### From: Culligan, Kevin Sent: Friday, July 31, 2015 1:53 PM To: Frey, Nathan J.; Szabo, Aaron Cc: Vasu, Amy; Hoffman, Howard Subject: Response to Interagency question

Nathan, The attached responds to the interagency question regarding clarification related to exclusion of BB-4. - Kevin

<< V B 3 -revisions_BB2-3 v BB4_07-31-15__11am_clean.docx >> << V B 3 -revisions_BB2-3 v BB4_07-31-15__11am_redline_w-o comments.docx >>1 Draft/V.B.3.-revisions_BB2-3 v BB4_07-31-15__11am_clean [Note for reviewers: This piece has revisions to section 111(d) preamble section V.B.3.a (adds new material), V.B.3.b(1) (deletes some paragraphs) and V.B.3.(b)(9) (adds new material; adds the paragraphs deleted from V.B.3.(b)(1), with edits; and makes additional edits).]

3. Building blocks 2 and 3 as a “system of emission reduction” a. Overview. As we explain above, the emission performance rates that we include in this rule’s emission guidelines are achievable by the affected EGUs through the application of the BSER, which includes the three building blocks. Commenters object that building blocks 2 (generation shift) and 3 (renewable energy) cannot, as a legal matter, be considered part of the BSER under CAA section 111(d)(1) and (a)(1). These commenters explain that in their view, under CAA section 111, the emission performance rates must be based on, and therefore the BSER must be limited to, methods for emissions control that the owner/operator of the affected source can integrate into the design or operation of the source itself, and cannot be based onactions taken beyond the source or actions involving thirdparty entities. 1 For these reasons, these commenters argue

1 See, e.g., comments by UARG at 6-7 (“Standards promulgated under section 111 must be source-based and reflect measures that the source’s owner can integrate into the design or2 that the phrase “system of emission reduction” cannot be interpreted to include building blocks 2 and 3. We disagree with these comments, and note that other commenters were supportive of our determination to include building blocks 2 and 3. Under CAA section 111(d)(1) and (a)(1), the EPA’s emission guidelines must establish achievable emission limits based on the “best system of emission reduction ... adequately demonstrated.” While some commenters assert that emission guidelines must be limited in the manner summarized above, the phrase “system of emission reduction,” by its terms and when read in context, contains no such limits. To the contrary, its plain meaning

operation of the source itself. A standard cannot be based on actions taken beyond the source itself that somehow reduce the source’s utilization.”); comments by UARG at 31 (the building blocks other than building block 1 take a “‘beyond-the-source’ approach” and “impermissibly rely on measures that go beyond the boundaries of individual affected EGUs and that are not within the control of individual EGU owners and operators”); comments by UARG at 33 (the “system” of emission reduction “can refer only to reductions resulting from measures that are incorporated into the source itself;” section 111 is “designed to improve the emissions performance of new and existing sources in specific categories based on the application of achievable measures implemented in the design or production process of the source at reasonable cost.”); comments by American Chemistry Council et al. (“Associations”) at 60-61 (EPA’s proposed BSER analysis is unlawful because it “looks beyond the fence line of the fossil fuel-fired EGUs that are the subject of this rulemaking;” “the standard of performance must ... be limited to the types of actions that can be implemented directly by an existing source within [the appropriate] class or category.”).3 is deliberately broad and is capacious enough to include actions taken by the owner/operator of a stationary source designed to reduce emissions from that affected source, including actions that may occur off-site and actions that a third party takes pursuant to a commercial relationship with the owner/operator, so long as those actions enable the affected source to achieve its emission limitation. Such actions include the measures in building blocks 2 and 3, which, when implemented by an affected source, enable the source to achieve their emission limits because of the unique characteristics of the utility power sector. For purposes of this rule, we consider a “system of emission reduction” -- as defined under CAA section 111(a)(1) and applied under CAA section 111(d)(1) -– to encompass a broad range of pollution-reduction actions, which includes the measures in building blocks 2 and 3. Furthermore, the measures in building blocks 2 and 3 fall squarely within EPA’s historical interpretation of section 111, pursuant to which the focus for the BSER has been on how to most cleanly produce a good, not on how much of the good should be produced. Our interpretation that a “system of emission reduction” is broad enough to include the measures in building blocks 2 and 3 is supported by the following: our4 interpretation of the phrase “system of emission reduction” is consistent with its plain meaning and statutory context; our interpretation accommodates the very design of CAA section 111(d)(1), which covers a range of source categories and air pollutants; 2 our interpretation is supported by the legislative history of CAA section 111(d)(1) and (a)(1), which indicates Congress’s intent to give the EPA broad discretion in determining the basis for CAA section 111 control requirements, particularly for existing sources, and Congress’s intent to authorize the EPA to consider measures that could be carried out by parties other than the affected sources; and our interpretation is reasonable in light of comparisons to CAA provisions that give the EPA similar authority to consider such measures and to CAA provisions that would preclude the EPA from considering such measures. In addition to the reasons stated above, the EPA's interpretation is also reasonable for the following reasons: (i) Building blocks 2 and 3 fit well within the structure and economics of the utility power sector. (ii)

2 Because it is designed to apply to a range of air pollutants not regulated under other provisions, CAAsection 111(d) may be described as a “catch-all” or “gapfiller.” As such, a “system of emission reduction” as applied under CAA section 111(d) should be interpreted flexibly to accommodate this role.5 Fossil fuel-fired EGUs are already implementing the measures in these building blocks for various reasons, including for purposes of reducing CO 2 emissions. (iii) Interpreting the phrase “system of emission reduction” to incorporate building blocks 2 and 3 is consistent with (a) other provisions in the CAA, including the acid rain provisions in Title IV and the SIP provisions in CAA section 110, along with the EPA’s regulations implementing the CAA SIP requirements concerning interstate transport and regional haze, each of which is based on at least some of the same measures included in building blocks 2 and 3; (b) prior EPA action under CAA section 111(d), including the 2005 Clean Air Mercury Rule, 3 which is based on some of the same measures in building blocks 2 and 3; (c) the various provisions of the CAA that authorize emissions trading, because emissions trading entails a source meeting its emission limitation based on the actions of another entity; and (d) the pollution prevention provisions of the CAA, which make clear that a primary goal of the CAA is to encourage federal and state actions that reduce or eliminate, through any measures, the amount of pollution

3 This rule was vacated by the D.C. Circuit on other grounds. New Jersey v. EPA , 517 F.3d 574, 583-84 (D.C. Cir. 2008), cert. denied sub nom

. Util. Air Reg. Group v. New Jersey , 555 U.S. 1169 (2009).6 produced at the source. 4 (iv) Lastly, interpreting the phrase “system of emission reduction” to authorize the EPA, in formulating its BSER determination, to weigh a broad range of emission-reducing measures that includes building blocks 2 and 3 is consistent with Congress’s intent to address urgent environmental problems and to protect public health and welfare against risks, as well as Congress’s expectation that American industry would be able to develop the innovative solutions necessary to protect public health

and welfare. Congress passed the CAA, including its several amendments, to protect public health and welfare from “mounting dangers,” including “injury to agricultural crops and livestock, damage to and the deterioration of property, and hazards to air and ground transportation.” 5 In doing so, Congress established numerous programs to address air pollution problems and provided the EPA with guidance and flexibility in carrying out many of those programs. In the context of this industry and this pollutant it is reasonable to reject the narrow interpretation urged by

4 As noted in the Legal Memorandum, in several of these rulemakings and in the course of litigation, the fossil fuel-fired electric power sector has taken positions that are consistent with the EPA’s interpretation that the BSER may include building blocks 2 and 3. 5 CAA section 101(a)(2).7 some commenters that the “system of emission reduction” applicable to the affected EGUs must be limited to only those measures that can be integrated into the design or operation of the source itself. The plain language of the statute does not support such an interpretation, and to adopt it would limit the “system of emission reduction” to measures that are either substantially more expensive or substantially less effective at reducing emissions than the measures in building blocks 2 and 3, notwithstanding the absence of any statutory language imposing such a limit. Such a result would be contrary to the goals of the CAA and would ignore the facts that sources in the electric generation industry routinely address planning and operating objectives on a broad, multi-source basis using the measures in building blocks 2 and 3 and would seek to use building blocks 2 and 3 (as well as non-BSER measures) to comply with whatever emission standards are set as a result of this rule. Indeed, as already observed, building blocks 2 and 3 are already being used to reduce emissions, and to do so specifically by operation of the industry’s inherent multi-source functions. Although the BSER provisions are sufficiently broad to include, for affected EGUs, the measures in building blocks 2 and 3, they also incorporate significant constraints on8 the types of measures that may be included in the BSER. We discuss those constraints at the end of this section. They include the section 111(d)(1) and (a)(1) requirements that emission reductions occur from the affected sources; that the emission performance standards for which the BSER forms the basis be achievable; that the system of emission reduction be adequately demonstrated; and that the EPA account for cost, non-air quality impacts, and energy requirements in determining the “best” system of emission reduction that is adequately demonstrated. These constraints do not preclude building blocks 2 and 3 from the BSER. In interpreting these statutory constraints, in determining the BSER, the EPA is mindful of past practice and current policy for section 111 regulatory requirements, as well as regulatory requirements under other CAA provisions for the electric power sector, under which the EPA generally bases regulatory requirements on controls and measures designed to reduce air pollutants from the production process without constraining the aggregate amount of production. While inclusion of building blocks 2 and 3 is consistent with our interpretation, inclusion of building block 4 is not, and for that reason, we are declining to include building block in the BSER. Finally, we briefly note additional constraints that focus9 the BSER for new sources under section 111(b) on controls

that assure that sources are well-controlled at the the time of construction. b. System of emission reduction as a broad range of

measures. (1) Plain meaning and context of “system of emission reduction.” The phrase “system of emission reduction” appears in the definition of a “standard of performance” under CAA section 111(a)(1). That definition reads: 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. Pursuant to this definition, it is clear that a “system of emission reduction” serves as the basis for emission limits embodied by CAA section 111 standards. For this reason, emission limits must be “achievable” through the “application” of the “best” “system of emission reduction” “adequately demonstrated.” Under CAA section 111(d)(1), such a limit is established for “any existing source,” which is defined as any existing “building, structure,10 facility, or installation which emits or may emit any air pollutant.” 6 Although a “system of emission reduction” lays the groundwork for CAA section 111 standards, the term “system” is not defined in the CAA. As a result, we look first to its ordinary meaning. Abstractly, the term “system” means a set of things or parts forming a complex whole; a set of principles or procedures according to which something is done; an organized scheme or method; and a group of interacting, interrelated, or interdependent elements. 7 As a phrase, “system of emission reduction” takes a broad meaning to

6 See CAA section 111(d)(1) (applying a standard of performance to any existing source); (a)(6) (defining the term “existing source” as any stationary source other than a new source); and (a)(3) (defining the term “stationary source” as “any building, structure, facility, or installation which emits or may emit any air pollutant,” however, explaining that “[n]othing in subchapter II [ i.e. , Title II] of this chapter relating to nonroad engines shall be construed to apply to stationary internal combustion engines.”) 7 Oxford Dictionary of English (3rd ed.) (2010), available at http://www.oxforddictionaries.com/us/definition/american_en glish/system ; see also American Heritage Dictionary (5th ed.) (2013), available at http://www.yourdictionary.com/system#americanheritage; and The American College Dictionary (C.L. Barnhart, ed. 1970) (“an assemblage or combination of things or parts forming a complex or unitary whole”).11 serve a singular purpose: it is a set of measures that work together to reduce emissions. When read in context, the phrase “system of emission reduction” carries important limitations: because the “degree of emission limitation” must be “ achievable through

the application of the best system of emission reduction,” (emphasis added), the “system of emission reduction” must be limited to a set of measures that work together to reduce emissions and that are implementable by the sources

themselves. As a practical matter, the “source” includes the “owner or operator” of any building, structure, facility, or installation for which a standard of performance is applicable. For instance, under CAA section 111(e), it is the “owner or operator” of a source who is prohibited from operating “in violation of any standard of performance applicable to such source.” 8 Thus, a “system of emission reduction” for purposes of CAA section 111(d) means a set of measures that source

8 While this section provides for enforcement in the context of new sources, a CAA section 111(d) plan must provide for the enforcement of a standard of performance for existing sources.12 owners or operators can implement to achieve an emission limitation applicable to their existing source. 9 In contrast, a “system of emission reduction” does not include actions that only a state or other governmental entity could take that would have the effect of reducing emissions from the source category, and that are beyond the ability of the affected sources’ owners/operators to take or control. Additionally, actions that a source owner or operator could take that would not have the effect of reducing emissions from the source category, such as purchasing offsets, would also not qualify as a “system of emission reduction.” Building blocks 2 and 3 each fall within the meaning of a “system of emission reduction” because they consist of measures that the owners/operators of the affected EGUs can implement to achieve their emission limits. In doing so, the affected EGUs will achieve the overall emission reductions the EPA identifies in this rule. We describe these building block 2 and 3 measures in detail elsewhere

9 Some commenters read the proposed rulemaking as taking the position that the phrase “system of emission reduction” includes anything whatsoever that reduces emissions, and criticized that interpretation as too broad. See UARG comment, at 3-4. We are not taking that interpretation here. In this final rule, we agree that the phrase should be limited to exclude, inter alia , actions beyond the ability of the owners/operators to control.13 in this rule, including the specific actions that owners/operators of affected EGUs can take to implement the

measures. It should be noted that defining the scope of a “system of emission reduction” is not the end of our inquiry under CAA section 111(a)(1); rather, as noted above, a standard of performance must reflect the application of the “ best system of emission reduction ... adequately demonstrated .” (Emphasis added.) Thus, in determining the BSER, the Administrator must first determine whether the available systems of emission reduction are “adequately demonstrated,” based on the criteria, described above, set out by Congress in the legislative history and the D.C. Circuit in case law. After identifying the “adequately demonstrated” systems of emission reduction, the Administrator then selects the “best” of these, based on several factors, including amount of emission reduction, cost, non-air quality health and environmental impact and energy requirements. Only after the Administrator weighs all of these considerations can she determine the BSER and, based on that, establish a standard of performance under CAA section 111(b) or an emission guideline under CAA section 111(d).

Commented [HH1]: Moved to the end, and edited14 For purposes of this final rule, it is not necessary to enumerate all of the types of measures that do or do not constitute a “system of emission reduction.” What is relevant is that building blocks 2 and 3 each qualify as part of the “system of emission reduction.” As noted, they focus on supply-side activities and they each constitute measures that the affected EGUs can implement that will allow those EGUs to achieve the degree of emission limitation that the EPA has identified based on those building blocks. Further, these building blocks also satisfy the other statutory criteria enumerated in CAA section 111(a)(1).

* * * * (9) Constraints on the BSER – Treatment of building block 4 and response to comments concerning precedent Although the BSER provisions are sufficiently broad to include, for affected EGUs, the measures in building blocks 2 and 3, they also incorporate significant constraints on the types of measures that may be included in the BSER. We discuss those constraints in this section. These constaints explain why we are not including building block 4 in the BSER. In addition, these constraints explain why our reliance on building blocks 2 and 3 will have limited Commented [HH2]: We are not proposing to revise sections (2) – (8) of this section V.B.3(b), and so we are not including them in this excerpt15 precedential effect for other rulemakings, and serve as our basis for responding to commenters who expressed concern that reliance on building blocks 2 and 3 would set a precedent for the EPA to rely on similar measures in promulgating future air pollution controls for other

sectors. 10 As discussed above, the emission limits in the CAA section 111(d) emission guidelines that this rule promulgates are based on the EPA’s determination, for the affected EGUs, of the “system of emission reduction” that is the “best,” taking into account “cost” and other factors, and that is “adequately demonstrated.” Those components include certain interpretations and applications and provide constraints on the types of measures or controls that the EPA may determine to the BSER. **(i) Emission reductions from affected sources**  The first constraint is that the BSER must assure emission reductions from the affected sources. Under section 111(d)(1), the states must submit state plans that “establish[] standards of performance for any existing source,” and, under section 111(a)(1) and the EPA’s implementing regulations, those standards are informed by

10 Commenters offered hypothetical examples to illustrate their concerns over precedential effects, discussed below.16 the EPA’s determination of the best system of emission reduction adequately demonstrated. Because the emission standards must apply to the affected sources, actions taken by affected sources that do not result in emission reductions from the affected sources, –- for example, offsets (e.g., the planting of forests to sequester CO 2 ) –- do not qualify for inclusion in the BSER. Building blocks 2 and 3 achieve emission reductions from the affected EGUs, and thus are not precluded under this constraint. **(ii) Controls or measures that affected EGUs can**  **implement** The second constraint is that because the affected EGUs must be able to achieve their emission performance rates through the application of the BSER, the BSER must be

controls or measures that the EGUs themselves can implement. Moreover, as noted, the D.C. Circuit has established criteria for achievability in the section 111(b) caselaw, e.g., sources must be able to achieve their standards under a range of circumstances. If those criteria are applicable in a section 111(d) rule, the BSER must be of a type that allows sources to meet those achievability criteria. As noted, under this rule, affected EGUs may achieve their emission performance rates in the various17 circumstances under which they operate, through the application of the building blocks. **(iii) “Adequately demonstrated”**  The third constraint is that the system of emission reduction that the EPA determines to the best must be “adequately demonstrated.” To qualify as the BSER, controls and measures must align with the nature of the regulated industry and the nature of the pollutant so that implementation of those controls or measures will result in emission reductions from the industry and allow the sources to achieve their emission performance standards. The history of the effectiveness of the controls or other measures, or other indications of their effectiveness, are important in determining whether they are adequately

demonstrated.

More specifically, the application of building blocks 2 and 3 to affected EGUs has a number of unique characteristics. Building blocks 2 and 3 entail the production of the same amount of the same product -- electricity, a fungible product that can be produced using a variety of highly substitutable generation processes -- through the cleaner (that is, less CO 2 -intensive) processes of shifting dispatch from steam generators to existing NGCC18 units, and from both steam generators and NGCC units to renewable generators. The physical properties of electricity and the highly integrated nature of the electricity system allow the use of these cleaner processes to generate the same amount of electricity. In addition, the electricity sector is primarily domestic -- little electricity is exported outside the U.S. -- and there is low capacity for storage. In addition, the electricity sector is highly regulated, planned, and coordinated. As a result, holding demand constant, an increase in one type of generation will result in a decrease in another type of generation. Moreover, the higher-emitting generators, which are fossil fuel-fired, have higher variable costs than renewable generators, so that increased renewable generation will generally back out fossil fuel-fired generation. Because of these characteristics, the electricity sector has a long and well-established history of substituting one type of generation for another. This has occurred for a wide variety of reasons, many of which are directly related to the system’s primary purposes and functions, as well as for environmental reasons. As a result, at present, there is a well-established network of business and operational relationships and past practices19 that supports building blocks 2 and 3. As noted elsewhere, a large segment of steam generators already have business relationships with existing NGCC units, and a large segment of all fossil fuel-fired EGUs already own, co-own, or have invested in renewable energy. Many of these characteristics are unique to the utility power sector. Moreover, this complex of characteristics, ranging from the physical properties of electricity and the integrated nature of the grid to the institutional mechanisms that assure reliability and the existing practices and business relationships in the industry, combine to facilitate the implementation of building blocks 2 and 3 in a uniquely efficient manner. This supports basing the emission limits on the ability of owners and operators of fossil fuel-fired EGUs to replace their generation with cleaner generation in other locations, sometimes owned by other entities. As noted above, commenters offered hypothetical examples to illustrate their concerns over precedential effects. Most of their concerns focused on building block 4, and most of their hypothetical examples concerned reductions in demand for various types of products. These concerns are mooted because we are not finalizing building block 4. Some commenters offered hypothetical examples for Commented [HH3]: Most of this paragraph moved here from above20 building blocks 2 and 3 as well. For example, some commenters asserted that the EPA could “develop standards of performance for tailpipe emissions from motor vehicles” by “requiring car owners to shift some of their travel to buses,” which the commenters considered analogous to building block 2; “or by requiring there to be more electric vehicle purchases,” which the commenters considered analogous to building block 3. 11 Commenters’ concerns over precedential impact cannot be taken to mean that the building blocks should not be considered to meet the requirements of the BSER or that the affected EGUs cannot be considered to meet the emission limits by implementing those measures. Moreover, because many of these individual characteristics, and their inherent complexity, are unique to the utility powersector, building blocks 2 and 3 as applied to fossil fuelfired EGUs will have a limited precedent for other industries and other types of rulemakings. For example, the commenter’s hypothetical examples noted above are inapposite for several reasons. The hypotheticals appear to be premised on government action mandating actions not implementable by emitting sources (e.g., that a government

11 UARG comment at 2-3.21 would “require[e] car owners to shift some of their travel to buses, or ... require[e] there to be more electric vehicle purchases”), whereas the measures in building blocks 2 and 3 can be implemented by the affected EGUs. Nor have commenters attempted to address how car owners shifting travel to buses or purchasing more electric vehicles could be translated into lower tailpipe standards for motor vehicles.. 12 **(iv) “Best” in light of “cost ... non-air quality**  **health and environmental impact and energy requirements” and EPA’s past practice and**  **current policy** The fourth constraint, or set of constraints, is that the system of emission reduction must be the “best,” “taking into account the cost of achieving such reduction, non-air quality health and environmental impact and energy requirements.” As noted, in light of the D.C. Circuit caselaw, the EPA has considered cost and energy factors on both an individual source basis and on the basis of the nationwide electricity sector. In determining what is

12 In any event, it is questionable whether measures such as those hypothesized by the commenters would be consistent with the provisions of Title II.22 “best,” the EPA has broad discretion to balance the

enumerated factors. 13 In interpreting and applying these provisions in this rulemaking to regulate CO 2 emissions from affected EGUs under section 111(d), we remain mindful of our past practice and current policy for interpreting and applying these provisions in previous section 111 rulemakings and for regulating air pollutants from the electricity sector under other provisions of the CAA. The great majority of our regulations under section 111 have been 111(b) regulations for new sources. As discussed in the Legal Memorandum and briefly below, the BSER under section 111(b) is designed to assure that affected sources are well controlled at the time of construction, and that approach is consistent with the design expressed in the legislative history for the 1970 CAA Amendments that enacted the provision. Ttraditionally, CAA section 111 standards have been rate-based, allowing as much overall production of a particular good as is desired, provided that it is produced through an appropriately clean (or low-emitting) process. CAA section 111 performance standards have primarily

13 See Lignite Energy Council v. EPA , 198 F.3d 930, 933 (D.C. Cir. 1999). Commented [HH4]: This paragraph is moved here from above23 targeted the means of production in an industry and not consumers’ demand for the product. Thus, the focus for the BSER has been on how to most cleanly produce a good, not on limiting how much of the good can be produced. One example of the focus under section 111 on clean production, not limitation of product is provided by the revised new source performance standards for electric utility steam generating units that we promulgated in 1979 following the 1977 CAA Amendments to limit emissions of SO2, particulate matter, and NOx. In relevant part, the revised standards limited SO2 emissions to 1.20 lb/million BTU heat input and imposed a 90 percent reduction in potential SO2 emissions. This was based on the application of flue gas desulfurization (FGD) together with coal preparation techniques. In the preamble, we explain that “[t]he intent of the final standards is to encourage power plant owners and operators to install the best available FGD systems and to implement effective operation and maintenance procedures but not to create power supply24 disruptions.” 14 15 EPA has taken the same overall approach in its section 111(d) rules, 16 including the CAMR rule noted

below.

14 See, e.g. , 44 F.R. 33580, at 33599 (June 11, 1979). In this rulemaking, the EPA recognized the ability of the integrated grid to minimize power disruptions: “When electric load is shifted from a new steam-electric generating unit to another electric generating unit, there would be no net change in reserves within the power system. Thus, the emergency condition provisions prevent a failed FGD system from impacting upon the utility company’s ability to generate electric power and prevents an impact upon reserves needed by the power system to maintain reliable electric service.” Id

. 15 The EPA’s 1982 revised new source performance standards for certain stationary gas turbines provide another example of a rulemaking that focused controls on reducing emissions, as well as reliance on the integrated grid to avoid power disruptions. 44 F.R. 33580 (June 11, 1979). In response to comments that requested a NOx emission limit exemption for base load utility gas turbines, the EPA explained that “for utility turbines ... since other electric generators on the grid can restore lost capacity caused by turbine down time” the NOx emission limit of 1150 ppm for such turbines would not be rescinded. 44 F.R. 33580, at 33597-98. 16 See “Phosphate Fertilizer Plants; Final Guideline Document Availability,” 42 Fed. Reg. 12,022 (Mar. 1, 1977); “Standards of Performance for New Stationary 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).25 Similarly, in a series of rulemakings regulating air pollutants from EGUs under several provisions of the CAA, we have focused our efforts on assuring that electricity is generated through cleaner or lower-emitting processes, and we have not sought to limit the aggregate amount of electricity that is generated. We describe those rules in section II., elsewhere in this section V.B.3., and in the Legal Memorandum. For example, as discussed in the Legal Memorandum, in the three transport rules promulgated under CAA section 110(a)(2)(D)(i)(I) – the NOx SIP Call, CAIR, and CSAPR – which regulated precursors to ozone-smog and particulate matter, the EPA based certain aspects of the regulatory requirements on the fact that fossil fuel-fired EGUs could shift generation to lower-emitting sources. In CAMR, the 2005 rulemaking under section 111(d) regulating mercury emissions from coal-fired EGUs, the EPA based the first phase of control requirements on the actions the affected EGUs were required to take under CAIR, including shifting generation to lower-emitting sources. In addition, as also discussed in the Legal Memorandum, in the EPA’s 2012 MATS rule regulating mercury from coal-fired EGUs under section 112, at industry’s urging, the EPA allowed compliance deadlines to be extended for coal-fired EGUs that desired26 to substitute replacement power of any type, including NGCC units or renewable energy, for compliance purposes.While these and other rulemakings for fossil fuelfired EGUs took different approaches towards lower-emitting generation and renewable generation, they all were based on control measures that reduced emissions without reducing aggregate levels of electricity generation. It should be noted that even though some of those rules established overall emission limits in the form of budgets implemented through a cap-and-trade program, the EPA recognized that the fossil fuel-fired EGUs that were subject to the rules could comply by shifting generation to lower-emitting EGUs, including relying on renewable energy. In this manner, the rules limited emissions but on the basis that the industry could implement lower-emitting processes, and not reductions in overall generation. We are applying the same approach to this rulemaking. Our basis for this rulemaking is that affected EGUs can implement a system of emission reduction that will reduce the amount of their emissions without reducing overall electricity generation. This approach takes into account costs by minimizing economic disruption as well as the nation’s energy requirements by avoiding the need for environmental-based reductions in the aggregate amount of27 electricity available to the consumer, commercial, and industrial sectors. This approach is a reasonable exercise of the EPA’s discretion under section 111, consistent with the U.S. Supreme Court’s statements in its 2011 decision, American Electric Power Co. v. Connecticut , that the CAA and the EPA actions it authorizes displace any federal common law right to seek abatement of CO2 emissions from fossil-fuel fired power plants. There, the Court emphasized that CAA section 111 authorizes the EPA –- which the Court identified as the “expert agency” -– to regulate CO2 emissions from fossil fuel-fired power plants based an “informed assessment of competing interests.... Along with the environmental benefit potentially achievable, our Nation's energy needs and the possibility of economic disruption must weigh in the

balance.” 17 Similarly, the D.C. Circuit, in a 1981 decision upholding the EPA’s section 111(b) standards for air pollutants from fossil fuel-fired EGUs, stated that section 111 regulations concerning the electric power sector “demand a careful weighing of cost, environmental, and

17 American Electric Power Co. v. Connecticut , 131 S. Ct. 2527, 2539-40 (2011).28 energy considerations.” 18 This exercise of policy discretion is consistent with Congress’s expectation that the Administrator “should determine the achievable limits” 19 and “would establish guidelines as to what the best system for each such category of existing sources is.” 20 As the D.C. Circuit explained, “[i]t seems likely that if Congress meant ... to curtail EPA’s discretion to weigh various policy considerations it would have explicitly said so in section 111, as it did in other parts of the statute.” 21 Our interpretation that CAA section 111 targets supply-side activities that allow continued production of a product through use of a cleaner process, rather than targeting consumer-oriented behavior,. also furthers Congress’ intent of promoting cleaner production measures “to protect and enhance the quality of the Nation’s air resources so as to promote the public health and welfare and the productive capacity of its population.” 22 This principle is also

18 Sierra Club v. EPA , 657 F.2d 298, 406 (D.C. Cir. 1981). Id. at 406 n. 526. 19 S. Rep. No. 91-1196, at 15-16 (Sept. 17, 1970), 1970 CAA Legis. Hist. at 415-16 (explaining that the “[Administrator] should determine the achievable limits and let the owner or operator determine the most economic, acceptable technique to apply.”). 20 H.R. Rep. No. 95-294, at 195 (May 12, 1977). 21 Sierra Club v. Costle , 657 F.2d 298, 330 (D.C. Cir. 1981)

. 22 CAA section 101(b)(1).29 consistent with promoting “reasonable ... governmental actions ... for pollution prevention.” 23 In this rule, we are applying that same overall policy approach in interpreting the BSER provisions of section 111. That is, we are basing the regulatory requirements on measures the affected EGUs can implement to assure that electricity is generated with lower emissions, taking into account the integrated nature of the industry and current industry practices. Building blocks 1, 2 and 3 fall squarely within this paradigm; they do not require reductions in the total amount of electricity produced. We recognize that commenters have raised extensive legal concerns about building block 4. We recognize that building block 4 is different from building blocks 1, 2, and 3 and the pollution control measures that we have considered under CAA section 111. Accordingly, in light of our past practice and current policy in implementing section 111, as well as the legal concerns raised in public comment, today’s final action excludes building block 4 from the BSER. Building block 4 is outside our policy paradigm as it targets consumer-oriented behavior and

23 CAA section 101(c).30 demand for the good, which would reduce the amount of electricity to be produced. Although numerous commenters urged us to include demand-side energy efficiency measures as part of the BSER, as we had proposed to do, we conclude that we cannot do so under our historical and current policy approach to interpretating section 111 and regulating the electricity sector under other CAA provisions . While building blocks 2 and 3 are rooted in our past practice and policy, building block 4 is not and would require a change which we are not making in our interpretation and implementation of CAA section 111. Excluding demand-side energy efficiency measures from the BSER has the benefit of allaying legal and other concerns raised by commenters, including concerns that individuals could be “swept into” the regulatory process by imposing requirements on “every household in the land.” 24 While building block 4 could have been implemented without imposing requirements on individual households, this final rule resolves any doubt on this matter and is not based on the inclusion of demand-side energy efficiency as part of

the BSER.

24 See Util. Air Reg. Group v. EPA , 134 S. Ct. 2427, 2436 (2014). Commented [HH5]: This paragraph moved here from above

Commented [HH6]: This paragraph moved here from above31 By the same token, we are not finalizing reduced generation of electricity overall as the BSER. Instead, components of the BSER focus on shifting generation to lower- or zero-emitting processes for producing electricity. 25 **(v) Constraints for new sources**  For new sources, practical and policy concerns support the application of basing the BSER on controls that new sources can install at the time of construction, so that they will be well-controlled throughout their long useful lives. This approach is consistent with the legislative history. We discuss this a greater length in the Legal Memorandum.

25 As discussed below, however, reduced generation remains important to this rule in that it is one of the methods for implementing the building blocks. Commented [HH7]: This paragraph moved here from above1 Draft/V.B.3.-revisions_BB2-3 v BB4_07-31-15__11am_redline_w-o comments [Note for reviewers: This piece has revisions to section 111(d) preamble section V.B.3.a (adds new material), V.B.3.b(1) (deletes some paragraphs) and V.B.3.(b)(9) (adds new material; adds the paragraphs deleted from V.B.3.(b)(1), with edits; and makes additional edits).] 3. Building blocks 2 and 3 as a “system of emission reduction” a. Overview. As we explain above, the emission performance rates that we include in this rule’s emission guidelines are achievable by the affected EGUs through the application of the BSER, which includes the three building blocks. Commenters object that building blocks 2 (generation shift) and 3 (renewable energy) cannot, as a legal matter, be considered part of the BSER under CAA section 111(d)(1) and (a)(1). These commenters explain that in their view, under CAA section 111, the emission performance rates must be based on, and therefore the BSER must be limited to, methods for emissions control that the owner/operator of the affected source can integrate into the design or operation of the source itself, and cannot be based onactions taken beyond the source or actions involving thirdparty entities. 1 For these reasons, these commenters argue

1 See, e.g., comments by UARG at 6-7 (“Standards promulgated under section 111 must be source-based and reflect measures that the source’s owner can integrate into the design or operation of the source itself. A standard cannot be based Formatted: Line spacing: single

Formatted: Font: Bold, Italic2 that the phrase “system of emission reduction” cannot be interpreted to include building blocks 2 and 3. We disagree with these comments, and note that other commenters were supportive of our determination to include building blocks 2 and 3. Under CAA section 111(d)(1) and (a)(1), the EPA’s emission guidelines must establish achievable emission limits based on the “best system of emission reduction ... adequately demonstrated.” While some commenters assert that emission guidelines must be limited in the manner summarized above, the phrase “system of emission reduction,” by its terms and when read in context, contains no such limits. To the contrary, its plain meaning

on actions taken beyond the source itself that somehow reduce the source’s utilization.”); comments by UARG at 31 (the building blocks other than building block 1 take a “‘beyond-the-source’ approach” and “impermissibly rely on measures that go beyond the boundaries of individual affected EGUs and that are not within the control of individual EGU owners and operators”); comments by UARG at 33 (the “system” of emission reduction “can refer only to reductions resulting from measures that are incorporated into the source itself;” section 111 is “designed to improve the emissions performance of new and existing sources in specific categories based on the application of achievable measures implemented in the design or production process of the source at reasonable cost.”); comments by American Chemistry Council et al. (“Associations”) at 60-61 (EPA’s proposed BSER analysis is unlawful because it “looks beyond the fence line of the fossil fuel-fired EGUs that are the subject of this rulemaking;” “the standard of performance must ... be limited to the types of actions that can be implemented directly by an existing source within [the appropriate] class or category.”).3 is deliberately broad and is capacious enough to include actions taken by the owner/operator of a stationary source designed to reduce emissions from that affected source, including actions that may occur off-site and actions that a third party takes pursuant to a commercial relationship with the owner/operator, so long as those actions enable the affected source to achieve its emission limitation. Such actions include the measures in building blocks 2 and 3, which, when implemented by an affected source, enable the source to achieve their emission limits because of the unique characteristics of the utility power sector. For purposes of this rule, we consider a “system of emission reduction” -- as defined under CAA section 111(a)(1) and applied under CAA section 111(d)(1) -– to encompass a broad range of pollution-reduction actions, which includes the measures in building blocks 2 and 3. Furthermore, the measures in building blocks 2 and 3 fall squarely within EPA’s historical interpretation of section 111, pursuant to which the focus for the BSER has been on how to most cleanly produce a good, not on how much of the good should be produced. Our interpretation that a “system of emission reduction” is broad enough to include the measures in building blocks 2 and 3 is supported by the following: our4 interpretation of the phrase “system of emission reduction” is consistent with its plain meaning and statutory context; our interpretation accommodates the very design of CAA section 111(d)(1), which covers a range of source categories and air pollutants; 2 our interpretation is supported by the legislative history of CAA section 111(d)(1) and (a)(1), which indicates Congress’s intent to give the EPA broad discretion in determining the basis for CAA section 111 control requirements, particularly for existing sources, and Congress’s intent to authorize the EPA to consider measures that could be carried out by parties other than the affected sources; and our interpretation is reasonable in light of comparisons to CAA provisions that give the EPA similar authority to consider such measures and to CAA provisions that would preclude the EPA from considering such measures. In addition to the reasons stated above, the EPA's interpretation is also reasonable for the following reasons: (i) Building blocks 2 and 3 fit well within the structure and economics of the utility power sector. (ii)

2 Because it is designed to apply to a range of air pollutants not regulated under other provisions, CAAsection 111(d) may be described as a “catch-all” or “gapfiller.” As such, a “system of emission reduction” as applied under CAA section 111(d) should be interpreted flexibly to accommodate this role.5 Fossil fuel-fired EGUs are already implementing the measures in these building blocks for various reasons, including for purposes of reducing CO 2 emissions. (iii) Interpreting the phrase “system of emission reduction” to incorporate building blocks 2 and 3 is consistent with (a) other provisions in the CAA, including the acid rain provisions in Title IV and the SIP provisions in CAA section 110, along with the EPA’s regulations implementing the CAA SIP requirements concerning interstate transport and regional haze, each of which is based on at least some of the same measures included in building blocks 2 and 3; (b) prior EPA action under CAA section 111(d), including the 2005 Clean Air Mercury Rule, 3 which is based on some of the same measures in building blocks 2 and 3; (c) the various provisions of the CAA that authorize emissions trading, because emissions trading entails a source meeting its emission limitation based on the actions of another entity; and (d) the pollution prevention provisions of the CAA, which make clear that a primary goal of the CAA is to encourage federal and state actions that reduce or eliminate, through any measures, the amount of pollution

3 This rule was vacated by the D.C. Circuit on other grounds. New Jersey v. EPA , 517 F.3d 574, 583-84 (D.C. Cir. 2008), cert. denied sub nom

. Util. Air Reg. Group v. New Jersey , 555 U.S. 1169 (2009).6 produced at the source. 4 (iv) Lastly, interpreting the phrase “system of emission reduction” to authorize the EPA, in formulating its BSER determination, to weigh a broad range of emission-reducing measures that includes building blocks 2 and 3 is consistent with Congress’s intent to address urgent environmental problems and to protect public health and welfare against risks, as well as Congress’s expectation that American industry would be able to develop the innovative solutions necessary to protect public health

and welfare. Congress passed the CAA, including its several amendments, to protect public health and welfare from “mounting dangers,” including “injury to agricultural crops and livestock, damage to and the deterioration of property, and hazards to air and ground transportation.” 5 In doing so, Congress established numerous programs to address air pollution problems and provided the EPA with guidance and flexibility in carrying out many of those programs. In the context of this industry and this pollutant it is reasonable to reject the narrow interpretation urged by

4 As noted in the Legal Memorandum, in several of these rulemakings and in the course of litigation, the fossil fuel-fired electric power sector has taken positions that are consistent with the EPA’s interpretation that the BSER may include building blocks 2 and 3. 5 CAA section 101(a)(2). Formatted: Font: (Default) Courier New, 12 pt, Complex Script Font: Courier New, 12 pt7 some commenters that the “system of emission reduction” applicable to the affected EGUs must be limited to only those measures that can be integrated into the design or operation of the source itself. The plain language of the statute does not support such an interpretation, and to adopt it would limit the “system of emission reduction” to measures that are either substantially more expensive or substantially less effective at reducing emissions than the measures in building blocks 2 and 3, notwithstanding the absence of any statutory language imposing such a limit. Such a result would be contrary to the goals of the CAA and would ignore the facts that sources in the electric generation industry routinely address planning and operating objectives on a broad, multi-source basis using the measures in building blocks 2 and 3 and would seek to use building blocks 2 and 3 (as well as non-BSER measures) to comply with whatever emission standards are set as a result of this rule. Indeed, as already observed, building blocks 2 and 3 are already being used to reduce emissions, and to do so specifically by operation of the industry’s inherent multi-source functions. Although the BSER provisions are sufficiently broad to include, for affected EGUs, the measures in building blocks 2 and 3, they also incorporate significant constraints on8 the types of measures that may be included in the BSER. We discuss those constraints at the end of this section. They include the section 111(d)(1) and (a)(1) requirements that emission reductions occur from the affected sources; that the emission performance standards for which the BSER forms the basis be achievable; that the system of emission reduction be adequately demonstrated; and that the EPA account for cost, non-air quality impacts, and energy requirements in determining the “best” system of emission reduction that is adequately demonstrated. These constraints do not preclude building blocks 2 and 3 from the BSER. In interpreting these statutory constraints, in determining the BSER, the EPA is mindful of past practice and current policy for both section 111 regulatory requirements , as well as and regulatory requirements under other CAA provisions for the electric power sector, under which the EPA generally bases regulatory requirements on controls and measures designed to reduce air pollutants from the production process without constraining the aggregate amount of production. While inclusion of building blocks 2 and 3 is consistent with our interpretation, inclusion of building block 4 is not, and for that reason, we are declining to include building block in the BSER. Finally, we briefly note additional constraints that focus9 the BSER for new sources under section 111(b) on controls

that assure that sources are well-controlled at the the time of construction. b. System of emission reduction as a broad range of

measures. (1) Plain meaning and context of “system of emission reduction.” The phrase “system of emission reduction” appears in the definition of a “standard of performance” under CAA section 111(a)(1). That definition reads: 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. Pursuant to this definition, it is clear that a “system of emission reduction” serves as the basis for emission limits embodied by CAA section 111 standards. For this reason, emission limits must be “achievable” through the “application” of the “best” “system of emission reduction” “adequately demonstrated.” Under CAA section 111(d)(1), such a limit is established for “any existing source,” which is defined as any existing “building, structure,10 facility, or installation which emits or may emit any air pollutant.” 6 Although a “system of emission reduction” lays the groundwork for CAA section 111 standards, the term “system” is not defined in the CAA. As a result, we look first to its ordinary meaning. Abstractly, the term “system” means a set of things or parts forming a complex whole; a set of principles or procedures according to which something is done; an organized scheme or method; and a group of interacting, interrelated, or interdependent elements. 7 As a phrase, “system of emission reduction” takes a broad meaning to

6 See CAA section 111(d)(1) (applying a standard of performance to any existing source); (a)(6) (defining the term “existing source” as any stationary source other than a new source); and (a)(3) (defining the term “stationary source” as “any building, structure, facility, or installation which emits or may emit any air pollutant,” however, explaining that “[n]othing in subchapter II [ i.e. , Title II] of this chapter relating to nonroad engines shall be construed to apply to stationary internal combustion engines.”) 7 Oxford Dictionary of English (3rd ed.) (2010), available at http://www.oxforddictionaries.com/us/definition/american_en glish/system ; see also American Heritage Dictionary (5th ed.) (2013), available at http://www.yourdictionary.com/system#americanheritage; and The American College Dictionary (C.L. Barnhart, ed. 1970) (“an assemblage or combination of things or parts forming a complex or unitary whole”).11 serve a singular purpose: it is a set of measures that work together to reduce emissions. When read in context, the phrase “system of emission reduction” carries important limitations: because the “degree of emission limitation” must be “ achievable through

the application of the best system of emission reduction,” (emphasis added), the “system of emission reduction” must be limited to a set of measures that work together to reduce emissions and that are implementable by the sources

themselves. As a practical matter, the “source” includes the “owner or operator” of any building, structure, facility, or installation for which a standard of performance is applicable. For instance, under CAA section 111(e), it is the “owner or operator” of a source who is prohibited from operating “in violation of any standard of performance applicable to such source.” 8 Thus, a “system of emission reduction” for purposes of CAA section 111(d) means a set of measures that source

8 While this section provides for enforcement in the context of new sources, a CAA section 111(d) plan must provide for the enforcement of a standard of performance for existing sources.12 owners or operators can implement to achieve an emission limitation applicable to their existing source. 9 In contrast, a “system of emission reduction” does not include actions that only a state or other governmental entity could take that would have the effect of reducing emissions from the source category, and that are beyond the ability of the affected sources’ owners/operators to take or control. Additionally, actions that a source owner or operator could take that would not have the effect of reducing emissions from the source category, such as purchasing offsets, would also not qualify as a “system of emission reduction.” Building blocks 2 and 3 each fall within the meaning of a “system of emission reduction” because they consist of measures that the owners/operators of the affected EGUs can implement to achieve their emission limits. In doing so, the affected EGUs will achieve the overall emission reductions the EPA identifies in this rule. We describe these building block 2 and 3 measures in detail elsewhere

9 Some commenters read the proposed rulemaking as taking the position that the phrase “system of emission reduction” includes anything whatsoever that reduces emissions, and criticized that interpretation as too broad. See UARG comment, at 3-4. We are not taking that interpretation here. In this final rule, we agree that the phrase should be limited to exclude, inter alia , actions beyond the ability of the owners/operators to control.13 in this rule, including the specific actions that owners/operators of affected EGUs can take to implement the

measures. It should be noted that defining the scope of a “system of emission reduction” is not the end of our inquiry under CAA section 111(a)(1); rather, as noted above, a standard of performance must reflect the application of the “ best system of emission reduction ... adequately demonstrated .” (Emphasis added.) Thus, in determining the BSER, the Administrator must first determine whether the available systems of emission reduction are “adequately demonstrated,” based on the criteria, described above, set out by Congress in the legislative history and the D.C. Circuit in case law. After identifying the “adequately demonstrated” systems of emission reduction, the Administrator then selects the “best” of these, based on several factors, including amount of emission reduction, cost, non-air quality health and environmental impact and energy requirements. Only after the Administrator weighs all of these considerations can she determine the BSER and, based on that, establish a standard of performance under CAA section 111(b) or an emission guideline under CAA section 111(d).14 Although we do not need to determine the overall scope of the phrase “system of emission reduction,” we recognize that commenters have raised extensive legal concerns about building block 4. We recognize that building block 4 is different from building blocks 1, 2, and 3 and the pollution control measures that we have considered under CAA section 111. Accordingly, in light of our past practice and current policy in implementing section 111, as well as the legal concerns raised in public comment, today’s final action excludes building block 4 from the BSER. Traditionally, CAA section 111 standards have been rate-based, allowing regulated entities to produce as much of a particular good as they desire provided that they do so through an appropriately clean (or low-emitting) process. CAA section 111 performance standards have primarily targeted the means of production in an industry and not consumers’ demand for the product. Thus, the focus for the BSER has been on how to most cleanly produce a good, not on how much of the good should be produced. Building blocks 1, 2 and 3 fall squarely within this paradigm; they do not require reductions in the total amount of electricity produced. Building block 4, however, is outside this paradigm as it targets consumer-oriented Commented [HH1]: Moved to the end, and edited15 behavior and demand for the good, which would reduce the amount of electricity to be produced. Although numerous commenters urged us to include demand-side energy efficiency measures as part of the BSER, as we had proposed to do, we conclude that we cannot do so under our historical and current interpretation of section 111. While building blocks 2 and 3 are rooted in our past practice and policy, building block 4 is not and would require a change which we are not making in our interpretation and implementation of CAA section 111. Excluding demand-side energy efficiency measures from the BSER has the benefit of allaying legal and other concerns raised by commenters, including concerns that individuals could be “swept into” the regulatory process by imposing requirements on “every household in the land.” 10 While building block 4 could have been implemented without imposing requirements on individual households, this final rule resolves any doubt on this matter and is not based on the inclusion of demand-side energy efficiency as part of

the BSER. Strong policy reasons also support our interpretation that CAA section 111 targets supply-side activities that

10 See Util. Air Reg. Group v. EPA , 134 S. Ct. 2427, 2436 (2014).16 allow continued production of a product through use of a cleaner process, rather than targeting consumer-oriented behavior. This continues our long-standing practice and furthers Congress’ intent of promoting cleaner production measures “to protect and enhance the quality of the Nation’s air resources so as to promote the public health and welfare and the productive capacity of its population.” 11 This principle is also consistent with promoting “reasonable ... governmental actions ... for pollution prevention.” 12 The statute is clear, moreover, that the Administrator has discretion to interpret CAA section 111. Specifically, as we describe in detail above, Congress expected that the Administrator “should determine the achievable limits” 13 and “would establish guidelines as to what the best system for each such category of existing sources is.” 14 As the D.C. Circuit explained, “[i]t seems likely that if Congress meant ... to curtail EPA’s discretion to weigh various policy considerations it would have explicitly said so in

11 CAA section 101(b)(1). 12 CAA section 101(c). 13 S. Rep. No. 91-1196, at 15-16 (Sept. 17, 1970), 1970 CAA Legis. Hist. at 415-16 (explaining that the “[Administrator] should determine the achievable limits and let the owner or operator determine the most economic, acceptable technique to apply.”). 14 H.R. Rep. No. 95-294, at 195 (May 12, 1977).17 section 111, as it did in other parts of the statute.” 15 The D.C. Circuit case law, discussed in section V.A., also is clear that the EPA has broad discretion to determine the appropriate BSER. By the same token, we are not finalizing our proposed alternative identification of the BSER as reduced generation. Reduced generation focuses on the amount of electricity generation, rather than lower-emitting processes for producing electricity. 16 For purposes of this final rule, it is not necessary to enumerate all of the types of measures that do or do not constitute a “system of emission reduction.” What is relevant is that building blocks 2 and 3 each qualify as part of the “system of emission reduction.” As noted, they focus on supply-side activities and they each constitute measures that the affected EGUs can implement that will allow those EGUs to achieve the degree of emission limitation that the EPA has identified based on those building blocks. Further, these building blocks also

15 Sierra Club v. Costle , 657 F.2d 298, 330 (D.C. Cir. 1981). 16 As discussed below, however, reduced generation remains important to this rule in that it is one of the methods for implementing the building blocks.18 satisfy the other statutory criteria enumerated in CAA section 111(a)(1).

* * * * (9) Constraints on the BSER – Treatment of building

block 4 and rR esponse to comments concerning building

blocks 2 and 3 as precedent s. Although the BSER provisions are sufficiently broad to include, for affected EGUs, the measures in building blocks 2 and 3, they also incorporate significant constraints on the types of measures that may be included in the BSER. We discuss those constraints in this section. These constaints explain why we are not including building block 4 in the BSER. In addition, these constraints explain why our reliance on building blocks 2 and 3 will have limited precedential effect for other rulemakings, and serve as our basis for responding to Some commenters who expressed concern that reliance on building blocks 2 and 3 would set a precedent for the EPA to rely on similar measures in promulgating future air pollution controls for other

sectors ., and offered hypothetical examples to illustrate their concerns. 17 For example, commenters asserted that the

17 Commenters offered hypothetical examples to illustrate their concerns over precedential effects, discussed below.Most of the commenters’ concerns over what they Commented [HH2]: We are not proposing to revise sections (2) – (8) of this section V.B.3(b), and so we are not including them in this excerpt

Formatted: Font: 12 pt, Complex Script Font: 12 pt

Formatted: Font: 12 pt, Complex Script Font: 12 pt19 EPA could “develop standards of performance for tailpipe emissions from motor vehicles” by “requiring car owners to shift some of their travel to buses,” which the commenters considered analogous to building block 2; “or by requiring there to be more electric vehicle purchases,” which the commenters considered analogous to building block 3. 18 As discussed above, the emission limits in the CAA section 111(d) emission guidelines that this rule promulgates are based on the EPA’s determination, for the affected EGUs, of the “system of emission reduction” that is the “best,” taking into account “cost” and other factors, and that is “adequately demonstrated.” Those components include certain interpretations and applications and provide constraints on the types of measures or controls that the EPA may determine to the BSER

. **(i) Emission reductions from affected sources**  The first constraint is that the BSER must assure emission reductions from the affected sources. Under section 111(d)(1), the states must submit state plans that

viewed as the precedential effects of the building blocks concerned building block 4, and most of their hypothetical examples concerned reductions in demand for various types of products. Because the EPA is not finalizing building block 4 as part of the BSER, it is not necessary to address those concerns. 18 UARG comment at 2-3. Formatted: Font: Bold Formatted: List Paragraph, Numbered + Level: 1 + Numbering Style: i, ii, iii, ... + Start at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 1.25" Formatted: Font: (Default) Courier New, Bold, Complex Script Font: Courier New20 “establish[] standards of performance for any existing source,” and, under section 111(a)(1) and the EPA’s implementing regulations, those standards are informed by the EPA’s determination of the best system of emission reduction adequately demonstrated. For example, because the affected EGUs must be able to achieve their emission standards through application of the BSER, the BSER must be something that the EGUs themselves can implement. Likewise,

bB ecause the emission standards must apply to the affected

source s category , actions taken by affected sources that do not result in emission reductions from the affected

source s, category –- for example, that is, offsets (e.g., the planting of forests to sequester CO 2 ) –- do not qualify for inclusion in the BSER. Building blocks 2 and 3 achieve emission reductions from the affected EGUs, and thus are not precluded under this constraint. **(ii) Controls or measures that affected EGUs can**  **implement** The second constraint is that because the affected EGUs must be able to achieve their emission performance rates through the application of the BSER, the BSER must be

controls or measures that the EGUs themselves can implement. Moreover, as noted, the D.C. Circuit has established criteria for achievability in the section Formatted: Font: Bold Formatted: List Paragraph, Numbered + Level: 1 + Numbering Style: i, ii, iii, ... + Start at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 1.25" Formatted: Font: (Default) Courier New, Bold, Complex Script Font: Courier New21 111(b) caselaw, e.g., sources must be able to achieve their

standards under athe range of circumstances. If those criteria are applicable in a section 111(d) rule, the BSER must be of a type that allows sources to meet those achievability criteria. As noted, under this rule, affected EGUs may achieve their emission performance rates in the various circumstances under which they operat eion , through the application of the building blocksBSER, including building blocks 2 and 3

. **(iii) “Adequately demonstrated”**  The third constraint is that the system of emission reduction that the EPA determines to the best must be “adequately demonstrated.” To qualify as the BSER, controls and measures must align with the nature of the regulated industry and the nature of the pollutant so that implementation of those controls or measures will both result in the emission reductions from the industry and allow the sources to achieve their emission performance standards. The history of the effectiveness of the controls or other measures, or other indications of their effectiveness, are important in determining whether they are adequately demonstrated. the Furthermore, under the EPA’s historical and continuing interpretation of section 111, BSER focuses on supply-side, Formatted: Font: Italic

Formatted: List Paragraph, Numbered + Level: 1 + Numbering Style: i, ii, iii, ... + Start at: 1 + Alignment: Left + Aligned at: 0.5" + Indent at: 1.25" Formatted: Font: Bold Formatted: Font: (Default) Courier New, Bold, Complex Script Font: Courier New22 not demand-side, measures for reducing emissions. Additionally, under this rule, the affected sources that are the subject of the emission guidelines can employ the BSER to achieve the emission limits that the guidelines prescribe. For the reasons discussed, building blocks 2 and 3 meet the definition of the BSER, as it has been interpreted and applied. As a result, they qualify as part of the basis for the emission limits in the emission guidelines promulgated in this rule. Moreover, as also discussed, the affected EGUs may meet those limits by implementing the BSER, including the measures in building blocks 2 and 3. Commenters’ concerns over precedential impact cannot be taken to mean that the building blocks should not be considered to meet the requirements of the BSER or that the affected EGUs cannot be considered to meet the emission limits by implementing those measures.

More over specifically , the application of building blocks 2 and 3 to affected EGUs has a number of unique characteristics that negate, or at least significantly limit their precedential impact . Building blocks 2 and 3 entail the production of the same amount of the same product -- electricity, a fungible product that can be produced using a variety of highly substitutable generation23 processes -- through the cleaner (that is, less CO 2 - intensive) processes of shifting dispatch from steam generators to existing NGCC units, and from both steam generators and NGCC units to renewable generators. The physical properties of electricity and the highly integrated nature of the electricity system allow the use of these cleaner processes to generate the same amount of electricity. In addition, the electricity sector is primarily domestic -- little electricity is exported outside the U.S. -- and there is low capacity for storage. In addition, the electricity sector is highly regulated, planned, and coordinated. As a result, holding demand constant, an increase in one type of generation will result in a decrease in another type of generation. Moreover, the higher-emitting generators, which are fossil fuel-fired, have higher variable costs than renewable generators, so that increased renewable generation will generally back out fossil fuel-fired generation. Because of these characteristics, the electricity sector has a long and well-established history of substituting one type of generation for another. This has occurred for a wide variety of reasons, many of which are directly related to the system’s primary purposes and functions, as well as for environmental reasons. As a24 result, at present, there is a well-established network of business and operational relationships and past practices that supports building blocks 2 and 3. As noted elsewhere, a large segment of steam generators already have business relationships with existing NGCC units, and a large segment of all fossil fuel-fired EGUs already own, co-own, or have invested in renewable energy. Many of these characteristics are unique to the utility power sector. Moreover, this complex of characteristics, ranging from the physical properties of electricity and the integrated nature of the grid to the institutional mechanisms that assure reliability and the existing practices and business relationships in the industry, combine to facilitate the implementation of building blocks 2 and 3 in a uniquely efficient manner. This supports basing the emission limits on the ability of owners and operators of fossil fuel-fired EGUs to replace their generation with cleaner generation in other locations, sometimes owned by other entities. As noted above, commenters offered hypothetical examples to illustrate their concerns over precedential effects. Most of their concerns focused on building block 4, and most of their hypothetical examples concerned reductions in demand for various types of products. These Formatted: Indent: First line: 0.5"

Commented [HH3]: Most of this paragraph moved here from above25 concerns are mooted because we are not finalizing building

block 4 . Some commenters offered hypothetical examples for building blocks 2 and 3 as well. For example, some commenters asserted that the EPA could “develop standards of performance for tailpipe emissions from motor vehicles” by “requiring car owners to shift some of their travel to buses,” which the commenters considered analogous to building block 2; “or by requiring there to be more electric vehicle purchases,” which the commenters considered analogous to building block 3. 19 Commenters’ concerns over precedential impact cannot be taken to mean that the building blocks should not be considered to meet the requirements of the BSER or that the affected EGUs cannot be considered to meet the emission limits by implementing those measures. Moreover, Bb ecause many of these individual characteristics, and their inherent complexity, are unique to the utility powersector, building blocks 2 and 3 as applied to fossil fuelfired EGUs will have a limited precedent for other industries and other types of rulemakings. For example, the commenter’s hypothetical examples noted above are inapposite for several reasons. The hypotheticals appear to

19 UARG comment at 2-3.26 be premised on government action mandating actions not implementable by emitting sources (e.g., that a government would “require[e] car owners to shift some of their travel to buses, or ... require[e] there to be more electric vehicle purchases”), whereas the measures in building blocks 2 and 3 can be implemented by the affected EGUs. Nor have commenters attempted to address how car owners shifting travel to buses or purchasing more electric vehicles could be translated into lower tailpipe standards for motor vehicles ., especially in light of the large numbers of motor vehicles that are imported and exported

. 20 **(iv) “Best” in light of “cost ... non-air quality**  **health and environmental impact and energy requirements” and EPA’s past practice and**  **current policy** The fourth constraint, or set of constraints, is that the system of emission reduction must be the “best,” “taking into account the cost of achieving such reduction, non-air quality health and environmental impact and energy

20 In any event, it is questionable whether measures such as those hypothesized by the commenters would be consistent with the provisions of Title II. Title II standards are based on “the application of technology which the Administrator determines will be available for the model year...,” which is a narrower standard than the “best system of emission reduction ... adequately demonstrated.” Formatted: Font: Bold

Formatted: Font: (Default) Courier New, Bold, Complex Script Font: Courier New27 requirements.” As noted, in light of the D.C. Circuit caselaw, the EPA has considered cost and energy factors on both an individual source basis and on the basis of the nationwide electricity sector. In determining what is “best,” the EPA has broad discretion to balance the

enumerated factors. 21 In interpreting and applying these provisions in this rulemaking to regulate CO 2 emissions from affected EGUs under section 111(d), we remain mindful of our past practice and current policy in for interpreting and applying BSER for promulgating regulations these provisions in previous section 111 rulemakings and for regulating air pollutants from the electricity sector under other provisions of the CAA. Under section 111, we have promulgated tT he great majority of our regulations under section 111 have been

111 (b) regulations , for new sources. As discussed in the Legal Memorandum and briefly below, the BSER under section 111(b) is designed to assure that affected sources are well controlled at the time of construction, and that approach is consistent with the design expressed in the legislative

21 See Lignite Energy Council v. EPA , 198 F.3d 930, 933 (D.C. Cir. 1999). Formatted: Subscript28 history for the 1970 CAA Amendments that enacted the provision. For this reason, T T traditionally, CAA section 111 standards have been rate-based, allowing regulated entities to produce as much overall production of a particular good

as is they desire d, provided that it is produced they do so through an appropriately clean (or low-emitting) process. CAA section 111 performance standards have primarily targeted the means of production in an industry and not consumers’ demand for the product. Thus, the focus for the BSER has been on how to most cleanly produce a good, not on limiting how much of the good can should be produced.

One For example of the focus under section 111 on clean production, not limitation of product is provided by the , we promulgated revised new source performance standards for electric utility steam generating units that we promulgated in 1979 following the 1977 CAA Amendments to limit emissions of SO2, particulate matter, and NOx. In relevant part, the revised standards limited SO2 emissions to 1.20 lb/million BTU heat input and imposed a 90 percent reduction in potential SO2 emissions. This was based on the application of flue gas desulfurization (FGD) together with coal preparation techniques. In the preamble, we explain that “[t]he intent of the final standards is to encourage Commented [HH4]: This paragraph is moved here from above29 power plant owners and operators to install the best available FGD systems and to implement effective operation and maintenance procedures but not to create power supply disruptions.” 22 23 EPA has taken the same overall approach in its section 111(d) rules, 24 including the CAMR rule noted

below.

22 See, e.g. , 44 F.R. 33580, at 33599 (June 11, 1979). In this rulemaking, the EPA recognized the ability of the integrated grid to minimize power disruptions: “When electric load is shifted from a new steam-electric generating unit to another electric generating unit, there would be no net change in reserves within the power system. Thus, the emergency condition provisions prevent a failed FGD system from impacting upon the utility company’s ability to generate electric power and prevents an impact upon reserves needed by the power system to maintain reliable electric service.” Id

. 23 The EPA’s 1982 revised new source performance standards for certain stationary gas turbines provide another example of a rulemaking that focused controls on reducing emissions, as well as reliance on the integrated grid to avoid power disruptions. 44 F.R. 33580 (June 11, 1979). In response to comments that requested a NOx emission limit exemption for base load utility gas turbines, the EPA explained that “for utility turbines ... since other electric generators on the grid can restore lost capacity caused by turbine down time” the NOx emission limit of 1150 ppm for such turbines would not be rescinded. 44 F.R. 33580, at 33597-98. 24 See “Phosphate Fertilizer Plants; Final Guideline Document Availability,” 42 Fed. Reg. 12,022 (Mar. 1, 1977); “Standards of Performance for New Stationary 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 Formatted: Font: (Default) Courier New, 12 pt, Complex Script Font: Courier New, 12 pt Formatted: Font: (Default) Courier New, 12 pt, Complex Script Font: Courier New, 12 pt

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Formatted: Font: (Default) Courier New, 12 pt, Complex Script Font: Courier New, 12 pt Formatted: Font: 12 pt, Complex Script Font: 12 pt Formatted: Font: (Default) Courier New, 12 pt, Complex Script Font: Courier New, 12 pt30 Another example of our practice under section 111 of not limiting how much of a good (in this case, electricity) could be produced are the 1982 By the same token, Similarly, in a series of rulemakings regulating air pollutants from EGUs under several provisions of the CAA , we have focused our efforts on assuring that electricity is generated through cleaner or lower-emitting processes, and we have not sought to limit the aggregate amount of electricity that is generated. We describe those rules in section II., elsewhere in this section V.B.3., and in the Legal Memorandum. For example, as discussed in the Legal Memorandum, in the three transport rules promulgated under CAA section 110(a)(2)(D)(i)(I) – the NOx SIP Call, CAIR, and CSAPR – which regulated precursors to ozone-smog and particulate matter, the EPA based certain aspects of the regulatory requirements on the fact that fossil fuel-fired EGUs could shift generation to lower-emitting sources. In CAMR, the 2005 rulemaking under section 111(d) regulating mercury emissions from coal-fired EGUs, the EPA based the first phase of control requirements on the actions the affected EGUs were required to take under CAIR, including shift in g

Sources: Municipal Solid Waste Landfills, Final Rule,” 61 Fed. Reg. 9905 (Mar. 12, 1996).31 generation to lower-emitting sources. In addition, as also discussed in the Legal Memorandum, in the EPA’s 2012 MATS rule regulating mercury from coal-fired EGUs under section 112, at industry’s urging, the EPA allowed compliance deadlines to be extended based compliance requirements for on the ability of coal-fired EGUs t hat desired to o substitute replacement power of any type, including NGCC units or or renewable energy, for compliance purposes.While these and other rulemakings for fossil fuelfired EGUs took different approaches towards lower-emitting generation and renewable generation, they all were based on control measures that reduced emissions without reducing aggregate levels of electricity generation. It should be noted that even though some of those rules established overall emission limits in the form of budgets implemented through a cap-and-trade program, the EPA recognized that the fossil fuel-fired EGUs that were subject to the rules could comply by shifting generation to lower-emitting EGUs, including relying on renewable energy. In this manner, the rules limited emissions but on the basis that the industry could implement lower-emitting processes, and not reductions in overall generation. We are applying the same approach to this rulemaking. Our basis for this rulemaking is that affected EGUs can32 implement a system of emission reduction that will reduce the amount of their emissions without reducing overall electricity generation. This approach takes into account costs by minimizing economic disruption as well as the nation’s energy requirements by , again, avoiding the need for environmental-based reductions in the aggregate amount of electricity available to the consumer, commercial, and industrial sectors. This approach is a reasonable exercise of the EPA’s discretion under section 111, consistent with the U.S. Supreme Court’s statements in its 2011 decision, American Electric Power Co. v. Connecticut , that the CAA and the EPA actions it authorizes displace any federal common law right to seek abatement of CO2 emissions from fossil-fuel fired power plants. There, the Court emphasized that CAA section 111 authorizes the EPA –- which the Court identified as the “expert agency” -– to regulate CO2 emissions from fossil fuel-fired power plants based an “informed assessment of competing interests.... Along with the environmental benefit potentially achievable, our Nation's energy needs and the possibility of economic disruption must weigh in the

balance.” 25

25 American Electric Power Co. v. Connecticut , 131 S. Ct. 2527, 2539-40 (2011). Formatted: Font: Italic

Formatted: Font: (Default) Courier New, 12 pt, Complex Script Font: Courier New, 12 pt Formatted: Font: (Default) Courier New, 12 pt, Complex Script Font: Courier New, 12 pt33 Similarly, the D.C. Circuit, in a 1981 decision upholding the EPA’s section 111(b) standards for air pollutants from fossil fuel-fired EGUs, stated that section 111 regulations concerning the electric power sector “demand a careful weighing of cost, environmental, and energy considerations.” 26 This exercise of policy discretion is consistent with Congress’s The statute is clear, moreover, that the Administrator has discretion to interpret CAA section 111. Specifically, as we describe in detail above, Congress expectationed that the Administrator “should determine the achievable limits” 27 and “would establish guidelines as to what the best system for each such category of existing sources is.” 28 As the D.C. Circuit explained, “[i]t seems likely that if Congress meant ... to curtail EPA’s discretion to weigh various policy considerations it would have explicitly said so in section 111, as it did in other parts of the statute.” 29 The D.C. Circuit case law, discussed in section V.A., also is clear

26 Sierra Club v. EPA , 657 F.2d 298, 406 (D.C. Cir. 1981). Id. at 406 n. 526. 27 S. Rep. No. 91-1196, at 15-16 (Sept. 17, 1970), 1970 CAA Legis. Hist. at 415-16 (explaining that the “[Administrator] should determine the achievable limits and let the owner or operator determine the most economic, acceptable technique to apply.”). 28 H.R. Rep. No. 95-294, at 195 (May 12, 1977). 29 Sierra Club v. Costle , 657 F.2d 298, 330 (D.C. Cir. 1981).34 that the EPA has broad discretion to determine the appropriate BSER. Strong policy reasons also support oO ur interpretation that CAA section 111 targets supply-side activities that allow continued production of a product through use of a cleaner process, rather than targeting consumer-oriented behavior , . This continues our long-standing practice

andalso furthers Congress’ intent of promoting cleaner production measures “to protect and enhance the quality of the Nation’s air resources so as to promote the public health and welfare and the productive capacity of its population.” 30 This principle is also consistent with promoting “reasonable ... governmental actions ... for pollution prevention.” 31 In this rule, we are applying that same overall policy approach in interpreting the BSER provisions of section 111. That is, we are basing the regulatory requirements on measures the affected EGUs can implement to assure that electricity is generated with lower emissions, taking into account the integrated nature of the industry and current industry practices. Building blocks 1, 2 and 3 fall

30 CAA section 101(b)(1). 31 CAA section 101(c).35 squarely within this paradigm; they do not require reductions in the total amount of electricity produced. Although we do not need to determine the overall scope of the phrase “system of emission reduction,” wW e recognize that commenters have raised extensive legal concerns about building block 4. We recognize that building block 4 is different from building blocks 1, 2, and 3 and the pollution control measures that we have considered under CAA section 111. Accordingly, in light of our past practice and current policy in implementing section 111, as well as the legal concerns raised in public comment, today’s final action excludes building block 4 from the BSER. Building

block 4 , however, is outside thisour policy paradigm as it targets consumer-oriented behavior and demand for the good, which would reduce the amount of electricity to be produced. Although numerous commenters urged us to include demand-side energy efficiency measures as part of the BSER, as we had proposed to do, we conclude that we cannot do so under our historical and current policy approach to interpretati ngon of section 111 and regulating the electricity sector under other CAA provisions . While building blocks 2 and 3 are rooted in our past practice and policy, building block 4 is not and would require a change Commented [HH5]: This paragraph moved here from above36 which we are not making in our interpretation and implementation of CAA section 111. Excluding demand-side energy efficiency measures from the BSER has the benefit of allaying legal and other concerns raised by commenters, including concerns that individuals could be “swept into” the regulatory process by imposing requirements on “every household in the land.” 32 While building block 4 could have been implemented without imposing requirements on individual households, this final rule resolves any doubt on this matter and is not based on the inclusion of demand-side energy efficiency as part of

the BSER. By the same token, we are not finalizing reduced generation of electricity overall as the BSER. Instead, components of the BSER focus on shifting generation to our proposed alternative identification of the BSER as reduced generation. Reduced generation focuses on the amount of electricity generation, rather than lower- or zero- emitting processes for producing electricity. 33 **(v) Constraints for new sources** 

32 See Util. Air Reg. Group v. EPA , 134 S. Ct. 2427, 2436 (2014). 33 As discussed below, however, reduced generation remains important to this rule in that it is one of the methods for implementing the building blocks. Commented [HH6]: This paragraph moved here from above

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Formatted: Font: (Default) Courier New, Complex Script Font: Courier New Formatted: List Paragraph, Indent: Before: 1.25"37 For new sources, practical and policy concerns support the application of basing the BSER on controls that new sources can install at the time of construction, so that they will be well-controlled throughout their long useful lives. This approach is consistent with the legislative history. We discuss this a greater length in the Legal

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