean that the standards of performance must apply directly to, and only to, the affected sources, that applic ation 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 “s ystem of emission reduction” that reduces

41 

### Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreferen ce.com.mutex.gmu.edu/view/10.1093/ acref/9780199571123.001.0001/acref9780199571123

### 21 the emissions of the affected sources may serve as the basis for the standards of 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 considered

is broad.

Based on these interpretations, for existing sources in the electric utility industry, we propose that the term “system of emission reduction” is sufficiently broad to include the measures in building blocks 2, 3, and 4 because they are part of the interconnected electricity sector and result in reduced utiliz ation, and therefore re duced emissions, from the higher emitting fossil-fuel-fired 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 matter of Chevron step 1 to include the measur es in building blocks 2, 3, and 4, then the EPA’s interpretation of the term to include those measures is valid as

reasonable construction under Chevron step 2. There are several reasons for interpreting “system of emission reduc tion” this broadly.

(I). Legislative history of “standard of performance”

First, the legislative history of the de finition of “standard of performance,” including the phrase “best system of emissi on reduction ... adequately demonstrated,” 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) defined the term “standard of performance” as, in relevant part --

a standard for emissions of air po llutants which reflects the degree of emission limitation achievable through th e application of the best system

of emission reduction ... ade quately demonstrated.”

In the 1977 CAA Amendments, Congress changed this definition to require that for new sources, the standard must, in relevant part, “reflect the degree of emission limitation ... achievable through application of the best technologicalsystem of continuous emission reduction ... adequately demonstr ated;” and for existing sources, the standard must, in relevant, “reflect[] the degree of emission re duction achievable through the application of the best system of continuous emission reduction ... adequately demonstrated....” (Emphasis added.) 42 

### In the 1990 CAA Amendments, Congress again changed this definition, this time to reinstate the defi nition as found in the 1970 CAA Amendments (with some revisions not here relevant). That is, Congress repealed the requirements

42 

### The 1977 CAA Amendments also revised section 111(a)(1) to require that the standards of performance for fossil-fuel-fired sources require a percentage reduction in emissions (the “percentage reduction” requirement).

### 22 added in the 1977 CAA Amendments that the “s ystem” be, in the case of new sources, “technological.”

These amendments make clear that the “system[s] of emission reduction” upon which the section 111(d) standards of perf ormance may be based are not limited to technological systems. Even when, in th e 1977 CAA Amendments, Congress limited the systems that could provide the basis for the standards of performance for new sources to technological systems, Congre ss did not establish that limit on the systems for existing sources. Moreover, the 1977 House-Senate Co nference Committee report stated that for existing sources, the standards of performan ce were to be based on the “best available means of emission control (not necessarily technological)....” 43



### (II). Pollution prevention

In addition, interpreting th e term “system of emissi on reduction” broadly to include the building blocks is consistent with a primary purpose of the CAA, which is encouraging pollution prevention, including assu ring that states fulfill their role in developing pollution prevention measures. CAA § 101(c) states that “[a] primary goal of [the Clean Air Act] is to en courage or otherwise promote r easonable Federal, State, and local governmental actions, consistent with th e provisions of this ch apter, for pollution prevention.” CAA § 101(b)(4) adds that one of “the purposes of [title I of the CAA, which includes section 111] are ... (b) to encourage and assist the development and operation of regional air polluti on prevention and cont rol programs.” Indeed, in the U.S. Code, in which the CAA is codified as chap ter 85, the CAA is entitled, “Air Pollution Prevention and Control.” CAA § 101(a)(3) desc ribes “air pollution prevention” as “the reduction or elimination, through any measures , of the amount of pollutants produced or

created at the sour ce,” and adds: “The Congress finds -- ... (3) that air pollution prevention ... and air pollution control at its so urce 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 amount of pollutants produced or created at the [fossil- fuel-fired affected] source[s].” It is reasonable to interpret the section 111 provision s at issue in this ru lemaking in light of these section 101 provisions, and this supports the reasonableness of interpreting the broad term found in section 111(a)(1), “syste m of emission reduction,” to include the pollution prevention measures in building blocks 2, 3, and 4.

(III). Title IV

The breadth of the term, “system of em ission reduction” is further confirmed by reference to certain provisions of CAA Title IV. In Title IV, C ongress established the

43 

### “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 statement. See H. Rep. 95-294 at 195, reprinted in 1977 Legislative History, vol. 4 at 2465, 2662.

### 23 program that regulates fossil-fuel-fired power plants to reduce their emissions of the precursers to acid deposition, includ ing reducing sulfur dioxide (SO 2 

### ) emissions in two phases, and reducing nitrogen oxides (NOx) em issions. Congress enacted Title IV during the 1990 CAA Amendments, at the same time that Congress revised the definition of “standard of performance” to generally return it to its 1970-vintage reading. In certain respects, section 111 and Title IV are related because both apply to fossil-fuel fired EGUs, and the Congress recognized the rela tionship in several Title IV provisions. 44



### One contrasting provision in Title IV is section 407(b)(2), wh ich requires the EPA

to base the NOx emission 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 promulgated emission limits for certain types of boilers “to be mo re 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 li mits to the results of certain technology, and that its choice to base the section 111(d) standards of performance on a “system of

emission reduction” indicates its intent to aut horize a broader basis for those standards.

Other provisions in Title IV and their le gislative history provide further support for interpreting the term, “system of emissi on reduction” to include building blocks 2, 3, and 4. In designing Title IV, Congress recognized the integrated nature of the electricity sector and how that integration could be harn essed to reduce air po llutant emissions; and, in fact, Congress included provisions to en courage re-dispatch to lower emitting sources, renewable energy, and demand-side energy efficiency, all of which are measures in those building blocks. Specifically, Congress added in to the “purposes” provision of Title IV,

the statements that in addition to the reduc ing the adverse effects of acid deposition by reducing of SO 2 

### and NO

x 

### emissions –

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 w ith the provisions of [Title IV], for reducing air pollution and other adve rse impacts of energy production and

use....” 45

44 

### 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 requi rements added in the 1977 CAA Amendments to the section 111(a)(1) definition of “stand ard of performance” for new fossil-fu el-fired sources at least in part on the grounds that provisions of Title IV would cap SO 2 

### emissions from fossil-fuel fired EGUs, and, further, 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).

45 

### CAA §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.

### 24 Congress recognized that the very structure of Title IV – which imposed a marketable trading system under which affected sources we re 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 demand-side energy efficiency and re-dispatch by lower-emitting sources. The 1990 Senate Committee Report explained:

[T]he incentives created by the al lowance market should stimulate innovations and the technologies an d strategies used to reduce emissions.... [T]he allowance market s hould encourage sources to exploit energy efficiency , enhanced emission reduction or control technologies....; fuel-switching and least-emissions dispatching in order to maximize

emission reductions.” 46



### In addition, Congress incorporated into Title IV specific incentives to further encourage electric utilities (defined as entities that sell electricity 47 

### ) to reduce their emissions through demand-side energy efficiency a nd renewable energy: Section 404(f)-(g) provided a special reserve of allowances to be allocated to electric utilities “for each ton

of SO 2 

### emissions avoided by an electric utility ... through th e use of ... energy conservation measures or ... renewable energy.” In fact, in adop ting these provisions, Congress explicitly recognized the integrated natu re of the electricity sector: As one of the conditions for eligibility for this special reserve of allowances, the utility must “ha[ve] adopted and is implementing a least cost energy conservati on and electric power plan which evaluates a range of resour ces, including new power supplies, energy conservation, and renewable energy resources, in order to meet expected future demand at the lowest system cost.” 48



### These CAA provisions and the accompanying statements in the legislative history make clear that in enacting the Title IV provisions to reduce SO 2 

### and NO

x 

### emissions from fossil-fuel-fired EGUs, Congress viewed the electricity sector as interconnected and considered re-dispatch to lower emitting sources, renewable energy, and demand-side energy efficiency as methods to reduce those emissions. All this supports the reasonableness of the EPA’s proposed inte rpretation that the “system of emission reduction” that serves as the basis for “standards of performance” for CO 2 

### emissions from fossil-fuel-fired EGUs may include those same measures, that is, building blocks 2, 3, and 4 (re-dispatch; low- or zero-emitting ge neration, including renewables; and demandside energy efficiency, respectively.)

(IV). Other considerations

It should also be noted that a number of commentators in the private sector and academia have indicated support for interpreting the term, “system of emission reduction” to base the section 111(d) standard s of performance on measures such as re-

46 

### 1990 Senate Committee Report at 316, reprinted in 1990 Legislative History, vol. V, at 8656 (emphasis added).

47 

### CAA § 404(f)(1)(C).

48 

### CAA § 404(f)(2)(B)(iii)(I).

### 25 dispatch, renewable energy, and demand-side energy efficiency. 49 

### Some stakeholders

have as well. 50



### In addition to the just-discussed reasons why interpreting th e term, “system of

emission reduction” to include those measur es is a reasonable interpretation under the CAA, that interpretation also is reasona ble as a matter of policy, as we discuss extensively in the preamble. To reiterate brie fly, including those meas ures is consistent with the industry’s long-standing methods of operating to assure reliability at the least cost, how states have more recently reduced non-greenhouse gas air pollutants from the industry, and, how states and segments of the industry have, still mo re recently, reduced

CO 2 

### emissions.

b. “Best system of emission reduction ... adequately

demonstrated”

For the reasons described next, the measur es in each of building blocks 2, 3, and 4 qualify as components of th e “best system of emissi on reduction ... adequately demonstrated.” As noted elsewhere, the D.C. Circuit has interprete d the BSER as “[a]n adequately demonstrated system,” and explaine d that such a system is one that can “be[] shown to be reasonably reliable, reasonably efficient, and ... reasonably ... expected to serve the interests of polluti on control without becoming e xorbitantly costly in an economic or environmental way.” 51 

### In fact, the measures in the building blocks do meet the criteria established by the Court in the section 111 case law. In addition, the measures

49 

### See Nordhaus R., Gutherz I., “Regulation of CO 2 

### Emissions from Existing Power Plants Under §111(d) of the Clean Air Act: Program Design and Statutory Authority,” Environmental Law Reporter, 44: 10366, 10384 (May 2014) (“strong arguments for” interpreting “system” to include measures such as the addition of new zero-carbon generating capacity and increases in end-user energy efficien cy); 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 emissions.”); Konschnik K. , Peskoe A., “Efficiency Rules: The Case for End-Use Energy Efficiency Programs in the Section 111(d) Rule for Existing Power Plants,” Harvard Law School Environmental Law Program – Policy Initiative 4 (March 3, 2014) (EPA is authorized to “consider[] ... the entire [electricity grid] system when setting performance standards.”); Monast J., Profeta T., Pearson B., Doyle J., “Regulating Greenhouse Gas Emissions From Existing Sources: Section 111(d) and State Equivalency,” Environmental Law Reporter, 42: 10206, 10209 (March 2012) (“Demand-side energy-efficiency programs and re newable energy generation may fit within the §111 framework, however, because both reduce the utilization of power plants .... According to this reasoning, emission reductions are occurring within the source category, because of changes in generation at the power plant.”).

50 

### Ceronsky M., Carbonell T., “Section 111(d) of the Clean Air Act: The Legal Foundation for Strong, Flexible & Cost-Effective Carbon Pollution Standards for Existing Power Plants,” Environmental Defense Fund, at 9 (Oct. 2013), available athttp://www . edf .org/sites/default/files/111-clean_air_actstrong_flexible_cost-effective_ carbon_pollution_stan dards_for_existing_power_plants .pdf ; Doniger D., “Questions and Answers on the EPA’s Legal Authority to Set ‘System Based’ Carbon Pollution Standards for Existing Power Plants under Clean Air Act Section 111(d),” NRDC [Natural Resources Defense Counsel] Issue Brief (Oct. 2013); “Comments of the Attorneys General of New York, California, Massachusetts, Connecticut, Delaware, Maine, Maryland, New Mexico, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia on the Design of a Program to Reduce Carbon Pollution from Existing Power Plants (Dec. 16, 2013).

51 

### Essex Chemical Corp. v. Ruckelshaus , 486 F.2d at 427.

### 26 are “adequately demonstrated” because they have already been implemented in many states, and because they may be undertaken by the affected EGUs in the regulated markets in which they operate, or may be im plemented by the states in the state plans.

i. Criteria for BSER

First, the measures in those building bloc ks are technically feasible, as described in the preamble. To reiterate briefly, bu ilding block 2, which entails substituting generation at higher emitting units (fossil-fuel-fired steam generating units) by shifting to generation at lower-emitting sources (existing NGCC units) is technically feasible

because the NGCC units are alr eady providing electricity to th e grid and have sufficient capacity to generate the add itional amount of electricity that would substitute for the generation at fossil-fuel-fired steam generating units. Re-dispa tch is already widely used (usually more in response to fuel pric e signals than as a GHG mitigation measure), including by companies that own both coal- and natural-gas-fired EGUs. It should be

noted that there are several mechanisms thr ough which states could cause re-dispatch to occur. First, a state could use its permitt ing authority to impose limits on the hours of operation (or emissions) of individual steam generating units over a given time period. Second, a state could change th e relative costs of generation for more carbon-intensive and less carbon-intensive generating units by imposing a cost on carbon emissions. A state could do so through any of several market-based mechanisms. One would be to adopt an allowance-based system. An example is the Regional Greenhouse Gas Initiative, an allowance-based system in which sources purchase allowances in periodic auctions. Another way would be through a tradable em ission rate system, under which the state would impose an emission rate on the steam generating unit that the unit could meet only by purchasing the right to average its emission ra te with a unit with a lower rate, such as an NGCC unit. Most broadly, an allowance sy stem would provide the greatest incentive

for the most carbon-intensive affected sources to reduce emissions as much as possible so as to reduce their need to purchase allowa nces (or to allow them to sell un-needed allowances), and the same would be true for a tradable emission rate system.

As discussed in the preamble, building block 3, which entails new low- and zeroemitting energy as well as preservation of nuclear capacity that might otherwise be retired, is also technically feasible. Th e technology for renewable energy is wellestablished and in use now, and the amount of renewable energy contemplated by 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 under construction, has long been known to grid operators for planni ng purposes. The measures in building block 3 may be implemented in different ways, incl uding market mechanisms. In particular, a market for renewable energy certificates, wh ich facilitates investment in renewable energy, is already well-establi shed. In addition, as noted above with re-dispatch, an allowance system or tradable emission rate system would provide incentives for sources to reduce their emissions as much as possi ble, including by substituting their generation with generation from renewable energy.

### 27 As for building block 4, as discussed in the preamble, numerous state and utility programs have demonstrated that improveme nts 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 th at promote the measures in building block 4 in the same manner as ju st discussed for other building blocks.

For the reasons discussed in the preamble , building blocks 2, 3, and 4 also meet the remaining criteria to qualify as the BSER. The level of CO 2 

### emissions reduction they achieve is significant, which is appropriate b ecause of the severity of the risk to public

health and the environment of climate cha nge, and the magnitude of both the amount of

emissions reductions needed and the amount of CO 2 

### emissions from fossil-fuel-fired power plants. In addition, the proposed levels of reduced generation are not unreasonably costly for the affected source category or th e nation-wide electricity system, they do not have adverse effects on the overall energy sy stem (to the contrar y, they improve it by reducing its carbon intensity), and they prom ote the development and implementation of technology that is important for continued emissions reductions.

ii. Basis for “adequately demonstrated” finding

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 electricity system, they have long been relied on to reduc e costs in general, a ssure reliability, and implement pre-existing pollution control requirem ents in the least cost manner. As also noted in the preamble, some utilities, states and regions are already relying on these measures for the specific purpose of reducing CO 2 

### emissions from EGUs.

At the same time, as discussed in the pr eamble, measures in building blocks 2, 3, and 4 may be undertaken by the affected EGUs themselves, which confirms that these measures are “adequately demonstrated.” To achieve the re-dis patch described in building block 2, operators of the affected fossil-fuel-fired steam-generating EGUs may reduce generation, while operators of the a ffected NGCC units may increase generation to replace that avoided at higher-emitting facilit ies. Operators of the affected EGUs may invest in, or otherwise ac quire power from, the new lo w- or zero-carbon intensive generation described in building block 3, as well as in many of the demand-side energy efficiency measures descri bed 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 integrat ed, and not only own the EGUs, but often also own renewable energy re sources and provide se rvice directly to retail customers. Operators of EGUs, in those circumstances, are well-positioned to undertake the measures in building blocks 3 a nd 4. In fact, as noted in the preamble, numerous states have already imposed rene wable portfolio standards and demand-side energy efficiency requirements on those utili ties. As a result, as also noted in the preamble, many companies have already developed integrated resource plans that include re-dispatch from higher-emitting fossil-fuel-fired generation to lower-emitting

### 28 generation, the purchase of renewable capac ity or the development of renewable generation assets, and the implementation of demand-side energy e fficiency measures. 52



### Other states have de-regulat ed their electricity markets 53 

### and as a result, in some instances, the EGUs in those states are merc hant generators that sell to the wholesale electricity market. The EPA believes that markets for acquiring renewable energy resources and for delivering demand-side ener gy efficiency services are sufficiently welldeveloped that operators of these EGUs c ould undertake or acquire those measures as well. For example, merchant generators can invest in NGCC capacity, invest in renewable capacity or purchase renewable energy or renewable energy certificates (representations that a certai n amount of energy was produced from renewable sources), as well as purchase demand-side energy efficiency services from energy service companies. The fact that the affected sources may themselves implement or invest in the measures in building blocks 2, 3, and 4 -- wh ich, again, reduce their emissions -- supports treating those measures as components of the BSER.

Another reason that the measures in building blocks 2, 3, and 4 should be considered “adequately demonstrated” – and wholly apart from the fact that the EGUs may undertake those measures themselves – is based on the fact that CAA section 111(d)(1)(A) provides, by its terms, that the standards of performance that are based on the BSER must be established by the states in state plans. As a result, emissions reduction

measures that the states themselves have the authority under state la w to put in place may be considered to be part of the BSER. Wh ile EGU owners and operators may effectuate such measures directly or indi rectly, the states also have au thority to enact measures such as re-dispatch requirements, renewable portfo lio standards that require investment in renewable energy resources, as well as demand-side energy efficiency measures. 54 

### As noted in the preamble, many st ates have already done so. 55



### Finally, we note that during the public out reach sessions, stakeholders generally recommended that state plans be authorized to rely on, a nd that affected sources be authorized to implement, re-dispatch, renewable energy measures and demand-side

52 

### Moreover, in many de-regulated st ates, forward capacity auctions are used to ensure the ability to meet future demand, and generators may bid into those auctions based on all of their resource portfolio, including renewable energy assets and demand-side energy efficiency projects. This has encouraged generators to undertake the measures in building blocks 3 and 4.

53 

### Some states, such as Ohio, have hybrid model that includes elements of a regulated market and a deregulated market.

54 

### It should be noted that under the portfolio appro ach to the state plan, discussed in the preamble, the entities that undertake some of the measures in, for example, building block 4 may not be the affected EGUs. Regardless of which entities undertake the measures in the building blocks, those measures have the effect of reducing CO 2 

### emissions from fossil-fuel-fired EGUs, and therefore each of the building blocks remains part of a “system” of emission reduction for those EGUs.

55 

### More than half the states have established renewable portfolio standards (RPS) that require minimum proportions of electricity sales to be supplied with generation from renewable generating resources. More than 20 states have energy efficiency resource standa rds (EERS) that require utilitie s to effectuate a certain amount of savings in electricity demand each year or cumulatively. Database of State Incentives for Renewables & Efficiency (DSIRE), http://www.d sireusa.org/summarymaps/index.cfm?ee=0&RE=0.

### 29 energy efficiency measures, in order to meet the states’ and sour ces’ emissions reduction obligations. The EPA agrees that state plan s may include these measures, at least under certain circumstances, discussed in the preambl e, and that sources may rely on them to achieve required reductions. It is clear th at these types of measures are well-accepted by

the stakeholders as means to reduce emissions from affected sources. The fact that state plans and sources would be expected to use th ese types of measures to reduce emissions supports the view that these measures are pa rt of a “system of emission reduction” for those sources that the EPA may evaluate ag ainst the appropriate criteria to determine whether they comprise the “best system of emission reduction ... adequately

demonstrated.”

c. Stakeholder concerns

As noted above, some stakeholders have argued that section 1 11(a)(1) authorizes the EPA to identify re-dispatch, low- or zero-emitting generation, and demand-side energy efficiency measures (building blocks 2, 3, and 4) as com ponents of the “best system of emission reduction ... adequately de monstrated.” However, other stakeholders have disagreed that this appr oach is consistent with CAA §111(d). According to these latter stakeholders, as a legal matter, the BSER is limited to measures that may be undertaken at the affected units, and not meas ures that are beyond th e affected units; the measures in building blocks 2, 3, and 4 are “beyond-the-unit” measures because they are implemented outside of the affected units and outside their control; and as a result, those

measures cannot be consider ed components of the BSER. 56



### We welcome comment on this issue. As discussed above, we propose that the provisions of section 111 do not by their te rms preclude the BSER from including those types of measures. In addition, as discusse d above, under our proposed approach, affected sources may themselves implement the measur es 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. 57 

### It should also be noted that, as discussed above, the re-

56 

### “Response of the Utility Air Regulatory Group to EP A’s ‘Considerations in the Design of a Program to Reduce Carbon Pollution from Existing Power Plants” (Oct. 2013), “Existing Source Performance Standards for Greenhouse Gas Emissions from Electrical Generating Units: Creating a Regulatory Framework Under Clean Air Act § 111(d) – A whitepaper from the Coalition for Innovative Climate Solutions” (Feb. 26, 2014).

57 

### Commenters have critiqued this “at-the-unit” and beyond-the-unit” distinction as follows:

There is an argument that the at-the-unit/beyond-the-unit distinction is not a meaningful one. Specifically, it could be argued that the distinction between at-the-unit and beyond-the-unit measur es is largely artificial, because

all of the emission reductions under consideration—whether from at-the-unit measures (e.g., fuel-switching or effi ciency upgrades) or from beyond-theunit 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

### 30 dispatch measures in building block 2 are li mited to affected sources. Thus, the proposed approach and alternative described above respond to these stak eholder concerns.

5. Reduced utilization approach

The EPA is also proposing an alternative approach to BSER, which identifies a component of the “system of emission reducti on” as reduced utiliz ation in specified amounts of the higher-emitting fossil-fuel-fired EGUs. For the reasons discussed below, reduced generation in the specified amounts is a “system of emission reduction,” and it is the “best” that is “adequately demonstrated” because it meets the criteria for the BSER

and it is a well-established method of pollution control.

a. “[S]ystem of emission reduction”

The phrase “system of emission reduction” may be interpreted to include reduced generation in the specified amounts as a matter of Chevron step 1. The phrase applies by its terms because reduced generation is an action or a set of ac tions – which include reduced use of generating equipment and redu ced fuel input – that the affected source may take to reduce its CO 2 

### emissions.

If the phrase “system of emission reduction” is not considered clear by its terms, then it may reasonably be interpreted under Chevron step 2 to include reduced generation. The legislative hi story supports this interpreta tion. Beginning with the 1970 CAA Amendments, Congress has recognized that SIPs under CAA §110, in order to assure reductions in NAAQS pollutants to m eet attainment requirements, may need to impose emission limits on industrial sources that those sources could meet only by retiring. 58 

### Similarly, in adopting CAA §112, whic h directed the EPA to promulgate

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 at-the-unit measures that ultimately reduce emissions solely from regulated EGUs. If energy-efficiency programs, added renewable energy, and redispatch from higher emitting facilities to lower emitting facilities are viewed as at-the-unit systems of emission reduction, the at-the-unit/ beyond-the-unit distinction arguably becomes irrelevant—at least from a legal perspective. Rather, the real issue may come down to whether §111(d) authorizes EPA to require EGUs to curtail their output of electricity as a means of complying with the rule.

Nordhaus R., Gutherz I., “Regulation of CO 2 

### Emissions from Existing Power Plants Under §111(d) of the Clean Air Act: Program Design and Statutory Authority,” Environmental Law Reporter, 44: 10366, 10383 n. 133 (May 2014).

58 

### See CAA §110(g) (authorizing temporary emergency suspensions of SIP revisions if needed to prevent the closing of a source of air po llution), enacted as CAA §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. Muskie) (discussing cr iteria for sources to recei ve compliance date extensi ons). Similarly, Congress recognized that to achiev e the NAAQS, it was necessary to reduce em issions from motor vehicles, and that an important method of doing so could be restricting the use of motor vehicles in urban areas that were

### 31 emission standards for sources of hazardous air pollutants (HAPs) to a level of stringency that provides an “ample margin of sa fety to protect the public health,” 59 

### Congress was

clear that the standards could be sufficientl y stringent so that “effectively, ... a plant would be required to close because of the absence of control techniques.” 60 

### As noted above, Congress adopted CAA §111(d) to addres s air pollutants from existing stationary

sources that were neither NAA QS pollutants nor HAPs, but that EPA might eventually regulate as either NAAQS pollu tants or HAPs. Because Congr ess intended that sources of NAAQS pollutants and HAPs might have to restrict producti on or even retire to meet their emission limits, it is reasonable to cons ider that Congress in tended the same for sources of air pollutants regulat ed under section 111(d). As a result, it is reasonable to interpret the term “system of emission reduction,” which C ongress mandated as the basis for controls on §111(d) air pollutants, to include reduced production.

Other examples of reduced utilization as a means of reducing emissions to comply with CAA requirements are found in settleme nt agreements between the EPA and fossilfuel-fired EGUs to resolve alleged violat ions of the CAA new source review (NSR) requirements. These agreements typically allow the EGUs to choose one of several means to comply with their emission re duction obligations, in cluding retiring units. 61



### Similarly, fossil-fuel-fired EGUs have em ployed reduced generation as one of the options to comply with other CAA require ments, including Title IV and CAA §110 SIP requirements implementing the Clean Air Interstate Rule (CAIR), 62



### b. “[B]est system of emissi on reduction ... adequately

demonstrated”

Reduced generation from the higher-emitting EGUs in the indicated amounts is the “best system of emission reduction ... adequately demonstrated” because it is technically feasible due to the source’s abil ity to limit its own operations; and the amount (i) may be substituted with the building block 2, 3, and 4 measures for increased generation from low- or zero-emitting sources and increased demand-side energy efficiency; and (ii) may be accomplished in a manner that assures the reliability of the electricity grid.

already highly polluted. For this reason, Congress included in the 1970 CAA Amendments authorization for SIPs under section 110 to include “transportation controls.” CAA §110(a)(2)(B), as approved in the 1970 CAA Amendments. Sen. Edmund S. Muskie (D-M E), who led the proponents for the Amendments in the Senate, explained 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).

59 

### CAA §112(b)(1)(B), as approved in the 1970 CAA Amendments.

60 

### 116 Cong. Rec. 42385 (Dec. 18, 1970), reprinted in 1970 Legislative History, vol. 1, at 133 (statement of Sen. Muskie). Sen. Muskie added that the emission standards set 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 result in reduced production.

61 

### 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/f iles/documents/wisconsinpower-cd.pdf [correct cite]

62 

### 70 Fed. Reg. 25,162 (May 12, 2005).

### 32 Specifically, the amount of emission re duction achieved is appropriate, as discussed above. In addition, th e cost of the proposed leve ls of reduced generation are reasonable for the affected source category a nd the nation-wide electricity system and do not jeopardize reliability. Further, reduced generation from the higher-emitting EGUs promotes the development and implementa tion of technology that is important for continued emissions reductions by increasing the demand for that technology. This is

because of the interconnected nature of the electrical grid and the fungibility of electricity, which allows decreases in utilizati on at one facility to be seamlessly offset by increased utilization elsewhere (building blocks 2 and 3) or by decreased demand (building block 4), and thereby makes reduced utilization a viable a pproach for emissions reductions by EGUs.

As noted above, the measures in building bloc ks 2, 3, and 4 are alrea dy in widespread use in the industry. At the levels in the propos al, they have the te chnical capability to

substitute for the affected un its’ reduced utilizati on at reasonable co st. Moreover, it is reasonable to expect that they will develop at the level requisite to ensure an adequate and reliable supply of electri city. There are two reasons fo r this. First, the affected

sources themselves could i nvest in new renewable ener gy resources and demand-side energy efficiency, as discussed above. 63 

### Second, the states, as part of their plans, have mechanisms available to put these substitutes in place: They could establish requirements

or incentives that would result in ne w renewable energy and demand-side energy efficiency programs, as also discussed above.

In addition, in this rulemaking, as de scribed in the preamble, the EPA is determining the BSER in a manner that is consistent with, and that provides further impetus for, current trends in the nation’s el ectricity system that offer promise to reduce the carbon intensity of the system over th e near- and long-term, while maintaining reliability and affordability. This approach is consistent with the case law, which authorizes the EPA to determine BSER by “b alanc[ing] long-term national and regional impacts,” and by “using a long-term lens with a broad focus on future costs, environmental and energy effects of different technological systems....” 64



### 7. Re-dispatch and sources in the regulated source categories.

As described in the preamble, buildi ng block 2 consists of reductions in generation from fossil-fuel-fired steam gene rating boilers, and corre sponding increases in generation by NGCC units. The amount of this re-dispatch is the amount that the steam generating boilers may reduce, and that NGCC units may increase, up to an average of 70% capacity utilizati on of the NGCC units.

63 

### It should be noted that in light of the low current an d projected near term prices for natural gas, market forces may lead investors to choose to build new NGCC units, rather than new renewable resources. This result would not call into question the technical feasib ility of a BSER that included reductions in fossilfuel-fired generation by the amount of a specified amount of new renewable resources. This is because under these circumstances, the fossil-fuel-fired gene rators could still reduce their generation without causing reliability or other problems in the electric power system.

64 

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

### 33 Accordingly, this component of BSER invol ves two sets of sources. The first (the steam generating boilers) decreases its em issions. The second (the lower-emitting NGCC units) may increase its emissions if increased operations are necessary to ensure the ongoing reliability of the integrat ed electricity system, of wh ich both sets of source are a part, as emissions and generation reduction is occurring at steam generating boilers and net reductions are being achie ved. Both these sets of sources are affected sources because they are in source categories that ar e covered by this rulemaking. As noted in the preamble, the fossil-fuel-fired steam generati ng boilers are in a s ource 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 boilers) are subject to reduc tion requirements through othe r components of the BSER, specifically, building blocks 3 and 4 (low- and zero-emitting energy and demand-side energy efficiency, respectively) . In addition, as noted in the preamble, the EPA is coproposing to combine the two source categorie s into a single sour ce category, covering

fossil-fuel-fired EGUs.

8. Re-dispatch: intra-state an d inter-state compliance

In this section, we discus s the issue of whether CAA section 111(d) limits the EPA to applying the re-dispatch component (b uilding block 2) of the BSER, based on the assumption that each state will comply with th at component on a purel y intra-state basis, or instead, whether the EPA c ould base building block 2 on an assumption that the states will comply with that component through the in terstate region with which they share the grid.

As the preamble describes, in evaluati ng building block 2, we have assumed that each state would implement it on a state-by-sta te basis, without relying on a multi-state regional grid. In particular, we have assu med that each state would increase generation

of its own NGCC units to as close to an av erage 70% capacity util ization as possible, given the amount of generation from in-state fossil-fuel-fired steam generating boilers, and we assumed the corresponding amount of reduction in generati on from those steam generators. We have determined the costs of that re-dispatch, a nd propose to find that they are reasonable. 65 

### Because we know that dispatch systems operate over multi-state regions, however, we have also determined the co sts 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.

We found that based on the intra-state appr oach, some states could not increase their average NGCC unit utilizat ion to 70% because they have limited fossil-fired boiler steam generation. In contrast, based on the region-wide approach, more of the states could increase their average NG CC utilization to 70%. In ad dition, the costs of the intrastate approach are demonstrably higher than the costs of the region- wide approach. In fact, we expect that because all of the lowe r-48 states, with the exception of Texas, are

65 

### It should be noted that we also evaluated regi on-wide re-dispatch, for which the costs are less.

### 34 part of a multi-state, regional grid each state’s implementa tion of building block 2 would, as a practical matter, necessarily occur on an interstate, and not an intrastate, basis.

CAA section 111(d)(1), by its terms, app lies requirements on a state-by-state basis. It requires that “each State shall subm it to the Administrator a plan” that includes standards of performance as well as impleme nting and enforcing measures. Further, it allows “the State in applying a standard of performance to any particular source under a [state] plan” to take into consideration factor s such as the source’s remaining useful life.

These provisions raise the issue of whethe r section 111(d) may be interpreted so that the re-dispatch component of BSER may be applied on the assumption that each state would implement that component on a purely in tra-state basis, or whether section 111(d) may be interpreted so that the re-dispatc h component may be applied on the assumption that each state would implement through the ope ration of the interstate grid in which it participates. This issue may also apply to building blocks 3 and 4.

VII. State plans – content

This section discusses various asp ects of the content of state plans.

A. Types of measures – state flexibilities

As discussed above, under CAA section 111(a)( 1), determining the BSER is part of the methodology by which the EPA determines the amount of emissions reduction that the state plans must achieve. Under section 111(d)(1), each state plan must include standards of performance that achieve its requisite emissions performance level. However, the state enjoys broad discretion in determining the standards of performance,

at least under certain ci rcumstances, as discussed below. Moreover, if a state wishes, it may require in its section 111(d) state plan particular measures that sources must implement, in order to achiev e the reductions necessary for the state to meet its emission performance level. These state plan measures are not limited to the measures that the EPA identifies as part of the BSER. Similarl y, affected sources that are subject to the state plan may meet their requirements through any measure they choose, as long as that measure is consistent with the plan’s requi rements, and these sources are not limited to using measures identified as part of the BSER.

For example, as the preamble explains, in this rulemaking, the EPA is not identifying carbon capture and storage (CCS) as a component of BSER. Even so, a state

could elect to include in its plan a requirement that a coal-fired EGU achieve an emission limit consistent with CCS, or even that the EGU implement CCS. By the same token, if the state plan simply imposes an emissions limit on the source, the s ource could elect to achieve that limit through CCS.

B. Design, equipment, work prac tice, or operational standards

### 35 In this section, we discus s whether section 111(d) state plans may include design, equipment, work practice, or operational standards.

CAA section 111(h)(1) authorizes the Ad ministrator to promulgate “a design, equipment, work practice, or operational standa rd, or combination thereof,” if in his or her judgment, “it is not feasib le to prescribe or enforce a standard of performance.” Section 111(h)(2) provides the circumstances under which prescribing or enforcing a standard of performance is “not feasible ”: Generally, when the pollutant cannot be emitted through a conveyance designed to emit or capture the pollutant, or when there is no practicable measurement methodology for the particular class of sources. Other provisions in section 111(h) fu rther provide that a design, eq uipment, work practice, or operational standard (i) must “be promulgated in the form of a standard of performance whenever it becomes feasible” to do so, 66 

### and (ii) must “be trea ted as a standard of performance” for purposes of, in general, the CAA. 67



### As noted above, section 111(d) requires th at state plans “establish[] standards of performance” as well as “provide[] for the implementation and enforcement of such standards of performance.” Section 111(d) is silent as to whether (i) states may include design, equipment, work practice, or operational standards, or (ii) they may include those types of standards, but only under the limited circumstances described in section 111(h) (i.e., when it is “not feasible” to prescrib e or enforce a standard of performance). Similarly, section 111(h) applies by its terms when the Administrator is authorized to prescribe standards of performance (which would include rulemaki ng under CAA section 111(b)), but is silent as to whether it a pplies to state plans un der CAA section 111(d). 68



### We invite consideration of the proper interpretati on of CAA §§111(d) and (h),

under either Chevron step 1 and step 2, specifically: (i) Do the provisions of section 111(d) preclude state plans from including “design, equipment, work practice, or operational standard[s]” unless those thi ngs may be considered “standards of performance” or as providing for the implemen tation and enforcement of such standards? As a related matter, do the references to “s tandard[s] of performance” in section 111(h) indicate that design, equipment, work pract ice, or operational st andards may not be considered “standards of perfor mance?” (ii) Alternatively, ar e state plans authorized to include those design, equipment, work practic e, or operational sta ndards, but only under

the limited circumstances described in secti on 111(h) relating to infeasibility? (iii) As another alternative, are state plans author ized to include design, equipment, work practice, or operational standard s under all circumstances, so that the limits of section 111(h) do not apply? Finally, to the extent th ere is legal uncertain ty over whether, and under what circumstances, state plans may include those standards, should the EPA authorize state plans to include them, on the understanding that if the Court invalidates, state plans would be required to be revised accordingly without further rulemaking from

the EPA?

66 

### CAA section 111(h)(4).

67 

### CAA section 111(h)(5).

68 

### It should be noted that section 111(b)(5), which concerns controls promulgated by the Administrator for new and modified sources, does refer to section 111(h).

### 36 C. Emissions averaging and trading

In this section, we discuss why CAA section 111(d) state plans may include standards of performance that author ize emissions averag ing and trading.

Section 111(d) authorizes state plans to include “standards of performance” and measures that implement and enforce those st andards of performance. Section 111(a)(1) defines a “standard of performance” as “a sta ndard for emissions of air pollutants which reflects the degree of emission limitation achie vable through the appl ication of the best system of emission reduction ... adequately dem onstrated.” Section 302 contains a set of definitions that apply “[w]hen used in [the Clean Air Act],” including subsection (l), which provides a separate definition of “sta ndard of performance” as “a requirement of

continuous emission reduction....”

The EPA proposes that the definition of “standard of performance” is broad enough to incorporate emissions averaging and trading provisions, including both emissions rate programs, in which sources may average or trade those rates; and mass emission limit programs, in which sources may buy and sell mass emission allowances (and, under certain circumstances, offsets). 69 

### The term “standard” in the phrase “standard for emissions of air pollutants” is not defined in the CAA. As the Supreme Court noted in a Clean Air Act case, a “standard” is simply “that which ‘is established by authority, custom, or general consent, as a m odel or example; criterion; test.’” Engine Mfrs. Ass’n v. South Coast Air Qua lity Magmt. Dist. , 541 U.S. 246, 252-53 (2004) (quoting Webster’s Second International Dictionary , at 2455 (1945)). A tradable emission rate or a tradable

mass limit is a “standard for emissions of air pollutants” because it establishes an emissions limit for a source’s air pollutants, a nd as a result, qualifie s as a “criterion” or “test” for those air pollu tants. In addition, a tradable rate or mass limit may “reflect[] the degree of emission limit achievable through th e application of the best system of emission reduction” because it may be set at a level that assures that emissions will not exceed the amount that would result from app lication of the best system of emission

reduction.

Moreover, although there may be doubt th at the definition of “standard of performance” in section 302(l) applies to sec tion 111(d) in light of the fact that the definition of the same term in section 111(a )(1) is more specific, even if the section 302(l) definition does apply, an averaging or trading requirement qualifies as a

“continuous emission reduction” b ecause, in the case of a trad eable emission rate, the rate is applicable at all times, and, in the case of a tradeable mass limit, the source is always under the obligation that its emissions be covered by allowances.

69 

### Typically, in a mass emission limit trading program, sources are required to obtain an allowance for each measure (e.g., ton) of air pollutant they emit. The acid rain program under Title IV of the CAA is an example of this type of trading program.

### 37 It should be noted that the EPA ha s promulgated two other section 111(d) rulemakings that authorized state plans to include emissions averaging or trading. 70



### VIII. Ongoing applicability of section 111(d) state plan

[NOTE TO INTERAGENCY REVIEWERS: We in tend to move this section to the preamble.]

The EPA is proposing that an existi ng source that becomes subject to requirements under CAA section 111(d) will con tinue to be subject to those requirements

even after it undertakes a m odification or reconstruction. Under this interpretation, a

modified or reconstructed source would be subject to both (1) the section 111(d) requirements that it had previously been s ubject to and (2) the modified source or reconstructed source standard being promul gated under 111(b) simultaneously with this rulemaking.

As noted above, a “new source” is de fined under section 111(a)(2) as “any stationary source, the constr uction or modification of whic h is commenced after,” in general, a proposed or final se ction 111(b) rule becomes app licable to that source; and under section 111(a)(6), an “existing source” is defined as “any stationary source other

than a new source.” Under these defini tions, an “existing source” that commences

construction of a modification or reconstruction after the EP A has proposed or finalized a section 111(b) standard of performance appl icable to it, become s a “new source.” However, section 111(d) is silent on whet her requirements imposed under a section 111(d) plan continue for a source that ceases to be an existing sour ce because it modifies or reconstructs. For example, section 111(d) pr ovides that the state plans will “establish[] standards of performance for any existi ng source” but does not say whether, once a standard of performance is established for a gi ven source, that standa rd is lifted if the source ceases to be an existing source. Si milarly, no other provisions of section 111 address whether the imposition of a sect ion 111(b) standard on a modified or reconstructed source ends the source’s obliga tion to meet any app licable section 111(d) requirements.

Because section 111(d) does not address whet her an existing sour ce that is subject to a 111(d) program remains subject that prog ram even after it modifies or reconstructs, the EPA has authority to provide a reasona ble interpretation, under the Supreme Court’s

decision in Chevron U.S.A. Inc. v NRDC , 467 U.S. 837, 842-844 (1984). The EPA’s interpretation is that under these circumstan ces, the source remains subject to the section 111(d) plan, for two reasons. The first is to assure the integrity of the section 111(d) plan. The EPA believes that many States will de velop integrated plans that include all of

70 

### See “Standards of Performance for New and Exis ting Stationary Sources: Electric Utility Steam Generating Units, Final Rule,” 70 Fed. Reg. 28,606 (May 18, 2005) [also known as the Clean Air Mercury Rule, or “CAMR”], 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 Sources and Emission Guidelines for Existing Sources; Municipal Waste Combustors,” 60 Fed. Reg. 65,387 (Dec. 19, 1995).

### 38 their EGUs, such as rate- or mass-based tr ading programs. Uncer tainty about whether units would remain in the program could be very disruptive to the operation of the program. The second reason is to avoid creati ng incentives for sources to seek to avoid their obligations under a section 111(d) plan by undertaking modifications. The EPA is concerned that owners or operators of un its might have incentives to modify purely because of potential discrepa ncies in the stringency of th e two programs, which would undermine the emission reduction goals of section 111(d). The EPA invites comments on this interpretation, incl uding whether this inte rpretation is supported by the statutory text and whether this interpretation is sensible policy and will further the goals of the statute.1 Leg-Mem_15-18-14_red-line-from-OMB Legal Memorandum for Proposed Carbon Pollution Guidelines for Existing Power

Plants

Introduction

This memorandum provides background for, and further discussion of, legal issues raised in the proposed rule, “Carbon Pollution Guidelines for Existing Power Plants: Emission Guidelines for Greenhouse Gas Emissions from Existing Stationary Sources: Electric Utility Generating Units.” This memorandum is intended to be read in conjunction with, and assumes familiarity with, the preamble for this proposed rule.

I. Background

A. Clean Air Ac t section 111

Clean Air Act (CAA) section 111, which Congress enacted as part of the 1970 CAA Amendments, establishes mechanisms for controlling emissions of air pollutants from stationary sources. This provision require s EPA to promulgate a list of categories of stationary sources that the Administrator, in his or her judgment, finds “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.” 1 EPA has listed more than 60 stationary source categories under this provision. 2 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 categories. 3 These standards are known as new source standards of performance (NSPS) , and they are national requirements that apply directly to the sources subject to them.

When the EPA establishes NSPS for new sources in a particular source category, the EPA is also required, 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 for the national ambient air quality standards (NAAQS) or regulated under the CAA section 112 requirements for hazardous air pollutants (HAP). In contrast with CAA section 111(b), which provides for direct federa l regulation of new sources, CAA section 111(d)’s mechanism for regulating existing sources differs from the one that CAA section 111(b) provides for new sources because section 111(d) provides that states will submit plans that establish “standards of performance” for the affected sources and that contain other measures to implement and enforce those standards.

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 emission reduction,” considering costs and other

1 CAA §111(b)(1)(A).

2 See 40 CFR 60 subparts Cb – OOOO.

3 CAA §111(b)(1)(B), 111(a)(1). Formatted: Font: 10 pt, Complex Script Font: 10 pt

Formatted: Font: 10 pt, Complex Script Font: 10 pt2 factors, that “the Administrator determines has been adequately demonstrated.” CAA section 302(l) also defines “standard of pe rformance” as “a requi rement of continuous emission reduction, including any requirement relating to the operation or maintenance of

a source to assure continuous emission 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 apply that best system to determine the appropriate amount of emission reductionrequired level of

emissions or emission reduction , which the regulations refer to as the “emissions guideline.” 4 Under section 111(d)(1), the states must then adopt state plans that establish standards of performance and measures that implement and enforce those standards. In the case of an air pollutant that EPA has determined may cause or contribute to endangerment of public health, the states’ standards of performance must not be less stringent tha nt the EPA’s emission guideline. 5 CAA section 111(d)(1) grants states the authority, in applying a standard of performa nce to particular sources, 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 st ate plan if it is “satisfactory.” 6 If a state does not submit a plan, the EPA must establish a federal plan for that state. 7 Once a state receives the EPA’s approval for its plan, the provisions in the plan become federally enforceable against the entity responsible for noncompliance, in the same manner as the provisions of an approved state implementation plan (SIP) under CAA section 110. In the case of a tribe that has one or more affected EGUs on its lands, 8 the tribe would have the opportunity, but not the obligation, to establish a CO 2 performance standard and a plan

for its tribal lands.

B. Legislative history

Congress adopted CAA section 111 in The legislative history of the 1970 Clean

Air Act Amendments indicates that at that time, Congress grouped air pollutants from existing stationary sources into three catego ries: (i) Air pollutants that affected the National Ambient Air Quality Standards (N AAQS), which would be regulated under CAA §110 state implementation plans (SIPs), (ii) hazardous air pollutants (HAPs), which would be regulated under EPA-promulgated national emission sta ndards pursuant to CAA §112, and (iii) all 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 proposed to require the EPA to promulgate national emission standards pursuant to proposed CAA §114. At that time, Congress defined “standard of performance,” under §111(a)(1), as—

4 40 CFR 60.22(b)(5).

5 40 CFR 60.24(c).

6 CAA section 111(d)(2)(A).

7 Id

. 8 The EPA is aware of at least three affected sources located in Indian Country located in Indian Country, two on [Navajo] lands – the Navajo Generating Stat ion and the Four Corners Generating Station – and one on [Ute] lands – the Bonanza Generating Station. All three are coal-fired EGUs.3 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.

Section 111(d) was added during tT he 1970 House-Senate Conference Committee that

was formed to resolve differences between the House and Senate versions of the CAA

Amendments did not adopt the Senate bill’s pr oposed CAA section 114, but did adopt section 111(d), which covers the same non-NAAQS, non-HAPs air pollutants

. Under section 111(d)(1) as included in the 1970 CA A Amendments, the states were required to submit to the EPA state plans that “establish[] emission standards” for their existing sources. Although Tt he legislative histor y of the 1970 CAA Amendments does not contain statements that directly discuss the specific provisions included in section 111(d), the legislative history of the Senate bill’s pr oposed section 114 is relevant to meaning of section 111(d), and we refer to parts of that legislative history below.

although the legislative history does discuss, among other things, the meaning of the term “standard of performance.” 9 For new sources, section 111(b) (1)(B) required the EPA to promulgate “standards of performance,” and defined that term, und er 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.

although the The legislative history does discuss es , among other things, the meaning of the term “standard of performance

, .” 10 which we refer to below.

In the 1977 CAA Amendments, Congress ma de several changes to section 111, including section 111(d). Among other things, Congress substituted “standards of performance” for “emission standards,” which, as noted above, the states are required to establish in their state plans. In addition, Congress added to section 111(d)(1) the requirement that the EPA’s regulations “permit the State in applying a standard of performance to any particular source under a [section 111(d)] plan ... to take into consideration, among other factors, the remain ing useful life of the existing source to which such standards applies.” Congress adde d to section 111(d)(2) a similar requirement applicable to federal plans. In addition, Congress revised the definition of “standard of performance” in section 111(a)(1) to distinguish among different types of sources, and to require that for fossil fuel-fired sources, the standard (i) be based on, in lieu of the “best system of emission reduction ... adequately demonstrated,” the “best technological

9 See, e.g ., Senate Comm. Rep. No. 91-1196 at 16.

10 See, e.g ., Senate Comm. Rep. No. 91-1196 at 16. Formatted: Indent: Before: 0.5", After: 0.5"

Formatted: Indent: First line: 0"

Formatted: Indent: Before: 0.5", After: 0.5"4 system of continuous emission reduction ... ad equately demonstrated;” and (ii) require a percentage reduction in emissions. In addition, in the 1977 CAA Amendments, Congress expanded the parenthetical requirement that the Administrator consider the cost of achieving the reduction to also require the Administrator to consider “any nonair quality health and environment impact and energy requirements.” Congress also added the definition of “standard of performance” in section 302(l), which defines the term to require a “continuous emission reduction.”

In the 1990 CAA Amendments, Congress made further amendments to section 111, including section 111(d). Among other th ings, Congress again re vised the definition of “standard of performance” under CAA section 111(a)(1), this time repealing the requirements that the standard of performance be based on the best technological system and achieve a percentage reduction in emission s, and replacing those provisions with the terms used in the 1970 CAA Amendments’ version of §111(a)(1) that the standard of performance be based on the “best system of emission reduction ... adequately demonstrated.” In addition, in section 111( d)(1)(A)(i), Congress revised the description of which air pollutants are subject to secti on 111(d) but, as discussed below, left the provision ambiguous with respect to its applicab ility to the air pollutant emitted from the sources at issue in this rulemaking: CO 2 emissions from fossil-fuel-fired EGUs . CAA

section 111 has not been revised since the 1990 CAA Amendments.

C. Regulatory history

The EPA issued regulations implementing CAA section 111(d) in 1975, 11 and has revised them in the years since. 12 (We refer to the regulations generally as the implementing regulations.) Thes e regulations provide that, in promulgating requirements for sources under CAA section 111(d), the EPA first develops regulations known as “emission guidelines,” which establish bindin g requirements that states must address when they develop their plans. 13 The implementing regulations also establish timetables

for state and EPA action .: The default rule is that states must submit state plans within

nine months of the EPA’s issuance of the guidelines, 14 although but the regulations provide the EPA with authority to extend the deadlines for those submissions

., 15 The regulations also provide that and the EPA must take final action on the state plans within four months of the due date for those plans. 16 In the present rulemaking, the EPA is

11 “State Plans for the Control of Certain Pollutants From Existing Facilities, ” 40 FR 53,340 (Nov. 17, 1975).

12 The most recent amendment was in 77 Fed. Reg. 9304 (Feb. 16, 2012).

13 40 CFR 60.22. In the 1975 rulemaking, the EPA explai ned that it used the term “emissions guidelines” –

instead of emissions limitations – to make clear that guidelines would not be binding requirements applicable to the sources, but instead are “criteria for judging the adequacy of State plans.” 40 Fed. Reg. at 53,343.

14 40 CFR 60.23(a)(2).

15 See id.; 40 CFR 60.27(a).

16 40 CFR 60.27(b).5 following the requirements of the implementing regulations, except that the EPA is extending certain timetables, as described in the preamble. 17

Over the last forty years, under CAA s ection 111(d), the agency has regulated four pollutants from five sour ce categories (i.e., phosphate fertilizer plants (fluorides), sulfuric acid plants (acid mist), primary al uminum plants (fluorides), Kraft pulp plants (total reduced sulfur), and municipal solid waste landfills (landfill gases)). 18 In addition, the agency has regulated additional pollutan ts under CAA section 111(d) in conjunction

with CAA section 129. 19 The agency has not previously regulated CO 2 or any other greenhouse gas under CAA section 111(d) (although because landfill gases include methane, the agency’s regulation of landfill gases reduced emissions of that greenhouse gas).

.

D. Case law

The D.C. Circuit has never handed down a decision that had occasion to review a rule promulgated directly under interpret ed , or review ed EPA’s interpretation of, section 111(d). The D.C. Circuit has, however, reviewed rulemakings under CAA section 111 on numerous occasions during the past four decades, handing down decisions dated from

1973 to 2011. 20 These decisions concerned various aspects of section 111, primarily the interpretation of the term “standard of performance.” Relevant statements of Tt hese cases

are discussed below.

E. 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 na tural gas-fired stationary combustion turbines (affected sources or affected EGUs). The first, published in January, 2014, proposes standards of performance under CAA section 111(b) for affected sources undertaking new construction. The second is the present rulemaking, under CAA section 111(d), which proposes emission guideli nes for states to follow in adopting state plans that regulate existing affected EGUs. In the third rulemaking, which we expect to propose

17 The EPA is not re-opening these regulations, although it is revising except for certain timetables. The deadline for action on state plan submittals.

18 See “Phosphate Fertilizer Plants; Final Guideline Document Availability,” 42 Fed. Reg. 12,022 (Mar. 1, 1977); “Standards of Performance fo r New Stationary Sources; Emission Guideline for Sulfuric Acid Mist,” 42 Fed. Reg. 55,796 (Oct. 18, 1977); “Kraft Pu lp Mills, Notice of Availability of Final Guideline Document,” 44 Fed. Reg. 29,828 (May 22, 1979); “P rimary Aluminum Plants; Availability of Final Guideline Document,” 45 Fed. Reg. 26,294 (Apr. 17 , 1980); “Standards of Perfor mance for New Stationary Sources and Guidelines for Control of Existing Sour ces: Municipal Solid Waste La ndfills, Final Rule,” 61 Fed. Reg. 9905 (Mar. 12, 1996).

19 See, e.g., “ Standards of Performance for New Stationary Sources and Emission Gu idelines for Existing Sources: Sewage Sludge Incineration Units, Final Rule,” 76 Fed. Reg. 15,372 (Mar. 21, 2011).

20 Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973); Essex Chemical Corp. v.

Ruckelshaus , 486 F.2d 427, (D.C. Cir. 1973); Portland Cement Ass’n v. EPA , 665 F.3d 177 (D.C. Cir. 2011). Formatted: Font: Not Bold, Not Italic6 concurrently with the present one, the EPA is proposing standards of performance under section 111(b) for a ffected EGUs that undertake modifications or reconstructions.

II. Summary of legal basis

The EPA believes that tT oday’s proposed action is authorized by the requirements of CAA section 111(d) and is consistent with the implementing regulations. As an initial matter, the CAA clearly authorizes the regulation of greenhouse gases (including CO 2 )

under section 111. An We discuss below an ambiguity in the provisions of section 111(d)(1)(A)(i) , arising from Congress’s simultaneous enactment of two separate version of this provision, has led some stakeholders to argue that the fact that EPA has regulated hazardous air pollutants from EGUs prevents EPA from regulating CO 2 emissions from

EGUs , but to the contrary,. As explained below in detail, however, EPA reads’s reasonable interpretation of the provision concerning the air pollutants covered under section 111(d)to authorize s EPA to regulateregulation of CO 2 emissions from EGUs and this interpretation is both reasonable and entitled to deference . Moreover, although section 111(d) applies only to sources that, if they were new sour ces, would be covered under a section 111(b) rule, the EPA intends to complete the section 111(b) rulemakings regulating CO 2 from newly constructed EGUs and from modified and reconstructed

EGUs before by the time we finaliz eing the section 111(d) rule, and either of those rulemakings will provide the requisite predicate for this rulemaking.

A key step in promulgating requirements under CAA section 111(d) is identifying the “best system of emission reduction whic h ... the Administrator determines has been adequately demonstrated” (BSER). In promulgating tT he 1975 implementing regulations,

are the EPA explicit ly stated that it is required under section 111(d) , the EPA to

determine s the BSER in promulgating emission guidelines under that provision

. 21
Accordingly, in this rulemaking, the EPA is determining the BSER.

In the preamble, the EPA lays out in detail its proposed determination of BSER, which includes a set of measures that constitute a system of emission reduction that has been adequately demonstrat ed by fossil-fuel-fired sources across the country. Specifically, the EPA proposes that that the BSER includes measures that can be sorted into four building blocks: (1) heat rate improvements, (2) re-dispatch from fossil-fuelfired steam-generating boilers to NGCC units, (3) new low- or zero-emitting generation, and (4) demand-side energy efficiency measures. Under the EPA’s proposed approach to view these measures asdetermining the BSER, the EPA identifies as a component of BSER the heat rate improvements in buildin g block 1 that could be made at coal-fired steam generating units to reduce their carbon intensity ( i.e ., to decrease the amount of carbon emitted per unit of energy generated). Importantly, the EPA’s proposed approach views the measures in building blocks 2, 3, and 4 in light of the fact that the electricity system is an integrated system with fungible products (electricity and electricity services). Under this approach, the BSER includes building blocks 2, 3, and 4 because they decrease the demand for generation at fossil-fuel-fired EGUs, and thereby

reduceresult in reductions in emissions from those sources. In addition, the EPA is also

21 The EPA is not re-opening that interpretation in this rulemaking.7 identifying an alternative basis, under which

, the BSER includes limitations in utilization of the fossil-fired EGUs, which reduce mass emissions from those EGUs, and building blocks 2, 3, and 4 provide the foundation basis for applying those limitations. In both cases, the EPA reasonably identifies the sets of measures as components of BSER based on the factors that the EPA is required to co nsider and the EPA’s authority to weigh those

factors.

As noted above and explained in the preamble and various Technical Support
Documents,

, the measures in each of the building blocks are both technically feasible and “adequately demonstrated.” Heat rate im provement measures (identified in building block 1) are well-recognized as feasible within the industry. Under the EPA’s approach to BSER, the measures that entail dispatch changes from fossil-fuel-fired steam-generating EGUs to NGCC units, investments in renewa ble and nuclear energy, and demand-side energy efficiency (measures in building blocks 2, 3 and 4) are each well-established in numerous states, and many of them ha ve already been relied on to reduce CO 2 and other air pollutants from fossil-fuel-fired EGUs. Further, all of the measures achieve an important degree of emission reduction. In ad dition, they are not unreasonably costly, including when considered through a nation-wide lens. In addition, and importantly, the measures encourage the development and expansion of technology and practices to

reduce CO 2 and are consistent with current trends in the electricity sector. By the same token, under the alternative approach to BSER , generation reduction fr om the fossil-fired EGUs is technically feasible and adequately demonstrated because of the characteristics, just described, of the measures in building blocks 2, 3, and 4.

After determining BSER, the EPA is authorized under theThe 1975 implementing regulations , as an integral component to setting emission guidelines, provide that, in establishing an emission guideline un der section 111(d), EPA both determine s BSER and to apply the BSER to determine the resulting emission limitation that results from application of the BSER to the affected sources . In this rulemaking, the EPA is taking the approach of applying the BSER to covered EGUs to each stat eon a state-by-state basis and determining the resulting emission limitation – termed

, the “state goal” – for each state. The EPA is formulating each state goal as an average emissions rate. The state goals form the EPA’s emission guidelines.

Once the EPA promulgates the emission guidelines, each state must develop a plan that identifies and achieves its emission performance level. The emissions performance level must be at least equivalent to (that is, no less stringent than) the state goal that the EPA has determined. As a practical matter, tT his means , among other things, that the states may adopt mass emission limits, instead of rate-based emissions

levels , provided such mass emission limits achiev e equivalent emission reductions to those that would be achieved by applicat ion of the rate that is the state goal . In addition, the state plans must establish standards of performance and include measures that implement and enforce those measures.

As the preamble for this rulemaking discusses, based on suggestions from states and other stakeholders directing the EPA to consider measures that in some cases are8 established by entities other than EGU owne rs or operators, the EPA is proposing that states be authorized to submit state plans that do not impose legal responsibility on the affected EGUs for the entirety of the emissions performance level. Instead, the proposal would allow for compliance plans that impose or entail requirements on other parties (which we will refer to as affected entities) – such as renewable energy and demand-side energy efficiency measures - that would provide a means or basis for reducing utilization of, and therefore CO 2 emissions from, the affected EGUs. The As noted in the preamble for this rulemaking

, notes that a possible basis for this approach is that those requirements on other affected entities may be authorized as standards of performance or implementing measures. The EPA acknowledges countervailing points of view, but proposes that this is an appropriate flexibility and solicits comment , but . As a result, in the preamble, the EPA also solicits comment on whether state plans must impose all of the legal responsibility for achieving the emissions performance level on the affected

EGUs.

The preamble further notes that even if state plan imposes all of the legal obligations on the affected EGUs, that is the case, the state plan could nevertheless include the requirements on other affected entities in order to facilitate the reduced utilization of, and CO 2 emissions from, the affected EGUs – and the practical effect for the EGUs would be the same as that under the proposed approach. The preamble solicits comment on other issues concerning state plan s, including whether a state may include in its plan an enforceable commitment by the state to assure some amount of emissions reduction from the affected sources, but not include the specific measures that would

achieve that amount of reduction.

The EPA emphasizes that in developing the state plans, as long as the plans reduce emissions from the affected sources to achieve the emissions performance level,

the states have substantial discretion in designing as to the form of the standards of performance. Moreover, the states may require sources to implement specific measures that the EPA did not identify as BSER, and may include other approaches such as, for example, emission trading programs. By the same token, states may allow sources, in complying with their applicable standards of performance, 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 state plan achieves the requisite level of emissions

reduction from the affected sources

.

In this rulemaking, the EPA proposes reasonable deadlines for state plan submission and the EPA’s action. The proposed deadline for the EPA’s action varies from that in the implementing regulations, and the EPA is revising that provision of the implementing regulations accordingly.

III. Authority to regulate CO 2 from EGUs

A. Authority to regulate CO 29 CAA section 111 authorizes EPA to regulate CO 2 emissions. The Supreme Court has held that greenhouse gases (including CO 2 ) are a n “airpollutant ” under the CAA.

Massachusetts. v. EPA

. 22 Furthermore, the U.S. Supreme Court’s holding in American

Electric Power Co. v. Connecticut , 131 S. Ct. 2527, 2537-38 (2011), that “the Clean Air Act and the EPA actions it authorizes displace any federal common law right to seek abatement of carbon-dioxide emissions from fossil-fuel-fired power plants” was premised on the Court’s understanding that §111, incl uding §111(d), applies to carbon dioxide

emissions from those sources.

The fact that EPA has regulated EGU em issions of mercury and other hazardous air pollutants under CAA section 112 does not deprive EPA of the authority to 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 subjec t to CAA section 111(d). 23 The ambiguities stem from apparent drafting errors that occurred during enactment of the 1990 CAA Amendments, which revised section 111(d). The confusion aris es because two different amendments to section 111(d) were enacted in the 1990 CAAA – one in title I of the bill, the other in title III of the bill (both amendments were to be codified in section 111(d)). The confusion is exacerbated because the U.S. Code does not accurately reflect what was enacted – it presents only one of the two amendments. In this circumstance, the enacted law signed by the President (as 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 wh ich is not included on a list published under [CAA section 108(a)] or [2] emitted from a source category which is regulated under [section 112] .” (Emphasis added.) This provision has two components that exclude from section 111(d) two types of air pollutan ts. The first component, which we call the NAAQS Exclusion, excludes NAAQS pollutants. The second component, which we call the Section 112 Exclusion, presents the ambigu ities. As presented in the U.S. Code, the Section 112 Exclusion appears by its terms to preclude from section 111(d) any pollutant if it is emitted from a source category that is regulated under section 112.

Looking solely at this presentation of the text of the Section 112 Exclusion, one might

concludeThe U.S. Code version of 111(d) can be read to provide that section 111(d)the

22 549 U.S. 497 (2007).

23 Under the U.S. Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v. NRDC

, to interpret how a statute applies to a particular question, an agency must, at Step 1, determine whether Congress’s intent as to the specific question is clear, and, if so, the agency must give effect to that intent. If congressional intent is not clear, then the agency, at Step 2, has discretion to fashion an interpretation that is a reasonable construction of

the statute. 23 Chevron U.S.A. Inc. v. NRDC , 467 U.S. 837, 842-844 (1984). Formatted: Indent: First line: 0"10 provision would not cover GHGs because GHGs are emitted from EGUs and EGUs are a source category regulated under section 112. 24

TThis conclusion would be incorrect, however, because t he text of section 111(d) as presented in the U.S. Code , however, does not accurately reproduce the Section 112

Exclusion as enacted in the 1990 CAA Amendments. The correct statement of the Section 112 Exclusion – the one that was enacted by the Congress and signed by the

President , and which therefore is controlling

--– is found in the U.S. Statutes at Large. This text incorporates two versions of the Section 112 Exclusion, one passed by the U.S. House of Representatives and one passed by the U.S. Senate. The two versions were never reconciled, and both were enacted as part of the 1990 CAA Amendments. The two

versions conflict with each other and thus render the Section 112 Exclusion ambiguous. Under these circumstances, the EPA may reas onably construe the Section 112 Exclusion

to authorize the re gulation of GHGs und er section 111(d). Under the U.S. Supreme

Court’s 1984 decision in Chevron U.S.A. Inc. v. NRDC

, to interpret how a statute applies to a particular question, an agency must, at Step 1, determine whether Congress’s intent as to the specific question is clear, and, if so, the agency must give effect to that intent. If congressional intent is not clear, then the agency, at Step 2, has discretion to fashion an interpretation that is a reasonable construction of the statute. 1 Chevron U.S.A. Inc. v.

NRDC , 467 U.S. 837, 842-844 (1984).

To understand the different amendments by the House and Senate, one must start with section 111(d)(1) as 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 wh ich 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) of this title, but (ii) to which a standard of performance under this section would appl y if such existing source were a new

source. * * *

42 U.S.C.A. 7411(d)(1) (West 1977); Public Law 95–95 (emphasis added). In this version, the Section 112 Exclusion, by its te rms, applied to section 112 pollutants, and not to categories of sources that emit those poll utants. It should also be noted that in the 1990 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.

24 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 excl ude virtually every pollutant from regulation under Section 111(d), because it would be difficult to identify any pollutant that is not emitted from at least one source category that is regulated under 112. We do not need to address this ridiculous result, however, for the reasons discussed in the text above.11 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).’’ Under this amendment, the text would read as follows (with changes 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 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 ap ply 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 112.’’ Under this amendment, the text would read as follows (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) emit ted 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 ap ply if such existing source were a new

source.

The House-Senate Conference Committee did not reconcile these two conflicting amendments, and both were included in the 1990 CAA Amendments as reported by the Conference Committee, approved by both th e House and the Senate, and signed by the President. As presented in the Statutes at Large, the Section 112 Exclusion is therefore ambiguous.

The EPA discussed these different amendments in the preamble to “Revision of December 2000 Regulatory Finding on the Em issions of Hazardous Air Pollutants From Electric Utility Steam Genera ting Units and the Removal of Coal- and Oil-Fired Electric Utility Steam Generating Units From the Se ction 112(c) List,” 70 FR 15994, 16029-32 (March 29, 2005). There, the EPA concluded that the Section 112 exclusion could be read as follows: Where a source category is regulated under section 112, a section 111(d) standard of performance cannot be establis hed to address any HAP listed under section 112(b) that may be emitted from that partic ular source category. The EPA explained that this approach reasonably interprets the Section 112 exclusion to give some effect to both amendments. The EPA emphasized that it is not reasonable to give full effect to the House language because a literal reading of that language would mean that the EPA12 could not regulate any air pollu tant from a source category regulated under section 112, a result that would be inconsistent with (i) Congress’ desire 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 (ii) the fact that the EPA has historically regulated non-hazardous air pollutants under section 111(d), even where those air pollutants were emitted from a source catego ry actually regulated under section 112. See

70 FR 16031-32. The EPA continues to view this interpretation of the Section 112 exclusion as reasonable, for the reasons just stated.

Applying this interpretation of the Section 112 Exclusion to this rule, we conclude that section 111(d) authorizes the EPA to establish section 111(d) guidelines for GHG emissions from EGUs. Although EGUs are a source category that is regulated under CAA section 112, GHGs are not a HAP regu lated under section 112. Therefore, the Section 112 exclusion in section 111(d) doe s not apply to GHGs, and 111(d) does not preclude the EPA from establishing guidelines covering GHGs from EGUs.

B. Authority to regulate EGUs

[NOTE TO INTERAGENCY REVIEWERS: This subsection was moved to the preamble.]

Before the EPA finalizes this section 111( d) rule, the EPA will finalize a section 111(b) rulemaking regulating CO 2 emissions from new EGUs, which will provide the requisite predicate for applicability of section 111(d).

CAA section 111(d)(1) requires the EPA to promulgate regulations under which states must submit state plans regulating “any existing source” of certain pollutants “to which a standard of performance would a pply if such existing source were a new

source.” 25 A “new source” is “any stationary sour ce, the construction or modification of which is commenced after the publication of regulations (or, if earlier, proposed regulations) prescribing a st andard of performance under [section 111] which will be applicable to such source.” 26 It should be noted that these provisions make clear that a

“new source” includes one that undertakes either new construction or a modification. It should also be noted that EPA’s implemen ting regulations define “construction” to include “reconstruction,” which the implementing regulations go on to define as the replacement of components of an existing facility to an extent that (i) the fixed capital cost of the new components exceeds 50 percent of the fixed capital cost that would be required to construct a comparable entirely new facility, and (ii) it is technologically and economically feasible to meet the applicable standards. 27

Under section 111(d)(1), in order for existing sources to become subject to that provision, the EPA must prom ulgate standards of performa nce under CAA section 111(b) to which, if the existing sources were ne w sources, they would be subject. Those

25 CAA section 111(d)(1).

26 CAA section 111(a)(2).

27 40 CFR 60.15(b). The EPA is not re-opening these regulations in this rulemaking. Formatted: Font: Bold, Italic13 standards of performance may include ones for sources that undertake new construction, modifications, or reconstructions.

The EPA is in the process of promulgating two rulemakings under section 111(b)

for CO 2 emissions from affected sources. The EPA proposed the first, which applies to affected sources undertaking new constructions, by notice dated January 8, 2014, which we refer to as the January 2014 Proposal. 28 The EPA is proposing the second, which applies to affected sources undertaking modi fications or reconstructions, concurrently with this section 111(d) proposal. The EPA will complete one or both of these CAA section 111(b) rulemaki ngs before or concurrently with this section 111(d) rulemaking, which will provide the requisite predicate for applicability of section 111(d). 29

IV. Rational basis, endangerment finding

In the course ofresponse to the January 2014 Proposal for standards of performance for GHGs emissions from ne wly constructed fossil-fuel-fired EGUs, 30 some stakeholders raised concerns that the EPA could not promulgate those standards without first issuing a finding that GHGs from those sources cause or contribute significantly to air pollution which may reasonably be anticipa ted to endanger public health or welfare, under CAA §111(b)(1)(A). In that proposal, the EPA stated that it is rational to regulate GHGs from fossil fuel-fired EGUs because the EPA has previously found that GHG emissions endanger public health and welfare, and because the electric generating industry emits a significant amount of GHGs . The EPA added that CAA section 111 does not require that EPA issue a formal endangerment finding, and that even if section 111 did require such a finding, the EPA’ s rational basis would qualify as one. 31 The EPA is taking the same position in the section 111(b) rulemaking proposal to establish standards of performance for GHG emissions from modified and reconstructed fossilfuel-fired EGUs.

The EPA will finalize either or both of the January 2014 Proposal and the rulemaking for modified and reconstructed EGUs by the time that it finalizes this 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 event, these questions are properly addressed and resolved in th e context of the parallel rulemakings under section 111(b), not in this rulemaking. Thus, the EPA is not seeking comment in this proposal on any issues related to a rational basis or endangerment finding.

V. Authority for EPA to determine BSER and emission guidelines

28 79 Fed. Reg. 1430.

29 In the past, EPA has issued standards of performanc e under section 111(b) and emission guidelines under section 111(d) simultaneously. See “Standards of Performance for new Stationary Sources and Guidelines for Control of Existing Sources: Municipal Solid Waste Landfills – Final Rule,” 61 Fed. Reg. 9905 (March 12, 1996).

30 79 Fed. Reg. 1,430 (Jan. 8, 2014).

31 See 79 FR at 1,452/3 – 1,456/1.14 In this section we describe the authority, as set out in the EPA’s 1975 implementing regulations under CAA section 111(d), for the EPA to determine the “best system of emission reduction ... adequately demonstrated” and the amount of required emission reduction that is based on the BSER. We also describe how, in this rulemaking,

the EPA is applyingproposes to apply the BSER to each state, and , based on that on that

basis

, to determin eing the amount of required emission reduction limitation 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 promulgate.

CAA §111(d) directs the EPA to –

prescribe regulations which shall establish a procedure similar to that provided by [CAA section 110] unde r which each State shall submit to the Administrator a plan which (A) es tablishes standard s of performance for any existing source for [certain ai r pollutants] ... and (B) provides for the implementation and enforcement of such standards of performance.

As noted above, the EPA promulgated the se implementing regulations for section 111(d) in 1975, and has revised pa rts of them since. The 1975 regulations set out a multi-step process for the development and approval of state plans, and assign responsibility for the various steps in the process to the EPA or the states. The EPA has followed these regulations in promulgating previous rulemakings under section 111(d). 32 In the present rulemaking, EPA continues to follow them, except in one instance, in whichthat EPA is revising one of the defaultestablishing a different deadline s for submission of state implementation plans tha n wha t the regulations would otherwise require. 33

Under the implementing regulations, at the same time or after the EPA proposes and then finalizes standards of performan ce for sources in a source category under section 111(b), the EPA must propose and then finalize notice of a “guideline 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 p ublic comments and upon or after promulgation of standard s of performance for c ontrol of a designated pollutant from affected facilities, a final guideline document will be published and notice of its availabilit y will be published in the Federal Register.” 34

32 These rulemakings are cited above.

33 The EPA is not re-opening these regulations, although it is revising except for the revised deadline for EPA action on state plans

. 34 40 CFR 60.22(a).15 The regulations go on to describe the contents of the “guideline document” as including, among other things, an “emission guideline” that incorporates the “best system 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 th e 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. 35

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 §60.22(a) whic h 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. 36

In addition, the implementing regulations mandate that for air pollutants that adversely affect public health, the “emission guidelines ” must be proposed and finalized with the draft and final guideline document:

[For air pollutants that have been dem onstrated to adversely affect public health], the emission guidelines and compliance times referred to in paragraph (b)(5) of this section will be proposed for comment upon publication of the draft guideline do cument, and after consideration of comments will be promulgated in subpart C of this part with such modifications as may be appropriate. 37

With this proposed rulemaking, the EPA is complying with these regulatory provisions. This proposed rulemaking follows the proposal of standards of performance for newly constructed affected sources in the January 2014 Proposal, and is concurrent with the proposal of standards of performa nce for modified and reconstructed affected sources. This proposed rulemaking – including the preamble and the supporting

35 Id . at 60.22(b).

36 40 CFR 60.21(e).

37 Id. at 60.22(c).16 documents -- comprise the “draft guideline document.” The documents contain the “information for the development of State plans” described in the regulations. This information includes the four building blocks , which are the BSER . This information also includes the EPA’s appli cation of the BSER to each state, and the EPA’s calculation of the resulting proposed state goals. These state goals comprise the proposed “emission guidelines.” In addition, the preamble and supporting documents propose the “time within which compliance with emission st andards of equivalent stringency can be achieved,” which are the periods of 2020-2029 for interim compliance, and the subsequent period for final complian ce, and provide other information.

It should be noted that the preamble discusses the EPA’s proposal in this rulemaking to adopt state-specific goals based on a single, consistent methodology, rather than to adopt nationally uniform emission rate s for particular types of affected EGUs. The preamble explains that this state-by-stat e approach ensures that the proposed goals reflect opportunities to reduce CO 2 emissions by shifting generation among different types of EGUs and accounts for the differences among the generating fleets in the various

states.

VI. Best system of emission reduction adequately demonstrated

We discuss in the preamble our interpretation of the section 111(d)(1) and (a)(1) provisions that require the state plans to establish “standards of performance” for existing sources, and that define that term. In th is section of this Legal Memorandum, we

elaborate on that discussion. A. Introduction and Overview Under CAA §111(d), the foundation for the standards of performance in the state plans is the “best system of emission reduction which ... the Administrator determines has been adequately demonstrated” (BSER). In the preamble for the proposed rule, the EPA describes the measures that comprise the BSER As background, it should be recalled that important to the BSER are the measures in the , which are organized into four “building blocks

,, ” which the preamble describes at length and summarizes as follows:and then explains why those building blocks, taken together, meet the criteria for

the BSER.

The measures in the four building blocks are described at length in the preamble, and may be summarized as follows:

Building block 1: Reducing the carbon intensity of generation at

individual affected EGUs thr ough heat rate improvements.

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). Formatted: Font: Not Bold

Formatted: Line spacing: single

Formatted: Indent: First line: 0.5", Tab stops: 1.67", Left17 Building block 3: Reducing emissions from affected EGUs in the amount that results from substituting gene ration 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 amount of generation required. Building block #1: Lowering the carbon intensity of generation at individual affected EGUs ( e.g. , through heat rate improvements).

Building block #2: Reducing utilization of, and therefore emissions from,

the most carbon-intensive affected EGUs to the extent that this can be accomplished cost-e ffectively by shifting to le ss carbon-intensive existing fossil-fuel-fired EGUs, including NGCC un its that are under construction.

Building block #3: Reducing utilization of, and therefore emissions from, affected carbon-emitting EGUs to the extent that this can be accomplishedcost-effectively by expanding the amount of available low- or zerocarbon-intensity generation.

Building block #4: Reducing utilization of, and therefore emissions from, affected carbon-emitting EGUs to the extent that this can be accomplished cost-effectively by increasing demand-side energy efficiency.

As noted below, the EPA is proposing an approach and an alternative to explaining how the building blocks provide the basis of the proposed determination of BSER. Both meet the criteria specified in the statute, as summarized next, and both are based on the integrated nature of the electricity system, as discussed after that.

BA . General approach for de termining the best system of emission reduction adequately demonstrated

The EPA’s explanation for this BSER proposal begins with the statutory definition of a “standard of performance”:

The term “standard of performance” means 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.

CAA section 111(a)(1).18 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.” 38

The U.S. Court of Appeals for the D.C. Ci rcuit (D.C. Circuit or Court) has handed down case law over a 40-year period that interprets this CAA provision, including its component elements. 39 In one of the earliest cases, Essex Chemical Corp. v. Ruckelshaus

, in 1973, the Court stated that because the st andard must be “achievable,” the emission limits must be technically feasible, and added that “[a]n adequately demonstrated system is one which has been shown to be reasonably reliable, reasonably efficient, and which can reasonably be expected to serve the interests of pollution control without becoming exorbitantly costly in an economic or environmental way.” 40

Under this case law, the EPA determines the BSER based on the following key considerations, among others:

 The system of emission reduction must be technically feasible. 41

 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 the power sector, on the national level in terms of the overall costs of electricity and the impact on the national economy over time. 42

 The EPA must also consider that CAA section 111 is designed to promote the development and implementation of technology. 43

Other considerations are also important, including that the EPA must also

38 Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreference.com.mutex.gmu.e du/view/10.1093/acref/ 9780199571123.001.0001/acref9780199571123

39 Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973); 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).

40 Essex Chemical Corp. v. Ruckelshaus , 486 F.2d at 427.

41 As noted in the text, the case law may be read to treat technical feasibility as the measure for whether the standard of performance is “achievable,” not as a crit erion for whether the system of emission reduction is the “best system of emission reduc tion ... adequately demonstrated.” However, for convenience, we may refer to technical feasibility as anot her of the criteria for the BSER.

42 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 the cost consideration in various ways: the costs must not be “exorbitant[]”, Essex Chemical Corp. v. Ruckelshaus , 486 F.2d 427, 433 (D.C. Cir. 1973), 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. Costle , 657 F.2d 298, 343 (D.C. Cir. 1981). In the January 2014 Proposal,

EPA stated that “these various formulations of the co st standard ... are synonym ous,” and, for convenience, EPA used “reasonableness” as the formulation. EPA takes the same approach in this rulemaking.

43 See 79 Fed. Reg. at 1,465/1-2 (discussing case law a nd legislative history that includes technological development as a consideration in the determination of BSER). Formatted: Font: Not Italic19 consider energy impacts, and, as with costs, may consider them both on the source level 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 greater weight than others, and may vary the weighting, depending on the source category.

The EPA discussed the CAA requirements and Court interpretations of the BSER at length in the January 2014 Proposal, 44 and incorporates by reference that discussion in this rulemaking.

CB . Application of the BSER criteria

1. Introduction and overview

The EPA’s BSER proposal in this rulemaking recognizes, and is based in part on, both the interconnected nature of the electrical generating system, which, among other things, means that generation at one EGU can substitute for generation at another . The importance of the interconnected nature of the grid in facilitating CO 2 emissions reductions is evident in the long history of re liance on it to provide least-cost dispatch, the more recent history of implementing air pollutant emissions reductions, and the still more recent history of implementing CO 2 emissions reductions at the company, state, and regional level. , and on the global nature of the pollutant at issue.

The EPA proposes an approach to determining the “best system of emission reduction ... adequately demonstrated” that in cludes several components, some of which are based on the interconnected nature of the electricity generating grid. The first component is building block 1, which entails measures that the affected sources may undertake to improve their efficiency.

The remaining components are based on the interconnected nature of the grid. Because the grid is interconnected, CO 2 emissions reductions can be achieved in either of two ways: (i) Instituting measures in building blocks 2, 3, and 4, which, due to the interconnected nature of the grid, result in drawing utilization away from higher-emitting fossil-fuel-fired EGUs, thereby lowering th ose EGUs’ emissions. (ii) Reducing utilization from higher-emitting fossil-fuel-fired EGUs, which due to the interconnected nature of the grid and its operation in the regulated mark ets, result in replacement generation, such as that identified in the building blocks 2, 3, and 4. Thus, each of these approaches may be considered to be a “sys tem of emission reduction.”

Accordingly, the EPA proposes that the “best system of emission reduction ... adequately demonstrated” also includes the m easures in building blocks 2, 3 and 4, which would substitute generation at higher-emitting EGUs with increases in generation at lower- or zero-emitting sources and in end- use efficiency in ways that reduced CO 2 emissions at fossil-fuel-fired EGUs. In addition, as an alternative approach, the EPA also proposes that BSER includes reduced utilization of the higher-emitting fossil-fuel-fired

44 See 79 Fed. Reg. at 1,462/1 – 1,467/3. Formatted: Subscript

Formatted: Subscript20 EGUs, with the measures in building blocks 2, 3, and 4 serving to provide replacement generation. Each of these appr oaches assures reliability of electricity supply and avoids unreasonable costs and meets all of the criteria to qualify as BSER.

It is also significant that CO 2 is a global pollutant, and therefore the location of the emissions (or emission reductions) does not affect the environmental consequences of an amount of emissions generated at any given source in any one location. 45 The global

nature of CO 2 means that CO 2 emissions may be reduced anywhere within the electricity grid and still achieve the intended environmental benefits. location. By analogy, because the problem of acid deposition is caused by EGU emissions of nitrogen oxide and sulfur dioxide over a wide geographic area, Title IV of the Clean Air Act established a national emissions trading program that addresses that problem by reducing the total amount of those emissions, but without regard to the particular location of those emissions (or emissions reductions). In contrast, EGU me rcury emissions have adverse health and welfare effects in the locality where they are emitted, and as a result, the EPA’s Mercury and Air Toxics Standards (MATS) rulemaking requires reductions at each affected EGU, and does not authorize emissions trading

. 46

2. Interconnected nature of the electricity system

As we observe in the preamble, the natio n’s electricity needs are being met, and have for many decades been met, through a grid formed by a network connecting groups of EGUs with each other and, ultimately, with the end-users of electricity. Through this interconnected grid, fungible prod ucts – electricity and electricity services – are produced and delivered by a diverse group of EGUs operating in a coordinated fashion in

respon seding to the end-users’ demand for electricity created by the users of the product

. Because the electricity grid operates through the interconnection of multiple EGUs and favors least-cost generation, ow ners and operators of generators have been able to assure the stability of electricity generation and the reliable delivery of electricity to users at

least cost (subject to certain reliability, environmental and other constraints)

. Instrumental to the success in meeting these several objectives is tT he fact that generation at one EGU can be substituted for generation at another . This allows operators to utilize

their least-cost assets primarilyfirst , and hold their higher-cost assets in reserve, thereby assuring that the system achieves the objectives of providing reliable and least-cost electricity service.

45 By analogy, because the problem of acid deposition is caused by EGU emissions of nitrogen oxide and sulfur dioxide over a wide geographic area, Title IV of the Clean Air Act established a national emissions trading program that addresses that problem by reducing the total amount of those emissions, but without regard to the particular location of those emission s (or emissions reductions). In contrast, other air pollutants have adverse health and we lfare effects in the locality where they are emitted, and as a result, geographic constraints on emissions trading are necessary. See CAA §173(c)(1) (limiting offsets for air pollutants subject to new source re view requirements to emissions redu ctions from sources in certain nonattainment areas). Formatted: Font: 12 pt, Complex Script Font: 12 pt

Formatted: Font: Bold, Italic

Formatted: List Paragraph, Numbered + Level: 1 + Numbering Style: 1, 2, 3, ... + Start at: 1 + Alignment: Left + Aligned at: 1" +

Indent at: 1.25"21 In recent years, the ability to shift between differ ent generation assets on the grid the grid has also facilitated the achievement of environmental objectives, including the reduction of emissions of nitrogen oxides, su lfur dioxide, and particulate matter -- which, among them, worsen acid deposition and jeopardize the attainment and maintenance of national ambient air quality standards – as well as hazardous air pollutants. Regulation of those air pollutants tends to increase th e cost of electricit y from higher-emitting generation assets. Because EGU operators have the ability to use the grid as an interchange for shifting levels of generation among several facilities, the higher-emitting assets tend to be utilized relatively less, and, as direct result, emit less pollution and

reduce cost.

Most recently, states and companies seeking specifically to achieve CO 2 emissions reduction objectives have also reli ed on the shifting of generation between and among EGUs that the interconnected nature of the grid allows to achieve those emissions reduction objectives , as discussed below

. Thus, it is apparent that the interconnected nature of the grid has allowed facilitate d the achievement of objectives ranging from assuring a reliable, least-cost supply of el ectricity to reducing pol lution, including, in some states, carbon pollution. In fact, as the preamble notes, there are many cases in which companies have reduced emissions th rough shifting generation away from higher emitting units to lower- or zero-emitting units, or through reducing overall electric demand through demand-side energy efficien cy measures. In some cases, this has occurred in response to goals set at the comp any level: some companies have established a single, company-wide emission target, and th en have used combinations of strategies such as fuel switching, increased renewable or nuclear generation, and increased energy efficiency, to achieve those goals. In othe r cases, this has occurred in response to goals set at the state level: for example, California enacted its Global Warming Solutions Act in 2006 (AB 32), requiring the state to reduce its GHG emissions to 1990 levels by 2020 and 80 percent below 1990 levels by 2050, 47 through a suite of mechanisms that include energy efficiency programs, renewable ener gy programs and an economy-wide cap and trade program, along with other programs. 48 Similarly, nine northeast and mid-Atlantic states participate in the Regional Greenhouse Gas Initiative (RGGI), a market-based emissions budget trading program that sets an aggregate limit on CO 2 from fossil fuel fired power plants in the participating states.

In all of these instances, companies’ choices and policies implemented by states may impact decisions about dispatching of lower instead of higher emitting generating units both as part of the short term dispatch process and as part of longer term business planning processes. We believe that the proposed emission guidelines, including the temporal flexibility that the guidelines incorporate, allow states and EGUs to implement a variety of mechanisms that can reduce emissi ons both as part of those shorter term dispatch decisions and as part of long er term business planning processes.

47 State of California Global Warming Solutions Act of 2006, Assembly Bill 32, Chapter http://www.leginfo.ca.gov/pub/05-06/bill/asm/ ab_0001-0050/ab_32_bill_20060927_chaptered.pdf

48 See Cal. Air Res. Bd., Climate Change Scoping Plan 31-32, 41-46 (2008), available at: http://www.arb.ca.gov/cc/scopingplan/doc ument/adopted_scoping_plan.pdf. Formatted: Normal, Indent: First line: 0.5"22 In this rulemaking, the EPA is building on these company, state, and regional approaches by continuing to rely on the interconnected nature of the grid to achieve, on a nationwide basis, the important obj ective of significant amounts of CO 2 reductions from fossil-fuel-fired EGUs. The EPA is doing so by proposing the implementation of heat improvement measures for fossil-fuel-fired steam generating units (building block 1) to reduce their emissions, as well as the implementation of other measures that decrease demand for generation by the affected EGUs, and thereforeresult inassociated with

reduced emissions from those EGUs . The latter include and by substituting generation at higher emitting sources through increasing generation at less carbon-intensive EGUs, expanding the amount of low- or zero-car bon generating capacity connected to the electric grid, and using electricity more efficiently to reduce the total demand for electricity (building blocks 2, 3 and 4, respectively).

Thus, tThe EPA proposes an approach to determining the “best system of emission reduction ... adequately demonstrated” in light of the interconnected nature of the electricity generating grid that, in turn, includes several components. The first is building block 1, which, as discussed below, entails measures that the affected sources may undertake to improve their efficiency.

In addition, the EPA proposes that the “system” for achieving emissions

reductions also includes the measures in building blocks 2, 3 and 4, which would substitute generation at higher-emitting EGUs with increases in generation at lower- or zero-emitting sources and in end-use efficiency in ways that reduced CO 2 emissions at

fossil-fuel-fired EGUs. For the reasons describe d below, the EPA proposes that this is the “best system of emission reduction ... adequately demonstrated.” In addition, as an alternative approach to BSER, the EPA also believes that the “system” may be viewedsimply as consisting of, in addition to building block 1, reduced utilization of the higheremitting fossil-fuel-fired EGUs, with the measur es in building blocks 2, 3, and 4 serving to assure reliability and avoid unreasonable costs associated with such reduced utilization. As also discussed below, this alternative approach may also be considered the “best system of emission reduction ... adequately demonstrated.”

23 . Heat rate improvements

As discussed in the preamble, under the EPA’s proposed approach to determining BSER, the measures in building block 1, which entail improvements in the efficiency of the affected EGUs’ equipment or processes, meet the criteria to qualify as a component
part of the BSER. Further elaboration here is not necessary.

34

. Components of electricity system Me asures in building blocks as

BSER

Under the EPA’s first approach , to determining BSER, the “ best system of emission reduction ... adequately demonstrated ” includes the measures in building blocks23 2, 3 and 4

, for in conjunction with the affected fossil-fuel-fired steam generating boilers

, and building blocks 3 and 4 for (in the case of building block 2) and the fossil-fuel-fired EGUs combustion turbines(in the case of building blocks 3 and 4)

. In this section, we first explain why the measures in these building blocks are a “system of emission reduction,” and then why they are the “best” system that is “adequately demonstrated.”

In brief, Tt he se building blocks , taken together, are part of a “system ” of emission

reduction ” because that phrase, in the context in which it is used in section 111 and by its terms, is broad enough to apply to the measures in the building blocks, in light because of the integrated nature of the electricity system grid

. That is, Through the y integrated grid,

the measures are “a set of things working together as parts of a mechanism or interconnecting network” 49 that leads to reduc etions in overall demand for , ( and thus in

therefore utilization of ,) higher emitting , fossil-fuel-fired EGUs generation

, and that therefore which, in turn, reduces CO 2 emissions

, from thosefossil- fuel-fired EGUs. Specifically, increased generation from NGCC units substituting for generation at higheremitting EGUs, in accordance with building block 2, reduces overall CO 2 emissions from fossil-fuel-fired steam generati ng units, and therefore overall CO 2 emissions from fossilfuel-fired EGUs. In exactly the same way, increased low- or zero-carbon generation, in accordance with building block 3, and decreased overall demand for electricity, in accordance with building block 4, reduce CO 2 emissions from those fossil-fuel-fired

EGUs. 50 The measures in the building blocks are part of the “best” system that is “adequately demonstrated” because they 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 measures 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 “establish[] standards of performan ce for any existing source” for certain types of air pollutants; and section 111(a)(1), whic h defines a “standard of performance” as “a standard for emissions ... which reflects the degree of emission limitation achievable through the application of the best system of emission reduction ... adequately demonstrated.” As explained next, the EPA’s interpretation may be ju stified under either

a Chevron step 1 or Chevron step 2 interpretation.

i. Chevron step 1 interpretation

The starting point for our analysis is the phrase, “system of emission reduction,”

which serves as the basis fo r the “standard for emissions.” As noted above, the CAA

49 Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreference.com.mutex.gmu.e du/view/10.1093/acref/ 9780199571123.001.0001/acref9780199571123.

50 Although we describe building blocks 2, 3, and 4 as, together, comprising the “system” of emission reduction, each by itself could be considered a “syste m” of emission reduction, fo r the reasons noted in the accompanying text. Formatted: List Paragraph, Numbered + Level: 1 + Numbering Style: a, b, c, ... + Start at: 1 + Alignment: Left + Aligned at: 1.5" +

Indent at: 1.75"24 does not define the term, “system,” and as a resu lt, 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.” 51 This definition is broad. It encompasses virtually any “set of things” that reduce emissions. Moreover, no other provisions in definition of “standard of performance” include any other constraints on the type of “things” that may serve as the basis for th e standard for emissions. The only constraints are the qualifiers “best” and “adequately de monstrated,” but these do not constrain the type of “things” that could be a “system of emission reduction,” only whether a particular “thing” qualifies as the “best” “system of emission reduction” (it must be, among other things, technically feasible and of reasonable cost) that is “adequately demonstrated.” Thus, the “system of emission reduction” may include anything that reduces emissions, ranging from add-on controls applied to th e affected sources’ smokestacks to control emissions, to measures that replace production at the affected sources and thereby reduce

emissions from those sources.

Moreover, the context in which “standard of performance,” which includes “system of emission reduction,” is found do es not add additional constraints. As noted above, section 111(d)(1) requires that state plans establish “standards of performance for any existing source,” and in the preamble, we solicit comment on the interpretation of that just quoted phrase. Among other things, we solicit comment on whether the standards of performance must apply directly to the affected sources and only to the affected sources, in which case the affected sources would bear the legal liability for the entire amount of emission reduction requirements; or whether, instead, the standards of performance may apply to other entities on the grounds that even under those circumstances, the standards of performan ce would still have the effect of reducing emissions from the affected sources. Under either of those interpretations, there is nothing in that phrase that limits the type of “system of emissions reductions” 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 existing source” -- is interpreted to mean that the standards of performance must apply directly to, and only to, the affected sources, that app lication 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 reduction” that reduces the emissions of the affected sources may serve as the basis for the standards of 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 considered

is broad.

Based on these interpretations, for existing sources in the electric utility industry, we propose that the term “system of emission reduction” is sufficiently broad to include the measures in building blocks 2, 3, and 4 because they are part of the interconnected electricity sector and result in reduced utiliz ation, and therefore reduced emissions, from the higher emitting fossil-fuel-fired power pl ants. This proposed reading is clear as a

51 Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreference.com.mutex.gmu.e du/view/10.1093/acref/ 9780199571123.001.0001/acref978019957112325 matter of Chevron step 1 because of the breadth of th e 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 matter of Chevron step 1 to include the measures in building blocks 2, 3, and 4, then the EPA’s interpretation of the term to include those measures is valid as

reasonable construction under Chevron step 2. There are several reasons for interpreting “system of emission reduction” this broadly.

(I). Legislative history of “standard of performance”

First, the legislative history of the definition of “standard of performance,” including the phrase “best system of emission reduction ... adequately demonstrated,” makes clear that the “system of emission re duction” is broader than a technological system. As enacted by Congress in the 1970 CAA Amendments, section 111(a)(1) defined the term “standard of perfo rmance” 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 standard must, in relevant part, “reflect the degree of emission 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 of emission re duction achievable through the application of the best system of continuous emission reduction ... adequately demonstrated....” (Emphasis added.) 52 In the 1990 CAA Amendments, Congress again changed this definition, this time to reinstate the definition as found in the 1970 CAA Amendments (with some revisions not here relevant). That is, Congress repealed the requirements added in the 1977 CAA Amendments that the “system” be, in the case of new sources, “technological.”

These amendments make clear that the “system[s] of emission reduction” upon which the section 111(d) standards 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 esta blish that limit on the systems for existing sources. Moreover, the 1977 House-Senate Co nference Committee report stated that for

52 The 1977 CAA Amendments also revised section 111(a) (1) to require that the standards of performance for fossil-fuel-fired sources require a percentage re duction in emissions (the “percentage reduction” requirement).26 existing sources, the standards of performance were to be based on the “best available means of emission control (not necessarily technological)....” 53

(II). Pollution prevention

In addition, interpreting the term “system of emission reduction” broadly to include the building blocks is consistent with a primary purpose of the CAA, which is encouraging pollution prevention, including a ssuring that states fulfill their role in developing pollution prevention measures. CAA § 101(c) states that “[a] primary goal of [the Clean Air Act] is to encourage or othe rwise promote reasonable Federal, State, and local governmental actions, consistent with the provisions of this chapter, for pollution prevention.” CAA § 101(b)(4) adds that one of “the purposes of [title I of the CAA, which includes section 111] are ... (b) to encourage and assist the development and operation of regional air 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 Control.” CAA § 101(a)(3) de scribes “air pollution prevention” as “the reduction or elimination, through any measures , of the amount of pollutants produced or created at the source,” and adds: “The Congress finds -- ... (3) that 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 amount of pollutants produced or created at the [fossil-fuel-fired affected] source[s].” It is reasonable to interpret the section 111 provision s 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 building blocks 2, 3, and 4.

(III). Title IV

The breadth of the term, “system of emi ssion reduction” is further confirmed by reference to certain 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 precursers to acid deposition, including reducing sulfur dioxide (SO 2 ) emissions in two phases, and reducing nitrogen oxides (NOx) emissions. Congress enacted Title IV during the 1990 CAA Amendments, at the same time that Congress revised the definition of “standard of performance” to generally return it to its 1970-vintage reading. In certain respects, section 111 and Title IV are related because both apply to fossil-fuel fired EGUs, and the Congress recognized the rela tionship in several Title IV provisions. 54

53 “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 statement. See H. Rep. 95-294 at 195, reprinted in 1977 Legislative History, vol. 4 at 2465, 2662.

54 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 at least in part27 One contrasting provision in Title IV is section 407(b)(2), which requires the EPA to base the NOx emission 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 promulgated 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 results of certain technology, and that its choice to base the section 111( d) standards of performance on a “system of

emission reduction” indicates its intent to aut horize a broader basis for those standards.

Other provisions in Title IV and their le gislative history provide further support for interpreting the term, “system of emission reduction” to include building blocks 2, 3, and 4. In designing Title IV, Congress recognize d the integrated nature of the electricity sector and how that integration could be harnessed to reduce air pollutant emissions; and, in fact, Congress included provisions to enc ourage re-dispatch to lo wer emitting sources, renewable energy, and demand-side energy efficiency, all of which are measures in those building blocks. Specifically, Congress added into the “purposes” pr ovision of Title IV, the statements that in addition to the reducing the adverse effects of acid deposition by reducing of SO 2 and NO

x emissions –

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....” 55

Congress recognized that the very structure of Title IV – which imposed a marketable trading system under which affected sources we re 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 demand-side energy efficiency and re-dispatch by lower-emitting

sources. The 1990 Senate Co mmittee Report explained:

[T]he incentives created by the allowance market should stimulate innovations and the technologies an d strategies used to reduce emissions.... [T]he allowance market should encourage sources to exploit energy efficiency , enhanced emission reduction or control technologies....;

on the grounds that provisions of Title IV would cap SO 2 emissions from fossil-fuel fired EGUs, and, further, 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).

55 CAA §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, 3393-94.28 fuel-switching and least-emissions dispatching in order to maximize

emission reductions.” 56

In addition, Congress incorporated into Title IV specific incentives to further encourage electric utilities (defined as entities that sell electricity 57 ) to reduce their emissions through demand-side energy efficiency a nd renewable energy: Section 404(f)-(g) provided a special reserve of allowances to be allocated to electric utilities “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 integrated nature of the electricity sector: As one of the conditions for eligibility for this special reserve of allowances, the utility must “ha[ve] adopted and is implementing a least co st energy conservation and electric power plan which evaluates a range of resource s, including new power supplies, energy conservation, and renewable energy resources, in order to meet expected future demand at the lowest system cost.” 58

These CAA provisions and the accompanying statements in the legislative history make clear that in enacting the Title IV provisions to reduce SO 2 and NO

x emissions from fossil-fuel-fired EGUs, Congress viewed th e electricity sector as interconnected and considered re-dispatch to lower emitting sources, renewable energy, and demand-side energy efficiency as methods to reduce those emissions. All this supports the reasonableness of the EPA’s proposed interp retation that the “system of emission reduction” that serves as the basis for “standards of performance” for CO 2 emissions from fossil-fuel-fired EGUs may include those same measures, that is, building blocks 2, 3,and 4 (re-dispatch; low- or zero-emitting generation, including renewables; and demandside energy efficiency, respectively.)

(IV). Other considerations

It should also be noted that a number of commentators in the private sector and academia have indicated support for interpreting the term, “system of emissionreduction” to base the section 111(d) standards of performance on measures such as redispatch, renewable energy, and demand-side energy efficiency. 59 Some stakeholders

have as well. 60

56 1990 Senate Committee Report at 316, reprinted in 1990 Legislative History, vol. V, at 8656 (emphasis added).

57 CAA § 404(f)(1)(C).

58 CAA § 404(f)(2)(B)(iii)(I).

59 See Nordhaus R., Gutherz I., “Regulation of CO 2 Emissions from Existing Power Plants Under §111(d) of the Clean Air Act: Program Design and Statutory Authority,” Environmental Law Reporter, 44: 10366, 10384 (May 2014) (“strong arguments for” interpreting “system” to include measures such as the addition of new zero-carbon generating capacity and increases in end-user energy efficiency); 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 effe ctive in reducing emissions.”); Konschnik K., Peskoe A., “Efficiency Rules: The Case for End-Use Energy Efficiency Prog rams in the Section 111(d) Rule for Existing Power Plants,” Harvard Law School Environmental Law Program – Policy Initiative 4 (March 3, 2014) (EPA is authorized to “consider[] ... the entire [electricity grid] system when setting performance standards.”);29 In addition to the just-discussed reasons why interpreting the term, “system of

emission reduction” to include those measur es is a reasonable interpretation under the CAA, that interpretation also is reasonable as a matter of policy, as we discuss extensively in the preamble. To reiterate briefly, including those measures is consistent with the industry’s long-standing methods of operating to assure reliability at the least cost, how states have more recently reduced non-greenhouse gas air pollutants from the industry, and, how states and segments of the industry have, still more recently, reduced

CO 2 emissions.

b. “Best system of emission reduction ... adequately

demonstrated”

In fact, as the preamble notes, there are many cases in which states and/or companies have reduced emissions through shifting generation away from higher emitting units to lower- or zero-emitting units, or through reducing overall electric demand through demand-side energy efficien cy measures. In some cases, this has occurred in response to goals set at the comp any level: some companies have established a single, company-wide emission target, and th en have used combinations of strategies such as fuel switching, increased renewable or nuclear generation, and increased energy efficiency, to achieve those goals. In othe r cases, this has occurred in response to goals set at the state level: for example, California enacted its Global Warming Solutions Act in 2006 (AB 32), requiring the state to reduce its GHG emissions to 1990 levels by 2020 and 80 percent below 1990 levels by 2050, 61 through a suite of mechanisms that include energy efficiency programs, renewable ener gy programs and an economy-wide cap and trade program, along with other programs. 62 Similarly, mechanisms have also been put in place regionally that have these same imp acts: for example, nine northeast and midAtlantic states participate in the Regional Greenhouse Gas Initiative (RGGI), a market-

Monast J., Profeta T., Pearson B., Doyle J., “R egulating Greenhouse Gas Emissions From Existing Sources: Section 111(d) a nd State Equivalency,” Environmental Law Reporter, 42: 10206, 10209 (March 2012) (“Demand-side energy-efficiency programs and re newable energy generation may fit within the §111 framework, however, because both reduce the utilization of power plants .... According to this reasoning, emission reductions are occurring within the source category, because of change s in generation at the power plant.”).

60 Ceronsky M., Carbonell T., “Section 111(d) of the Clean Air Act: The Legal Foundation for Strong,

Flexible & Cost-Effective Carbon Pollutio n Standards for Existing Power Plants,” Environmental Defense Fund, at 9 (Oct. 2013), available athttp://www . edf .org/sites/default/files/111-clean_air_actstrong_flexible_cost-effective_ car bon_pollution_standards_for_existing_power_plants .pdf ; Doniger D., “Questions and Answers on the EPA’s Legal Authority to Set ‘System Based’ Ca rbon Pollution Standards for Existing Power Plants under Clean Air Act Section 111(d),” NRDC [Natural Resources Defense Counsel] Issue Brief (Oct. 2013); “Comments of the Attorneys General of New York, California, Massachusetts, Connecticut, Delaware, Maine, Mary land, New Mexico, Oregon, Rhode Island, Vermont, Washington, and the District of Columbia on the De sign of a Program to Reduce Carbon Pollution from Existing Power Plants (Dec. 16, 2013).

61 State of California Global Warming Solutions Act of 2006, Assembly Bill 32, Chapter http://www.leginfo.ca.gov/pub/05-06/bill/asm/ ab_0001-0050/ab_32_bill_20060927_chaptered.pdf

62 See Cal. Air Res. Bd., Climate Change Scoping Plan 31-32, 41-46 (2008), available at: http://www.arb.ca.gov/cc/scopingplan/doc ument/adopted_scoping_plan.pdf. Formatted: Indent: First line: 0.5"

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Indent at: 1.75"30 based emissions budget trading program that sets an aggregate limit on CO 2 from fossil fuel fired power plants in the participating states.

In all of these instances, companies’ choices and policies implemented by states may impact decisions about dispatching of lower instead of higher emitting generating units both as part of the short term dispatch process and as part of longer term business planning processes. We believe that the proposed emission guidelines, including the temporal 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 long er term business planning processes.

For the reasons described next, the measures in each of building blocks 2, 3, and 4 qualify as components of the “best system of emission reduction ... adequately demonstrated.” , As noted elsewhere, the D.C. Circuit has interpreted the BSER as to reiterate the test of the D.C. Circuit, “[a]n adequately demonstrated system

, ” and explained that such a system is one that because they 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.” 63 In fact, th eose measures in the building blocks do meet all the criteria , as established by the Court in the section 111 case law. In addition, the measures are “adequately demonstrated” because they have already been implemented in many states, and because they may be undertaken by the af fected EGUs in the regulated markets in which they operate, or may be implemente d by the states in the state plans.

i. Criteria for BSER

First, the measures in those building blocks are technically feasible, as described in the preamble. To reiterate briefly, bu ilding block 2, which entails substituting generation at higher emitting uni ts (fossil-fuel-fired steam ge nerating units) by shifting to generation at lower-emitting sources (exis ting NGCC units) is technically feasible because the NGCC units are already providing el ectricity to the grid and have sufficient capacity to generate the additional amount of electricity that would substitute for the generation at fossil-fuel-fi red steam generating units. Re-dispatch is already widely used (usually more in response to fuel price signals than as a GHG mitigation measure), including by companies that own both coal - and natural-gas-fire d EGUs. It should be

noted that Tt here are several mechanisms through which states could cause this redispatch to occur. First, a state could use its permitting authority to impose limits on the hours of operation (or emissions) of individual steam genera ting units over a given time period. Second, a state could change the re lative costs of generation for more carbonintensive and less carbon-intensive generatin g units by imposing a cost on carbon

emissions. A state could do so through any of several market-based mechanisms. One way to do so would be to adopt an allowance-based system. An example is the Regional Greenhouse Gas Initiative, an allowance- based system in which sources purchase allowances in periodic auctions. Another wa y would be through a tradable emission rate system, under which the state would impose an emission rate on the steam generating

63 Essex Chemical Corp. v. Ruckelshaus , 486 F.2d at 427. Formatted: Font: Bold, Italic

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Indent at: 2.5"31 unit that the unit could meet only by purchasing the right to average its emission rate with a unit with a lower rate, such as an NGCC unit. Most broadly, an allowance system would provide the greates t incentive for the most carbon-intensive affected sources to reduce emissions as much as possible so as to reduce their need to purchase allowances (or to allow them to sell un-needed allowa nces), and the same would be true for a tradable emission rate system.In addition, re-dispatch is already widely used (usually more in response to fuel price signals than as a GHG mitigation measure), including by companies that own both coal- and natural-gas-fired EGUs.

As discussed in the preamble, building bl ock 3, which entails new low- and zeroemitting energy as well as preservation of nuclear capacity that might otherwise beretired, is also technically feasible. The technology for renewable energy is wellestablished and in use now, and the amount of renewable energy contemplated by the proposal would not impair the reliability of the grid. The nuclear capacity at issue either is already in operation or, in the case of new nuclear capacity under 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 mechanisms. In particular, a market for renewable energy certificates, wh ich facilitates investment in renewable energy, is already well-established. In addition, as noted above with re-dispatch, an allowance system or tradable emission rate system would provide incentives for sources to reduce their emissions as much as possibl e, including by substitu ting their generation with generation from renewable energy.

As for building block 4, as discussed in the preamble, numerous state and utility programs have demonstrated that improvemen ts 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 measures in building block 4 in the same manner as just discussed for other building blocks.

It should be noted, as discussed in the preamble, that because of the integrated nature of the electricity system, these measures have long been relied on to reduce costs in general, assure reliability, and implement pre-existing pollution control requirements in the least cost manner. As also noted in the preamble, some utilities, states and regions are already relying on these measures fo r the specific purpose of reducing CO 2 emissions

from EGUs.

For the reasons discussed in the preamble, building blocks 2, 3, and 4 also meet the remaining criteria to qualify as the BSER. The level of CO 2 emissions reduction they achieve is significant, which is appropriate be cause of the severity of the risk to public health and the environment of climate change , and the magnitude of both the amount of

emissions reductions needed and the amount of CO 2 emissions from fossil-fuel-fired power plants. In addition, the proposed leve ls of reduced generation are not unreasonably costly for the affected source category or the nation-wide electricity system, they do not have adverse effects on the overall energy system (to the contrary, they improve it by reducing its carbon intensity), and they pr omote the development and implementation of technology that is important fo r continued emissions reductions.32 ii. Basis for “adequately demonstrated” finding

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 electricity system, they have long been relied on to redu ce costs in general, assure reliability, and implement pre-existing pollution control require ments in the least cost manner. As also noted in the preamble, some utilities, states and regions are already relying on these measures for the specific purpose of reducing CO 2 emissions from EGUs.

It should be noted that because the measures in building blocks 2, 3, and 4 have the effect of reducing CO 2 emissions from fossil-fuel-fired EGUs, each of the building blocks is part of a “system” of emission reduction for those EGUs regardless of which entities undertake the measures; o. Regardless of the entities required to undertake the relevant measuresf course, during the complia nce periodthe resulting emission reductions in fact will be taking place at individual EGUs. At the same time, as discussed in the preamble, all of the measures in building blocks 2, 3, and 4 that are needed to achieve the requisite emissions reductions may be undertaken by the affected EGUs themselves , which confirms that these measures are “adequately demonstrated

. ” To achieve the re-dispatch described in building block 2, operators of the affected fossil-fuel-fired steam-generating EGUs may reduce generation, while operators of the affected NGCC units may increase generation to provide substitute generation to replace that avoided at higher-emitting facilities. Operators of the affected EGUs may invest in, or otherwise acquire power from, the new low- or zero-carbon intensive generation described in building block 3, as well as in many of the demand-side energy efficiency measures desc ribed in building block 4.

More specifically, Mm any states maintain a utility regulatory structure under which the utilities that serve end users in the state are vertically integrated, and not only own the EGUs, but often also own renewa ble energy resources and provide servicedirectly to retail customers. Operators of EGUs, in those circumstances, are wellpositioned to undertake the measures in buildin g blocks 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 preamble, many companies have already developed integrated resource plans that include re-dispatch from higher-emitting fossil-fuel-fired generation to lower-emitting generation, the purchase of renewable capacity or the developm ent of renewable generation assets , and the implementation of demand-side energy efficiency measures. 64

64 Moreover, in many de-regulated states, forward capacity auctions are used to ensure the ability to meet future demand, and generators may bi d into those auctions based on all of their resource portfolio, including renewable energy assets and demand-side energy efficiency projects. This has encouraged generators to undertake the measures in building blocks 3 and 4. Formatted: Indent: First line: 0"

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Formatted: Tab stops: 5.45", Left33 Other states have de-regulate d their electricity markets 65 and as a result, in some instances, the EGUs in those states are merchant generators that sell to the wholesale electricity market. The EPA believes that markets for acquiring renewable energyresources and for delivering demand-side energy efficiency services are sufficiently welldeveloped that operators of these EGUs coul d undertake or acquire those measures as well. For example, merchant generators can invest in NGCC capacity, invest in renewable capacity or purchase renewable energy or renewable energy certificates (representations that a certain amount of en ergy was produced from renewable sources), as well as purchase demand-side energy efficiency services from energy service companies. Moreover, in many de-regulated states use forward capacity auctions to ensure the ability to meet future demand, and generators may bid into those auctions based on all of their resource portfolio in cluding renewable energy assets and demandside energy efficiency projects. The fact that the affected sources may themselves implement or invest in the measures in building blocks 2, 3, and 4 -- which, again, reduce their emissions -- supports treating thos e measures as components of the BSER.

Another reason that the measures in building blocks 2, 3, and 4 should be

considered “adequately demonstrated” part of the BSER – and wholly apart from the fact that the question of which entities should be considered to be responsible forEGUs may

undertak eing those measures themselves – is based on the fact that CAA section 111(d)(1)(A) provides, by its terms, that the standards of performance that are based on the BSER must be established by the states in state plans. As a result, emissions reduction measures that the states themselves have the authority under state law to put in place may be considered to be part of the BSER. Here, wW hile EGU owners and operators may effectuate such measures directly or indirectly, the states also have authority to enact measures such as re-dispatch requirements, renewable portfolio standards that require investment in renewable energy resources, as well as demand-side energy efficiency

measures. 66 As noted in the preamble, many states have already done so. 67

The fact that many states have adopted measures that require increased renewable electricity generation and increased end-use energy efficiency further supports the

conclusion that these emission reduction meth ods are feasible and offer opportunities for significant reductions in emissions that are achievable considering cost. More than half the states have established renewable port folio standards (RPS) that require minimum proportions of electricity sales to be supp lied with generation from renewable generating

65 Some states, such as Ohio, have hybrid model that includes elements of a re gulated market and a deregulated market.

66 It should be noted that under the portfolio approach to the state plan, discussed in the preamble, the entities that undertake some of the measures in, fo r example, building block 4 may not be the affected EGUs. Regardless of which entities undertake the meas ures in the building blocks, those measures have the effect of reducing CO 2 emissions from fossil-fuel-fired EGUs, and therefore each of the building blocks remains part of a “system” of em ission reduction for those EGUs.

67 More than half the states have established ren ewable portfolio standards (RPS) that require minimum proportions of electricity sales to be supplied with generation from re newable generating resources. More than 20 states have energy efficiency resource standard s (EERS) that require utilities to effectuate a certain amount of savings in electricity demand each year or cumulatively. Database of State Incentives for Renewables & Efficiency (DSIRE), http://www.dsireusa.org/summarymaps/index.cfm?ee=0&RE=0. Formatted: Indent: First line: 0.5"

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Formatted: Font: 10 pt, Complex Script Font: 10 pt34 resources. More than 20 states have energy efficiency resource standards (EERS) that require utilities to effectuate a certain amount of savings in electricity demand each year or cumulatively. 68

Finally, we note an additional reason that building blocks 3 and 4 should be considered to be part of the BS ER for fossil-fuel-fired EGUs.that Dd uring the public outreach sessions, stakeholders generally recommended that st ate plans be authorized to rely on, and that affected sources be authorized to implement, re-dispatch, renewable energy measures and demand-side energy effi ciency measures, in order to meet the states’ and sources’ emissions reduction obligations. The EPA agrees that state plans may include these measures, at least under certain circumstances, discussed belowin the preamble , and that sources may rely on them to achieve required reductions. It is clear that these types of measures are well-accepted by the stakeholders as means to reduce emissions from affected sources. The fact that state plans and sources would be expected to use these types of measures to reduce emissions supports the view that these measures are part of a “system of emission reduction” for those sources that the EPA may evaluate against the appropriate criteria to determine 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 demand-side energy efficiency measures (bui lding blocks 2, 3, and 4) as components of the “best system of emission reduction ... adequately de monstrated.” However, other stakeholders have disagreed that this approach is consis tent with CAA §111(d). According to these latter stakeholders, as a legal matter, the BSER is limited to measures that may be undertaken at the affected units, and not measur es that are beyond the affected units; the measures in building blocks 2, 3, and 4 are “beyond-the-unit” measures because they are implemented outside of the affected units and outside their control; and as a result, those measures cannot be considered components of the BSER. 69

We welcome comment on this issue. As discussed above, we propose that the provisions of section 111 do not by their terms preclude the BSER from including those

68 More than half the states have establishe d renewable portfolio standards (RPS) that require minimum proportions of electricity sales to be s upplied with generation from renewable generating resources. More than 20 states have energy efficiency resource standards (EERS) that require utilities to effectuate a certain amount of savings in electricity demand each year or cumulatively. Database of State Incentives for Renewables & Efficiency (DSIRE), http://www.dsireusa.org/summarymaps/index.cfm?ee=0&RE=0.

69 “Response of the Utility Air Regula tory Group to EPA’s ‘Considerations in the Design of a Program to Reduce Carbon Pollution from Existing Power Plan ts” (Oct. 2013), “Existin g Source Performance Standards for Greenhouse Gas Emissions from Electrical Generating Units: Creating a Regulatory Framework Under Clean Air Act § 111(d) – A whitepaper from the Coalition for Innovative Climate Solutions” (Feb. 26, 2014). Formatted: Numbered + Level: 1 + Numbering Style: a, b, c, ... + Start at: 1 + Alignment: Left + Aligned at: 1.5" + Indent at:

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Formatted: Font: 12 pt, Complex Script Font: 12 pt35 types of measures. In addition, as discussed above, under our proposed approach, affected sources may themselves implement the measures included in building blocks 2, 3, and 4, so that those measures are within their control. Moreover, under our proposed alternative approach, the “system of emission reduction” in cludes reductions in utilization at the

affected sources themselves. 70 It should also be noted that, as discussed above, the redispatch measures in building block 2 are limited to affected sources. Thus, the proposed approach and alternative de scribed above respond to these stakeholder concerns.

45

. Alternate Reduced utilization approach

As an alternative to the approach described above for determining the “best system of emission reduction ... adequately demonstrated,” the EPA believes the “system” may be identified as simply including, in addition to building block 1, the reduced utilization of fossil-fuel-fired EGUs, with the measures in building blocks 2, 3, and 4 serving as sources of substituting genera tion or electricity services needed to assure

that the amount of the reduced utilization from these higher emitting sources will be consistent with reliability needs and not be unreasonably costly.

The EPA is also proposing an alternative approach to BSER, which identifies a component of the “system of emission reducti on” as reduced utilization in specified amounts of the higher-emitting fossil-fuel-fired EGUs. For the reasons discussed below,

70 Commenters have critiqued this “at-the-unit ” and beyond-the-unit” di stinction as follows:

There is an argument that the at-the- unit/beyond-the-unit distinction is not a meaningful one. Specifically, it could be argued that the distinction between at-the-unit and beyond-the-unit measur es is largely artificial, because

all of the emission reductions under co nsideration—whether from at-the-unit measures (e.g., fuel-switching or effi ciency upgrades) or from beyond-theunit 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 reduct ion here contemplated—whether they involve end-use energy efficiency, disp lacing high-emission generation with lower emission generation , fuel-switching, heat-rate improvements, etc.— are effectively at-the-unit measures that ultimately reduce emissions solely from regulated EGUs. If energy-efficiency programs, added renewable energy, and redispatch from higher emitting f acilities to lower emitting facilities are viewed as at-the-unit systems of emission reduction, the at-the-unit/ beyond-the-unit distinction arguably becomes irrelevant—at least from a legal perspective. Rather, the real i ssue may come down to whether §111(d) authorizes EPA to require EGUs to curtail their output of electricity as a means of complying with the rule.

Nordhaus R., Gutherz I., “Regulation of CO 2 Emissions from Existing Power Plants Under §111(d) of the Clean Air Act: Program Design and Statutory Authority,” Environmental Law Reporter, 44: 10366, 10383 n. 133 (May 2014).36 reduced generation in the specified amounts is a “system of emission reduction,” and it is the “best” that is “adequately demonstrated” because it meets the criteria for the BSER and it is a well-established method of pollution control.

Like the approach described above, this alternative treats the measures in building block 1 – the heat rate improvements at the affected sources – as a component of

the BSER. This alternative also includes sim ilarities to the approach described above in how it evaluates the measures in building blocks 2, 3, and 4.

Specifically, under this alternative, the amount of reduced generation correspondsto the amounts of increased generation available at NGCC units, increased available lowor zero-carbon generation, and available increased demand-side energy efficiency (building blocks 2, 3, and 4, respectively). In light of the building blocks, this approach also meets the criteria to qualify as the BSER.

Reduced generation is a “system of emission reduction” because it is an action or a set of actions (i.e., limiting the amount of el ectricity produced) that the affected source may take to reduce its emissions. Reducing generation is te chnically feasib le because of the source’s ability to limit its own operations; however, it should be emphasized that the reduced generation that the EPA proposes as the “system” is in an amount that (i) as discussed below, may be subs tituted with increased generation from low- or zeroemitting sources and increased demand-side energy efficiency, and (ii) as discussed in the preamble, may be accomplished in a manner that assures the reliability of the electricity grid. [NOTE TO INTERAGENCY REVIEWERS: We intend to add to the preamble the explanation for (ii).]

a. “[S]ystem of emission reduction”

The phrase “system of emission reduction” may be interpreted to include reduced generation in the specifie d amounts as a matter of Chevron step 1. The phrase applies by its terms because reduced generation is an action or a set of actions – which include reduced use of generating equipment and redu ced fuel input – that the affected source may take to reduce its CO 2 emissions.

If the phrase “system of emission reduction” is not considered clear by its terms, then it may reasonably be interpreted under Chevron step 2 to include reduced generation. The legislative history supports this interpretation. Beginning with the 1970 CAA Amendments, Congress has recognized that SIPs under CAA §110, in order to assure reductions in NAAQS pollutants to m eet attainment requirements, may need to impose emission limits on industrial sour ces that those sources could meet only by retiring. 71 Similarly, in adopting CAA §112, wh ich directed the EPA to promulgate

71 See CAA §110(g) (authorizing temporary emergency susp ensions of SIP revisions if needed to prevent the closing of a source of air pollution), enacted as CAA §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. Muskie) (discussing criteria for sources to receiv e compliance date extensions). Similarly, Congress recognized that to achieve the NAAQ S, it was necessary to reduce emissions from motor vehicles, and that Formatted: Indent: First line: 0"

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Formatted: Font: Italic37 emission standards for sources of hazardous air pollutants (HAPs) to a level of stringency that provides an “ample margin of safety to protect the public health,” 72 Congress was clear that the standards could be sufficiently stringent so that “effectively, ... a plant would be required to clos e because of the absence of control techniques.” 73 As noted above, Congress adopted CAA §111(d) to addr ess air pollutants from existing stationary sources that were neither NAAQS pollutants nor HAPs, but that EPA might eventually regulate as either NAAQS pollutants or HAPs. Because Congress intended that sources of NAAQS pollutants and HAPs might have to re strict production or ev en retire to meet their emission limits, it is reasonable to c onsider that Congress intended the same for sources of air pollutants regulat ed under section 111(d). As a result, it is reasonable to interpret the term “system of emission reduction,” which Congress mandated as the basis for controls on §111(d) air pollutan ts, to include reduced production.

Other examples of reduced utilization as a means of reducing emissions to complywith CAA requirements are found in settlement agreements between the EPA and fossilfuel-fired EGUs to resolve alleged violat ions of the CAA new source review (NSR) requirements. These agreements typically allow the EGUs to choose one of several means to comply with their emission reduc tion obligations, including retiring units. 74

Similarly, fossil-fuel-fired EGUs have empl oyed reduced generation as one of the options to comply with other CAA requirements, including Title IV and CAA §110 SIP requirements implementing the Clean Air Interstate Rule (CAIR), 75

Reduction of, or limitation on, production is already a well-established means of reducing emissions of pollutants in the electric sector and not merely a theoretical option that is unavailable as a practical matter for sources that may have to operate to ensure system reliability. For example, reduced generation 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 Call 76 and the Clean Air Interstate Rule (CAIR). 77

an important method of doing so could be restricting the use of motor vehicles in urban areas that were already highly polluted. For this reason, Congress included in the 1970 CAA Amendments authorization

for SIPs under section 110 to include “transportation controls.” CAA §110(a)(2)(B), as approved in the 1970 CAA Amendments. Sen. Edmund S. Muskie (D-ME), who led the proponents for the Amendments in the Senate, explained 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).

72 CAA §112(b)(1)(B), as approved in the 1970 CAA Amendments.

73 116 Cong. Rec. 42385 (Dec. 18, 1970), reprinted in 1970 Legislative History, vol. 1, at 133 (statement of Sen. Muskie). Sen. Muskie added that the emi ssion standards set 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 result in reduced production.

74 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/documents /wisconsinpower-cd.pdf [correct cite]

75 70 Fed. Reg. 25,162 (May 12, 2005).

76 63 Fed. Reg. 57,356 (Oct. 27, 1998).

77 70 Fed. Reg. 25,162 (May 12, 2005). Formatted: Not Highlight

Formatted: Not Highlight38 b. “[B]est system of emission reduction ... adequately

demonstrated”

Reduced generation from the higher-emitting EGUs in the indicated amounts is the “best system of emission reduction ... adequately demonstrated” because it is technically feasible due to th e source’s ability to limit its own operations; and the amount (i) may be substituted with the building block 2, 3, and 4 measures for increased generation from low- or zero-emitting so urces and increased demand-side energy efficiency; and (ii) may be accomplished in a manner that assures the reliability of the electricity grid.

The levels of reduced generation proposed meet the criteria for the “best system of emission reduction ...adequatel y demonstrated.”Specifically, Tt he amount of emission

reduction they achieve d is appropriate, as discussed above. In addition, the cost of the proposed levels of reduced generation are reas onable for the affected source category and the nation-wide electricity system , and do not jeopardize reliability . Further, reduced generation from the higher-emitting EGUs , and do promote s the development and implementation of technology that is important for continued emissions reductions by increasing the demand for that technology . This is because of the interconnected nature of the electrical grid and the 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 (build ing block 4), and th ereby makes reduced utilization a viable approach for emissions reductions by EGUs.

As noted above, the measures in buildi ng blocks 2, 3, and 4 are already in widespread use in the industry. At the leve ls in the proposal, they have the technical capability to substitute for the affected units’ reduced utilization at reasonable cost. Moreover, it is reasonable to expect that they will develop at the level requisite to ensure an adequate and reliable supply of electrici ty. There are two reasons for this. First, the

affected sources themselves could invest in new renewable energy resources and demand-side energy efficiency, as discussed above. 78 Second, the states, as part of their plans, have mechanisms available to put these substitutes in place: They could establish requirements or incentives that would result in new renewable energy and demand-side energy efficiency programs, as also discussed above. Second, the affected sources

themselves could invest in new renewable energy resources and demand-side energy efficiency, as also discussed above. 79

78 It should be noted that in light of the low current an d projected near term prices for natural gas, market forces may lead investors to choose to build new NGCC units, rather than new renewable resources. This result would not call into question the technical feas ibility of a BSER that in cluded reductions in fossilfuel-fired generation by the amount of a specified amount of new renewable resources. This is because under these circumstances, the fossil-fuel-fired gene rators could still reduce their generation without causing reliability or other problems in the electric power system.

79 It should be noted that in light of the low current an d projected near term prices for natural gas, market forces may lead investors to choose to build new NGCC units, rather than new renewable resources. This result would not call into question the technical feas ibility of a BSER that in cluded reductions in fossilfuel-fired generation by the amount of a specified amount of new renewable resources. This is because Formatted: Indent: First line: 0"

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Indent at: 1.75"39 5. EPA’s discretion in applying the criteria for the best system of

emission reduction

[NOTE TO INTERAGENCY REVIEWERS: We moved this subsection to the preamble.]

Each of the approaches to determining BSER described above entail applying the same criteria described in the D.C. Circuit case law for evaluating BSER. Above and in the preamble, we explain why each approach satisfies those criteria.

Here, we emphasize that under the case law, the EPA has significant discretion in weighing the different criteria, and may weigh them differently in different rulemakings. In the present rulemaking, the EPA is heavil y weighting two criteria in particular: the amount of emissions reduction and the promotion of technology implementation – while also noting that the proposed BSER determination readily meets the other criteria as well. The EPA considers it especially important in this rulemaking, while ensuring that costs are not unreasonable, to achieve a significant amount of emissions reductions in response to the urgency and the magnitude of the need to mitigate climate change. The preamble discusses this in the sections concerning the scientific background for this rulemaking. The EPA also considers it especially important in this rulemaking to promote technological innovation and de velopment of, in particular, the measures in building blocks 3 and 4 (to reiterate, low- or zero -emitting electric gene ration and demand-side energy efficiency, respectively). Promoting innovation in, and market penetration of, these technologies and practices is critical to making the substantial reductions in emissions that will be required during th e next few decades to reduce the risks of dangerous climate change.

In addition, in this rulemaking, as described in the preamble, the EPA is determining the BSER in a manner that is consistent with, and that provides further impetus for, current trends in the nation’s electricity system that offer promise to reduce the carbon intensity of the system over the near- and long-term, while maintaining reliability and affordability. This approach is consistent with the case law, which authorizes the EPA to determine BSER by “b alanc[ing] long-term national and regional impacts,” and by “using a long-term lens with a broad focus on future costs, environmental and energy effects of different technological systems....” 80

67

. Re-dispatch and sources in the regulated source categories.

As described in the preamble, building block 2 consists of reductions in generation from fossil-fuel-fired steam genera ting boilers, and corre sponding increases in generation by NGCC units. The amount of this re-dispatch is the amount that the steam

under these circumstances, the fossil-fuel-fired gene rators could still reduce their generation without causing reliability or other problems in the electric power system.

80 Sierra Club v. Costle , 657 F.2d 298, 331 (D.C. Cir. 1981). Formatted: Tab stops: 3.87", Left40 generating boilers may reduce, and that NGCC units may increase, up to an average of 70% capacity utilization of the NGCC units.

Accordingly, this component of BSER involv es two sets of sources. The first (the steam generating boilers) decreases its emi ssions. The second (the lower-emitting NGCC units) may increase its emissions if increased operations are necessary to ensure the ongoing reliability of the integr ated electricity system, of wh ich both sets of source are a part, as emissions and generation reduction is occurring at steam generating boilers and net reductions are being achieved. Both th ese sets of sources are affected sources because they are in source categories that are covered by this rulemaking. As noted in the preamble, the fossil-fuel-fired steam generating boilers 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 boilers) are subject to reduction requirements through other components of the BSER, specifically, building blocks 3 and 4 (low - and zero-emitting energy and demand-sideenergy efficiency, respectively). In addition, as noted in the preamble, the EPA is coproposing to combine the two source categories into a single source category, covering

fossil-fuel-fired EGUs.

7. Stakeholder concerns

The EPA is aware that some stakeholders have expressed concern that redispatch, renewable energy, and demand-side energy efficiency measures (building blocks 2, 3, and 4) are not authorized under CAA section 111 to be components of the BSER because, according to these stakeholders, these measures are implemented outside of the affected units and beyond the control of the affected units. However, the provisions of section 111 do not by their terms preclude the BSER from including those types of measures. In addition, as noted above, unde r the proposed approach, affected sources may themselves implement the measures included in building blocks 2, 3, and 4, so that

those measures are within their control. More over, under the alternativ e, the “system” of emission reduction may be viewed as including reductions in utilization at the affected sources themselves. It should also be noted that, as discussed above, the re-dispatch measures in building block 2 are limited to a ffected sources. Thus, the proposed approach and alternative described above resp ond to these stakeholder concerns.

8. Re-dispatch: intra-state and inter-state compliance

In this section, we discuss the issue of whether CAA section 111(d) limits the EPA to applying the re-dispatch component (bui lding block 2) of the BSER, based on the assumption that each state will comply with that component on a purely intra-state basis, or instead, whether the EPA could base build ing block 2 on an assumption that the 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 implement it on a state-by-state basis, without relying on a multi-state41 regional grid. In particular, we have assumed that each state would increase generation of its own NGCC units to as close to an average 70% capacity utilization as possible, given the amount of generation from in-state fossil-fuel-fired steam generating boilers, and we assumed the corresponding amount of reduction in generation from those steam generators. We have determined the costs of that re-dispatch, and propose to find that they are reasonable. 81 Because we know that dispatch systems operate over multi-state regions, however, we have also determined 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.

We found that based on the intra-state approach, some states could not increase their average NGCC unit utilization to 70% because they have limited fossil-fired boiler steam generation. In contrast, based on the region-wide approach, more of the statescould increase their average NGCC utilization to 70%. In addition, the costs of the intrastate 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 exception of Texas, are part of a multi-state, regional grid each stat e’s implementation of building block 2 would, as a practical matter, necessarily occur on an interstate, and not an intrastate, basis.

CAA section 111(d)(1), by its terms, a pplies requirements on a state-by-state basis. It requires that “each State shall submit to the Administrator a plan” that includes standards of performance as well as implem enting and enforcing measures. Further, it allows “the State in applying a standard of performance to any particular source under a [state] plan” to take into consideration factors such as the source’s remaining useful life.

These provisions raise the issue of whethe r section 111(d) may be interpreted so that the re-dispatch component of BSER may be applied on the assumption that each state would implement that component on a purely intra-state basis, or whether section 111(d) may be interpreted so that the re-dispatch component may be applied on the assumption that each state would implement through the op eration of the interstate grid in which it participates. This issue may also apply to building blocks 3 and 4.

VII. State plans – content

This section discusses various aspects of the content of state plans.

A. Emissions performance level – stringency, state flexibilities

[NOTE TO INTERAGENCY REVIEWERS: We moved this subsection to the preamble.]

This subsection discusses the obligations and flexibilities that states have in determining the emissions performance levels of their CAA section 111(d) state plans.

81 It should be noted that we also evaluated region-wide re-dispatch, for which the costs are less.42 As discussed above, the implementing regulations assign to the EPA the responsibility for determining the “best system of emission reduction ... adequately demonstrated” and applying it to determine th e “degree of emission reduction” reflected in the “emission guideline[s],” which in this case are the state goals. 82 In addition, the implementing regulations provide that, in the case of an air pollutant that adversely affects human health, the state plans must achie ve emissions reductions equivalent to the EPA emission guidelines: “[W]here the Admi nistrator has determined that a designated pollutant may cause or contribute to endangerm ent of public health, emission standards shall be no less stringent than the corresponding emission guideline(s) ...." 83

In this rulemaking, we are follow ing these implementing regulations. 84 As a result, each state plan’s emissions performance level must be equivalent to the state goal the EPA promulgates for that state, which, as noted above, is based on the EPA’s application of the BSER to the affected sources in the state. In the preamble, we request comment on the process for a state to provide input into the EPA’s establishment of the state’s goal, including the type of showing that the state must make if it believes that the EPA’s proposed goal is inconsistent with BSER as applied to the state. These requests should not be interpreted as requesting comment on whether the state plan may establish an emissions performance level that is less stringent than the EPA-promulgated state goal.

As discussed in the preamble, the state has flexibility as to the form of the emissions performance level, for example, whethe r it is expressed as an emission rate or a mass limit, as long as it is equivalent to – that is, as the regulations provide, “no less stringent than” 85 -- the state goal.

[NOTE TO INTERAGENCY REVIEWERS: We in tend to move the rest of this section to the preamble.]

BA . Types of measures – state flexibilities

As discussed above, under CAA section 111(a)( 1), determining the BSER is part of the methodology by which the EPA determines the amount of emissions reduction that the state plans must achieve. Under section 111(d)(1), each state plan must include standards of performance that achieve it s requisite emissions performance level. However, the state enjoys broad discretion in determining the standards of performance, at least under certain circumstances, as discussed below. Moreover, if a state wishes, it may require in its section 111(d) state plan particular measures that sources must implement, in order to achieve the reductions necessary for the state to meet its emission performance level. These state plan measures are not limited to the measures that the EPA identifies as part of the BSER. Similarly, affected sources that are subject to the state plan may meet their requirements through any measure they choose, as long as that

82 40 CFR 60.22.

83 40 CFR 60.24(c).

84 The EPA is not re-opening these implementing regulations.

85 Id

.43 measure is consistent with the plan’s requirements, and these sources are not limited to using measures identified as part of the BSER.

For example, as the preamble explains, in this rulemaking, the EPA is not identifying carbon capture and storage (CCS) as a component of BSER. Even so, a state could elect to include in its plan a requirement that a coal-fired EGU achieve an emission limit consistent with CCS, or even that the EGU implement CCS. By the same token, if the state plan simply imposes an emissions limit on the source, the source could elect to achieve that limit through CCS.

CB . Design, equipment, work practice, or operational standards

In this section, we discuss whether section 111(d) state plans may include design, equipment, work practice, or operational standards.

CAA section 111(h)(1) authorizes the Ad ministrator to promulgate “a design, equipment, work practice, or operational standard, or combination thereof,” if in his or her judgment, “it is not feasible to prescribe or enforce a standard of performance.” Section 111(h)(2) provides the circumstances under which prescribing or enforcing a standard of performance is “not feasible”: Generally, when the pollutant cannot be emitted through a conveyance designed to emit or capture the pollutant, or when there is no practicable measurement methodology for th e particular class of sources. Other provisions in section 111(h) further provide that a design, equipment, work practice, or operational standard (i) must “be promulgated in the form of a standard of performance whenever it becomes feasible” to do so, 86 and (ii) must “be treated as a standard of performance” for purposes of, in general, the CAA. 87

As noted above, section 111(d) requires that state plans “establish[] standards of performance” as well as “provide[] for the implementation and enforcement of such standards of performance.” Section 111(d) is silent as to whether (i) states may include design, equipment, work practice, or operational standards, or (ii) they may include those types of standards, but only under the lim ited circumstances descri bed in section 111(h) (i.e., when it is “not feasible” to prescribe or enforce a standard of performance). Similarly, section 111(h) applies by its terms when the Administrator is authorized to prescribe standards of performance (which would include rulemaking under CAA section 111(b)), but is silent as to whether it app lies to state plans under CAA section 111(d). 88

We invite consideration of the proper interpretation of CAA §§111(d) and (h),

under either Chevron step 1 and step 2, specifically: (i) Do the provisions of section 111(d) preclude state plans from including “design, equipment, work practice, or operational standard[s]” unless those th ings may be considered “standards of performance” or as providing for the implemen tation and enforcement of such standards?

86 CAA section 111(h)(4).

87 CAA section 111(h)(5).

88 It should be noted that section 111(b)(5), which concerns controls promulgated by the Administrator for new and modified sources, does refer to section 111(h).44 As a related matter, do the references to “standard[s] of performance” in section 111(h) indicate that design, equipment, work pract ice, or operational standards may not be considered “standards of performance?” (ii) Alternatively, are state plans authorized to include those design, equipment, work practi ce, or operational standa rds, but only under the limited circumstances described in section 111(h) relating to infeasibility? (iii) As another alternative, are state plans authorized to include design, equipment, work practice, or operational standards under all circumstances, so that the limits of section 111(h) do not apply? Finally, to the extent th ere is legal uncertainty over whether, and under what circumstances, state plans may include those standards, should the EPA authorize state plans to include them, on the understanding that if the Court invalidates, state plans would be required to be revise d accordingly without further rulemaking from

the EPA?

DC . Emissions averaging and trading

In this section, we discuss why CAA section 111(d) state plans may include standards of performance that author ize emissions averaging and trading.

Section 111(d) authorizes state plans to include “standards of performance” and measures that implement and enforce those standards of performance. Section 111(a)(1) defines a “standard of performance” as “a st andard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction ... adequately de monstrated.” Section 302 contains a set of definitions that apply “[w]hen used in [the Clean Air Act],” including subsection (l), which provides a sepa rate definition of “standard of performance” as “a requirement of

continuous emission reduction....”

The EPA proposes that the definition of “standard of performance” is broad enough to incorporate emissions averaging and trading provisions, including both emissions rate programs, in which sources may average or trade those rates; and mass emission limit programs, in which sources may buy and sell mass emission allowances (and, under certain circumstances, offsets)

. 89 The term “standard” in the phrase “standard for emissions of air pollutants” is not defined in the CAA. As the Supreme Court noted in a Clean Air Act case, a “standard” is simply “that which ‘is established by authority, custom, or general consent, as a model or example; criterion; test.’” Engine Mfrs. Ass’n v. South Coast Air Quality Magmt. Dist. , 541 U.S. 246, 252-53 (2004) (quoting Webster’s Second International Dictionary , at 2455 (1945)). A tradable emission rate or a tradable mass limit is a “standard for emissions of air pollutants” because it establishes an emissions limit for a source’s air pollutants, and as a result, qualifies as a “criterion” or “test” for those air pollutants. In addition, a tradable rate or mass limit may “reflect[] the degree of emission limit achievable through the application of the best system of emission reduction” because it may be set at a level that assures that emissions will not

89 Typically, in a mass emission limit trading program, so urces are required to obtain an allowance for each measure (e.g., ton) of air pollutant they emit. The ac id rain program under Title IV of the CAA is an example of this type of trading program.45 exceed the amount that would result from application of the best system of emission

reduction.

Moreover, although there may be doubt that the definition of “standard of performance” in section 302(l) applies to se ction 111(d) in light of the fact that the definition of the same term in section 111(a)(1) is more specific, even if the section 302(l) definition does apply, an averagin g or trading requirement qualifies as a “continuous emission reduction” because, in the case of a tradeable emission rate, the rate is applicable at all times, and, in the case of a tradeable mass limit, the source is always under the obligation that its emissi ons be covered by allowances.

It should be noted that the EPA ha s promulgated two other section 111(d) rulemakings that authorized state plans to include emissions averaging or trading. 90

VIII. Ongoing applicability of section 111(d) state plan

[NOTE TO INTERAGENCY REVIEWERS: We intend to move this section to the preamble.]

The EPA is proposing that an existing source that becomes subject to requirements under CAA section 111(d) will cont inue to be subject to those requirements even after it undertakes a modification or reconstruction. Under this interpretation, a

modified or reconstructed source would be subject to both (1) the section 111(d) requirements that it had previously been subject to and (2) the modified source or reconstructed source standard being promulgated under 111(b) simultaneously with this rulemaking.

As noted above, a “new source” is defined under section 111(a)(2) as “any stationary source, the construction or modification of which is commenced after,” in general, a proposed or final section 111(b) rule becomes applicable to that source; and under section 111(a)(6), an “exi sting source” is defined as “any stationary source other than a new source.” Under these definitions, an “existing source” that commences

construction of a modification or reconstruction after the EPA has proposed or finalized a section 111(b) standard of performance applicable to it, becomes a “new source.” However, section 111(d) is silent on whet her requirements imposed under a section 111(d) plan continue for a source that ceases to be an existing sour ce because it modifies or reconstructs. For example, section 111(d) provides that the state plans will “establish[] standards of performance for any existing source” but does not say whether, once a standard of performance is established for a given source, that standard is lifted if the source ceases to be an existing source. Sim ilarly, no other provisions of section 111

90 See “Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units, Final Rule,” 70 Fed. Reg. 28,606 (May 18, 2005) [also known as the Clean Air Mercury Rule, or “CAMR”], 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 Sources and Emission Guidelines for Existing Sources; Municipal Waste Combustors,” 60 Fed. Reg. 65,387 (Dec. 19, 1995). Formatted: Indent: First line: 0"

Formatted: Font: Bold, Italic46 address whether the imposition of a secti on 111(b) standard on a modified or reconstructed source ends the source’s obligation to meet any applicable section 111(d) requirements.

Because section 111(d) does not address whether an existing source that is subject to a 111(d) program remains subject that prog ram even after it modifies or reconstructs, the EPA has authority to provide a reasonable interpretation, under the Supreme Court’s

decision in Chevron U.S.A. Inc. v NRDC , 467 U.S. 837, 842-844 (1984). The EPA’s interpretation is that under these circumstances, the source remains subject to the section 111(d) plan, for two reasons. The first is to assure the integrity of the section 111(d) plan. The EPA believes that many States will develop integrated plans that include all of their EGUs, such as rate- or mass-based tr ading programs. Uncertainty about whether units would remain in the program could be very disruptive to the operation of the program. The second reason is to avoid creating incentives for sources to seek to avoid their obligations under a section 111(d) plan by undertaking modifications. The EPA is concerned that owners or ope rators of units might have incentives to modify purely because of potential discrepancies in the st ringency of the two programs, which would

undermine the emission reduct ion goals of section 111(d). The EPA invites comments on this interpretation, including whether this interpretation is supported by the statutory text and whether this interpretation is sensible policy and will further the goals of the statute.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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1 Legal Memorandum for Proposed Carbon Pollution Guidelines for Existing Power

Plants

Introduction

This memorandum provides background for, and further discussion of, legal issues raised in the proposed rule, “Carbon Pollution Guidelines for Existing Power Plants: Emission Guidelines for Greenhouse Gas Emissions from Existing Stationary Sources: Electric Utility Generating Units.” This memorandum is intended to be read in conjunction with, and assumes familiarity with, the preamble for this proposed rule.

I. Background

A. Clean Air Ac t section 111

Clean Air Act (CAA) section 111, which Congress enacted as part of the 1970 CAA Amendments, establishes mechanisms for controlling emissions of air pollutants from stationary sources. This provision require s EPA to promulgate a list of categories of stationary sources that the Administrator, in his or her judgment, finds “causes, or contributes significantly to, air pollution which may reasonably be anticipated to endanger public health or welfare.” 1 EPA has listed more than 60 stationary source categories under this provision. 2 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 categories. 3 These standards are known as new source standards of performance (NSPS) , and they are national requirements that apply directly to the sources subject to them.

When the EPA establishes NSPS for new sources in a particular source category, the EPA is also required, 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 for the national ambient air quality standards (NAAQS) or regulated under the CAA section 112 requirements for hazardous air pollutants (HAP). CAA section 111(d)’s mechanism for regulating existing sources differs from th e one that CAA section 111(b) provides for new sources because section 111(d) provides th at states will submit plans that establish “standards of performance” for the affected sources and that contain other measures to implement and enforce those standards.

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 emission reduction,” considering costs and other factors, that “the Administrator determines has been adequately demonstrated.” CAA

1 CAA §111(b)(1)(A).

2 See 40 CFR 60 subparts Cb – OOOO.

3 CAA §111(b)(1)(B), 111(a)(1).I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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2 section 302(l) also defines “standard of pe rformance” as “a requi rement of continuous emission reduction, including any requirement relating to the operation or maintenance of

a source to assure continuous emission 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 apply that best system to determine the appropriate amount of emission reduction, which the regulations refer to as the “emissions guideline.” 4 Under section 111(d)(1), the states must then adopt state plans that establish standards of performanc e and measures that implement and enforce those standards. In the case of an air pollutant that EPA has determined may cause or contribute to enda ngerment of public health, the states’ standards of performance must not be less stringent that the EPA’s emission guideline. 5
CAA section 111(d)(1) grants states the authority, in applying a standard of performance to particular sources, 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 st ate plan if it is “satisfactory.” 6 If a state does not submit a plan, the EPA must establish a federal plan for that state. 7 Once a state receives the EPA’s approval for its plan, the provisions in the plan become federally enforceable against the entity responsible for noncompliance, in the same manner as the provisions of an approved state implementation plan (SIP) under CAA section 110. In the case of a tribe that has one or more affected EGUs on its lands, 8 the tribe would have the opportunity, but not the obligation, to establish a CO 2 performance standard and a plan

for its tribal lands.

B. Legislative history

Congress adopted CAA section 111 in the 1970 Clean Air Act Amendments. At that time, Congress defined “standard of performance,” under §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.

Section 111(d) was added during the 1970 House-Senate Conference Committee

that was formed to resolve differences between the House and Senate versions of the

4 40 CFR 60.22(b)(5).

5 40 CFR 60.24(c).

6 CAA section 111(d)(2)(A).

7 Id

. 8 The EPA is aware of at least three affected sources located in Indian Country located in Indian Country, two on [Navajo] lands – the Navajo Generating Stat ion and the Four Corners Generating Station – and one on [Ute] lands – the Bonanza Generating Station. All three are coal-fired EGUs. Comment [A1]: This text is inconsistent with the text on pg. 222 of the Preamble which indicates that

if a Tribe chooses not to su bmit a tribal plan or if EPA does not approve the tribal plan, then EPA will develop a plan for the EGUs on tribal lands.

Comment [A2]: There is no inconsistency. Rather, the preamble simply adds another piece of information, which is what happens if the tribe does not submit a state plan or submits one that can’t be approved.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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3 CAA Amendments. The legislative history of the 1970 CAA Amendments does not contain statements that directly discuss the specific provisions included in section 111(d), although the legislative history does discuss, among other things, the meaning of the term “standard of performance.” 9 In the 1977 CAA Amendments, Congress made several changes to section 111, including section 111(d). Among other things, Congress added to section 111(d)(1) the requirement that th e EPA’s regulations “permit the State in applying a standard of performance to any pa rticular source under a [section 111(d)] plan ... to take into consideration, among other 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 federal plans. In addition, Congress revised the definition of “standard of performance” in section 111(a)(1) to distinguish among different types of sources, and to require that for fossil fuel-fired sources, the standard (i) be based on, in lieu of the “best system of emission reduction ... adequately demonstrated,” the “best technological system of continuous emission reduction ... adequately demonstrated;” and (ii) require a percentage reduction in emissions. In addition, in the 1977 CAA Amendments, Congress expanded the parenthetical requirement that the Administrator consider the cost of achieving the reduction to also require the Administrator to consider “any nonair quality health and environment impact and energy requirements.” Congress also added the definition of “standard of performance” in section 302(l), which define s the term to require a “continuous emission

reduction.”

In the 1990 CAA Amendments, Congress made further amendments to section 111, including section 111(d). Among other th ings, Congress again re vised the definition of “standard of performance” under CAA section 111(a)(1), this time repealing the requirements that the standard of performanc e be based on the best technological system and achieve a percentage reduction in emission s, and replacing those provisions with the terms used in the 1970 CAA Amendments’ version of §111(a)(1) that the standard of performance be based on the “best system of emission reduction ... adequately demonstrated.” In addition, in section 111( d)(1)(A)(i), Congress revised the description of which air pollutants are subject to secti on 111(d) but, as discussed below, left the provision ambiguous with respect to its applicab ility to the air pollutant emitted from the sources at issue in this rulemaking: CO 2 emissions from fossil-fuel-fired EGUs . CAA

section 111 has not been revised since the 1990 CAA Amendments.

C. Regulatory history

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 implementing regulations.) Thes e regulations provide that, in promulgating requirements for sources under CAA section 111(d), the EPA first develops regulations known as “emission guidelines,” which establish bindin g requirements that states must address

9 See, e.g ., Senate Comm. Rep. No. 91-1196 at 16.

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).I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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4 when they develop their plans. 12 The implementing regulations also establish timetables for state and EPA action: states must submit state plans within nine months of the EPA’s issuance of the guidelines, 13 although the regulations provide the EPA with authority to extend the deadlines for those submissions, 14 and the EPA must take final action on the state plans within four months of the due date for those plans. 15 In the present rulemaking, the EPA is following the requirements of the implementing regulations, except that the EPA is extending certain timetables, as described in the preamble. 16

Over the last forty years, under CAA s ection 111(d), the agency has regulated four pollutants from five sour ce categories (i.e., phosphate fertilizer plants (fluorides), sulfuric acid plants (acid mist), primary al uminum plants (fluorides), Kraft pulp plants (total reduced sulfur), and municipal solid waste landfills (landfill gases)). 17 In addition, the agency has regulated additional pollutan ts under CAA section 111(d) in conjunction

with CAA section 129. 18 The agency has not previously regulated CO 2 or any other greenhouse gas under CAA section 111(d).

D. Case law

The D.C. Circuit has never had occasion to review ed a rule promulgated directly under section 111(d). The D.C. Circuit has, however, reviewed rulemakings under CAA section 111 on numerous occasions during the past four decades, handing down decisions

dated from 1973 to 2011. 19 These decisions concerned va rious aspects of section 111, primarily the interpretation of the term “standard of performance.” These cases are

discussed below.

E. Summary of section 111 proposals

12 40 CFR 60.22. In the 1975 rulemaking, the EPA explai ned that it used the term “emissions guidelines” –

instead of emissions limitations – to make clear that guidelines would not be binding requirements applicable to the sources, but instead are “criteria for judging the adequacy of State plans.” 40 Fed. Reg. at 53,343.

13 40 CFR 60.23(a)(2).

14 See id.; 40 CFR 60.27(a).

15 40 CFR 60.27(b).

16 The EPA is not re-opening these regulations, except for certain timetables.

17 See “Phosphate Fertilizer Plants; Final Guideline Document Availability,” 42 Fed. Reg. 12,022 (Mar. 1, 1977); “Standards of Performance fo r New Stationary Sources; Emission Guideline for Sulfuric Acid Mist,” 42 Fed. Reg. 55,796 (Oct. 18, 1977); “Kraft Pu lp Mills, Notice of Availability of Final Guideline Document,” 44 Fed. Reg. 29,828 (May 22, 1979); “P rimary Aluminum Plants; Availability of Final Guideline Document,” 45 Fed. Reg. 26,294 (Apr. 17 , 1980); “Standards of Perfor mance for New Stationary Sources and Guidelines for Control of Existing Sour ces: Municipal Solid Waste La ndfills, Final Rule,” 61 Fed. Reg. 9905 (Mar. 12, 1996).

18 See, e.g., “ Standards of Performance for New Stationary Sources and Emission Gu idelines for Existing Sources: Sewage Sludge Incineration Units, Final Rule,” 76 Fed. Reg. 15,372 (Mar. 21, 2011).

19 Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973); Essex Chemical Corp. v.

Ruckelshaus , 486 F.2d 427, (D.C. Cir. 1973); Portland Cement Ass’n v. EPA , 665 F.3d 177 (D.C. Cir. 2011). Comment [A3]: – Why are we describing this as reopening the regulations as opposed to making a change in the time-frames in the regulations for this specific rule (ie making a subpart specific timeframe)? Shouldn’t we argue we are not reopening the regulations at all. We are simply establishing appropriate time-frames for this rule.

Comment [A4]: Edits have been made.

Comment [A5]: What about landfill gas?

Comment [A6]: Edits have been made.

Comment [A7]: This is an attempt to make this easier to understand., but is it still true? The sentence, as written, implies that EPA is issuing a rule, rather than a rule for guidelines, via this action.

Comment [A8]: Edits have been made.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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5 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 na tural gas-fired stationary combustion turbines (affected sources or affected EGUs). The first, published in January, 2014, proposes standards of performance under CAA section 111(b) for affected sources undertaking new construction. The second is the present rulemaking, under CAA section 111(d), which proposes emission guideli nes for states to follow in adopting state plans that regulate existing affected EGUs. In the third rulemaking, which we expect to propose concurrently with the present one, the EPA is proposing standards of performance under section 111(b) for a ffected EGUs that undertake modifications or reconstructions.

II. Summary of legal basis

The EPA believes that today’s proposed action is authorized by the requirements of CAA section 111(d) and is consistent with the implementing regulations. As an initial matter, the CAA clearly authorizes the regulation of greenhouse gases (including CO 2 ) under section 111. An ambiguity in the provisions of section 111(d)(1)(A)(i) has led some stakeholders to argue that the fact that EPA has regulated hazardous air pollutants from EGUs prevents EPA from regulating CO 2 emissions from EGUs, but to the contrary, EPA’s reasonable interpretation of th e provision concerning the air pollutants covered under section 111(d) au thorizes EPA to regulate CO 2 emissions from EGUs. Moreover, although section 111(d) applies only to sources that, if they were new sources,

would be covered under a secti on 111(b) rule, the EPA intends to complete the section 111(b) rulemakings regulating CO 2 from newly constructed EGUs and from modified and reconstructed EGUs before finalizing the section 111(d) rule, and either of those rulemakings will provide the requisite predicate for this rulemaking.

A key step in promulgating requirements under CAA section 111(d) is identifying the “best system of emission reduction whic h ... the Administrator determines has been adequately demonstrated” (BSER). In prom ulgating the implementing regulations, the EPA explicitly stated that it is required to determine BSER. 20 Accordingly, in this rulemaking, the EPA is determining the BSER.

In the preamble, the EPA lays out in detail its proposed determination of BSER, which includes a set of measures that constitute a system of emission reduction that has been adequately demonstrat ed by fossil-fuel-fired sources across the country. Specifically, the EPA proposes that that the BSER includes measures that can be sorted

into four building blocks: (1) heat rate improv ements, (2) re-dispatch from fossil-fuelfired steam-generating boilers to NGCC units, (3) new low- or zero-emitting generation, and (4) demand-side energy efficiency measures. Under the EPA’s proposed approach to view these measures as the BSER, the EPA identifies as a component of BSER the heat rate improvements in building block 1 that co uld be made at coal-fired steam generating units to reduce their carbon intensity ( i.e ., to decrease the amount of carbon emitted per unit of energy generated). Importantly, the EPA’s approach views the measures in

20 The EPA is not re-opening that interpretation in this rulemaking. Comment [A9]: Or concomitantly, right? You just can’t issue a 111(d) rule before a final 111(b)

r ule??

Comment [A10]: This is a reference to what EPA plans to do, and EPA’s plan is to complete the 111(b) new construction rulemaking before the 111(d) rule.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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6 building blocks 2, 3, and 4 in light of the fact that the electricity system is an integrated system with fungible products (electricity and electricity services). Under this approach, the BSER includes building blocks 2, 3, an d 4 because they decrease the demand for generation at fossil-fuel-fired EGUs, and ther eby reduce emissions from those sources. In addition, the EPA is also identifying an alternativebasis, under which , the BSER includes limitations in utilization of the fossil-fired EGUs, which reduce mass emissions from those EGUs, and building blocks 2, 3, and 4 provide the foundation for applying those limitations. In both cases, the EPA reasonably identifies the sets of measures as components of BSER based on the factors that the EPA is required to consider and the EPA’s authority to weigh those factors.

As noted above and explained in the preamble and various Technical Support Documents,, the measures in each of the building blocks are both technically feasible and “adequately demonstrated.” Heat rate im provement measures (identified in building block 1) are well-recognized as feasible within the industry. Under the EPA’s approach to BSER, the measures that entail dispatch changes from fossil-fuel-fired steam-generating EGUs to NGCC units, investments in renewa ble and nuclear energy, and demand-side energy efficiency (measures in building blocks 2, 3 and 4) are each well-established in numerous states, and many of them ha ve already been relied on to reduce CO 2 and other air pollutants from fossil-fuel-fired EGUs. Further, all of the measures achieve an important degree of emission reduction. In ad dition, they are not unreasonably costly, including when considered through a nation-wide lens. In addition, and importantly, the measures encourage the development and expansion of technology and practices to

reduce CO 2 and are consistent with current trends in the electricity sector. By the same token, under the alternative approach to BSER , generation reduction fr om the fossil-fired EGUs is technically feasible and adequately demonstrated because of the characteristics, just described, of the measures in building blocks 2, 3, and 4.

After determining BSER, the EPA is authorized under the implementing regulations, as an integral component to se tting emission guidelines, to apply the BSER to determine the resulting emission limitation. In this rulemaking, the EPA is taking the approach of applying the BSER to each state and determining the resulting emission limitation – termed, the “state goal” – for each state. The EPA is formulating each state goal as an emissions rate. The state goa ls form the EPA’s emission guidelines.

Once the EPA promulgates the emission guidelines, each state must develop a plan that identifies and achieves its emission performance level. The emissions performance level must be at least equivalent to (that is, no less stringent than) the state goal that the EPA has determined. As a practical matter, this means that the states may adopt mass emission limits, instead of rate-bas ed emissions levels. In addition, the state plans must establish standard s of performance and include measures that implement and

enforce those measures.

As the preamble for this rulemaking discusses, based on suggestions from states and other stakeholders directing the EPA to consider measures that in some cases are established by entities other than EGU owne rs or operators, the EPA is proposing that Comment [A11]: This isn’t true from NG fired

units under BB2. Please correct.

Comment [A12]: The statement is literally correct. Refining it to distinguish between steam

boiler EGUs and NGCC units would add a level of complexity that is not appropriate for a brief

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7 states be authorized to submit state plans that do not impose legal responsibility on the affected EGUs for the entirety of the emissions performance level. Instead, the proposal would allow for compliance plans that impose or entail requirements on other parties (which we will refer to as affected entities) – such as renewable energy and demand-side energy efficiency measures - that would provide a means or basis for reducing utilization of, and therefore CO 2 emissions from, the affected EGUs. The preamble for this rulemaking notes that a possible basis for this approach is that those requirements on other affected entities may be authorized as standards of performance or implementing measures. The EPA acknowledges countervailing po ints of view, but proposes that this is an appropriate flexibility and solicits comment. As a result, in the preamble, the EPA also solicits comment on whether state plans must impose all of the legal responsibility for achieving the emissions performance level on the affected EGUs.

The preamble further notes that even if that is the case, the state plan could nevertheless include the requirements on other af fected entities in order to facilitate the reduced utilization of, and CO 2 emissions from, the affected EGUs – and the practical effect for the EGUs would be the same as that under the proposed approach. The preamble solicits comment on other issues concerning state plans, including whether a state may include in its plan an enforceable commitment by the state to assure some

amount of emissions reduction from the affect ed sources, but not include the specific

measures that would achieve that amount of reduction.

The EPA emphasizes that in developing the state plans, the states have discretion

as to the form (i.e. mass- or rate-based) of the standards of performance. Moreover, the states may require sources to implement specific measures that the EPA did not identify as BSER, and may include other approaches such as, for example, emission trading

programs.

By the same token, states may allow sources, in complying with their applicable standards of performance, to rely on any measures that will reduce their CO 2 emissions, regardless of whether the EPA identifies those measures as part of BSER.

In this rulemaking, the EPA proposes reasonable deadlines for state plan submission and the EPA’s action. The proposed deadline for the EPA’s action varies from that in the implementing regulations, and the EPA is revising that provision of the implementing regulations accordingly.

III. Authority to regulate CO 2 from EGUs

A. Authority to regulate CO 2

CAA section 111 authorizes EPA to regulate CO 2 emissions. The Supreme Court has held that greenhouse gases (including CO 2 ) are a pollutant under the CAA.

Massachusetts. v. EPA

. 21 Furthermore, the U.S. Supreme Court’s holding in American

21 549 U.S. 497 (2007). Comment [A13]: Is this what you mean? Please clarify.

Comment [A14]: This comment seems to

confuse the states’ discretion as to the state emission performance level (rate- or mass-based) with the

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8 Electric Power Co. v. Connecticut , 131 S. Ct. 2527, 2537-38 (2011), that “the Clean Air Act and the EPA actions it authorizes displace any federal common law right to seek abatement of carbon-dioxide emissions from fossil-fuel-fired power plants” was premised on the Court’s understanding that §111, incl uding §111(d), applies to carbon dioxide

emissions from those sources.

The fact that EPA has regulated EGU em issions of mercury and other hazardous air pollutants does not deprive EPA of the authority to 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). 22 The ambiguities stem from a pparent drafting errors that occurred during enactment of the 1990 CAA Amendments, which revised section 111(d).

The confusion arises because two different ame ndments to section 111(d) were enacted in the 1990 CAAA – one in title I of the bill, the other in title III of the bill (both

amendments were to be codified in sect ion 111(d)). The confusion is exacerbated because the U.S. Code does not accurately reflect what was enacted – it presents only one of the amendments. In this circumstance, the enacted law signed by the President (as 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 wh ich is not included on a list published under [CAA section 108(a)] or [2] emitted from a source category which is regulated under [section 112] .” (Emphasis added.) This provision has two components that exclude from section 111(d) two types of air pollutan ts. The first component, which we call the NAAQS Exclusion, excludes NAAQS pollutants. The second component, which we call the Section 112 Exclusion, presents the ambiguities. As presented 0 in the U.S. Code, the Section 112 Exclusion appears by its terms to preclude from section 111(d) any pollutant if it is emitted from a source category th at is regulated under section 112.

Looking solely at this presentation of th e text of the Section 112 Exclusion, one might conclude that section 111(d) would not cover GHGs because GHGs are emitted

from EGUs and EGUs are a source ca tegory regulated under section 112. 23 This

22 Under the U.S. Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v. NRDC

, to interpret how a statute applies to a particular question, an agency must, at Step 1, determine whether Congress’s intent as to the specific question is clear, and, if so, the agency must give effect to that intent. If congressional intent is not clear, then the agency, at Step 2, has discretion to fashion an inte rpretation that is a reasonable construction of

the statute. 22 Chevron U.S.A. Inc. v. NRDC , 467 U.S. 837, 842-844 (1984).

23 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 excl ude virtually every pollutant from regulation under Section 111(d), because it would be difficult to identify any pollutant that is not emitted from at Comment [A15]: Consider whether you might

include an expanded discussion of the AEP case at

the close of this section (III.A.). Readers will know

that no regulatory actions under § 111(d) have been
litigated and thus wonder how it is that the
Supreme Court spoke to this question. The brief

treatment of AEP at the beginning of this section is helpful but may not provide sufficient context to

convince a skeptic that the case is on point.

Further, why not provide the relevant quote(s),

rather than a summary here?

Comment [A16]: We appreciate this comment but we think that the discussion of AEP explains the relevance of section 111 to that case. In addition, the

level of detail included about the AEP case is

sufficient.

Comment [A17]: Consider whether it might

benefit your argument to observe that, under a plain language reading, the clause in section 111(d)(1)(A)(i) that EPA terms the Section 112

Exclusion is not an exclusion at all. Section 111(d)(1)

directs the states to establish standards of
performance for any existing source for any air pollutant “for which air quality criteria have not

been issued or which is not included on a list
published under section 7408(a) of this titled or
emitted from a source category which is regulated

under section 7412” (emphasis added). Taken
literally, this is a disjunctive list and EPA may regulate any pollutant that fits within any of the

three categories under § 111(d). We understand

that EPA has not adopted this reading in the past

and we are not suggesting EPA do so here.
Nevertheless, it may be helpful to mention this
reading as a way of illustrating that EPA has not

chosen the most expansive reading available to it.

Comment [A18]: We appreciate this comment but we do not think it is useful to add this reading

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9 conclusion would be incorrect, however, because the text of section 111(d) as presented in the U.S. Code does not accurately reprod uce the Section 112 Exclusion as enacted in

the 1990 CAA Amendments. The correct statement of the Section 112 Exclusion – the one that was enacted by the Congress and signed by the President -- is found in the U.S. Statutes at Large. This text incorporates two versions of the Section 112 Exclusion, one passed by the U.S. House of Representative s and one passed by the U.S. Senate. The two versions were never reconciled, and both were enacted as part of the 1990 CAA

Amendments. The two versions conflict with each other and thus render the Section 112 Exclusion ambiguous. Under these circumstances, the EPA may reasonably construe the Section 112 Exclusion to authorize 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) as 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 wh ich 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) of this title, but (ii) to which a standard of performance under this section would appl y if such existing source were a new

source. * * *

42 U.S.C.A. 7411(d)(1) (West 1977); Public Law 95–95 (emphasis added). In this version, the Section 112 Exclusion, by its te rms, applied to section 112 pollutants, and not to categories of sources that emit those poll utants. It should also be noted that in the 1990 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).’’ Under this amendment, the text would read as follows (with changes 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 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 ap ply if such existing source were a new

source.

least one source category that is regulated under 112. We do not need to address this ridiculous result, however, for the reasons discussed in the text above. Comment [A19]: The statement that the House

and Senate language “conflict with each other and

thus render the Section 112 Exclusion ambiguous”

would benefit from further development. Shouldn’t

EPA first attempt to harmonize the two provisions

and then to apply various canons of statutory

construction (i.e. the specific governs the general, etc.) before concluding that the statute is ambiguous within the meaning of Chevron ?

Comment [A20]: We are considering this

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10 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 112.’’ Under this amendment, the text would read as follows (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) emit ted 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 ap ply if such existing source were a new

source.

The House-Senate Conference Committee did not reconcile these two conflicting amendments, and both were included in the 1990 CAA Amendments as reported by the Conference Committee, approved by both th e House and the Senate, and signed by the President. As presented in the Statutes at Large, the Section 112 Exclusion is therefore ambiguous.

The EPA discussed these different amendments in the preamble to “Revision of December 2000 Regulatory Finding on the Em issions of Hazardous Air Pollutants From Electric Utility Steam Genera ting Units and the Removal of Coal- and Oil-Fired Electric Utility Steam Generating Units From the Se ction 112(c) List,” 70 FR 15994, 16029-32 (March 29, 2005). There, the EPA concluded that the Section 112 exclusion could be read as follows: Where a source category is regulated under section 112, a section 111(d) standard of performance cannot be establis hed to address any HAP listed under section 112(b) that may be emitted from that partic ular source category. The EPA explained that this approach reasonably interprets the Section 112 exclusion to give some effect to both amendments. The EPA emphasized that it is not reasonable to give full effect to the House language because a literal reading of that language would mean that the EPA could not regulate any air pollu tant from a source category regulated under section 112, a result that would be inconsistent with (i) Congress’ desire 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 (ii) the fact that the EPA has historically regulated non-hazardous air pollutants under section 111(d), even where those air pollutants were emitted from a source catego ry actually regulated under section 112. See

70 FR 16031-32. The EPA continues to view this interpretation of the Section 112 exclusion as reasonable, for the reasons just stated.

Applying this interpretation of the Section 112 Exclusion to this rule, we conclude that section 111(d) authorizes the EPA to establish section 111(d) guidelines for GHG emissions from EGUs. Although EGUs are a source category that is regulated under CAA section 112, GHGs are not a HAP regu lated under section 112. Therefore, theI NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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11 Section 112 exclusion in section 111(d) doe s not apply to GHGs, and 111(d) does not preclude the EPA from establishing guidelines covering GHGs from EGUs.

B. Authority to regulate EGUs

Before the EPA finalizes this section 111( d) rule, the EPA will finalize a section 111(b) rulemaking regulating CO 2 emissions from new EGUs, which will provide the requisite predicate for applicability of section 111(d).

CAA section 111(d)(1) requires the EPA to promulgate regulations under which states must submit state plans regulating “any existing source” of certain pollutants “to which a standard of performance would a pply if such existing source were a new

source.” 24 A “new source” is “any stationary sour ce, the construction or modification of which is commenced after the publication of regulations (or, if earlier, proposed regulations) prescribing a st andard of performance under [section 111] which will be applicable to such source.” 25 It should be noted that these provisions make clear that a

“new source” includes one that undertakes either new construction or a modification. It should also be noted that EPA’s implemen ting regulations define “construction” to include “reconstruction,” which the implementing regulations go on to define as the replacement of components of an existing facility to an extent that (i) the fixed capital cost of the new components exceeds 50 percent of the fixed capital cost that would be required to construct a comparable entirely new facility, and (ii) it is technologically and economically feasible to meet the applicable standards. 26

Under section 111(d)(1), in order for existing sources to become subject to that provision, the EPA must prom ulgate standards of performa nce under CAA section 111(b) to which, if the existing sources were ne w sources, they would be subject. Those standards of performance may include ones for sources that undertake new construction, modifications, or reconstructions.

The EPA is in the process of promulgating two rulemakings under section 111(b)

for CO 2 emissions from affected sources. The EPA proposed the first, which applies to affected sources undertaking new constructions, by notice dated January 8, 2014, which we refer to as the January 2014 Proposal. 27 The EPA is proposing the second, which applies to affected sources undertaking modi fications or reconstructions, concurrently with this section 111(d) proposal. The EPA will complete one or both of these CAA section 111(b) rulemaki ngs before or concurrently with this section 111(d) rulemaking, which will provide the requisite predicate for applicability of section 111(d). 28

24 CAA section 111(d)(1).

25 CAA section 111(a)(2).

26 40 CFR 60.15(b). The EPA is not re-opening these regulations in this rulemaking.

27 79 Fed. Reg. 1430.

28 In the past, EPA has issued standards of performanc e under section 111(b) and emission guidelines under section 111(d) simultaneously. See “Standards of Performance for new Stationary Sources and Guidelines for Control of Existing Sources: Municipal Solid Waste Landfills – Final Rule,” 61 Fed. Reg. 9905 (March 12, 1996). Comment [A21]: Or concomitantly, right?

Comment [A22]: EPA’s plan is finalize the 111(b) new construction rule first.

Comment [A23]: Does EPA believe it has
authority under § 111(b) to regulate only modified/reconstructed sources and not newly

constructed sources in a particular source category?

If so, that may help support the argument that a
modified source rule, on its own, can serve as a predicate for regulation under § 111(d).

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12 IV. Rational basis, endangerment finding

In the course of the January 2014 Proposal for standards of performance for GHGs emissions from newly constructed fossil-fuel-fired EGUs, 29 stakeholders raised concerns that the EPA could not promulgate those standards without first issuing a finding that GHGs from those sources cause or contribute significantly to air pollution which may reasonably be anticipated to enda nger public health or welfare, under CAA §111(b)(1)(A). In that proposal, the EPA stated that it is rational to regulate GHGs from fossil fuel-fired EGUs because the EPA has previously found that GHG emissions endanger public health and welfare, and because the electric generating industry emits a significant amount of GHGs. The EPA a dded that CAA section 111 does not require that EPA issue a formal endangerment finding, and that even if section 111 did require such a finding, the EPA’s rati onal basis would qualify as one. 30 The EPA is taking the same position in the section 111(b) rulema king proposal to establish standards of performance for GHG emissions from modified and reconstructed fossil-fuel-fired EGUs.

The EPA will finalize either or both of the January 2014 Proposal and the rulemaking for modified and reconstructed EGUs by the time that it finalizes this proposed rulemaking. In that event, the EPA would not be required to further address the rational basis or endangerment finding in th is rulemaking. Thus, the EPA is not seeking comment in this proposal on any issues related to a rational basis or endangerment finding.

V. Authority for EPA to determine BSER and emission guidelines

In this section we describe the author ity, as set out in the EPA’s implementing regulations under CAA section 111(d), for the EPA to determine the “best system of emission reduction ... adequately demonstrated” and the amount of required emission reduction that is based on the BSER. We also describe how, in this rulemaking, the EPA is applying the BSER to each state, and, based on that, determining the amount of required emission reduction 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 promulgate.

CAA §111(d) directs the EPA to –

prescribe regulations which shall establish a procedure similar to that provided by [CAA section 110] unde r which each State shall submit to the Administrator a plan which (A) es tablishes standard s of performance for any existing source for [certain ai r pollutants] ... and (B) provides for the implementation and enforcement of such standards of performance.

29 79 Fed. Reg. 1,430 (Jan. 8, 2014).

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13 As noted above, the EPA promulgated these implementing regulations in 1975, and has revised parts of them since. The regulati ons set out a multi-step process for the development and approval of st ate plans, and assign responsibility for the various steps in the process to the EPA or the states. The EPA has followed these regulations in promulgating previous rulemakings under section 111(d). 31 In the present rulemaking, EPA continues to follow them, except in one instance, in which EPA is revising one of the deadlines that the regulations require. 32

Under the implementing regulations, at the same time or after the EPA proposes and then finalizes standards of performan ce for sources in a source category under section 111(b), the EPA must propose and th en finalize notice of a “guideline 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 p ublic comments and upon or after promulgation of standard s of performance for c ontrol of a designated pollutant from affected facilities, a final guideline document will be published and notice of its availabilit y will be published in the Federal Register.” 33

The regulations go on to describe the contents of the “guideline document” as including, among other things, an “emission guideline” that incorporates the “best system 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 th e 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. 34

The implementing regulations define the “emission guideline” as –

31 These rulemakings are cited above.

32 The EPA is not re-opening these regula tions, except for the revised deadline.

33 40 CFR 60.22(a).

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14 A guideline set forth in subpart C of this part, or in a final guideline document published under §60.22(a) whic h 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. 35

In addition, the implementing regulations mandate that for air pollutants that adversely affect public health, the “emission guidelines ” must be proposed and finalized with the draft and final guideline document:

[For air pollutants that have been dem onstrated to adversely affect public health], the emission guidelines and compliance times referred to in paragraph (b)(5) of this section will be proposed for comment upon publication of the draft guideline do cument, and after consideration of comments will be promulgated in subpart C of this part with such modifications as may be appropriate. 36

With this proposed rulemaking, the EPA is complying with these regulatory provisions. This proposed rulemaking follows the proposal of standards of performance for newly constructed affected sources in the January 2014 Proposal, and is concurrent with the proposal of standards of performa nce 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 “information for the development of State plans” described in the regulations. This information includes the four building blocks, which are the BSER. 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 guidelines.” In addition, the preamble and supporting documents propose the “time within which compliance with emission st andards of equivalent stringency can be achieved,” which are the periods of 2020-2029 for interim compliance, and the subsequent period for final complian ce, and provide other information.

It should be noted that the preamble discusses the EPA’s proposal in this rulemaking to adopt state-specific goals based on a single, consistent methodology, rather than to adopt nationally uniform emission rate s for particular types of affected EGUs. The preamble explains that this state-by-stat e approach ensures that the proposed goals reflect opportunities to reduce CO 2 emissions by shifting generation among different types of EGUs and accounts for the differences among the generating fleets in the various

states.

VI. Best system of emission reduction adequately demonstrated

35 40 CFR 60.21(e).

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15 A. Introduction and Overview

Under CAA §111(d), the foundation for the standards of performance in the state plans is the “best system of emission reduction which ... the Administrator determines has been adequately demonstrated” (BSER). In the preamble for the proposed rule, the EPA describes the measures that comprise the BSER, which are organized into four “building blocks,” and then explains why th ose building blocks, taken together, meet the

criteria for the BSER.

The measures in the four building blocks are described at length in the preamble, and may be summarized as follows:

Building block #1: Lowering the carbon intensity of generation at individual affected EGUs ( e.g. , through heat rate improvements).

Building block #2: Reducing utilization of, and therefore emissions from,

the most carbon-intensive affected EGUs to the extent that this can be accomplished cost-e ffectively by shifting to le ss carbon-intensive existing fossil-fuel-fired EGUs, including NGCC un its that are under construction.

Building block #3: Reducing utilization of, and therefore emissions from, affected carbon-emitting EGUs to the extent that this can be accomplishedcost-effectively by expanding the amount of available low- or zerocarbon-intensity generation.

Building block #4: Reducing utilizati on of, and therefore emissions from, affected carbon-emitting EGUs to the extent that this can be accomplished cost-effectively by increasing demand-side energy efficiency.

As noted below, the EPA is proposing an approach and an alternative to explaining how the building blocks provide the basis of the proposed determination of BSER. Both meet the criteria specified in the statute, as summarized next, and both are based on the integrated nature of the electricity system, as discussed after that.

B. General approach for determining the best system of emission reduction adequately demonstrated

The EPA’s explanation for this BSER proposal begins with the statutory definition of a “standard of performance”:

The term “standard of performance” means 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.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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16 CAA section 111(a)(1).

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.” 37

The U.S. Court of Appeals for the D.C. Ci rcuit (D.C. Circuit or Court) has handed down case law over a 40-year period that interprets this CAA provision, including its component elements. 38 In one of the earliest cases, Essex Chemical Corp. v. Ruckelshaus

, in 1973, the Court stated that because the st andard must be “achievable,” the emission limits must be technically feasible, and added that “[a]n adequately demonstrated system is one which has been shown to be reasonably reliable, reasonably efficient, and which can reasonably be expected to serve the interests of pollution control without becoming exorbitantly costly in an economic or environmental way.” 39

Under this case law, the EPA determines the BSER based on the following key considerations, among others:

 The system of emission reduction must be technically feasible. 40

 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 the power sector, on the national level in terms of the overall costs of electricity and the impact on the national economy over time. 41

 The EPA must also consider that CAA section 111 is designed to promote the development and implementation of technology.

37 Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreference.com.mutex.gmu.e du/view/10.1093/acref/ 9780199571123.001.0001/acref9780199571123

38 Portland Cement Ass’n v. Ruckelshaus , 486 F.2d 375 (D.C. Cir. 1973); 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).

39 Essex Chemical Corp. v. Ruckelshaus , 486 F.2d at 427.

40 As noted in the text, the case law may be read to treat technical feasibility as the measure for whether the standard of performance is “achievable,” not as a crit erion for whether the system of emission reduction is the “best system of emission reduc tion ... adequately demonstrated.” However, for convenience, we may refer to technical feasibility as anot her of the criteria for the BSER.

41 As discussed in the January 2014 Proposal, the D.C. Circuit’s case law formulates the cost consideration in various ways: the costs mu st not be “exorbitant[]”, Essex Chemical Corp. v. Ruckelshaus , 486 F.2d 427, 433 (D.C. Cir. 1973), 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. Costle , 657 F.2d 298, 343 (D.C. Cir. 1981). In the January 2014 Proposal, EPA stated that “these various formulati ons of the cost standard ... are synonymous,” and, for convenience, EPA used “reasonableness” as the fo rmulation. EPA takes the same approach in this rulemaking. Comment [A25]: We suggest also noting that no

court has opined on the definition of “system.”

Comment [A26]: We think the approach we take of using the dictionary definition is adequate and is consistent with how the Courts approach interpreting

a word that is not defined in the statute.

Comment [A27]: Do the cases in FN41 address

the fact that EPA may consider the costs on
different levels (i.e. source

‐ level, industry

‐ wide,

nation

‐ wide)? If so, we suggest adding language in

the FN to provide support.

Comment [A28]: Edits have been made.

Comment [A29]: Given that there have been no cases on 111(d), why is it reasonable to presume that Congress intended 111(d) to also be technology forcing?

Comment [A30]: Edits have been made to support this statement.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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17 Other considerations are also important, including that the EPA must also consider energy impacts, and, as with costs, may consider them both on the source level and on the nationwide structure of the power sector over time. Importantly, the EPA has discretion to weigh these various consideratio ns, may determine that some merit greater weight than others, and may vary the weighting, depending on the source category.

The EPA discussed the CAA requirements and Court interpretations of the BSER at length in the January 2014 Proposal, 42 and incorporates by reference that discussion in this rulemaking.

C. Application of the BSER criteria

1. Introduction and overview

The EPA’s BSER proposal in this rulemaking recognizes, and is based on, both

the interconnected nature of the electrical generating system, which, among other things, means that generation at one EGU can substitu te for generation at another, and on the global nature of the pollutant at issue.

As we observe in the preamble, the natio n’s electricity needs are being met, and have for many decades been met, through a grid formed by a network connecting groups of EGUs with each other and, ultimately, with the end-users of electricity. Through this interconnected grid, fungible prod ucts – electricity and electricity services – are produced and delivered by a diverse group of EGUs operating in a coordinated fashion in responding to the demand for electricity create d by the users of the product. Because theelectricity grid operates through the interconnection of multiple EGUs and favors leastcost generation, owners and operators of genera tors have been able to assure the stability of electricity generation and th e reliable delivery of electricity to users at least cost. Instrumental to the success in meeting these several objectives is the fact that generation at one EGU can be substituted for generation at another. This allows operators to utilize their least-cost assets primarily, and hold their higher-cost assets in reserve, thereby assuring that the system achieves the objectives of providing reliable and least-cost electricity service.

In recent years, the grid has also faci litated the achievement of environmental objectives, including the reduction of emissi ons of nitrogen oxides, sulfur dioxide, and particulate matter -- which, among them, worsen acid deposition and jeopardize the attainment and maintenance of national ambient air quality standards – as well as hazardous air pollutants. Regulation of those air pollutants tends to increase the cost of electricity from higher-emitting generation assets. Because EGU operators have the ability to use the grid as an interchange fo r shifting levels of ge neration among several facilities, the higher-emitting assets tend to be utilized relatively less, and, as direct result, emit less pollution and reduce cost. Most recently, states and companies seeking

42 See 79 Fed. Reg. at 1,462/1 – 1,467/3. Comment [A31]: Please explain more clearly

how these outcomes have been attributed to “the grid.” The explanation that follows really seems to be an explanation of economic principles – the regulation of air pollutants increased the cost of generation for some facilities (those that needed to install controls had higher costs of production), and some lower emitting, lower cost sources bid in below them. If you are speaking about the Acid Rain program, that wasn’t orchestrated by the grid.

Comment [A32]: This section has been significantly revised. If the commenter continues to have these concerns, we’d be glad to discuss.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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18 specifically to achieve CO 2 emissions reduction objectives have also relied on the shifting of generation between and among EGUs that th e interconnected nature of the grid allows to achieve those emissions reduction objectives , as discussed below. Thus, it is apparent that the interconnected nature of the grid has allowed the achievement of objectives ranging from assuring a reliable, least-cost supply of electricity to reducing pollution, including, in some states, carbon pollution.

In this rulemaking, the EPA is continuing to rely on the interconnected nature of the grid to achieve, 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 the implementation of heat improvement measures for fossil-fuel-fired steam generating units (building block 1) to reduce their em issions, as well as the implementation of measures that decrease demand for genera tion by the affected EGUs, and therefore emissions from those EGUs and by substituting generation at higher emitting sources through increasing generation at less carbon- intensive EGUs, expanding the amount of low- or zero-carbon generating capacity connected to the electric grid, and using electricity more efficiently to reduce the tota l demand for electricity (building blocks 2, 3 and 4, respectively).

It is also significant that CO 2 is a global pollutant, and therefore the location of the emissions (or emission reductions) does not affect the environmental consequences of an amount of emissions generated at any give n source in any one location. By analogy, because the problem of acid deposition is caused by EGU emissions of nitrogen oxide and sulfur dioxide over a wide geographic area , Title IV of the Clean Air Act established a national emissions trading program that ad dresses that problem by reducing the total amount of those emissions, but without re gard to the particular location of those emissions (or emissions reductions). In contrast, EGU mercury emissions have adverse health and welfare effects in the locality where they are emitted, and as a result, the EPA’s Mercury and Air Toxics Standards (M ATS) rulemaking requires reductions at each affected EGU, and does not authorize emissions trading. 43

Thus, the EPA proposes an approach to de termining the “best system of emission reduction ... adequately demonstrated” in light of the interconnected nature of the electricity generating grid that, in turn, incl udes several components. The first is building block 1, which, as discussed below, entails measures that the affected sources may undertake to improve their efficiency.

In addition, the EPA proposes that the “system” for achieving emissions

reductions also includes the measures in building blocks 2, 3 and 4, which would substitute generation at higher-emitting EGUs with increases in generation at lower- or zero-emitting sources and in end-use efficiency in ways that reduced CO 2 emissions at

fossil-fuel-fired EGUs. For the reasons describe d below, the EPA proposes that this is the

43 “National Emission Standards for Hazardous Air Pollutants From Coal- and Oil-Fired Electric Utility Steam Generating Units and Standard s of Performance for Fo ssil-Fuel-Fired Electric Utility, IndustrialCommercial-Institutional, and Small Industrial-Comme rcial-Institutional Steam Generating Units – Final Rule,” 77 Fed. Reg. 9304 (Feb. 16, 2012). Comment [A33]: Where are the specific examples?

Comment [A34]: This section has been significantly revised and this point has been

addressed.

Comment [A35]: Did EPA ever state this explicitly in the rule? Suggest deleting, since saying

that individual sources have to meet a standard is

sufficient.

Comment [A36]: Edits have been made.

Comment [A37]: Both examples can be distinguished from the current scenario by express
statutory framework, so it’s an apples

‐ to

‐ oranges comparison regarding EPA’s discretion under

Section 111. Further, regarding MATS, if EPA did

not expressly state that it set a source

‐ based

standard based on adverse health and welfare

effects in the locality where Mercury was emitted,

the commenter suggests deleting these sentences.

The commenter recalls that the tenor of the

benefits and preamble language in MATS spoke to

broader and more indirect justifications.

Comment [A38]: The Title IV example is valid because of the nature of the air pollutant. We have replaced the MATS example with another example.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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19 “best system of emission reduction ... adequately demonstrated.” In addition, as an alternative approach to BSER, the EPA also believes that the “system” may be viewedsimply as consisting of, in addition to building block 1, reduced utilization of the higheremitting fossil-fuel-fired EGUs, with the measur es in building blocks 2, 3, and 4 serving to assure reliability and avoid unreasonable costs associated with such reduced utilization. As also discussed below, this alternative approach may also be considered the “best system of emission reduction ... adequately demonstrated.”

2. Heat rate improvements

As discussed in the preamble, under the EPA’s proposed approach to determining BSER, the measures in building block 1, which entail improvements in the efficiency of the affected EGUs’ equipment or processes, meet the criteria to qualify as a component of the BSER. Further elaboration here is not necessary.

3. Components of electricity system

Under the EPA’s approach to determining BSER, the “system” includes the measures in building blocks 2, 3 and 4, in conjunction with the affected fossil-fuel-fired steam generating boilers (in the case of build ing block 2) and the fossil-fuel-fired EGUs (in the case of building blocks 3 and 4). These building blocks, taken together, are a “system” of emission reduction because of the integrated nature of the electricity system. That is, they are “a set of things working together as parts of a mechanism or interconnecting network” 44 that leads to reductions in demand for (and thus in utilization of) higher emitting generation, and that therefore reduces CO 2 emissions, from fossilfuel-fired EGUs. Specifically, increased generation from NGCC units substituting for generation at higher-emitting EGUs, in accordance with building block 2, reduces overall

CO 2 emissions from fossil-fuel-fired steam generating units, and therefore overall CO 2emissions from fossil-fuel-fired EGUs. In exactly the same way, increased low- or zerocarbon generation, in accordance with buildi ng block 3, and decrea sed overall demand for electricity, in accordance with building block 4, reduce CO 2 emissions from those

fossil-fuel-fired EGUs. 45

In fact, as the preamble notes, there are many cases in which companies havereduced emissions through shifting generation away from higher emitting units to loweror zero-emitting units, or through reducing overall electric demand through demand-side energy efficiency measures. In some cases, this has occurred in response to goals set at the company level: some companies have es tablished a single, company-wide emission target, and then have used combinations of strategies such as fuel switching, increased renewable or nuclear generation, and increased energy efficiency, to achieve those goals.

44 Oxford Dictionary of English (3rd ed.) (published 2010, online version 2013) http://www.oxfordreference.com.mutex.gmu.e du/view/10.1093/acref/ 9780199571123.001.0001/acref9780199571123.

45 Although we describe building blocks 2, 3, and 4 as, together, comprising the “system” of emission reduction, each by itself could be considered a “syste m” of emission reduction, fo r the reasons noted in the accompanying text.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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20 In other cases, this has occurred in response to goals set at the state level: for example, California enacted its Global Warming Solutions Act in 2006 (AB 32), requiring the state to reduce its GHG emissions to 1990 levels by 2020 and 80 percent below 1990 levels by 2050, 46 through a suite of mechanisms that include energy efficiency programs, renewable energy programs and an economy-w ide cap and trade program, along with other programs. 47 Similarly, mechanisms have also been put in place regionally that have these same impacts: for example, nine northeast and mid-Atlantic states participate in the Regional Greenhouse Gas Initia tive (RGGI), a market-based emissions budget trading program that sets an aggregate limit on CO 2 from fossil fuel fired power plants in the participating states.

In all of these instances, companies’ choices and policies implemented by states may impact decisions about dispatching of lower instead of higher emitting generating units both as part of the short term dispatch process and as part of longer term business planning processes. We believe that the proposed emission guidelines, including the temporal 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 long er term business planning processes.

For the reasons described next, the measures in each of building blocks 2, 3, and 4 qualify as components of, to re iterate the test of the D.C. Circuit, “[a]n adequately demonstrated system” because they can “be[] shown to be reasonably reliable, reasonably efficient, and ... reasonably ... expected to se rve the interests of pollution control without becoming exorbitantly costly in an economic or environmental way.” 48 In fact, those measures do meet all the criteria, as established by the Court in the section 111 case law.

First, the measures in those building blocks are technically feasible, as described in the preamble. To reiterate briefly, bu ilding block 2, which entails substituting generation at higher emitting uni ts (fossil-fuel-fired steam ge nerating units) by shifting to generation at lower-emitting sources (exis ting NGCC units) is technically feasible because the NGCC units are already providing el ectricity to the grid and have sufficient capacity to generate the additional amount of electricity that would substitute for the generation at fossil-fuel-fired steam genera ting units. There are several mechanisms through which states could cause this re-dispa tch to occur. First, a state could use its permitting authority to impose limits on the hours of operation (or emissions) of individual steam generating units over a given time period. Second, a state could change the relative costs of generation for more carbon-intensive and less carbon-intensive generating units by imposing a cost on carbon emissions. One way to do so would be to adopt an allowance-based system. An example is the Regional Greenhouse Gas Initiative, an allowance-based system in which sources purchase allowances in periodic auctions. Another way would be through a tradable em ission rate system, under which the state

46 State of California Global Warming Solutions Act of 2006, Assembly Bill 32, Chapter http://www.leginfo.ca.gov/pub/05-06/bill/asm/ ab_0001-0050/ab_32_bill_20060927_chaptered.pdf

47 See Cal. Air Res. Bd., Climate Change Scoping Plan 31-32, 41-46 (2008), available at: http://www.arb.ca.gov/cc/scopingplan/doc ument/adopted_scoping_plan.pdf.

48 Essex Chemical Corp. v. Ruckelshaus , 486 F.2d at 427. Comment [A39]: The Legal Memorandum

references California’s Global Warming Solutions

Act (AB32) and Regional Greenhouse Gas Initiative (RGGI) and the market

‐ based emissions trading

mechanisms. The market

‐ based mechanisms section specifically discussed allowance

‐ based trading and

associated mechanisms. However, both programs
also allow for the utilization of offsets. In addition to discussing allowances, USDA suggests that EPA

include a comprehensive overview of the use of

offsets for a portion of the compliance
requirements under the programs cited (AB32 and RGGI). This seems to inadvertently omitted from the

market mechanisms discussion within the Legal

Memorandum.

For reference, under AB32, “covered entities may

use a limited number of offsets credits to satisfy a portion of their compliance obligation. Specifically,

covered entities may use offset credits for up to 8

percent of their total compliance obligation for each
compliance period.”

Under RGGI “CO2 offset allowances may be used to satisfy a limited portion of a regulated power plant's
compliance obligation. The use of CO2 offset

allowances is constrained to 3.3 percent of a power plant's

24

Comment [A40]: We appreciate this comment. We have revised the preamble to refer to offsets.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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21 would impose an emission rate on the steam generating unit that the unit could meet only by purchasing the right to average its emission rate with a unit with a lower rate, such as an NGCC unit. In addition, re-dispatch is alr eady widely used (usually more in response to fuel price signals than as a GHG mitiga tion measure), including by companies that own both coal- and natural-gas-fired EGUs.

As discussed in the preamble, building bl ock 3, which entails new low- and zeroemitting energy as well as preservation of nuclear capacity that might otherwise beretired, is also technically feasible. The technology for renewable energy is wellestablished and in use now, and the amount of renewable energy contemplated by the proposal would not impair the reliability of the grid. The nuclear capacity at issue either is already in operation or, in the case of new nuclear capacity under construction, has long been known to grid operators for planning purposes.

As for building block 4, as discussed in the preamble, numerous state and utility programs have demonstrated that improvemen ts in demand-side energy efficiency are technically feasible at the levels contemplated in the proposal.

It should be noted, as discussed in the preamble, that because of the integrated nature of the electricity system, these measures have long been relied on to reduce costs in general, assure reliability, and implement pre-existing pollution control requirements in the least cost manner. As also noted in the preamble, some utilities, states and regions are already relying on these measures fo r the specific purpose of reducing CO 2 emissions

from EGUs.

For the reasons discussed in the preamble, building blocks 2, 3, and 4 also meet the remaining criteria to qualify as the BSER. The level of CO 2 emissions reduction they achieve is significant, which is appropriate be cause of the severity of the risk to public health and the environment of climate change , and the magnitude of both the amount of

emissions reductions needed and the amount of CO 2 emissions from fossil-fuel-fired power plants. In addition, the proposed leve ls of reduced generation are not unreasonably costly for the affected source category or the nation-wide electricity system, they do not have adverse effects on the overall energy system (to the contrary, they improve it by reducing its carbon intensity), and they pr omote the development and implementation of technology that is important fo r continued emissions reductions.

It should be noted that because the measures in building blocks 2, 3, and 4 have the effect of reducing CO 2 emissions from fossil-fuel-fired EGUs, each of the building blocks is part of a “system” of emission reduction for those EGUs regardless of which entities undertake the measures; of course, during the compliance period reductions in fact will be taking place at individual EGUs. At the same time, all of the measures in building blocks 2, 3, and 4 that are needed to achieve the requisite emissions reductions may be undertaken by the affected EGUs themselves. To achieve the re-dispatch described in building block 2, operators of th e affected fossil-fuel-fired steam-generating EGUs may reduce generation, while operators of the affected NGCC units may increase generation to provide substitute generation to replace that avoided at higher-emitting Comment [A41]: This is muddled – suggest being more clear/expanding on what you mean as it

relates to the BSER factors.

Comment [A42]: We think it is clear that this point relates to one of the criteria for BSER, noted above, which is the amount of emissions reductions generated by the system of emission reduction.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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22 facilities. Operators of the affected EGUs may invest in, or otherwise acquire power from, the new low- or zero-carbon intensive gene ration described in building block 3, as well as in many of the demand-side energy efficiency measures described in building

block 4.

Many states maintain a utility regulatory structure under which the utilities that serve end users in the state are vertically integrated, and not only own the EGUs, but often also own renewable energy resources and provide service di rectly to retail customers. Operators of EGUs, in those circ umstances, are well-positioned to undertake the measures in building blocks 3 and 4. In fact, as noted in the preamble, numerous states have already imposed renewable por tfolio standards an d demand-side energy efficiency requirements on those utilities. As a result, as also noted in the preamble, many companies have already developed integrated resource plans that include re-dispatch from higher-emitting fossil-fuel-fired generation to lower-emitting generation, the purchase of renewable capacity, and the implementation of demand-side energy efficiency measures.

Other states have de-regulate d their electricity markets and as a result, in some instances, the EGUs in those states are merchant generators that sell to the wholesale electricity market. The EPA believes that markets for acquiring renewable energyresources and for delivering demand-side energy efficiency services are sufficiently welldeveloped that operators of these EGUs coul d undertake or acquire those measures as well. For example, merchant generators can invest in NGCC capacity, invest in renewable capacity or purchase renewable energy or renewable energy certificates (representations that a certain amount of en ergy was produced from renewable sources), as well as purchase demand-side energy efficiency services from energy service companies. Moreover, many de-regulated states use forward capacity auctions to ensure the ability to meet future demand, and generators may bid into those auctions based on all of their resource portfolio including rene wable energy assets and demand-side energy efficiency projects. The fact that the affected sources may themselves implement or invest in the measures in building blocks 2, 3, and 4 -- which, again, reduce their emissions -- supports treating those measures as components of the BSER.

Another reason that the measures in building blocks 2, 3, and 4 should be considered part of the BSER – and wholly apart from the question of which entities should be considered to be responsible for undertaking those measures – is based on the fact that CAA section 111(d)(1)(A) provid es, by its terms, that the standards of performance that are based on the BSER must be established by the states in state plans. As a result, emissions reduction measures that the states themselves have the authority under state law to put in place may be considered to be part of the BSER. Here, while EGU owners and operators may effectuate such measures directly or indirectly, the states also have authority to enact measures su ch as re-dispatch requirements, renewable portfolio standards that require investment in renewable energy resources, as well as demand-side energy efficiency measures. As noted in the preamble, many states have already done so. Comment [A43]: This section of the TSD argues
that building blocks 2, 3, and 4 are statutorily
eligible for consideration as BSER. However, in a
few places the reader may be confused whether you

are speaking about the statutory eligibility of these
building blocks for consideration as BSER or whether

in fact these building blocks constitute BSER. Specifically, please consider editing the following

passages to make clear you are speaking of
eligibility for consideration as BSER:

 P. 22 “The fact that the affected sources may
themselves implement or invest in the

measures in building blocks 2, 3, and 4 ‐‐ which, again, reduce their emissions ‐‐ supports treating those measures as
components of the BSER”

 P. 22 “As a result, emissions reduction

measures that the states themselves have the
authority under state law to put in place may
be considered to be part of the BSER.”

 P. 23 “Finally, we note an additional reason
that building blocks 3 and 4 should be

considered to be part of the BSER for fossil

‐ fuel

‐ fired EGUs.”

Comment [A44]: We appreciate this comment. We think that the current phrasing is OK. We will be glad to discuss this point if the commenter

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23 The fact that many states have adopted measures that require increased renewable electricity generation and increased end-use energy efficiency further supports the

conclusion that these emission reduction meth ods are feasible and offer opportunities for significant reductions in emissions that are achievable considering cost. More than half the states have established renewable port folio standards (RPS) that require minimum proportions of electricity sales to be supp lied with generation from renewable generating resources. More than 20 states have energy efficiency resource standards (EERS) that require utilities to effectuate a certain amount of savings in electricity demand each year or cumulatively. 49

Finally, we note an additional reason that building blocks 3 and 4 should be considered to be part of the BSER for fossil-fuel-fired EGUs. During the public outreach sessions, stakeholders generally recommended th at state plans be authorized to rely on,

and that affected sources be authorized to implement, re-dispatch, renewable energy measures and demand-side energy efficiency measures, in order to meet the states’ and sources’ emissions reduction obligations. The EPA agrees that state plans may include these measures, at least under certain circum stances, discussed below, and that sources may rely on them to achieve required reductions. It is clear that these types of measures are well-accepted by the stakeholders as means to reduce emissions from affected sources. The fact that state plans and sources would be expected to use these types of measures to reduce emissions supports the view that these measures are part of a “system

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

4. Alternate approach

As an alternative to the approach described above for determining the “best system of emission reduction ... adequately demonstrated,” the EPA believes the “system” may be identified as simply including, in addition to building block 1, the reduced utilization of fossil-fuel-fired EGUs, with the measures in building blocks 2, 3, and 4 serving as sources of substituting genera tion or electricity services needed to assure

that the amount of the reduced utilization from these higher emitting sources will be consistent with reliability needs and not be unreasonably costly.

Like the approach described above, this alternative treats the measures in building block 1 – the heat rate improvements at the affected sources – as a component of

the BSER. This alternative also includes sim ilarities to the approach described above in how it evaluates the measures in building blocks 2, 3, and 4.

Specifically, under this alternative, the amount of reduced generation correspondsto the amounts of increased generation available at NGCC units, increased available lowor zero-carbon generation, and available increased demand-side energy efficiency

49 Database of State Incentives for Renewables & Efficiency (DSIRE), http://www.dsireusa.org/summarymaps/index.cfm?ee=0&RE=0.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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24 (building blocks 2, 3, and 4, respectively). In light of the building blocks, this approach also meets the criteria to qualify as the BSER.

Reduced generation is a “system of emission reduction” because it is an action or a set of actions (i.e., limiting the amount of el ectricity produced) that the affected source may take to reduce its emissions. Reducing generation is technically feasible because of the source’s ability to limit its own operations; however, it should be emphasized that the reduced generation that the EPA proposes as the “system” is in an amount that (i) as discussed below, may be subs tituted with increased generation from low- or zeroemitting sources and increased demand-side energy efficiency, and (ii) as discussed in the preamble, may be accomplished in a manner that assures the reliability of the electricity grid. [NOTE TO INTERAGENCY REVIEWERS: We intend to add to the preamble the explanation for (ii).]

Reduction of, or limitation on, production is already a well-established means of reducing emissions of pollutants in the electric sector and not merely a theoretical option that is unavailable as a practical matter for sources that may have to operate to ensure system reliability. For example, reduced generation 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 Call 50 and the Clean Air Interstate Rule (CAIR). 51

The levels of reduced generation proposed meet the criteria for the “best system of emission reduction ...adequately demonstrat ed.” The amount of emission reduction they achieve is appropriate, as discussed above. In addition, the cost of the proposed levels of reduced generation are reasonable for the affected source category and the nation-wide electricity syst em, do not jeopardize reliability, and do promote the development and implementation of technology that is important for continued emissions reductions. This is because of the interconnected nature of the electrical grid and the fungibility of electricity, which allows decr eases 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 th ereby makes reduced utilization a viable approach for emissions reductions by EGUs.

As noted above, the measures in buildi ng blocks 2, 3, and 4 are already in widespread use in the industry. At the leve ls in the proposal, they have the technical capability to substitute for the affected units’ reduced utilization at reasonable cost. Moreover, it is reasonable to expect that they will develop at the level requisite to ensure an adequate and reliable supply of electricity . There are two reasons for this. First, the states, as part of their plans, have mechanisms available to put these substitutes in place: They could establish requirements or incentives that would result in new renewable energy and demand-side energy efficiency programs, as discussed above. Second, the

50 63 Fed. Reg. 57,356 (Oct. 27, 1998).

51 70 Fed. Reg. 25,162 (May 12, 2005). Comment [A45]: : In discussing reduced utilization, consider whether it might help to distinguish between capacity and energy. EGUs provide both capacity and energy to the electric system and are typically compensated separately for the two services. Reduced utilization may cause a class of EGUs to provide less energy, but will not diminish their value as capacity resources.

Comment [A46]: We appreciate this comment. We are considering it.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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25 affected sources themselves could invest in new renewable energy resources and demand-side energy efficiency, as also discussed above. 52

5. EPA’s discretion in applying the criteria for the best system of

emission reduction

Each of the approaches to determining BSER described above entail applying the same criteria described in the D.C. Circuit case law for evaluating BSER. Above and in the preamble, we explain why each approach satisfies those criteria.

Here, we emphasize that under the case law, the EPA has significant discretion in weighing the different criteria, and may weigh them differently in different rulemakings. In the present rulemaking, the EPA is heavil y weighting two criteri a in particular: the amount of emissions reduction and the promotion of technology implementation – while also noting that the proposed BSER determination readily meets the other criteria as well. The EPA considers it especially important in this rulemaking, while ensuring that costs are not unreasonable, to achieve a significant amount of emissions reductions in response to the urgency and the magnitude of the need to mitigate climate change. The preamble

discusses this in the sections concerning the scientific background for this rulemaking. The EPA also considers it especially important in this rulemaking to promote technological innovation and de velopment of, in particular, the measures in building blocks 3 and 4 (to reiterate, low- or zero -emitting electric gene ration and demand-side energy efficiency, respectively). Promoting innovation in, and market penetration of, these technologies and practices is critical to making the substantial reductions in emissions that will be required during th e next few decades to reduce the risks of dangerous climate change.

In addition, in this rulemaking, as described in the preamble, the EPA is determining the BSER in a manner that is consistent with, and that provides further impetus for, current trends in the nation’s electricity system that offer promise to reduce the carbon intensity of the system over the near- and long-term, while maintaining reliability and affordability. This approach is consistent with the case law, which authorizes the EPA to determine BSER by “b alanc[ing] long-term national and regional impacts,” and by “using a long-term lens with a broad focus on future costs, environmental and energy effects of different technological systems....” 53

6. Re-dispatch and sources in the regulated source categories.

52 It should be noted that in light of the low current an d projected near term prices for natural gas, market forces may lead investors to choose to build new NGCC units, rather than new renewable resources. This result would not call into question the technical feas ibility of a BSER that included reductions in fossilfuel-fired generation by the amount of a specified amount of new renewable resources. This is because under these circumstances, the fossil-fuel-fired gene rators could still reduce their generation without causing reliability or other problems in the electric power system.

53 Sierra Club v. Costle , 657 F.2d 298, 331 (D.C. Cir. 1981).I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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26 As described in the preamble, building block 2 consists of reductions in generation from fossil-fuel-fired steam genera ting boilers, and corre sponding increases in generation by NGCC units. The amount of this re-dispatch is the amount that the steam generating boilers may reduce, and that NGCC units may increase, up to an average of 70% capacity utilization of the NGCC units.

Accordingly, this component of BSER involv es two sets of sources. The first (the steam generating boilers) decreases its emi ssions. The second (the lower-emitting NGCC units) may increase its emissions if increased operations are necessary to ensure the ongoing reliability of the integr ated electricity system, of wh ich both sets of source are a part, as emissions and generation reduction is occurring at steam generating boilers and net reductions are being achieved. Both th ese sets of sources are affected sources because they are in source categories that are covered by this rulemaking. As noted in the preamble, the fossil-fuel-fired steam generating boilers 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 boilers) are subject to reduction requirements through other components of the BSER, specifically, building blocks 3 and 4 (low - and zero-emitting energy and demand-sideenergy efficiency, respectively). In addition, as noted in the preamble, the EPA is coproposing to combine the two source categories into a single source category, covering

fossil-fuel-fired EGUs.

7. Stakeholder concerns

The EPA is aware that some stakeholders have expressed concern that redispatch, renewable energy, and demand-side energy efficiency measures (building blocks 2, 3, and 4) are not authorized under CAA section 111 to be components of the BSER because, according to these stakeholders, these measures are implemented outside of the affected units and beyond the control of the affected units. However, the provisions of section 111 do not by their terms preclude the BSER from including those types of measures. In addition, as noted above, unde r the proposed approach, affected sources may themselves implement the measures included in building blocks 2, 3, and 4, so that

those measures are within their control. More over, under the alternativ e, the “system” of emission reduction may be viewed as including reductions in utilization at the affected sources themselves. It should also be noted that, as discussed above, the re-dispatch measures in building block 2 are limited to a ffected sources. Thus, the proposed approach and alternative described above resp ond to these stakeholder concerns.

8. Re-dispatch: intra-state and inter-state compliance

In this section, we discuss the issue of whether CAA section 111(d) limits the EPA to applying the re-dispatch component (bui lding block 2) of the BSER, based on the assumption that each state will comply with that component on a purely intra-state basis, or instead, whether the EPA could base build ing block 2 on an assumption that the states will comply with that component through the interstate region with which they share the grid.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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27 As the preamble describes, in evaluating building block 2, we have assumed that each state would implement it on a state-by-state basis, without relying on a multi-state regional grid. In particular, we have assumed that each state would increase generation of its own NGCC units to as close to an average 70% capacity utilization as possible, given the amount of generation from in-state fossil-fuel-fired steam generating boilers, and we assumed the corresponding amount of reduction in generation from those steam generators. We have determined the costs of that re-dispatch, and propose to find that they are reasonable. 54 Because we know that dispatch systems operate over multi-state regions, however, we have also determined 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.

We found that based on the intra-state approach, some states could not increase their average NGCC unit utilization to 70% because they have limited fossil-fired boiler steam generation. In contrast, based on the region-wide approach, more of the statescould increase their average NGCC utilization to 70%. In addition, the costs of the intrastate 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 exception of Texas, are part of a multi-state, regional grid each stat e’s implementation of building block 2 would, as a practical matter, necessarily occur on an interstate, and not an intrastate, basis.

CAA section 111(d)(1), by its terms, a pplies requirements on a state-by-state basis. It requires that “each State shall submit to the Administrator a plan” that includes standards of performance as well as implem enting and enforcing measures. Further, it allows “the State in applying a standard of performance to any particular source under a [state] plan” to take into consideration factors such as the source’s remaining useful life.

These provisions raise the issue of whethe r section 111(d) may be interpreted so that the re-dispatch component of BSER may be applied on the assumption that each state would implement that component on a purely intra-state basis, or whether section 111(d) may be interpreted so that the re-dispatch component may be applied on the assumption that each state would implement through the op eration of the interstate grid in which it participates. This issue may also apply to building blocks 3 and 4.

VII. State plans – content

This section discusses various aspects of the content of state plans.

A. Emissions performance level – stringency, state flexibilities

This subsection discusses the obligations and flexibilities that states have in determining the emissions performance levels of their CAA section 111(d) state plans.

54 It should be noted that we also evaluated region-wide re-dispatch, for which the costs are less.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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28 As discussed above, the implementing regulations assign to the EPA the responsibility for determining the “best system of emission reduction ... adequately demonstrated” and applying it to determine th e “degree of emission reduction” reflected in the “emission guideline[s],” which in this case are the state goals. 55 In addition, the implementing regulations provide that, in the case of an air pollutant that adversely affects human health, the state plans must achie ve emissions reductions equivalent to the EPA emission guidelines: “[W]here the Admi nistrator has determined that a designated pollutant may cause or contribute to endangerm ent of public health, emission standards shall be no less stringent than the corresponding emission guideline(s) ...." 56

In this rulemaking, we are follow ing these implementing regulations. 57 As a result, each state plan’s emissions performance level must be equivalent to the state goal the EPA promulgates for that state, which, as noted above, is based on the EPA’s application of the BSER to the affected sources in the state. In the preamble, we request comment on the process for a state to provide input into the EPA’s establishment of the state’s goal, including the type of showing that the state must make if it believes that the EPA’s proposed goal is inconsistent with BSER as applied to the state. These requests should not be interpreted as requesting comment on whether the state plan may establish an emissions performance level that is less stringent than the EPA-promulgated state goal.

As discussed in the preamble, the state has flexibility as to the form of the emissions performance level, for example, whethe r it is expressed as an emission rate or a mass limit, as long as it is equivalent to – that is, as the regulations provide, “no less stringent than” 58 -- the state goal.

B. Types of measures – state flexibilities

As discussed above, under CAA section 111(a)( 1), determining the BSER is part of the methodology by which the EPA determines the amount of emissions reduction that the state plans must achieve. Under section 111(d)(1), each state plan must include standards of performance that achieve it s requisite emissions performance level. However, the state enjoys broad discretion in determining the standards of performance, at least under certain circumstances, as discussed below. Moreover, if a state wishes, it may require in its section 111(d) state plan particular measures that sources must implement, in order to achieve the reductions necessary for the state to meet its emission performance level. These state plan measures are not limited to the measures that the EPA identifies as part of the BSER. Similarly, affected sources that are subject to the state plan may meet their requirements through any measure they choose, as long as that measure is consistent with the plan’s requirements, and these sources are not limited to using measures identified as part of the BSER.

55 40 CFR 60.22.

56 40 CFR 60.24(c).

57 The EPA is not re-opening these implementing regulations.

58 Id

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29 For example, as the preamble explains, in this rulemaking, the EPA is not identifying carbon capture and storage (CCS) as a component of BSER. Even so, a state could elect to include in its plan a requirement that a coal-fired EGU achieve an emission limit consistent with CCS, or even that the EGU implement CCS. By the same token, if the state plan simply imposes an emissions limit on the source, the source could elect to achieve that limit through CCS.

C. Design, equipment, work prac tice, or operational standards

In this section, we discuss whether section 111(d) state plans may include design, equipment, work practice, or operational standards.

CAA section 111(h)(1) authorizes the Ad ministrator to promulgate “a design, equipment, work practice, or operational standard, or combination thereof,” if in his or her judgment, “it is not feasible to prescribe or enforce a standard of performance.” Section 111(h)(2) provides the circumstances under which prescribing or enforcing a standard of performance is “not feasible”: Generally, when the pollutant cannot be emitted through a conveyance designed to emit or capture the pollutant, or when there is no practicable measurement methodology for th e particular class of sources. Other provisions in section 111(h) further provide that a design, equipment, work practice, or operational standard (i) must “be promulgated in the form of a standard of performance whenever it becomes feasible” to do so, 59 and (ii) must “be treated as a standard of performance” for purposes of, in general, the CAA. 60

As noted above, section 111(d) requires that state plans “establish[] standards of performance” as well as “provide[] for the implementation and enforcement of such standards of performance.” Section 111(d) is silent as to whether (i) states may include design, equipment, work practice, or operational standards, or (ii) they may include those types of standards, but only under the lim ited circumstances descri bed in section 111(h) (i.e., when it is “not feasible” to prescribe or enforce a standard of performance). Similarly, section 111(h) applies by its terms when the Administrator is authorized to prescribe standards of performance (which would include rulemaking under CAA section 111(b)), but is silent as to whether it app lies to state plans under CAA section 111(d). 61

We invite consideration of the proper interpretation of CAA §§111(d) and (h),

under either Chevron step 1 and step 2, specifically: (i) Do the provisions of section 111(d) preclude state plans from including “design, equipment, work practice, or operational standard[s]” unless those th ings may be considered “standards of performance” or as providing for the implemen tation and enforcement of such standards? As a related matter, do the references to “standard[s] of performance” in section 111(h) indicate that design, equipment, work pract ice, or operational standards may not be considered “standards of performance?” (ii) Alternatively, are state plans authorized to

59 CAA section 111(h)(4).

60 CAA section 111(h)(5).

61 It should be noted that section 111(b)(5), which concerns controls promulgated by the Administrator for new and modified sources, does refer to section 111(h).I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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30 include those design, equipment, work practi ce, or operational standa rds, but only under the limited circumstances described in section 111(h) relating to infeasibility? (iii) As another alternative, are state plans authorized to include design, equipment, work practice, or operational standards under all circumstances, so that the limits of section 111(h) do not apply? Finally, to the extent th ere is legal uncertainty over whether, and under what circumstances, state plans may include those standards, should the EPA authorize state plans to include them, on the understanding that if the Court invalidates, state plans would be required to be revise d accordingly without further rulemaking from

the EPA?

D. Emissions averaging and trading

In this section, we discuss why CAA section 111(d) state plans may include standards of performance that author ize emissions averaging and trading.

Section 111(d) authorizes state plans to include “standards of performance” and measures that implement and enforce those standards of performance. Section 111(a)(1) defines a “standard of performance” as “a st andard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction ... adequately de monstrated.” Section 302 contains a set of definitions that apply “[w]hen used in [the Clean Air Act],” including subsection (l), which provides a sepa rate definition of “standard of performance” as “a requirement of

continuous emission reduction....”

The EPA proposes that the definition of “standard of performance” is broad enough to incorporate emissions averaging and trading provisions, including both emissions rate programs, in which sources may average or trade those rates; and mass emission limit programs, in which sources may buy and sell mass emission allowances. 62
The term “standard” in the phrase “standard fo r emissions of air pollutants” is not defined in the CAA. As the Supreme Court noted in a Clean Air Act case, a “standard” is simply “that which ‘is established by authority, custom, or general consent, as a model or example; criterion; test.’” Engine Mfrs. Ass’n v. South Coast Air Quality Magmt. Dist.

, 541 U.S. 246, 252-53 (2004) (quoting Webster’s Second International Dictionary , at 2455 (1945)). A tradable emission rate or a tradable mass limit is a “standard for emissions of air pollutants” because it establishes an emissions limit for a source’s air pollutants, and as a result, qualifies as a “crite rion” or “test” for those air pollutants. In addition, a tradable rate or mass limit may “reflect[] the degree of emission limit achievable through the application of the best system of emission reduction” because it may be set at a level that assures that emissions will not exceed the amount that would result from application of the best system of emission reduction.

Moreover, although there may be doubt that the definition of “standard of performance” in section 302(l) applies to se ction 111(d) in light of the fact that the

62 Typically, in a mass emission limit trading program, so urces are required to obtain an allowance for each measure (e.g., ton) of air pollutant they emit. The ac id rain program under Title IV of the CAA is an example of this type of trading program. Comment [A47]: Consider adding “and offsets”

to the end of the sentence.

Comment [A48]: Sentence has been edited.

Comment [A49]: Consider adding “and offsets”

after “allowance” in the footnote.

Comment [A50]: We are not aware that offsets are “[t]ypically” included in mass emission limit trading programs.I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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31 definition of the same term in section 111(a)(1) is more specific, even if the section 302(l) definition does apply, an averagin g or trading requirement qualifies as a “continuous emission reduction” because, in the case of a tradeable emission rate, the rate is applicable at all times, and, in the case of a tradeable mass limit, the source is always under the obligation that its emissi ons be covered by allowances.

It should be noted that the EPA ha s promulgated two other section 111(d) rulemakings that authorized state plans to include emissions averaging or trading. 63

VIII. Ongoing applicability of section 111(d) state plan

The EPA is proposing that an existing source that becomes subject to requirements under CAA section 111(d) will cont inue to be subject to those requirements even after it undertakes a modification or reconstruction. Under this interpretation, a

modified or reconstructed source would be subject to both (1) the section 111(d) requirements that it had previously been subject to and (2) the modified source or reconstructed source standard being promulgated under 111(b) simultaneously with this rulemaking.

As noted above, a “new source” is defined under section 111(a)(2) as “any stationary source, the construction or modi fication of which is commenced after,” in general, a proposed or final section 111(b) rule becomes applicable to that source; and under section 111(a)(6), an “exi sting source” is defined as “any stationary source other than a new source.” Under these definitions, an “existing source” that commences

construction of a modification or reconstruction after the EPA has proposed or finalized a section 111(b) standard of performance applicable to it, becomes a “new source.” However, section 111(d) is silent on whet her requirements imposed under a section 111(d) plan continue for a source that ceases to be an existing sour ce because it modifies or reconstructs. For example, section 111(d) provides that the state plans will “establish[] standards of performance for any existing source” but does not say whether, once a standard of performance is established for a given source, that standard is lifted if the source ceases to be an existing source. Sim ilarly, no other provisions of section 111 address whether the imposition of a secti on 111(b) standard on a modified or reconstructed source ends the source’s obligation to meet any applicable section 111(d) requirements.

Because section 111(d) does not address whether an existing source that is subject to a 111(d) program remains subject that prog ram even after it modifies or reconstructs, the EPA has authority to provide a reasonable interpretation, under the Supreme Court’s

decision in Chevron U.S.A. Inc. v NRDC , 467 U.S. 837, 842-844 (1984). The EPA’s

63 See “Standards of Performance for New and Existing Stationary Sources: Electric Utility Steam Generating Units, Final Rule,” 70 Fed. Reg. 28,606 (May 18, 2005) [also known as the Clean Air Mercury Rule, or “CAMR”], 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 Sources and Emission Guidelines for Existing Sources; Municipal Waste Combustors,” 60 Fed. Reg. 65,387 (Dec. 19, 1995).I NTERAGENCY W ORKING C OMMENTS ON D RAFT L ANGUAGE UNDER EO12866

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32 interpretation is that under these circumstances, the source remains subject to the section 111(d) plan, for two reasons. The first is to assure the integrity of the section 111(d) plan. The EPA believes that many States will develop integrated plans that include all of their EGUs, such as rate- or mass-based tr ading programs. Uncertainty about whether units would remain in the program could be very disruptive to the operation of the program. The second reason is to avoid creating incentives for sources to seek to avoid their obligations under a section 111(d) plan by undertaking modifications. The EPA is concerned that owners or ope rators of units might have incentives to modify purely because of potential discrepancies in the st ringency of the two programs, which would undermine the emission reduction goals of section 111(d). The EPA invites comments on this interpretation, including whether this interpretation is supported by the statutory text and whether this interpretation is sensible policy and will further the goals of the statute.