From: Schmidt, Lorie Sent: Friday, May 30, 2014 2:52 PM To: 'Cortney_Higgins@omb.eop.gov' Cc: Culligan, Kevin; Wayland, Robertj; Elman, Barry; Hoffman, Howard Subject: additional preamble text missing from legal discussion

Cortney Kevin asked me to send you the attached document, which we believe addresses your question about a blank spot in the preamble where the legal issues were to be discussed. The attached document is section f (legal issues) in the discussion on state plans. I’m sorry I don’t know what page it is on in the preamble version y ou have, but if you search for “placeholder” that should take you to the right section. The attached document is intended to show the changes from the last preamble version that we sent you. Thanks Lorie Lorie Schmidt Associate General Counsel, Air and Radiation Office of General Counsel US Environmental Protection Agency (202)564-1681

<< EGU GHG NSPS 111d Proposal Legal Section on Portfolio Approach 5-30-2014.docx >>**VIII. State Plans** 

*** * * *** f. Legal issues The EPA is proposing to interpret the relevant provisions in CAA section 111 to authorize state plans that achieve emissions reductions from affected EGUs by means of the portfolio approach. Section 111(d)(1) requires each state to submit a plan that “(A) establishes standards of performance for any existing source [for certain air pollutants] . . . and (B) provides for the implementation and enforcement of such standards of performance.” CAA section 111(a)(1) defines a “standard of performance” as “a standard for emissions of air pollutants which reflects the degree of emission limitation achievable through the application of the best system of emission reduction ... adequately demonstrated.”

T hese provisions make clear that emission limits that are enforceable against affected EGUs appropriately belong in state plans because they clearly are “standards of performance.” However, the terms of CAA section 111(d)(1) do not explicitly address whether, in addition to emission limits on affected EGUs, state plans may include other measures for achieving the emission performance level. Nor do they address whether entities other than affected EGUs may be subject to requirements thatcontribute to reducing EGU emissions. Under the U.S. Supreme Court’s 1984 decision in Chevron U.S.A. Inc. v. NRDC , where the statute leaves a gap, the agency has discretion to fashion an interpretation that is a reasonable construction of the statute. 1 The EPA is proposing to interpret the phrases “standards of performance for any existing source” and “the implementation and enforcement of such standards of performance” to encompass and allow the various components of the portfolio approach. To the extent that a portfolio approach contains measures that are not standards of performance or do not implement or enforce such standards, the EPA is proposing to interpret section 111 as allowing state 111(d) plans to include measures that are neither standards of performance nor measures that implement or enforce those standards, provided that the measures reduce CO 2 emissions

from affected sources.

T he EPA’s proposed interpretation is based, in part, on CAA section 111(d)’s requirement that states set performance standards “for” affected sources. Although “for” could be read as meaning that the standards must apply to affected sources, [ here, “for” is also reasonably interpreted to have a more capacious meaning: standards (such as EE and RE standards) are reasonably considered to be “for” affected sources if they would have an effect on affected sources by, for example, directly

1 Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837, 842-44 (1984)causing emission reductions in affected EGU’s CO2 emissions by decreasing the amount of generation needed from affected EGUs

. Under this interpretation, and depending on the specific provisions in the state plan, renewable energy and demand-side energy efficiency requirements would be “for” fossil fuel-fired EGUs where such standards result in reduced CO 2 emissions from fossil fuel-fired EGUs, even if the standards do not apply directly to fossil fuel-fired EGUs. EPA also requests comment on another approach, whether “standards of performance for [affected sources]” is reasonably read to include the emission performance level (i.e., the state goal) on grounds that the level is “a standard for emissions” because it is in the nature of a requirement that concerns emissions and it is “for” the affected sources because it helps determine their obligations under the plan. Moreover, where the specific measure in the portfolio approach are not themselves a “standard of performance,” state plans may include measures that implement or enforce a standard of performance. For example, if the state’s plan achieves the emission performance level through rate-based emission limits applicable to the affected sources, coupled with a crediting mechanism for RE and demand-side EE measures, we propose that RE and demand-side EE measures may be included in the plan as “implement[ing]” measures because they facilitate the sources’compliance with their standards of performance. We solicit

comment on the extent to which whether measures such as RE and demand-side EE may be considered “implement[ing]” measures in state plans if they are not directly tied to emission reductions that affected sources are required to make through emission limits , and if they are requirements on entities other than the

affected sources

.

In addition, the EPA proposes to interpret CAA section 111(d)(1) to allow state plans to include components of the portfolio approach that are measures that would reduce emissions from affected sources, even if those measures are neither “standards of performance for existing sources” nor measures “for the implementation and enforcement of such standards of performance.” There is no specific language in CAA section 111(d) or elsewhere in the Act that prohibits states from including measures other than performance standards and implementation and enforcement measures, provided that they reduce emissions from affected EGUs. This interpretation is consistent with the principle of cooperative federalism, which is one of the foundational principles of the Clean Air Act and which supports providing flexibility to states to meet environmental goals (provided minimum CAA statutory requirements are met). This generalprinciple, especially when combined with the statutory directive that CAA section 111(d) regulations shall establish procedures “similar to that provided by section 110,” supports an interpretation of CAA section 111(d) that allows states sufficient flexibility in meeting the state goal set under CAA section 111(d) to include in their CAA section 111(d) plans other measures (i.e., measures that are neither performance standards nor measures that enforce or implement performance standards). The EPA solicits comment on all aspects of its proposed interpretation that states have this flexibility in selecting measures for their state plans under CAA section 111(d). An alternative interpretation of 111(d)(1) would suggest that the responsibility to achieve the state’s required emission performance level must be assigned solely to affected EGUs. As described elsewhere in this preamble, there are a number of State level CO2 programs that take this approach while still taking advantage of low cost reductions from EE and RE through the use of complementary measures. This alternative interpretation would be based on, for example: a determination that section 111(d)(1) must be read as precluding a state plan from including measures that are neither standards of performance nor measures for the implementation or enforcement of such standards; an interpretation that the state’s obligationto set performance standards “for” existing sources means that the standards must apply to affected EGUs and not to other entities; and an interpretation that measures “for the implementation and enforcement of such performance standards” do not include measures that are not intended or designed to assist affected EGUs in meeting the performance standards. EPA takes comment on whether it must adopt this alternative interpretation. If so, EPA also takes comment on whether there is a way, nonetheless, to allow states to rely on the portfolio approach to some extent and/or for some period of time. We request comment on all of the se interpretations discussed in this section generally , and as well as the following specific issues. [Placeholder for a few specific requests for comment we will add related to the porfolio approach – we are still drafting these.] Finally, notwithstanding the specific requests for comment above, the EPA solicits comment on all legal issues under CAA section 111(d)(1) with respect to what measures can be included in a state plan and what entities must be legally responsible for meeting those measures.