U.S. Environmental Protection Agency
Air and Radiation Docket and Information Center
MC-6102
401 M Street, S.W.
Washington, DC 20460
 

Finding of Significant Contribution and Rulemaking for Certain States in the Ozone Transport Assessment Group Region for Purposes of Reducing Regional Transport of Ozone; Federal Register Volume 62, November 7, 1997

Dear Sir or Madam:

The Natural Gas Supply Association (NGSA) represents integrated and independent energy companies that produce and market natural gas in the United States. The members of the NGSA also operate a significant number of facilities potentially covered by the proposed rulemaking. We appreciate this opportunity to comment on the proposal.

Natural gas is a safe, efficient and abundant domestic natural resource that is an important contributor to the health of the U.S. economy and the environment. Natural gas is a clean-burning primary fuel used in the production of steam, electricity, process heat, engine horsepower, and a variety of commercial and residential applications. Approximately 20% and 50% of domestic gas consumption is used in the production of electricity and in commercial/industrial applications, respectively.

The notice of proposed rulemaking will affect source categories that consume in excess of 40% of gas demand in the affected states. Furthermore, the rulemaking will affect the ability of consumers to value the clean and efficient attributes of natural gas and will determine (in part) the ability of primary energy markets to function efficiently and without regulatory biases for or against any fuel(s). The structure and implementation of this rulemaking will materially affect the members of the NGSA as integrated fuel providers and as operators of covered sources. Therefore, we submit the following comments for the Agency's consideration.

The NGSA supports the fundamental premise that to reduce emissions from the power generation sector, EPA should focus its efforts on regulating the emissions from the production of electricity, not on continuing to micro-manage plant operations, fuel choices, or technology choices. In this proposal, EPA has laid the foundation for this important change. The NGSA believes this foundation can and should be built upon.

SUMMARY

The NGSA supports the structure and intent of the proposal - to significantly reduce NOx emissions from the power-generation sector for the purpose of reducing regional transport. We highlight several Agency decisions from the proposal that the NGSA believes to be critical to the success and balance of the rulemaking. For the Agency's consideration, the NGSA also recommends some important modifications to the proposal that would facilitate a more viable and responsive emissions-control program for the future of the electricity generation industry.

The NGSA supports the EPA conclusion that utility NOx controls are the most cost-effective approach for reducing NOx emissions and the regional transport of ozone and its precursors.

The NGSA supports the implementation of the proposed NOx reductions from power generators through regional a cap and trade system that will enable sources and states to meet their utility NOx budget responsibilities at the lowest possible cost and with maximum flexibility.

The NGSA supports the fuel-neutral approach to setting state NOx emission budgets for the electricity generation sector. The NGSA believes that the Agency could improve this approach further. We urge the EPA to seriously consider modifying its approach to adopt an output-based policy (lb./MWH) for controlling emissions from electricity generators. However, the NGSA does not recommend the use of output-based emissions allocations for non-electric generating industrial facilities covered by the proposal.

The NGSA urges the EPA to allocate the state power-generation NOx budgets on an output-based and fuel-neutral basis. Output-based allocations to the states for the power generation sector should be calculated on the basis of actual net-generation statistics available from FERC and state public utility commissions. The NGSA urges the Agency to proceed with the output-based approach for the utility sector for the initial budget allocation. The quality of net-generation data from these sources far exceeds that of fuel-input data used in the Acid Rain SO2 allocation process and that which is contemplated for use in this proposed rule.

The NGSA urges the Agency to allocate the state power-generation budgets based on the total amount of electricity generated in the state - including all fossil- and non-fossil-fueled generators. This is necessary to directly link electricity generation (MWH) to NOx emissions (lb./MWH). All generators with capacity greater than 25 MW should be included in the emissions cap and trading system; including renewable, biomass, hydro, nuclear, and fossil-fueled generators.

The NGSA urges the EPA to work with the states to ensure that new and modified sources are accommodated in the design and implementation of the state NOx cap. Furthermore, the NGSA urges the Agency to modify the New Source Review program in order to expedite source modifications and new construction in all states adopting the cap-and-trade approach.

DISCUSSION
 

The NGSA supports the EPA conclusion that utility NOx controls are the most cost-effective approach for reducing NOx emissions and the regional transport of ozone and its precursors. Several peer-reviewed reports, with significant public input, reached similar conclusions regarding the superior cost-effectiveness of controlling NOx emissions from electricity generators versus other industrial or mobile source reductions. These include; the OTAG control options cost matrix, the NESCAUM NOx control report, and draft reports prepared for the National Regional Strategies and Base Programs work groups of the FACA sub-committee for Ozone PM and Regional Haze.

In addition, the NGSA supports the interpretation that cost-effectiveness should be a factor in considering "significant contribution."⁽¹⁾ The NGSA supports the implementation of the proposed NOx reductions from power generators through regional a cap-and-trade system that will enable sources and states to meet the utility NOx budget responsibilities at the lowest possible cost. The experience and record of the national Acid Rain cap and trade program and other state emissions trading programs provide substantial evidence that market-based programs: significantly reduce the cost of compliance, significantly increase the flexibility for sources to meet their obligations, and successfully encourage innovation and the implementation thereof.

The NGSA supports the fuel-neutral approach to setting state NOx emission budgets for the electricity generation sector. The NGSA believes that the Agency could improve the fuel-neutral approach further. We urge the EPA to seriously consider modifying its approach to adopt an output-based policy (lb./MWH) for controlling emissions from electricity generators.

By setting fuel-neutral standards, the EPA will eliminate a significant regulatory barrier to generating power with cleaner technologies. Furthermore, the Agency is correctly reducing its involvement in the fuel and technology choices made by generators in the electricity marketplace. A percentage reduction, as some have suggested, would continue the explicit subsidy of high-emissions generators. The NGSA considers the percentage-reduction proposals ill-advised, particularly in light of the inter-regional wholesale power transfers taking place today and the emergence of a competitive generation industry, with access to and impact on significantly large regions. The Agency has recognized this fact and has correctly chosen to allocate the utility budget responsibility to the states on a fuel-neutral basis. We strongly support the Agency's decision.

Uniform emissions standards across states are necessary for deriving the emission cap for electric utility generating units in order to minimize generation and emissions shifting. In deriving the NOx emissions cap for the electric utility generating sector, the EPA adopted a set of uniform emissions standards in order to calculate the NOx emissions cap for each State, i.e., 0.15 lb. NOx per MMBTU. EPA's rationale is to minimize emissions shifting that can occur if an electric generating company can shift generation capacity to another State with less stringent emission limitations. This becomes an even more significant concern if unrestricted cap-and-trade were allowed across the States. The NGSA supports the concept of cap-and-trade to allow for the kind of compliance flexibility sought by the regulated community. To make such a program work well for the regulated community and at least cost, The NGSA supports the approach undertaken by the Agency to derive the NOx emissions cap using uniform emissions standards across States.

The NGSA believes that the Agency could improve the fuel-neutral approach further. We urge the EPA to seriously consider modifying its approach to adopt an output-based policy (lb./MWH) for controlling emissions from electricity generators. This change in policy would, for the first time, directly link what we need from generating plants - electricity - to what we want less of - pollution. The direct linkage will provide clear market signals and directionally correct incentives for efficiency that will evolve with the changes in the generation industry - not lag behind as is the case today. Furthermore, output-based standards create an important interface between energy trading and emissions responsibilities by using a common currency: the megawatt-hour.

Other important benefits would be realized as well. The output-based approach should simplify the administration of the regulatory program. It will also increase the flexibility of plant operations by enabling generators to improve non-combustion segments of their plants to meet their emission responsibilities.

This recommendation is consistent with the flexibility cited in section 2. Further, our recommendation is consistent with EPA's own proposed revisions of New Source Performance standards for subpart Da boilers.⁽²⁾ The recommendation is also consistent in form and timing with the commitments of Massachusetts and New Jersey to implement the 2003 OTC utility NOx cap on an output basis. The OTC is also contemplating the broad implementation of an output-based system for the 2003 utility NOx cap and is looking to EPA for guidance.

However, the NGSA believes that it is inappropriate to control industrial facilities other than electric generation facilities using the output-based approach. In contrast to the power generation facilities that have similar and well-reported output, non-generating facilities have a significantly diverse set of outputs that are difficult to quantify, monitor, and/or evaluate. Furthermore, the non-generating industrial sources employ a vast array of technologies in combination for the production of singular or sometimes multiple outputs. The data and data quality needed to reasonably impose an output-based metric on non-generating industrial facilities simply does not exist today. There are no effective methods apparent that the Agency (or other organization) has proposed to collect and analyze such data. For these reasons, the NGSA urges the Agency to limit its application of output-based standards to electricity generating facilities (i.e. pure generators and co-generation facilities).
 

The NGSA urges the EPA to allocate the state power generation NOx budget on an output-based and fuel-neutral basis. Output-based allocations to the states for the power generation sector should be calculated on the basis of actual net-generation statistics available from FERC and state public utility commissions. Such an approach would encourage generation efficiency and lower emissions. The NGSA urges the Agency to proceed with the output-based approach for the utility sector for the initial budget allocation. The quality of net-generation data from these sources far exceeds that of fuel input data used in the Acid Rain SO2 allocation process and that which is contemplated for use in this proposed rulemaking.

Utility budgets to the states should be based on the average of the past 3 years of actual generation data - not on model projections for future generation growth. Although it may be appropriate to project future electricity demand in order to develop long-range program implementation cost estimates, it is unnecessary and problematic to make tonnage allocations to states based on anything other than actual generation data. Assumptions in the IPM model regarding future demand growth patterns, the predicted mix of generation technologies, and overall economic projections drive the outcome of the model. We urge the Agency to use actual generation data in determining the budget allocation with respect to the power generation sector.

The NGSA urges the Agency to allocate state power generation budgets based on the total amount of electricity generated in the state, including all fossil and non-fossil fueled generators. This is necessary to directly link electricity generation (MWH) to NOx emissions (lb./MWH). All generators with capacity greater than 25 MW should be included in the emissions cap-and-trading system; including renewable, biomass, hydro, nuclear, and fossil-fueled generators.

In the proposal, the cap focuses on fossil generating plants only. The NGSA believes that this is a mistake because it omits from consideration the value of all generating plants' NOx emissions - or the lack thereof. To complete the linkage between electricity and emissions, all large generators should be included in the emissions cap and trading system; including renewable, biomass, hydro, nuclear, and fossil-fueled generators. To do otherwise would continue the practice of penalizing emissions-free and low-emission generators. For the trading system to provide environmental incentives within a diverse and competitive generation market, the emissions profile of electricity must be valued across the entire generation sector, not limited to fossil-fueled units.

To ensure that the intent and benefits of the output-based federal allocation are realized, the NGSA urges the Agency to direct the States to allocate emissions credits to generating sources on an output basis. EPA should consider conditionally accepting the individual state SIP revisions if the states meet this objective. Direction should include instructions to allocate credits to all electricity generators under the cap and trading system, including; fossil generators, renewables, hydro, nuclear, and biomass. The conceptual notion of an output standard is that EPA would internalize the regulation of NOx emissions with respect to the public benefits of net-generation. To limit the control strategy to only fossil units would not only introduce disincentives for clean and efficient power generation, it would also miss some of the NOx inventory, potentially leaving a lingering gap in the power generation budget, providing incentives to generate electricity with non-fossil fueled sources with significant NOx emissions.

Allocations different from historical emissions are a reasonable part of the process. The precedent was set in the Acid Rain SO2 allocation. Output-based allocation to all sources provides market-based support for clean, efficient generation rather than reliance on command and control programs or subsidies for polluters.

The NGSA urges the EPA to work with the states to ensure that new and modified sources are accommodated in the design and implementation of the state NOx cap. The Agency should ensure that allowances for new and modified sources are adequately incorporated into the SIP development and approval process. Furthermore, the NGSA urges the Agency to modify the New Source Review program in order to expedite source modifications and new construction in all states adopting the cap and trade approach. The changes should include: the ability to trade under the cap for offsets, a generic regional control level of BACT for all generating sources subject to NSR, and a reorientation of the BACT determination for power generators and co-generators that is based on a lb./MWH. These recommendations were represented in the draft issue paper on NSR reform that was presented to the FACA sub-committee on Ozone PM and Regional Haze at the Denver FACA meeting last year by the Base Programs and National/Regional Strategies work groups. Bruce Craig (NGSA) and Gregg Schaefer (Arco Coal) were the co-chairs of the task force on NSR.

In addition, the Agency should consider eliminating other conflicting elements of the NSR program by providing policy guidance memoranda that accomplish the following goals. First, the sources subject to the cap should be specifically exempted from the requirement to obtain offsets for modifications that are made to facilities for the purpose of complying with the NOx reductions in this proposal. Second, generating facilities that re-power coal fired steam-generating units with combined cycle generation or co-generation technologies should be similarly exempted from NSR.

We appreciate the Agency's consideration of our comments and welcome the Agency's questions and comments.

Sincerely,
 

Bruce A. Craig
Director, Utility Regulation & Environmental Affairs
Natural Gas Supply Association
 

1.  The EPA solicits comment on two legal interpretations of section 110(a)(2)(D) of the Clean Air Act, concerning the weight of evidence test in determining what is "significant contribution" in that section. Section 110(a)(2)(D) provides that the state implementation plan for the upwind area must "contain adequate provisions … prohibiting … [sources] from emitting any air pollutant in amounts which will … contribute significantly to nonattainment in, or interfere with maintenance by, any other State … ."

EPA states, in part:

Each interpretation relies on the same factors (although certain factors enter into different parts of the analysis under the two interpretations). Because each relies on the same factors, there is little technical difference between the two interpretations. Each requires the same determinations as to, for example, the ambient impact of upwind emissions and the cost effectiveness of controls. …

… Under the first interpretation, EPA may determine that a relatively larger inventory of emissions contributes significantly to nonattainment (or interferes with maintenance) in light of the fact that the costs of controlling those emissions are not considered in determining significant contribution. …

… The term "prohibit" could be interpreted to require EPA, upon finding that a State's full set of emissions "contribute significantly" to nonattainment, must then require the SIP to eliminate that full set of emissions. This construction could mean that EPA must require the State to shut down all of the emission-generating activities. It is doubtful Congress would have intended this result.

For the second legal interpretation, EPA states, in part:

The EPA's second interpretation avoids this possible result by taking into account the relative cost effectiveness of the upwind and downwind controls in defining the "amounts" of emissions in each State that contribute significantly to the downwind problem. Once EPA set those "amounts" in light of its consideration of the cost factors, the SIPs for the affected States would then need to prohibit only those amounts.

The NGSA also believes that the Congress clearly could not have intended the result of the first interpretation, requiring the upwind State to shut down all of the emission-generating activities. Further, EPA must not overlook the imperative condition in section 109(d)(2)(C) that the EPA must be advised of and consider "any adverse public health, welfare, social, economic, or energy effects which may result from … strategies for attainment and maintenance of such national ambient air quality standards." For these reasons, The NGSA supports the legal interpretation that cost-effectiveness must be considered in determining "significant contribution" under section 110(a)(2)(D).

2. 62 FR 36948.