Wisconsin Public Utility Institute
Impact of New EPA Regulations on
Electric Utilities
Cross State Air Pollution Rule
January 26, 2012
Attorney Todd Palmer
Michael Best & Friedrich LLP
One South Pinckney Street, Suite 700
Madison, WI 53703
(608) 283-4432
tepalmer@michaelbest.com
www.michaelbest.com
Overview
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Background for CSAPR
Overview of Key CSPAR Provisions
Legal Basis for CSAPR
Legal Challenges
Wisconsin Issues
General Observations
2
CSAPR in Perspective
“[T]he Clean Air Act of 1970 is complex and demanding
enough to keep lawyers, engineers, and environmentalists
busy for all of their life times. It seems to me that we have
created a maze into which only the foolhardy attempt to
enter and from which only the exhausted, depleted, and
defeated emerge.”
-Senator Barry Goldwater
122 Cong. Reg. 512476 (Daily Ed. July 26, 1976)
Clean Air Act Initiatives Impacting Utilities and Boilers
Ozone
NAAQS
NOX
NAAQS
PM2.5
NAAQS
Remand
CAIR
Replacement
SO2
NAAQS
EGU
MACT
ICR II
NSR
Changes
Boiler MACT
Boiler MACT
O3 (New)
Controls
EGU MACT
CISWI MACT
EGU
MACT
ICR I
NOX NAAQS
SO2 NAAQS
Boiler GACT
2010
PM
Controls
PM NAAQS
Boiler GACT
2009
Regional
Haze II
Ozone NAAQS
CAIR
Replacement
CISWI MACT
H2 S
2011
2012
2013
H2 S
Controls
EGU
MACT
2014
2015
2016
2017
2018
NSR
Reforms
Revisited
CISWI MACT
PM (06)
Controls
Boiler
GACT
Expand CAIR to
Boilers
Tailorin
g Rule
GHG
Reporting Rule
NSR
Changes
CAIR
Proposal
H2S MACT
Proposal
GHG
Reporting
GHG
Utility
Decision
Point
Utility
MACT
July
2009
Tailoring Rule
NSR
H2 S
Final
Ozone
(New)
Control
s
MACT
PM
Ozone
Implemented
NOX
2020
CAIR
Implem
entatio
n
SIPs for
NOX &
SO2
Johnson Memo
Endangerment
Finding
April 2009
Johnson
Memo
Boiler
Ozone
SIPs
2019
PM
(ne
w)
SIP
s
Boiler MACT
H2 S
Listing
Regional
Haze
NOX/SO2
Controls
ICI and
EGU
Boiler NSPS
SO2
Haze II
Overview of CSAPR
 CSAPR is designed to facilitate attainment and
maintenance of the national ambient air quality
standards (NAAQS) for:
 Ozone
 Particulate matter with an aerodynamic diameter smaller than
2.5 microns (PM2.5).
 Limits NOx and SO2 emissions from electric
generating units (“EGUs”) generally located in the
eastern half of the United States.
 Establishes an elaborate cap and trade program.
5
The CSAPR Rules
 Aug. 2, 2010 - EPA proposed the Clean Air Transport Rule
(CATR) in response to the court’s remand of CAIR. 75 Fed.
Reg. 45,210.
 Aug. 8, 2011 - EPA publishes final rule but renames as the
Transport Rule (a/k/a “CSAPR”). 76 Fed. Reg. 48,208.
 Oct. 14, 2011 - EPA publishes a supplemental proposed rule
correcting numerous errors in the budget setting process. 76
Fed. Reg. 63,860. This “Error Correction Rule” is not yet
final.
 Dec, 27, 2011 – EPA publishes final rule expanding the
CSAPR Ozone Season obligations to five states. 76 Fed.
Reg. 80,760.

Included Wisconsin in the Ozone Season trading program.
6
CSAPR Reduces Pollution Transport
 CSAPR establishes statewide NOX and SO2
emission caps for each state subject to the rule.
 State caps are set at levels designed to eliminate
an upwind state’s “significant contribution” to a
downwind state’s ozone and PM2.5 concentrations.
Chemistry of Ozone and PM2.5 Formation
 Ozone is formed secondarily in the atmosphere by the
interaction of NOx and volatile organic compounds
(“VOCs”) in the presence of sunlight.
 Phenomena primarily occurs between May 1 through September 30
(i.e., the “Ozone Season”).
 Accordingly, CSAPR imposed NOX caps that apply to certain states
only during the Ozone Season.
 PM2.5 can be formed secondarily in the atmosphere by
the interaction of NOx and SO2.
 PM2.5 is formed throughout the year.
 Accordingly, CSAPR also imposes NOX and SO2 caps that apply
throughout the year.
States Subject to CSAPR
9
CSAPR Findings of Downwind Significant Contributions
10
CSAPR Reduces Pollution Transport
 EPA promulgated federal implementation plans
(“FIPs”) preliminarily allocating each state’s budget to
individual EGUs.
 EPA had originally proposed to allocate allowances on an
emission based approach.
 Final rule allocates allowances based on a heat-input basis.
States Can Reallocate Allowances
 States can submit a SIP that reallocates CSAPR
allowances to units within their jurisdiction.
 SIP must be “substantially identical” to FIP.
 States can use a different allocation methodology.
 Required to have notified EPA by October 17, 2011 of
intent to create a SIP for 2013 allocations.
 Twelve states filed notifications.
 Wisconsin did not submit a notification.
 Wisconsin can still submit a SIP to reallocate
allowances in future years.
 States can withdraw from trading program.
14
Key Provisions of CSAPR – State Allowance Budgets
 EPA established state allowance budgets through
a two step process.
 First, EPA identified states with:
 Modeled future emissions from all sources in the state;
 That contribute to PM2.5 and ozone concentrations in certain
downwind locations; and
 That equal or exceed 1% of the NAAQS.
15
Key Provisions of CSAPR – State Allowance Budgets
 Second, EPA set the state budgets for EGUs
based on emission reductions that could be
achieved at a certain cost threshold:
 Group 1 SO2 states - $2,300/ton
 Group 2 SO2 states - $500/ton
 NOX - $500/ton in all states
16
Key Provisions of CSAPR – States Budget Caps
 Arguably, EPA did not correlate state emission budgets
with downwind contributions to pollution.
 Control costs were principal driver of budgets.
 Past EPA rules had used cost effectiveness to limit
emission reduction requirements.
 CSAPR uses cost effectiveness to push emission
reduction requirements.
 Arguably, results in some states controlling emissions
beyond their “significant contribution” levels to
downwind pollution.
17
Key Provisions of CSAPR – Initial Applicability
 Fossil fuel fired boilers and combustion turbines
serving, at any time after January 1, 2005 or later, an
electric generator with a nameplate capacity exceeding
25 MWe and producing power for sale.
 Certain cogeneration units and solid waste incinerators are
exempt.
 States can submit a SIP to expand applicability to units with
nameplate capacity as low as 15 MWe.
18
Key Provisions of CSAPR - Trading
 Creates four trading programs:*
 SO2 annual for Group 1 states (Wisconsin). Group 1 states
have a reduced budget starting in 2014.
 SO2 annual for Group 2 states.
 NOX annual (Wisconsin).
 NOX seasonal (Wisconsin).
 All trading programs were to begin in 2012.
 Stayed by court order dated Dec. 30, 2011.
 The SO2 budgets in Group 1 states are to decrease in
2014.
 Stayed by court order dated Dec. 30, 2011.
19
*40 C.F.R. Part 97.
Trading Groups
Group 1 States
have a reduced
budget starting
in 2014.
20
Key Provisions of CSAPR – Trading (cont.)
 Sources in a Group 1 state can only use SO2
allowances issued to other units in a Group 1 State.
 Sources in a Group 2 state can only use SO2
allowances issued to other units in a Group 2 State.
 No similar restrictions on NOX annual and NOX ozone
season trading.
 CSAPR allowances can be banked.
 Cannot use allowances from other programs (e.g., NOX
SIP Call, CAIR, Title IV).
Key Provisions of CSAPR – Assurance Provisions
 Assurance provisions created in response to North
Carolina decision.
 Ensures that each state will eliminate its significant
downwind contribution and not overly rely on trading for
compliance.
 Assurance provisions limit each state’s annual
emissions to its state budget plus a “variability limit:”
 18% of a state’s budget for NOX Annual, SO2 Group 1 and SO2
Group 2 trading programs.
 21% of a state’s budget for the NOX Ozone Season trading
program.
22
Key Provisions of CSAPR – Assurance Provisions
 A state must surrender allowances if it exceeds the
trading budget plus variability limit.
 Imposed on a unit level basis.
 Units with emissions in excess of budget.
 Proportionate share of variability limit.
 EPA has proposed delaying until 2014 to ease
concerns with ability to timely install controls.
 Use allowances from any state for compliance.
 Legal challenge initiated regarding the ability of EGU
owners to trade amongst units owned in multiple
states.
23
Key Provisions of CSAPR – Monitoring
 NOX Annual and SO2 program monitors must be
certified by January 1, 2012.
 NOX Ozone Season program monitors must be
certified by May 1, 2012.
 Deadlines extended for an uncertain period due to stay
order issued by the Untied States Court of Appeals for
the District of Columbia on Dec. 30, 2011.
24
Key Provisions of CSAPR – Permitting
 No new permitting requirements imposed by CSAPR.
 Must modify Title V to include emission limitations and
other conditions required for assuring compliance with
the CSAPR program.
Key Provisions of CSAPR – Interaction with Other Programs
 CSAPR does not affect Title IV requirements.
 NOX SIP Call remains in place.
 Wisconsin is not subject to the NOX SIP Call.
 On Dec. 30, 2011, EPA published a proposed rule that
would allow CSAPR compliance to be an alternative to
case-by-case BART determinations for purposes of
reducing regional haze. 76 Fed. Reg. 82,219.
 WDNR had intended to use this approach before the court
ordered stay was issued on Dec. 30, 2011.
 WDNR now plans to asserts that CAIR compliance satisfies
BART obligations.
Legal Basis for CSAPR
 CSAPR is premised on the “Good Neighbor
Provision”* of the Clean Air Act which provides:
“Each [SIP] shall…contain adequate provisions…prohibiting …any
source or other type of emissions activity within the State from
emitting any air pollutant in amounts which will … contribute
significantly to nonattainment in, or interference by, any other State
with respect to any such national primary or secondary ambient air
quality standard.”
*42 U.S.C. § 7410(a)(2)(D)(i)(1).
27
Court Interpretations of the “Good Neighbor” Provision
 Michigan v. EPA, 213 F.3d 663 (D.C. Cir. 2000) – The
NOX SIP Call.
 North Carolina v. EPA, 451 F.3d 896 (D.C. Cir. 2008) –
The Clean Air Interstate Rule (“CAIR”).
 E.M.E. Homer v. EPA, No. 11-1303 (D.C. Cir. 2011) –
CSAPR.
28
Michigan v. EPA – The NOX SIP Call
 In Michigan v. EPA,* the United States Court of
Appeals for the D.C. Circuit substantially upheld the
first transport rule premised on the Good Neighbor
Provision - the “NOX SIP Call.”
 Upheld EPA’s reliance on emission control costs as a criteria for
defining the amount of an upwind state’s emissions that contributed
significantly to downwind nonattainment.
 Rejected challenges to EPA’s prescriptive budgeting approach.
 EPA’s inclusion of Wisconsin in the NOX SIP Call was
held to be illegal (based on the 1-hour ozone
standard).
* 213 F.3d 663 (D.C. Cir. 2000)
29
Michigan v. EPA (cont.)
 The court noted that the legality of trading
under the Good Neighbor Provision had not
been raised by the litigants:
“Of course we are able to assume the existence of
EPA's allowance trading program only because no one
has challenged its adoption.”*
* 213 F.3d at 676.
30
North Carolina v. EPA - The CAIR Rule
 In North Carolina v. EPA,* the D.C. Circuit remanded
CAIR to EPA.
 CAIR’s cap and trade program did not ensure that each upwind
state would eliminate its significant contribution to downwind
nonattainment.
 EPA failed to consider downwind attainment areas that were at
risk of slipping into nonattainment.
 Warned that one state cannot be compelled to address more
than its own significant contribution to downwind air quality
problems.
*451 F.3d 896 (D.C. Cir. 2008)
31
North Carolina v. EPA (cont.)
 The court reconciled its decisions upholding the
NOX SIP Call with the remand of CAIR:
“Despite Michigan's approval of emissions controls that
do not correlate directly with each state's relative
contribution to a specific downwind nonattainment area,
CAIR must include some assurance that it achieves
something measurable towards the goal of prohibiting
sources "within the State" from contributing to
nonattainment or interfering with maintenance in
"any other State."
*451 F.3d at 908.
32
North Carolina v. EPA (cont.)
 The court again suggests that the legality of interstate
trading under the Good Neighbor Provision had not
been raised:
“North Carolina contests the lack of reasonable
measures in CAIR to assure that upwind states will abate their
unlawful emissions as required by section 110(a)(2)(D)(i)(I),
but does not submit that any trading is per se unlawful.”*
*451 F.3d at 906.
33
Legal Challenges to CSAPR – E.M.E. Homer v. EPA
 Challenges filed in the United States Court of Appeals
for the District of Columbia.
 45 legal challenges.
 Approximately 90 industry and state petitioners.
 Texas interests have been leading the process.
 Wisconsin interests filing challenges:
 State of Wisconsin
 Wisconsin Paper Counsel, Wisconsin Manufacturers and
Commerce, Wisconsin Cast Metals Association, and Midwest
Food Processors.
 WPS
 Dairyland Power Cooperative
 WE Energies (very limited issue)
Stay of CSAPR
 On December 30, 2011 the United States Court of
Appeals for the D.C. Cir. issued an order that:
 Stayed CSAPR.
 Reinstated CAIR until a final decision can be issued on
CSAPR.
 Post-2011 vintage CAIR credits had been removed
from the EPA’s Allowance Management System (AMS)
as of October 14, 2011.
 EPA restored 2012 credits as of January 9, 2012.
 Havoc on CAIR/CSAPR allowance market.
 Uncertain effect on CSAPR trades for 2012 vintage allowances.
Stay of CSAPR (cont.)
 Doubtful that EPA will restore 2013 and beyond CAIR
credits expecting a 2012 court ruling on the merits.
 Stay does not necessarily mean that the court will
remand/vacate CSAPR.
 The NOx SIP Call was stayed but later upheld on the merits.
Briefing Schedule
 Jan. 18 – Court order on the briefing schedule.
 Feb. 9 – Petitioners Joint Brief (28,000 words)
 Feb. 14 – Intervenors and Amicus Curiae Joint Brief (7,000
words)
 Mar. 1 – EPA Brief (28,000 words)
 Mar. 6 – Intervenors supporting EPA Joint Brief (7,000
words)
 Mar. 12 – Respondents Joint Reply Brief (14,000 words)
 Apr. 13 – Oral Argument
Briefing Schedule
 Wisconsin interests were denied authorization to file a
separate brief on state specific issues.
 Need to fight for pages in Petitioners Joint Brief
 Can request extended briefing, but court ordered that
such a request must be accompanied by a motion to lift
the stay.
Legal Challenges – Significant Contribution
 EPA failed to properly define “significant contribution”
and “interference with maintenance” consistent with the
North Carolina decision.
 EPA’s use of a uniform cost threshold to require states to
reduce emissions below the 1% of a NAAQS de minimis
contribution threshold.
 Placing the principal burden on sources in upwind states for
achieving and maintaining compliance with NAAQS.
39
Legal Challenges – Significant Contribution
 EPA failed to distinguish between “contribute
significantly” and “interfere with maintenance.”
 North Carolina decision required each to have independent
meaning.
 Yet, EPA uses the same 1% of a NAAQS threshold for each.
40
Legal Challenges – Reliance on Modeling
 EPA improperly relied on modeled projections of future
NAAQS violations to identify downwind areas that must
be addressed by CSAPR, without regard to actual
monitored air quality.
 Inclusion of states contributing only to areas already in
attainment or projected to reach attainment without CSAPR.
 EPA’s modeling assumptions failed to incorporate emission
control requirments that are already in place.
41
Legal Challenges – Budgeting Method
 Challenges to method for creating budgets
(independent of how EPA defined “significant
contribution”).
 No cost threshold below $500/ton.
 Improperly reducing budgets below what is required under air
quality and cost based budget setting methods.
 EPA ignoring costs of state mandated controls.
 Failure to cumulatively assess costs of controls of other EPA
rules and consider costs of reliability degradation.
 Overstatement of health benefits.
42
Legal Challenges – Implementation and Timing
 Compliance dates are not practicable and achievable.
 Compliance dates do not account for reliability impacts.
 Particular states were improperly included in the Group
1 Category (requiring further reductions of SO2 after
2014).
 EPA’s failure to provide adequate notice of its change
in models and allocation methodology.
43
Legal Challenges – State Issues
 EPA improperly issued states a federal implementation
plan (“FIP”) defining EGU emission allocations instead
of allowing states to first develop their own SIP.
 EPA must first make a finding that a state has failed to submit a
SIP that adequately addresses “significant contribution” to
downwind states.
 States need to be given adequate time to develop a SIP in the
first instance.
Legal Challenges – State Issues
 EPA improperly refused to consider the costs
associated with the availability and suitability of lower
emitting fuels and biomass.
 Good Neighbor Provision does not authorize emission
reductions in upwind states beyond what is required to
mitigate the “significant contribution” to downwind
pollution levels.
 The cost effectiveness of controls cannot drive reductions
beyond this threshold.
Wisconsin Specific Issues
 Outlined in two State of Wisconsin filings:
 Oct. 24, 2011 - Petition for Reconsideration (Attachment 3).
 Nov. 28, 2011 – Comments on proposed technical revisions to
CSAPR (Attachment 4).
 EPA failed to include all CSAPR units in the Wisconsin
allowance budgets.
 MPU
 Bayfront
 At a minimum, Wisconsin’s “significant contribution” to
downwind pollution is mitigated at the SO2 Group 2 cost
effectiveness threshold of $500/ton.
 Wisconsin should be in Group 2.
 Alternatively, Wisconsin should not have an SO2 cap.
Wisconsin Specific Issues
 EPA significantly over-estimated the emission
baselines of certain units which were in turn used to
include Wisconsin in the annual SO2 program.
 EPA significantly under-estimated the future emissions
of units which were in turn used to allocate allowances
to Wisconsin EGUs.
 8,600 ton SO2 budget shortfall in 2012 and 23,000 ton shortfall
in 2014.
 Approximately a 2,500 ton shortfall for NOX.
47
Wisconsin Specific Issues
 EPA underestimated the time require for installing
controls in Wisconsin.
 Regulatory approval process
 Construction
 Shakedown operation
 EPA failed to consider the cost and feasibility
constraints of switching Wisconsin EGUs to ultra-low
sulfur coals.
 WE Energies issue associated with the assurance
penalty provisions and owning EGUs in separate
states.
48
Observations – Preliminary Allowance Costs
 CSAPR allowance costs have been volatile.
 As of Sept. 2011, the bid-offer spread:
 Group 1 SO2 Vintage 2012 - $2,000 to $3,000/ton.
 Group 2 SO2 Vintage 2012 - $2,000 to $4,000/ton.
 NOX Vintage 2012 - $3,250 to $4,250/ton.
 Anywhere from 2x to 6x EPA predictions.
Observations
 As NAAQS continue to decrease, the need to address
interstate transport will increase.
 State will not be able to meet NAAQS by just regulating
sources under their jurisdiction.
 EPA will need to take a more active role in controlling
emissions within each state.
 This will effectively remove state sovereignty to decide
how to control emissions within their jurisdiction.
Observations
 The Clean Air Act has various tools for regulating
interstate pollution transport.
 PSD and NSR single source dispersion modeling.
 Section 126 petition process whereby a state can petition EPA
to enforce the Good Neighbor Provision against a single source
or a grouping of sources in another state.
 Yet, EPA is principally relying on an aggressive
interpretation of the Good Neighbor Provision to
unilaterally impose emission controls.
 Arguable authority for elaborate cap and trade programs.
 Allows for more meaningful and certain planning.
 Allows for more parity.
51
Will CSAPR Become Obsolete Due to Source Specific
Modeling?
 On January 4, 2012, EPA granted a Sierra Club
petition for rulemaking which will require modeling of
PSD and NSR permits for the secondary formation of
PM2.5 and ozone.
 This will effectively result in unit-by-unit determinations and
mitigation of downwind impacts on PM2.5 and ozone
concentrations.
 An EGU could be meeting its CSAPR obligations, but still be
required to reduce NOX and SO2 to a greater extent.
 If an EGU passes source specific modeling as part of a
permitting event, should the source still be subject to CSAPR.
Will CSAPR Become Obsolete Due to State Filed Section 126
Petitions?
 EPA has been more aggressive in granting section 126
petitions.
 Oct. 31, 2011 – EPA issues the first “sole source”
section 126 petition filed by New Jersey against a
power plant in Pennsylvania.
 1999 – EPA granted section 126 petitions filed by
Connecticut, New York, Massachusetts and
Pennsylvania against 392 facilities in 12 other states.
Impact of EPA Enforcement on CSAPR
 New Source Review settlement template requires
EGUs to surrender excess allowances and in some
cases cap emissions. See, TVA Settlement (April
2011).
 Takes CSAPR allowances out of the trading program,
possibly driving up allowance prices and indirectly
curtailing solid fossil fuel generation.
 Emission caps result in derating of units unless fuel
switch or new technology can be voluntarily installed to
reduce NOX and SO2 emissions.
Coal Plant Retirements
Bernstein
Research
MJ Bradley
Charles River
Associates
CSAPR + MACT + Others
Credit Suisse
Brattle Group
CSAPR + MACT
ICF/IEE
NERC
0
20
40
60
80
Estimated GW of Retired Coal
55
Need Will Arise for New Generation Assets
 As regulations and enforcement settlements force plant
shutdowns and de-ratings, the lost capacity will need to
be rebuilt.
 Coal replacement/expansions are extremely difficult to
permit at this time.
 Although the door will open for possible renewable
power generation, natural gas prices have made the
fuel very attractive.