Janice K. Brewer Governor

December 1 7, 2013 

### ARIZONA DEPARTMENT OF 

### ENVIRONMENTAL QUALITY

1110 West Washington Street • Phoenix, Arizona 85007 (602) 771-2300 • www.azdeq.gov

Acting AdministratorJanet McCabe Office ofAir and Radiation U.S. Environmental Protection Agency 1200 Pennsylvania Avenue, N.W. Washington, DC 20460 Henry R. Darwin Director

Re: State framing questions regarding considerations in the design ofa program to reduce carbon pollution from existing powerplants under CAA section 111(d)

Dear Ms. McCabe,

As you know President Obama unveiled his Climate Action Plan on June 25, 2013 with a directive for the US Environmental Protection Agency (EPA) to issue carbon pollution guidelines for both new and existing fossil fuel fired Electric Generating Units (EGU). EPA issued a proposed "Carbon Pollution Standard for New Power Plants" on September 20, 2013. In accordance with the President's plan, EPA has announced that it will issue proposed guidelines for existing sources by June 1, 2014; issue final guidelines by June 1, 2015; and states will be expected to submit state implementation plans to reduce carbon pollution for covered

sources by June 1, 2016.

EPA is to be commended for the unprecedented outreach it has undertaken to gather input in the design of a program under Clean Air Act (CAA) section 111(d). This tact is a constructive approach to fostering cooperation on complex issues and serves as a model for future outreach efforts. The aforementioned considered, Arizona remains unconvinced EPA has demonstrated the need or authority to adopt carbon pollution regulations under the CAA, and questions whether it is even prudent to proceed down this path.

EPA's proposed path creates inherent conflicts in both the law, and the Agency's mission. From

a legal perspective, the Clean Air Act has set a number ofnon-discretionary duties required of EPA. The purpose ofthese non-discretionary duties is to ensure the protection ofpublic health from the immediate and long-term public health threat of conventional air pollutants. EPA is already behind in complying with many of its non-discretionary duties, resulting in time consuming lawsuits to compel action as well as the awarding ofpenalties in the form oflawyer's fees for the prevailing plaintiffs. These lawsuits take diminishing resources away from EPA's mission to protect human health and the environment.
Addressing greenhouse gas emissions under 111(d) is not one ofthose non-discretionary duties. Yet, to meet the deadlines imposed by the President's plan, EPA will undoubtedly remove

1110 West Washington Street • Phoenix, AZ 85007 (602) 771-2300

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resources from the non-discretionary programs and reassign them to the development ofthese duties. This will also force states to forego their responsibilities to their own non-discretionary duties and re-task their already thin resources to this completely discretionary program, or forfeit their ability to make their own decisions to EPA.

From a mission perspective, EPA is pitting its primary mission against itselfby forgoing nondiscretionary duties that protect public health for fully discretionary duties that only have the potential to improve the environment. Concentrations of greenhouse gases are the result of global emissions, and do not comprise an immediate health risk, as do criteria pollutants for which EPA has promulgated National Ambient Air Quality Standards (NAAQS). The resources necessary to develop and then implement a greenhouse gas program can only come from those programs that are better situated to protect public health in the near term.

Since EPA appears prepared to follow this course of action despite the damage to its nonoptional programs, the following are Arizona's responses to the four framing questions issued in regards to "Considerations in the design ofa program to reduce carbon pollution from existing powerplants".



### What are the State of Arizona and stakeholder experiences with programs that reduce C02 

### emissions in the electricpowersector?

Utilities regulated by the Arizona Corporation Commission (ACC) are required to comply with Renewable Energy Standard and Tariff (REST) which includes a requirement to generate 15 percent ofretail load using renewable energy by 2025 and thereafter1• In addition to the REST, the ACC has implemented an Energy Efficiency Resource Standard (EERS) mandating that regulated utilities with annual revenues greater than $5 million achieve annual energy savings goals of22% by the year 20202•
Other utilities that are not regulated by the ACC, such as the Salt River Project, have board mandated targets for generating retail energy through the implementation of Sustainable Resources which includes renewable energy and programs that promote energy efficiency.



### How shouldEPA SetPerformanceStandards forStatePlans?

Section 111(d) ofthe act does not authorize EPA to set performance standards for state plans3

. Rather, EPA should recognize the role and responsibility states possess in setting C02 standards for existing EGUs under CAA section 111(d) by establishing procedures·that allow states the flexibility to choose a source-category specific or system based carbon pollution standard that allows individual states the fastest and most economical means ofcompliance. This would have

1Title 14,Article 18 oftheArizonaAdministrative Code (AAC) governingtheArizona Corporation Commission (AAC R14-2-1801 et. seq.) describes infull the state REST, including details on compliance schedule, enforceabilityand penalties for non-compliance. The program is enforceable, surplus, quantifiable andpermanentundertheAAC.

2 AAC R14-2-2401 et. Seq. describes in full detail theArizona EERS.
1 Section 111(d), 42 U.S.C. §7411(d), ofthe CleanAirAct requires EPAto "prescribe regulations which shall establish a procedure

...underwhich each State shall submittotheAdministratora planwhich (A) establishes standards of performancefor anyexisting source

..."Page 3 of7

multiple benefits for both EPA and states. EPA, in establishing procedures for the case-by-case determination of "Best System ofEmission Reduction" (BSER), should allow states the pliancy to choose a source-specific or system-based standard. EPA should:

• Acknowledge the diversity in climate, portfolio mix, geology, geography and regulatory landscape unique to each state;

• Ensure maximum power sector reliability and energy affordability in each state;

• Prevent the infringement on states' rights to develop standards under CAA section lll(d); and

• Allow for utilities and independent power producers operating affected sources to meet these standards using a variety ofcompliance methods.

The BSER procedures should allow the determination to be based on demonstrated technologies suitable for the regional geology, geography and economy. The BSER analysis should examine, among other factors, fuel type; regional capacity planning; local geography; imminent non-C02 environmental regulation; commercial demonstration of technologies; and potential environmental health and safety risks associated with electricity reliability and affordability. In setting the procedures, EPA should consider changes to the electric system that will occur as part of compliance with other EPA regulations, including New Source Review and Prevention of Significant Deteriorationpermitting requirements, both current and future.

Residential buildings in Arizona consume significantly more electricity than the national average
on cooling and appliances3

. Commercial building energy use is the second largest end-use sector in Arizona, yet has seen the highest growth in consumption ofretail electricity from 2000-2010. Additionally, Arizona's fast-fowing urban population centers see significantly higher energy intensity as a ratio ofkWhlft than the rest ofthe state, presenting a significant opportunity to reduce end-use energy intensity4• When establishing procedures, EPA should provide the flexibility for states to account for potential generation displacement, and thus emissions savings, by accommodating programs from outside of the electric power sector that directly influence end-use energy intensity.

Arizona's utilities already employ some programs to improve end-use efficiency by offering rebates and incentives for the installation and implementation ofrenewable and energy efficiency improvements in the residential, commercial and industrial sectors. Utilities already submit annual reports detailing many ofthese programs to demonstrate compliance with state energy mandates. When establishing procedures, EPA should offer states flexibility in determining the efficacy of these existing programs and documentation in reducing carbon emissions from the state electric powerportfolio.

3 EIA produces summaryreports forArizona Residential Energyuse based on datacollectedthrough residential energystudies. The summaryreport and supporting datais available here: http:IIwww.eia.govIconsumption/residential/reports/2009/state briefs/pdf/az.pdf

4 EIA compiles stateprofiles andrankings ofenergy, environmental, and economic data. This data includes summaries, analysis andrawdataandwas used as a referencefor otherstatistics ontheArizona economy and energy prices herein. The datais available here: http:/lwww.eia.gov/state/data.cfm?sid=AZPage 4 of7

Issues that influenceArizona C02 Emissions

Arizona is currently the 16th most populous state with a compound population growth rate of 2.9% from 1980-2010. However, Arizona ranks 42"d in the nation for per capitapersonal income and pays retail electric rates near the national average. Price stability and reliability are ofthe utmost importance in Arizona as the heat in the western, central and southern portions of the state can be deadly without affordable electricity for cooling.

In Arizona, a misery day occurs when the average daily temperature exceeds 11

## oo F, and the number ofmisery days in Arizona has reached record proportions in recent years. Phoenix had 32 misery days in 2007, previously a record setting year for average daily temperatures. The city recorded its fourth hottest day in recorded history in 2013, with the year breaking the previous record for average daily temperatures set in 20075

. The National Weather Service recorded 25 "misery" days at the Phoenix Sky Harbor weather station in the summer of 2013 6• A lack of reliable firm power on these days could be catastrophic and result in the tragic loss of life, a much greater and immediate impact on public health than that posed by greenhouse gasses.

Arizona urges EPA to consider the human health consequences of exceptionally high temperature events, and to provide flexible peak-demand day solutions or exemptions, while developing guidance to create long-term market signals for technologies and programs that drive efficiency, smooth demand curves or firm renewable resources. The abject consequences resultant ofthe lack of affordable, sustainable and available electricity during extreme heating events constitutes immediate and substantial endangerment to public health and is unacceptable.
RegionalInfluences on theArizonaElectric Power Sector

The regional trade balance in electricity also affects Arizona emissions. Arizona's diversified portfolio allows for cheaper base load electricity for states dependent on a higher emitting fossil fuel portfolio, while offering firm power resources for neighboring states that consume more electricity than they produce. Regional marketing and trading, by default, externalize some of the emissions or benefit from reduced emissions incorporated in generation of marketed electricity. As an example, Arizona utilities buy and sell wholesale electricity to and from the California Independent System Operator (CAISO) in both the day-ahead and hour-ahead wholesale energy market; in effect, displacing emissions from California when they sell energy to the CAISO and reducing emissions in Arizona when purchasing energy from the CAISO.
Additionally, individual utilities often operate generation capacity in states other than those whose load they serve, and many generating facilities have multiple owners in multiple states. It is imperative that EPA consider the regional nature ofthe electric power sector, while allowing

sRuddell, D., Hoffman, D., Ahmad, 0., Brazel, A. (January, 2010). HistoricalThresholds Temperaturesfor Phoenix (Urban) and Gila Bend (Desert), CentralArizona, USA. Climate Research. Vol. 55: 201-215, 2013 DOl: 10.3354/ CrQ1130 Dungan, R. (September21, 2013). PhoenixSummerHottestEver. TheArizona Republic. PhoenixArizona. Retrieved from: http://www.azcentral.com/weather/articles/20130920phoenix-summer-hottest-ever.html
6 NWS datawas pulled from a datarequesttothe NOAA National Climate DataCenteravailable here: http://www.ncdc.noaa.gov/cdo-web/datasets/GHCND/locations/CITY:US0400u/detailPage 5 of7

the appropriate time for regional cooperation to occur. As a result, EPA's procedures should allow for states to cooperate in setting and achieving regional reduction targets.

Arizona also recommends that EPA's procedures allow for the consideration of all real world costs associated with implementing any air pollution controls, including the costs of any additional air pollution controls triggered for criteria pollutants under NSR and PSD during the installation ofany controls under this program. Finally, Arizona recommends that EPA consider the co-benefit ofreduction ofcriteria pollutants

as a result of this program to be creditable for other State Implementation Planning purposes. For example, efficiency improvements that achieve both a C02 and 0 3 emission reduction should be creditable for planning purposes under Section lll(d) as well as Section 110.

What requirements shouldstateplans meet, andwhat flexibility shouldbeprovidedto states in developing theirplans?

Arizona requests EPA allow states to propose and develop a "system ofemissions reductions" that conform to procedures set by EPA. EPA should provide concise methodology for evaluating alternative systems for emissions reductions.

Arizona also recommends that EPA's procedures allow energy efficiency, renewable energy resources, and programs outside of the electric power sector (building energy efficiency standards, building codes, etc.) as compliance credits as long as they are quantifiable, surplus, enforceable and permanent. Additionally, EPA should provide guidance and methodologies for quantifying these credits; processes to prevent double counting; and their comparability between

mass based and rate based standards to harmonize and facilitate regional compliance trading to maintain affordability. Arizona also requests that EPA's procedures provide flexibility to bank credits for early emissions reductions.

EPA should also allow credit for existing programs that have provided a quantifiable reduction in emissions (e.g. renewable energy and efficiency mandates, early retirement of C02 emitting EGUs, fuel switching, etc.) that occur after the baseline has been established. This crediting of early action will ensure ratepayers receive full value for emission reductions while incentivizing investment and participation in programs inthe future.
Finally, when establishing its procedures, EPA must recognize, as alluded to earlier, that states have the primary role in establishing and implementing performance standards under section Ill(d) as determined in the state plan, and should clearly define a consultation process to evaluate state plans and determine equivalency. EPA's guidelines should provide states with the maximum amount of flexibility to set an appropriate state-specific standard; and in doing so, should allow for the development and implementation ofregional and national solutions should states decide that such an approach is most beneficial. It is in both EPA and the states interests to establish a clear, predictable, defensible and transparent program in order to avoid the years of frustration, delay and waste ofresources that have been observed in programs such as inter-state transport ofair pollution and regional haze.Page 6 of7

What can EPA do tofacilitate stateplan development andimplementation?

One ofthe most important recommendations is for EPA to extend the timeline necessary for the development of the 111(d) standards to facilitate multistate coordination and ensure states establish the standards and compliance mechanisms correctly the first time. In this respect, Arizona recommends at least 24 months for the development ofthe State Implementation Plan (SIP) and an additional 24 months to resolve any partial or full disapproval ofa SIP prior to EPA prescribing and implementing a Federal Implementation Plan (FIP). This will ensure EPA provides the necessary commitment that the federal government will provide states with the appropriate opportunity to address plan shortcomings and perform the necessary consultation amongst state and regional stakeholders involved in the development ofa plan.

EPA should promote regulatory and market certainty by providing clear guidance prior to the SIP process beginning. This certainty should be legally durable and provide market signals that promote long-term investment in emission reductions. In defense ofthis justification, Arizona points out that EPA has still not sent the NSPS under CAA section Ill(b) to public comment despite being signed on September 20, 2013. It has been over two and a halfyears since EPA initiated the process to establish a carbon pollution standard for new sources7

, yet states are only being afforded one year to develop existing source standards. It is unreasonable to expect states to develop a program that is inherently more complicated due to issues such as retrofit technology and existing source mix in less time that it has taken EPA to develop a program for

sources that do not exist today and can be more easily designed to meet the standards.

In Conclusion

Should EPA decide to proceed down this path, EPA's authority under Ill(d) should be interpreted in the most defensible way possible, and nothing more. It is clear that Ill(d) limits EPA's role to that of setting procedures that states must follow when the states set the appropriate standards. If EPA chooses to develop standards as part ofthe 111(d) procedures, that decision will result in lawsuits and thus also result in delay, uncertainty, an no immediate action or benefit. While the Statute provides EPA with the authority to approve or disapprove a State's plan, Arizona believes that this authority is constrained to determining conformance with the procedures, not EPA's opinion regarding the adequacy ofthe standard the State chooses to set.

The aforementioned complexities and considerations underscore the delicacy required in setting guidelines for C02 standards that ensure climate change mitigation balanced with sustainable economic growth, sociocultural sensitivity, and environmental health and safety. EPA guidance should be a catalyst for the modernization of the electric power sector, guiding the states in developing sound and adaptable programs that align with our shared mission to protect human health and the environment.

7 according to http://yosemite.epa.gov/opei/rulegate.nsf/byRIN/2o6o-AOg1theyinitiatedthe process in March of
2011Page 7 of7

Arizona recognizes that these issues are complicated, and that they require significant thought and effort onthe part ofEPA. We encourage EPA to continue its unprecedented outreach as it considers these comments, and work directly with the states as they are best situated to resolve these complicated problems.
Sincerely,

Gina McCarthy, EPA Headquarters Jared Blumenfeld, EPA Region IX Deborah Jordan, EPA Region IX Amy Zimpher, EPA Region IX Colleen McKaughan, EPA Region IX Peter Tsirigotis, EPA OAQPS Joe Goffman, EPA Headquarters Sarah Dunham, EPA carbonpollutioninput@epa.gov:!jJ!fu!r1•1.ttuAirQualityDivisionDirector'sOffice1110WestWashingtonStreetPhoenix,Arizona85007-2952!iq;!!!fltfuH!•!...."d!p!!!Iiift/iI/if,!...\\\\\\\\\1\\\\\\\\\\\\\\\\\\\\\\\\FCF10026727Ire:,1o13}RETURNSERVICEREQUESTEDMSJANETMCCABE.ACTINGADMINSTRATOROFFICEOFAIR&RADIATIONUSEPAI·(blV\---'1200PENNSYLVANIAAVENWlPf"JWASIDNGTON,DC204600wwfhJ-:3•••::J•,.,,_,.,.-,I'!$gl-2•.l,4326639[u:MAILEDFROMZIPC