555 Eleventh Street, N.W., Suite 1000

Washington, D.C. 20004-1304

Tel: +1.202.637.2200 Fax: +1.202.637.2201

www.lw.com

FIRM / AFFILIATE OFFICES

Abu Dhabi Moscow

Barcelona Munich

Beijing New Jersey

Boston New York

Brussels Orange County

Chicago Paris

Doha Riyadh

Dubai Rome

Frankfurt San Diego

Hamburg San Francisco

Hong Kong Shanghai

Houston Silicon Valley

London Singapore

Los Angeles Tokyo

Madrid Washington, D.C.

Milan June 22, 2011

The Honorable Cass Sunstein

Administrator Office of Information and Regulatory Affairs Office of Management and Budget

725 17th St. NW Washington, DC 20503-0004 Washington, D.C.

Re: E.O. 12866 Meeting: EPA’s Proposed Clean Air Transport Rule 1

Dear Administrator Sunstein:

Thank you for scheduling our Executive Order 12866 meeting this week. As you may know from our comments on the propos ed Clean Air Transport Rule (CATR), 2 our client, Edison Mission Energy (EME), has very significant legal and operational concerns regarding the proposed CATR. EME has alr eady invested severa l hundreds of millions of dollars over the past decade to reduce em issions to meet state and federal mandates and has a very substantial interest in en suring that these improvements continue on a rapid but practical and lega lly permissible course.

Over the past decade, EME has work ed proactively hand-i n-hand with EPA and state regulators to reduce mercury, NO X and SO 2 emissions. 3 Indeed, EME intervened in

1 This letter is submitted pursuant to the public disclosure requirements of section 6(b) of Executive

Order 12866.

2 Comments of Edison Mission Energy on EPA’s Proposed Federal Implementation Plans to Reduce Interstate Transport of Fine Particulate Matter and Ozone (Oct. 1 2010) (“EME Comments”). See Federal Implementation Plans to Reduce Interstate Transport of Fine Particulate Matter and Ozone, 75 Fed. Reg. 45,210 (Aug. 2, 2010) (“CATR”).

3 On December 11, 2006, EME’s subsidiary Mi dwest Generation EME, LLC entered into an agreement with the Illinois Environmental Prot ection Agency (“IL EPA”) whereby it committed to aggressive fleet-wide reductions in emissions of mercury, NO X and SO 2 from its Illinois-based coal-fired generation facilities. 35 IAC 225.291 to 225.299. EME committed to a 90% reduction in its fleet-wide mercury emissions rate, a 4-fold reduction in its fleet-wide SO 2 emissions rate andJune 22, 2011 Page 2

2 prior litigation to support EPA’ s CAIR rule, and plans to fi le public comments supporting EPA’s most recent proposed rule on Utility MACT. 4 Given its prior support for EPA policy and rulemaking in other contexts, EME regrets that it must strongly and publicly oppose the CATR as currently proposed.

Multiple fundamental flaws in EPA’s propos ed rule stem from the fact that its

effort to mandate environmental bene fits in the coming year—2012—can only be achieved from industry retrofit s that cannot realistically be completed until 2014 at the earliest. EPA has no real world suppor t—and certainly no administrative record support—for any conclusion that EME or other entities can realistica lly accelerate this construction so that it can be completed next year. Indeed, EPA has acknowledged: “it is not possible to require the in stallation of post-combustion SO 2 controls (scrubbers) or post-combustion NO

x controls (SCRs) before 2014 (because it takes about 27 months to

install a scrubber and 21 months to install an SCR) . . . .” 5 EPA’s NODA 6 nevertheless mandates that these results be achieved by 2012, and compels EME and other utilities to buy billions of dollars worth of emission allo wances if they are not. The proposed CATR and NODA are fundamentally flawed—and could not survive judicial review—for at least two reasons: (1) EPA can only impose th ese mandates through an illegal “FIP-first” 7
unilateral federal mandate; and (2) although EP A imposes massive new costs on utilities and rate-payers in multiple states in its NODA, it achieves zero environmental benefits by doing so.

First, as many states and power generation i ndustry commenters have explained in depth, EPA’s CATR proposal di sregarded the core procedural requirements of the Clean Air Act’s (CAA) process of coopera tive federalism. For example:

West Virginia : “[T]he action of EPA issuing a FIP with no SIP mechanism wrongly implies that states ha ve intentionally failed to comply with Clean Air Act Requirements.” West Virginia Depart ment of Environmental Protection, Comments on Proposed Trans port Rule, 3 (Sept. 30, 2010).

a two-fold reduction in its fleet-wide NO X emissions rate (these NO X reductions are on top of the 50% reduction made to comply with the NO X SIP Call).

4 See Press Release, Midwest Generation (an EME subsidiary), Midwest Generation Supports Goals of Proposed USEPA Air Regulations, Opposes Delay (May 23, 2011).

5 CATR, 75 Fed. Reg. at 45,281. By industry calculations, it may take even longer. See Comments of Edison Mission Energy on EPA’s Proposed Fe deral Implementation Plans to Reduce Interstate Transport of Fine Particulate Matter and Ozone (The “Transport Rule”) , 22-25 (Oct. 1, 2010).

6 Notice of Data Availability for Federal Implementation Plans to Reduce Interstate Transport of Fine Particulate Matter and Ozone: Request for Co mment on Alternative Allocations, Calculation

of Assurance Provision Allowance Surrender Re quirements, New-Unit Allocations in Indian Country, and Allocations by States, 76 Fed. Reg. 1109 (Jan. 7, 2011) (The “NODA”).

7 “FIP” refers to Federal Implementation Plan and “SIP” refers to State Implementation Plan.June 22, 2011 Page 3

3 Utility Air Regulatory Group (UARG) : “This [FIP-first] scheme is plainly contrary to the terms of the Act and th e states-first prin ciple recognized and enforced by the courts. . . . Congress gave the states the right to develop and submit SIPs implementing the Act’s requirements in the first instance , based on state-specific considerations. No amount of expediency can jus tify violation of the terms of the Act and upsetting the balan ce that Congress struck between federal and state government.” Utility Air Regulatory Group, Comments on Proposed Transport Rule, 23-24 (Oct. 1, 2010) (hereinafter, “UARG Comments”).

Southern Company : “The Act grants no authority to EPA to promulgate a FIP without first giving the states adequate ti me and a real opportunity to develop and

submit SIPs that reflect each state’s ‘sen sitive . . . choices’ on how to implement section 110(a)(2)(D)(i)(I). EPA has no aut hority to leapfrog over the SIP process and impose its own choices on states and regulated parties.” Southern Company, Comments on Proposed Transpor t Rule, 22 (Oct. 1, 2010) (citing Michigan v.

EPA , 268 F.3d 1075, 1084 (D.C. Cir. 2001)).

Massachusetts : “[W]e are concerned about the loss of state’s ability to tailor the trading program to meet state policy goa ls under a FIP, rather than a [SIP].” Massachusetts Department of Enviro nmental Protection, Comments on EPA’s Proposed CATR, 2 (Oct. 1, 2010).

Illinois : “EPA should allow sufficient time for st ates to develop state plans. . . . Using a later date than 2012 for the in itial budgets under the Transport Rule FIP

allows states sufficient time to devel op SIPs and would allow emission sources sufficient time to plan and optimize control measures. Allowing states sufficient time to develop SIPs may ultimately prove to be a more timely approach for reducing interstate transport than will U.S. EPA’s FIP approach, due to the likelihood of further litiga tion.” Illinois EPA, Comme nts on Proposed Transport Rule, 1-2 (Sept. 30, 2010).

Ameren : “EPA has no authority to promulgate a FIP to replace CAIR without first giving the states the opportunity to develop their own SIPs and then finding

such SIPs deficient for a failure to submit.” Ameren, Comments on Proposed Transport Rule, 3 (Oct. 1, 2010) (citi ng 42 U.S.C. §§ 101(a)(3), 107(a)).

Edison Mission Energy : “EPA’s promulgation of a FIP absent the statutory findings is flatly contrary to the C AA’s requirements, as well as being inconsistent with the cooperative federa lism dictates of Title I.” Edison Mission Energy, Comments on Proposed Transport Rule, 8 (Oct. 1, 2010).

The D.C. Circuit has repeatedly a ddressed the CAA mandates of cooperative federalism in a long line of cases, addressed be low. In short, in order to implement new emissions limitations through CATR, EPA mu st do a SIP call pursuant to 42 U.S.C. §June 22, 2011 Page 4

4 7410(k)(5). 8 As recently as 2005, EPA expressly recognized that a SIP call was the appropriate procedural course to implement an air transport rule. 9

Second , the practical flaws in EPA’s appro ach—specifically including its recent January 2011 NODA, are profound. As EPA has itself expressly acknowledged, applying Phase I of the proposed CATR in 2012 would not result in any significant increase in the speed of retrofits. 10 But again, in its haste to impose a new 2012 mandate, EPA has disregarded the practical reality f acing facilities, and more than a decade of careful planning that has allowed significan t emissions reductions to progress in an aggressive but ultimately achievable fashion. 11 As set forth below, the net effect of EPA’s new proposals is not to achieve any substantial emissions reductions by 2012, but instead only to make marginal adjustments to operations and to mandate that certain facilities purchase allowan ces from other facilities between 2012 and 2014 when real emission-reduction gains will be realized. 12 In other words, although the EPA proposals may have permitted the agency to state publicly that it was imposing a tough new deadline, Phase I of the CATR proposal, and the NODA approach specifically, will have zero environmental benefit, and instead would only create a mandate to purchase emissions credits that could effectively tax rate payers in certain areas and enrich utility

owners in others.

EPA’s proposed NODA approach is particularly perplexing given the Administration’s recent public announcement recommitting to the cost-benefit rationality purposes of Executive Order 12866. 13 As the President recently indicated:

8 See EME comments at 7-8, UARG comments at 20, Progress Energy, Comments on Proposed Transport Rule, 4 (Oct. 1, 2010).

9 See Rule to Reduce Interstate Transport of Fine Pa rticulate Matter and Ozone (Clean Air Interstate Rule); Revisions to Acid Rain Program; Revisions to the NO

x SIP Call, 70 Fed. Reg. 25162, 25268-69 (May 12, 2005) (“CAIR”) (providing states with the opportunity to issue SIPs in response to the new rule and clarifying that “EPA will only issue a final FIP for those jurisdictions that fail to respond adequately to the CAIR”).

10 75 Fed. Reg. at 45,281 (“it is not possible to require the installation of post-combustion SO 2 controls (scrubbers) or post-combustion NO

x controls (SCRs) before 2014 (because it takes about 27 months to install a scrubber and 21 months to install an SCR).”). Industry comments make

clear that a more realistic estimate is 40 to 60 m onths for scrubbers and 32 to 46 months for SCR.

See EME comments at 22-25. Title IV, the Acid Rain Program under the 1990 Clean Air Act amendments, left almost four years before requiri ng the first emission reductions, and left nearly nine years for producers to install equipment before the cap and trade system entered into force.

See 42 U.S.C. §§ 7651c, 7651d.

11 While EPA proposes mandatory emission reductions by 2012 in Phase I of CATR, the D.C. Circuit expressly declined to impose specific de adlines for EPA action when it remanded CAIR.

See North Carolina v. EPA , 550 F.3d 1176, 1178 (D.C. Cir. 2008).

12 See 75 Fed. Reg. 45281; 76 Fed. Reg. at 1,114.

13 Improving Regulation and Regulatory Review, Executive Order 13563, (Jan. 18, 2011) (reaffirming the principles of E.O. 12866 and re quiring each agency “to use the best availableJune 22, 2011 Page 5

5 Our regulatory system must . . . . take into account benef its and costs, both quantitative and qualitative. . . .

* * * * [E]ach agency must, among other things : (1) propose or adopt a regulation only upon a reasoned determination that it s benefits justify its costs. . . . 14

We are not aware of any EPA effort at all to analyze the costs imposed on ratepayers by the NODA. 15 A recent study suggests that the NODA approach would result in an increase in consumer power pr ices by as much as $514 million per year in

2012 and 2013 with consumers in the Midwest bearing the greatest increase in power

costs. 16 None of the billions of dollars in benefits that EPA predicts from this rule result from the NODA approach in 2012. This failure to account for the potential costs imposed on ratepayers by the NODA undermines EPA’s proposals.

Although we have very specific concerns with the proposed CATR, we are not privy to EPA’s approach to the final rule. We thank EPA for its willingness to meet with us and be briefed on these issues, and we hope that good faith efforts will be made to

consider these and similar concerns voiced by many commenters in the record. EME is committed to working with the Administration to achieve real meaningful progress on air quality without imposing significant new cost s on ratepayers and industry during these

difficult economic times.

BACKGROUND

The Clean Air Act’s Cooperative Federalism

Cooperative Federalism is at the core of Title I of the CAA. Congress specifically assigned different tasks to the states and to the EPA: EPA is tasked with promulgating

techniques to quantify anticipat ed present and future benefits and costs as accurately as possible.”).

14 E.O. 13563, section 1(a), (b).

15 As many commenters made clear, the costs of su ch a change are likely to be significant, as overallocated units have a strong incentive to refuse to trade allocations, forcing underallocated units to curtail production and drive up the cost of electricity on the market. Given the small number of players in the market, such abuse of market power is likely. See Comments of Edison Mission Energy on EPA’s Notice of Data Availab ility for FIPs to Reduce Interstate Transport of Fine Particulate Matter and Ozone (The” NODA”), 7-11 (Feb. 7, 2011). See also Letter from U.S. Representative Shuster of Pennsylvania to EPA Administrator Jackson (June 15, 2011) (describing both local effects an d a national increase in electricity prices of between $359 and $514 million).

16 See Charles River Associates, Market Power Implications of EPA’s Proposed Alternative Allowance Allocations Under CATR for 2012-13, 3-4 (May 9, 2011).June 22, 2011 Page 6

6 uniform national ambient air quality standards (NAAQS); 17 States are specifically assigned the “primary responsibility” for weighing the appropriate manner to achieve these standards, consistent with lo cal, economic and other state interests. 18 Although the EPA has the responsibility to review and appr ove or disapprove of state implementation plans (SIPs), the role of the states in fo rmulating their SIPs is fundamental to the operation of the Act, and a key reason for its past success.

Upon EPA’s issuance (or revision) of a NAAQS, “[e]ach State shall, after reasonable notice and public hearings, adopt and submit to the Administrator, within 3 years . . . a plan which provides for imple mentation, maintenance and enforcement of such . . . standard in each air quality control region . . . within such State.” 19 The statute is unambiguous in assigning to states the ro le of developing implementation plans, and indeed requires public hearings on such plans in order to ensu re that the location-specific

issues in each state are consid ered by the state regulatory au thorities while drafting their

SIPs. 20

Upon receipt of a state plan, the EPA must determine whether such a plan is complete, based on preexisti ng criteria, and if so, approve or disapprove of it. 21 The EPA

must approve such a plan if it meets all of the applicable requirements under the Act. 22
The structure of cooperative federalism thus provides that states pr oduce the plans, and EPA evaluates whether these plans meet the requirements of the Act. 23 This institutional separation preserving the role of the states is key to the Act, as a long line of case law in the D.C. Circuit Court of Appeals and the Supreme Court confirm.

Relevant Caselaw

Beginning in 1975, the Supreme Court cons idered “whether Congress intended the States to retain any signi ficant degree of control of the manner in which they attain

and maintain national standards”:

17 42 U.S.C. § 7409.

18 § 7401(a)(3) (“air pollution prevention . . . and air pollution control at its source is the primary responsibility of States and local governments.”); § 7407(a) (“Each State shall have the primary responsibility for assuring air quality within the entire geographic area comprising such State by submitting an implementation plan for such State which will specify the manner in which [NAAQS] will be achieved and maintained within eac h air quality control region in such state.”).

19 42 U.S.C. § 7410(a)(1).

20 See id.

21 § 7410(k).

22 § 7410(k)(3).

23 See § 7410

.June 22, 2011 Page 7

7 [EPA] is relegated by the Act to a secondary role in the process of determining and enforcing the sp ecific, source-by-source emission limitations which are necessary if the national standards it has set are to be met. Under [CAA] § 110(a)(2), the Agen cy is required to approve a state plan which provides for the timely a ttainment and subsequent maintenance of ambient air standards, and which also satisfies that section’s other general requirements. The Act gives the Agency no authority to question

the wisdom of a State’s choices of emi ssion limitations if they are part of a plan which satisfies the standards of § 110(a)(2), and the Agency may devise and promulgate a specific plan of its own only if a State fails to submit an implementation plan which satisfies those standards. § 110(c). Thus, so long as the ultimate eff ect of a State’s choice of emission limitations is compliance with the nati onal standards for ambient air, the State is at liberty to adopt whatev er mix of emission limitations it deems best suited to its pa rticular situation.

Train v. Natural Res. Def. Council , 421 U.S. 60, 78-79 (1975) (emphases added) (footnote omitted). The D.C. Circuit has been just as clear; in Virginia v. EPA , 108 F.3d 1397, 1407-08 (D.C. Cir. 1997) the D.C. Circui t Court of Appeals considered EPA’s attempt to dictate the content of states’ SI Ps by requiring specific control measures for interstate ozone transport:

EPA determines the ends--the standard s of air quality--but Congress has given the states the ini tiative and a broad respons ibility regarding [the]

means to achieve those ends thr ough state implementation plans and timetables of compliance . . . . The Clean Air Act is an experiment in federalism, and the EPA may not run roughshod over the procedural prerogatives that the Act has reserved to the states.

Id. at 1408 (quoting Bethlehem Steel Corp. v. Gorsuch , 742 F.2d 1028, 1037-38 (7th Cir. 1984)). See also Natural Res. Def. Council v. Browner , 57 F.3d 1122, 1123 (D.C. Cir. 1995) (“The states are responsible in the first instance for meeting the NAAQS through state-designed plans that pr ovide for attainment, maintenance and enforcement of the NAAQS.”).

Michigan v. EPA , 213 F.3d 663 (D.C. Cir. 2000) is also instructive. In that case,

the court affirmed EPA’s NO

x SIP Call rule, in large part because the rule sufficiently respected the important role of states in making the source -specific regulatory decisions

within their own borders. The court noted that the validity of the rule turned on “whether the program constitutes an impermissible sour ce-specific means rather than a permissible end goal.” Id. at 687. The court affirmed the ru le because it “merely provide[d] the levels to be achieved by state-determined compliance mechanisms” and allowed states “real choice with regard to the control meas ure options available to them to meet the budget requirements.” Id. It is clear from both the Supreme Court and D.C. CircuitJune 22, 2011 Page 8

8 precedent that the courts take cooperative federalism seriously and have regularly recognized the right of the states to devel op SIPs to meet the Act’s requirements.

The States’ procedural right to design their own SIPs is not easily forfeited. When a new NAAQS is promulgated, the EPA doe s not step in and dictate new plans for

each state to ensure th at the new NAAQS are met. Instea d, states are given up to three years after the issuance of a new NAAQS to issue a new SIP. 24 If the EPA disapproves

of a submitted SIP 25 or finds that a state either fail ed to make a required submission, or submitted an inadequate plan, the state may be given a chance to “correct[] the deficiency” before the EPA steps in and issues a FIP. 26

Even when an existing SIP is “substan tially inadequate” to comply with the requirements of the Act, the Administrator mu st notify the state of the inadequacies and require the state to make revisions within a reasonable amount of time. 27 Such a “SIP Call” is the statutorily appropriate way for EP A to require states to update their SIPs for compliance with a new rule. 28 In CAIR, the EPA expressed publicly its concern with the speed of implementation, but al so publicly recognized the pr oper statutory role of the Agency. EPA concluded that the appropriate and legal course of action was a “SIP Call”—giving states eighteen months to submit ne w SIPs to address interstate transport in compliance with the rule. 29 The EPA proposed a FIP during the submission period, but observed the State’s statutory right to reac t to CAIR by submitting SIP revisions before any FIP could be applied. As a result, the st ates maintained their critically important and statutorily required opportunity to submit their own SIPs. Although EPA prepared FIPs for States that did not respond to the SIP ca ll, EPA recognized that it could not preempt the State SIPs by implementing a FIP first. As the D.C. Circuit has recently observed, no agency policies, no matter how strong, can al low an agency to violate the terms of a

statute. 30

CAIR

Although CAIR was ultimately struck down by the D.C. Circuit in North

Carolina v. EPA , 531 F.3d 896 (D.C. Cir. 2008) ( per curiam ), the court expressly decided not to vacate CAIR, leaving the rule in place until the EPA promulgated a

24 § 7410(a)(1).

25 SIP submissions must be evaluated by the EPA and the Administrator must approve a SIP submittal if it meets the requirements of the Act. § 7410(k)(3).

26 § 7410(c)(1).

27 § 7410(k)(5).

28 See NOx SIP Call Rule, 63 Fed. Reg. 57356 (Oct 27, 1998); CAIR, 70 Fed. Reg. at 25263-70.

29 CAIR, 70 Fed. Reg. at 25263.

30 See North Carolina v. EPA, 531 F.3d 896, 922 (D.C. Cir. 2008) ( per curiam ) (“Lest EPA forget, it is ‘a creature of statute,’ and has ‘only those aut horities conferred upon it by Congress’; ‘if there is no statute conferring authority, a federal agency has none.’”)(citation omitted).June 22, 2011 Page 9

9 replacement rule. 31 In North Carolina , the D.C. Circuit concluded that, because the interstate trading system set up under CAIR a llowed for the possibility that emitters in a given state could simply buy credits from out of state instead of reducing emissions, the rule did not sufficiently assure that up wind states would redu ce their significant

contribution to downwind states. 32 By leaving CAIR in pl ace, the court acknowledged

the continued environmental benefits it would provide compared to is vacatur and chose to remand the rule to “temporarily preser ve the environmental values covered by

CAIR.” 33 In order to continue providing envi ronmental benefits, states’ existing SIPs also must stay in place. The D.C. Circuit in North Carolina did not rule, or even expressly hint, that any of the existing or proposed SIPs under the rule were invalidated by its ruling. Indeed, the EPA continued to approve SIPs under CAIR after the D.C. Circuit remanded CAIR. As will be discussed below, the existence of these approved SIPs is one key reason why EPA’s new FIP-first approach for CATR will fail.

Retrofits and CATR

Retrofitting an entire industry is a complicated, expensive, and time-intensive process, and EPA has conceded that it is impo ssible for these retrofits to occur in time for

Phase I of CATR in 2012. 34 Indeed, it is even questiona ble if the required retrofits can practically be made by 2014, let alone 2012. There is wide agreement among the industry and state commenters that EPA’s estimat es about what will be required in this massive undertaking grossly underestimate the burdens on industry, pa rticularly in the

short-term. 35 On a plant-by-plant basis, the time to design, contract, permit, and construct the pollution control equipment is significan t and well-documented. By contrast, EPA’s estimates about how long it takes to inst all relevant equipment—multimillion dollar installations known colloquially as scrubbers or SCRs—are exceedingly optimistic and have no genuine support in the record. Relying on unrepresentative information concerning retrofits that two companies undertook a decade ago on two electrical generating facilities, 36 EPA suggests (in the preamble) that owners of all such facilities

should be able to inst all SCRs in 21 months. 37 However, the overwhelming amount of

available data demonstrates that it takes between 40 and 60 months to complete scrubber installation and SCR retrofits average 39 to 40 months, but can take as long as 60

31 See North Carolina v. EPA , 550 F.3d 1176, 1178 (D.C. Cir. 2008).

32 North Carolina , 531 F.3d at 906-08.

33 North Carolina, 550 F.3d at 1178.

34 CATR, 75 Fed. Reg. at 45,281 (“it is not po ssible to require the installation of post-combustion

SO 2 controls (scrubbers) or post-combustion NO

x controls (SCRs) before 2014 (because it takes about 27 months to install a scrubber and 21 months to install an SCR).”).

35 See, e.g. Southern Company, Comments on Proposed Transport Rule, 13-21 (Oct. 1, 2010); Progress Energy, Comments on the Proposed CATR, 5 (Oct. 1, 2010).

36 See UARG Comments at 38-41, 44.

37 CATR, 75 Fed. Reg. at 45,173.June 22, 2011 Page 10

10 months. 38 Beyond being objectively infeasible, co mpressing all of the construction into the short period leading up to 2014 will likely le ad to significant reliability concerns—an issue raised by state commenters. For inst ance, the Ohio Public Utilities Commission

concluded: “We believe that in terms of relia bility, implementation of the Transport Rule, as proposed, will result in a level of uncer tainty that is unacceptable and, further, irresponsible.” 39 This further demonstrates that EPA’s potential 2012 mandate in the NODA is unsupportable.

In addition to forcing plants to go off line to install pollution control devices, the rule is likely to drive a number of older co al plants to decommissioning. In areas that depend heavily on coal production, this is likel y to have significant impacts on the price of electricity, as the costs of new plants are priced into the charges to consumers. 40 It may also negatively affect the struggling ec onomies in those areas. Moreover, the EPA’s compressed time schedule will unnecessarily driv e up the cost of compliance, an effect the EPA has failed to consider. History shows that, even when EPA appropriately complies with the CAA to implement NAAQS, it often underestimates actual costs. This is precisely what happened r ecently with respect to the NO

x SIP call. 41 Compliance costs were dramatically higher for that rule than EPA predicted, largely due to increased costs

for materials and services resu lting from heightened demand that EPA failed to foresee in the proposed rule and its underestimation of the complexity of many retrofits. These significant costs of retrofits will be exacerbate d by the unjustified costs to many facilties of the wealth transfer EPA proposed in the NODA, and these costs will be passed along to ratepayers. A recent study projects that the NODA allocation approach alone would result in an increase in consumer power pr ices by as much as $514 million per year in

2012 and 2013 with consumers in the Midwest bearing the greatest increase in power

costs. 42

38 UARG Comments at 42, 44. See also Southern Company, Comments on Proposed Transport Rule, 13-21 (Oct. 1, 2010) (stating that Southern Company’s average installation time for scrubbers is 54 months with a range from 40 to 69); Progress Energy, Comments on the Proposed CATR, 5 (Oct. 1, 2010) (urging EPA to assume more realistic timeframes, estimating 44 months for scrubber installation and 38 months for SCRs).

39 See Ohio Public Utilities Commission, Comments on Proposed CATR (Oct. 1 2010).

40 See id. at 3-4.

41 See J.E. Cichanowicz et al., Utility Industry Re sponse to the IAQR Mandates: Estimates of Technology Retrofit and Schedule, EPA-HQ-OAR-2003-0053-1024 (Mar. 30, 2004); J.E. Cichanowicz et al., Analysis of CAIR Complia nce Schedule: A Response to ICAC Estimates, Docket Entry EPA-HQ-OAR-2003-0053-1786 (July 26, 2004).

42 See Charles River Associates, Market Power Implications of EPA’s Proposed Alternative Allowance Allocations Under CATR for 2012-13, 3-4 (May 9, 2011).June 22, 2011 Page 11

11 ARGUMENT

While EME is not privy to EPA’s draft fi nal rule, we can say confidently that EPA would err by replicati ng the proposed 2012 mandate therein. First, as many commentators and key state agencies have indicated, EPA lacks au thority to require implementation in 2012 under FIPs, and must instead issue a SIP Call. Second, EPA’s most recent NODA proposal mandates an approach for allocations in 2012 that will have zero actual benefits—because, as EPA has acknowledged, retrofits cannot and will not be accomplished by that time. But EPA’s NODA propos al will leave some facilities short of

emission allowances while others will be given excess allowances. Thus, EPA’s 2012 mandates would serve no purpose but to requi re payments, funded by rate payers from certain regions of the U.S. (including in Pe nnsylvania, West Virginia, Ohio, Illinois and Tennessee) to the utility shareholders in othe rs. EPA lacks statutory or record support for such a mandate, and would only further nega tively impact the fragile economy in those regions by doing so.

Cooperative Federalism is the Central Structure of Title I

There are only two ways that EP A may involve itself in state-level implementation: SIP Calls and FIPs.

SIP Calls: Once a SIP has been approved , EPA may not modify or otherwise disapprove of it without issuing a SIP call. Under secti on 110(k)(5), whenever the EPA finds that a SIP is “substantially inadequa te” to attain or maintain the relevant NAAQS, to “mitigate adequately” interstate pollutant transport or otherwise fails to comply with requirements of the CAA, EPA “shall require the State to re vise the plan as nece ssary to correct such inadequacies.” 43 In issuing such a SIP call, the C AA requires that EPA notify the state of the inadequacies in the SIP and allows EPA to set “reasonable deadlines (not to exceed

18 months after the date of such notice)” to submit SIP revisions. 44 Absent the procedures provided in this subsection, an approved SIP remains in effect unless a specific statutory provision re quires that it be updated or altered. A SIP call is the appropriate way to compel states to readjust their SIPs, while giving states the statutorily required opportunity to determine how to comply with the NAAQS. EPA knows this:

EPA effectuated its last two intersta te transport rules with SIP Calls.

FIPs : EPA may issue a FIP in certain statutorily enumerated situations. In all of these situations, EPA has not yet approved a state’s SIP

. 45 Under section 110(c)(1), EPA can only promulgate a FIP where:

43 § 7410(k)(5).

44 Id.

45 See § 7410(c)(1).June 22, 2011 Page 12

12 (1) the state failed to submit a SIP or SIP revision; (2) EPA finds the SIP submission to be incomplete; or (3) EPA disapproves the SIP in whole or in part, and the state fails to correct the deficiency. 46

These limitations are an important part of th e statute’s limits on federal power, and are designed to serve as a signifi cant constraint on EPA’s ability to dictate the details of state-level implementation. They are not a menu, designed to allow EPA to mine back fifteen years through past SIPs or SIP revisions to try to justify a preemptive FIP.

Here, in a rush to promulgate regulati ons that would take effect as soon as 2012, EPA has issued a proposal that profoundly mi sinterprets these provi sions. Instead of inappropriately dictating the conten t of states’ SIPs, as it did in Virginia v. EPA , EPA is now attempting to preempt states’ ability to generate SIPs at all. 47 EPA proposed two rationales for a FIP first approach, neither of which could survive judicial review.

First , in relation to states’ interstate transport obli gations for 1997 Ozone and

PM 2.5 NAAQS , EPA inexplicably argued since “E PA approvals of the CAIR SIPs preceded the remand of the CAIR by the C ourt,” and the Court found CAIR unlawful, then “a CAIR SIP submission can no longe r be considered an adequate section 110(a)(2)(D)(i)(I) SIP submission” and EPA’s 2005 finding that states failed to submit SIPs addressing the transport obligations for the 1997 NAAQS “remain in force regardless of whether a state covered by CAIR submitted and/or had an approved SIP stating that compliance with the CAIR sa tisfied their 110(a)(2)(D)(i) obligations.” 48 In other words, EPA claimed that the D.C. Ci rcuit’s remand of the CAIR rule somehow acted as a repeal of EPA’s a pproval of the states’ SIP revisi ons addressing the transport obligations for the 1997 NAAQS.

Nothing in the North Carolina v. EPA decision or the CAA provides a basis for such a claim. While EPA made a finding of failure to submit for these states in 2005, EPA’s later action in approving each state’s SIP as meeting the requirements of section 110(a)(2)(D)(i)(I) ended EPA’s authority to issue a FIP. The D.C. Circuit’s decision in

North Carolina v. EPA did nothing to restore this aut hority to EPA. While the D.C.

46 It is important to note for the third condition, that it is EPA’s and only EPA’s disapproval that triggers the FIP process.

47 See Virginia , 108 F.3d at 1408. EPA’s proposal in th e NODA purports to create options for states

to issue abbreviated or constrained SIPs instead of accepting the FIP. Neither of these options cure the fundamental issue that is raised by EP A’s “FIP first” approach . In the proposal, EPA “assume[s] that the first year for which state allocations might be used, in lieu of EPA allocation, would be 2014,” requiring the implementation of the CATR by FIPs in the interim. See NODA, 76 Fed. Reg. at 1,120.

48 See CATR, 75 Fed. Reg. at 45341.June 22, 2011 Page 13

13 Circuit remanded CAIR and the CAIR FIP, 49 EPA’s individual SI P approvals were not

before the court in that case and, therefore, remain in plac e. EPA’s own actions support this conclusion. EPA approved six SIPs to meet the requirements of CAIR after the D.C.

Circuit’s remand of the CAIR rule in December 2008, demonstrating the fallacy in EPA’s analysis. 50 The conclusion that these SIPs remain in place is consistent with the D.C. Circuit’s goal in remanding the CAIR rule to “temporarily preserve environmental values covered by CAIR.” 51 The plain language of the stat ute and EPA’s subsequent actions

thus confirm that the indi vidual SIPs that EPA approve d under CAIR remain valid.

Second , for states’ interstate tr ansport obliga tions under 2006 PM 2.5 NAAQS

, EPA has proposed to disapprove many states’ SIPs for failing to meet requirements that had not even been identified by EPA at the time the SIPs were submitted. 52 For example, EPA is explicitly proposing to disa pprove the state SIP re visions responding to

the 2006 PM 2.5 NAAQS (which revisions were s ubmitted in 2009 for the most part)

because none of those revisions have met th e emission limitations EPA identified in its proposed 2010 CATR rule. 53 In other words, EPA is proposing to deny the states the right to implement the requirements of EPA’s 2010 proposal fo llowing a SIP Call by pretending that the states failed to do so earlier—in 2009 submissions—before EPA even made that proposal.

Likewise, EPA has found that other states faile d to submit SIP revisions to address

the 2006 PM 2.5 NAAQS where EPA had not yet esta blished state emission budgets and was more than a year late in even designati ng areas as attainment or nonattainment. This

49 See North Carolina , 550 F.3d at 1178.

50 These states are: Maryland, 10/30/2009; North Carolina, 11/30/2009; West Virginia, 8/4/2009; Pennsylvania, 12/10/2009; South Carolina, 10/16/2009; Ohio, 9/25/2009.

51 See North Carolina , 550 F.3d at 1178.

52 EPA explained that it had separately issued a finding of failure to submit § 110(a)(2)(D)(i)(I) transport SIPs for the 2006 PM 2.5 NAAQS. See CATR, 75 Fed. Reg. at 45342. However, of the states for which EPA proposes FIPs to meet the transport obligations for the 2006 PM 2.5 NAAQS,

16 of those states submitted SIP revi sions addressing those requirements. While a number of these submittals are still pending, in January and March of 2011, EPA propo sed to disapprove the majority of these submittals. See, e.g. , 76 Fed. Reg. 4584, 4586 (proposed Jan. 26, 2011).

53 See, e.g. , Approval and Promulgation of Air Quality Implementation Plans; Georgia; Disapproval of Interstate Transport Submission for the 2006 24-Hour PM 2.5 Standard, 76 Fed. Reg. 4584, 4586 (proposed Jan. 26, 2011) (proposing to disapprove the state’s SIP revision based on modeling EPA conducted for the Transport Rule); Approval of Air Quality Implementation Plans; Indiana and Ohio; Disapproval of Interstate Transport State Implementation Plan Revision for the 2006 24- Hour PM2.5 NAAQS, 76 Fed. Reg. 6376, 6378 (proposed Feb. 4, 2011) (same); Approval and Promulgation of Air Quality Implementation Plans; Kentucky; Disapproval of Interstate Transport Submission for the 2006 24-Hour PM2.5 Standard, 76 Fed. Reg. 4597, 4599 (proposed Jan. 26, 2011) (same).June 22, 2011 Page 14

14 again is an effort to work around the C AA requirements of cooperative federalism. 54

Indeed, EPA still has not finalized state emi ssion budgets. It is not credible for EPA to contend that states failed to develop SIPs to meet the requirements of section 110(a)(2)(D)(i)(I) until they know whether or not areas are in nonattainment or what the state emission budgets will be.

The NODA

Compounding the problems with EPA’s FIP-first approach, the NODA proposes

an allocation of emission allowances between existing units during Phase I that amount to a redistribution of wealth without any environm ental benefit. EPA has admitted that it is “not possible” to require retrofits of emi ssion-control technology before 2014 because of required installation time, 55 but EPA’s NODA nonetheless would give some units significantly fewer emission allowances than they will require (without the ability to install additional controls before 2014) and pr ovides other units with significantly more allowances than they will use. Facilities that are assigned fewer allowances than they will need to operate will not be able to in stall equipment to reduce their emissions, and will thus be forced to either pur chase allowances on the open market, 56 or shut down. 57 A recent study indicates that the price of allo wances under the NODA approach is projected to be significantly higher than under the original CATR proposal because of the incentives for withholding allowances from th e market, but EPA did not even evaluate the market power effects of the allowance approach under its NODA. 58 According to the study:

54 For example, EPA did not even designate areas as attainment or nonattainment until November 13, 2009, more than a year after its statutory deadline for doing so and two months after states were purportedly required to submit SIPs. See 42 U.S.C. § 7407(d)(1)(B)(i); U.S. EPA, Air Quality Designations for the 2006 24-Hour Fine Particle (PM 2.5 ) National Ambient Air Quality

Standards , 74 Fed. Reg. 58688 (Nov. 13, 2009).

55 CATR, 75 Fed. Reg. at 45,281 (“it is not po ssible to require the installation of post-combustion

SO 2 controls (scrubbers) or post-combustion NO

x controls (SCRs) before 2014 (because it takes about 27 months to install a scrubber and 21 months to install an SCR).”).

56 If indeed, such allowances are available. Due to th e incentives to bank allo wances for future years instead of selling, and the potentially monopolistic structure of the market EPA has designed, units

that have been allocated allowances in excess of their emissions are likely to have considerable market power. See NODA Comments, at 7-11 (Feb. 7 2011); See also Charles River Associates, Market Power Implications of EPA’s Proposed Alternative Allowance Allocations Under CATR for 2012-13, 11-19 (May 9, 2011).

57 This very problem led to the suspension of the RECLAIM NO

x market during the California energy crisis. Moreover, shutting down plants harms more than the specific EGUs. Taking capacity off the market will decrease supply on the electricity market, increasing prices, and potentially causing volatility on the electricity spot markets.

58 See Charles River Associates, Market Power Implications of EPA’s Proposed Alternative Allowance Allocations Under CATR for 2012-13, 3, 10 (May 9, 2011).June 22, 2011 Page 15

15 [The] NODA alternative a llocation proposals concentr ate a large number of SO 2 allowances in the hands of a few entities that do not need them to operate their generating units, giving them market power, which they can exercise by withholding allowances from the market. 59

The net effect of EPA’s rule will thus be to force the victims of the allocation system (those allocated fewer allowances than needed) to purchase allowances from the beneficiaries of the system (those allocated excess allowances) at inflated rates—money they should be spending on investing in th e control technology needed to achieve

emission reductions. This massive re distribution of wealth – amounting to $1.5 billion in

2012 and 2013 – is depicted below 60 :

The wealth transfer effectively required under the NODA will have negative effects on ratepayers and local economies. As the victim companies face increased costs in the form of allowances that must be pur chased from the beneficiary companies, they must necessarily attempt to pass these cost s along to the ratepayers. A recent study projects that the NODA alloca tion approach would result in an increase in consumer

59 Id. at 3.

60 This chart depicts the wealth tr ansfer for one year and only incl udes distribution that exceeds $10

million.June 22, 2011 Page 16

16 power prices by as much as $514 million per year in 2012 and 2013 with consumers in the Midwest bearing the great est increase in power costs. 61 The windfall that this will generate at the beneficiary companies will al most certainly accrue to the shareholders, with little to no benefits pa ssed on to the ratepayers.

On the local level, this will have signif icant impacts. In a recent letter from Congressman Shuster to Administrator Jackson, the Congressman summarized the potential impact of the NOD A allocation methodology on EME’s Homer City plant in his

district. 62 The NODA would require Homer City to buy three times as many allowances

as it would need under CATR. This facility produces 1,884 MW of electricity—enough to power two million homes. The facility also employs many high earning workers and supports hundreds of local coal mining and trucking jobs. If this facility is forced to shut down or cut back operations b ecause of the NODA, this woul d be very harmful to the local economy. Additionally, he noted that Pennsylvania residents could see a $30 million per year increase in el ectricity costs under the NODA.

As a result, the net effect of Phase I will be to transfer wealth from the ratepayers of the victim companies to the shareholders of the beneficiary companies, however, there

will be no environmental benefits to show for it. Since the victims of EPA’s NODA approach could not possibly install emission controls before 2012, as EPA acknowledges, the NODA approach will not result in any additional environmental benefits beyond the CATR proposal. Rather than providing environmental benefits, the NODA proposal will merely manipulate the market.

EPA goes so far as to acknowledge this, writing that “the initial allocation of allowances . . . [based upon] hi storic heat input would yield a distribution of allowances putting relatively greater burden on the higher- emission-rate units to reduce emissions or purchase additional allowances in order for the units to be in compliance with the proposed Transport Rule trading programs.” 63 However, by EPA’s own admission, short

term reductions in emissions are available only on a marginal basis by making minor changes. As a result, the effect of the allocation during Phase I will be to put a “relatively greater burden” on the relatively higher-emi ssion-rate units to purchase allowances from

those units allocated excess allowances. EPA has presented no environmental justification for requiring so me producers to pay others.

EPA attempted to justify the wealth tr ansfer consequence of the allocation methodologies in EPA’s proposal by stating that “because higher-emission-rate units generally are responsible for a greater share of a state’s total emi ssions and thus bear

61 See Charles River Associates, Market Power Implications of EPA’s Proposed Alternative Allowance Allocations Under CATR for 2012-13, 3-4 (May 9, 2011).

62 Letter from U.S. Representative Shuster of Pennsylvania to EPA Administrator Jackson (June 15, 2011).

63 NODA, 76 Fed. Reg. at 1,114.June 22, 2011 Page 17

17 greater responsibility for a states’ significant contribu tion and interference with maintenance, this distribution of burden is consistent with the goals of CAA section 110(a)(2)(D)(i)(I).” 64 This reasoning is clearly errone ous. The “distribution of burden” is not consistent with the goals of the CAA. As established above, the “burden” generates

no emission reduction benefits. The “burden” is simply an invention of the NODA’s pointless wealth transfer and ca nnot be justified by any reference to the CAA or any other sensible public policy interest . This is particularly the case given that CAIR was expressly premised on a two-phased implem entation, wherein less stringent reductions would take place in 2010, with more stringen t reductions occurring five years later, and on the presumption that some sources would not install controls – particularly for the 2010-2014 phase of the rule. Under the NODA a pproach, however, sources are penalized for choices that not only were legal, but indeed were expr essly contemplated by CAIR – and upon which EPA relied to ensure the cost-e ffectiveness of the CAIR rule. Nor do

those sources have time to “correct” their co mpliance choices before the penalty occurs: as EPA acknowledges, sources cannot instal l new controls by 2012. This penalty is especially egregious as applied to sources such as EME, which committed in 2006 to aggressive reductions of mercury, NO

x and SO 2 , but agreed to phase in implementation of controls based on the priorities establishe d by the state. In sum, the NODA approach is simply punitive, and a textbook example of arbitrary and capricious agency action. 65

EPA could easily avoid this problem by (1) abandoning the timeline for Phase I implementation of CATR and delaying the star t of Phase II to a point where regulated entities could modify their demand by i nvesting in additional emission control equipment, (2) allocating emissions based on es timated emissions instead of historic heat input, or (3) leaving it to the states, as required by the statut e, to allocate allowances.

We appreciate your consideration of th ese issues. Should you have any further questions or want to discuss these issues furt her, please do not hesita te to contact me. I

can be reached at claudia .o’brien@lw.com or 202-637-2181.

Sincerely,

/s/

Claudia M. O’Brien

of LATHAM & WATKINS

64 Id.

65 See Motor Veh. Mfrs. Ass’n v. State Farm Ins. , 463 U.S. 29, 43 (1983) (“Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.”).