[Federal Register: April 21, 2009 (Volume 74, Number 75)]
[Rules and Regulations]
[Page 18127-18132]
[DOCID:fr21ap09-8]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 284

[Docket No. RM08-1-003, et al.; Order No. 712-B]

Promotion of a More Efficient Capacity Release Market

Issued April 16, 2009.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Final rule; order on rehearing and clarification and
terminating dockets.

-----------------------------------------------------------------------

SUMMARY: The Federal Energy Regulatory Commission (Commission) is
issuing an order addressing the requests for rehearing and
clarification of Order No. 712-A [73 FR 72692, December 1, 2008]. Order
No. 712 [73 FR 37058, June 30, 2008], as modified by Order No. 712-A,
revised the Commission's regulations governing interstate natural gas
pipelines to reflect changes in the market for short-term
transportation services on pipelines and to improve the efficiency of
the Commission's capacity release program. The orders lifted the
maximum rate ceiling on secondary capacity releases of one year or less
provided that such releases take effect within a year of the date that
a pipeline is notified of the release. The revised regulations
facilitated asset management arrangements (AMA) by relaxing the
Commission's prohibition on tying and on its bidding requirements for
certain capacity releases. The Commission further clarified in Order
No. 712 that its prohibition on tying does not apply to conditions
associated with gas inventory held in storage for releases of firm
storage capacity. Finally, the Commission waived its prohibition on
tying and bidding requirements for capacity releases made as part of
state-approved retail access programs.
    This Order denies rehearing and grants clarification in part and
denies clarification in part of Order No. 712-A. This order also
terminates Docket Nos. RM06-21-000 and RM07-4-000.

DATES: Effective Date: This order denying rehearing of the final rule
will become effective May 21, 2009.

FOR FURTHER INFORMATION CONTACT:

William Murrell, Office of Energy Market Regulation, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426,
<EMAIL_ADDRESS>(202) 502-8703.
Robert McLean, Office of General Counsel, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426,
<EMAIL_ADDRESS>(202) 502-8156.
David Maranville, Office of the General Counsel, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426,
<EMAIL_ADDRESS>(202) 502-6351.

SUPPLEMENTARY INFORMATION:

Order on Rehearing and Clarification and Terminating Dockets

    1. On November 21, 2008, the Commission issued Order No. 712-A in
which it denied rehearing and granted clarification in part of Order
No. 712.\1\ Order No. 712, as modified by Order No. 712-A, revised the
Commission's regulations governing interstate natural gas pipelines to
reflect changes in the market for short-term transportation services on
pipelines and to improve the efficiency of the Commission's capacity
release program. The orders lifted the maximum rate ceiling on
secondary capacity releases of one year or less provided that such
releases take effect within a year of the date that the pipeline is
notified of the release. The revised regulations facilitated asset
management arrangements (AMA) by relaxing the Commission's prohibition
on tying and on its bidding requirements for certain capacity releases.
The Commission further clarified in Order No. 712 that its prohibition
on tying does not apply to conditions associated with gas inventory
held in storage for releases of firm storage capacity. Finally, the
Commission waived its prohibition on tying and bidding requirements for
capacity releases made as part of state-approved retail access
programs. This Order denies rehearing and grants clarification in part
and denies clarification in part of Order No. 712-A, and terminates
Docket Nos. RM06-21-000 and RM07-4-000.
---------------------------------------------------------------------------

    \1\ Promotion of a More Efficient Capacity Release Market, 73 FR
37058 (June 30, 2008), FERC Statutes and Regulations ] 31,271
(2008), (Order No. 712), order on reh'g, Order No. 712-A, 73 FR
72692 (December 1, 2008), FERC Stats. & Regs. ] 31,284 (2008) (Order
No. 712).
---------------------------------------------------------------------------

    2. Several parties seek clarification and/or rehearing of Order No.
712-A. The Marketer Petitioners seek clarification concerning an asset
manager's delivery obligation when an AMA includes released capacity on
upstream and downstream pipelines.\2\ The National Grid Gas Delivery
Companies \3\ request clarification, and National Fuel Gas Distribution
Corporation (National Fuel) requests clarification, rehearing, or a
limited waiver, concerning what releases qualify as releases to a
marketer participating in a state-regulated retail access program.
Consolidated Edison of New York Inc., (Con Ed) and Orange and Rockland
Utilities, Inc., (O&R) (filing collectively), Energy America, New York
State Electric and Gas Corporation (NYSEG) and Rochester Gas and
Electric Corporation (RG&E) (filing collectively) seek clarification of
Order No. 712-A or alternatively request waivers on the same issue
raised by National Grid and National Fuel. The New York State Energy
Marketers Coalition (NYSEMC) moved to intervene out of time and filed
comments opposing the requests for clarification and waivers sought by
National Fuel others on the retail access issue. The Commission denies
rehearing of Order No. 712-A and grants in part, and denies in part,
clarification of Order No. 712-A. The clarification granted in this
order moots the requests for waivers.
---------------------------------------------------------------------------

    \2\ For purposes of this request for clarification, the Marketer
Petitioners include Shell Energy NorthAmerica (US), L.P.,
ConocoPhillips Company, Chevron U.S.A. Inc., Constellation Energy
Commodities Group, Inc., Tenaska Marketing Ventures, Merrill Lynch
Commodities, Inc., Nexen Marketing U.S.A. Inc., UBS Energy LLC, and
Citigroup Energy Inc.
    \3\ The National Grid Gas Delivery Companies comprise The
Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery NY; KeySpan
Gas East Corporation d/b/a KeySpan Energy Delivery LI; Boston Gas
Company, Colonial Gas Company, EnergyNorth Natural Gas, Inc., and
Essex Gas Company, collectively d/b/a KeySpan Energy Delivery NE;
Niagara Mohawk Power Corporation d/b/a National Grid; and The
Narragansett Electric Company d/b/a National Grid, all subsidiaries
of National Grid USA, (collectively National Grid).
---------------------------------------------------------------------------

Upstream Pipeline Delivery Obligations

Request for Clarification

    3. In Order No. 712, the Commission exempted capacity releases that
were meant to implement AMAs from the Commission's prohibition against
tying and its bidding requirements. As part of the definition of AMAs
that would qualify for these exemptions, the Commission determined that
there must be a significant delivery or purchase obligation on the
replacement shipper to deliver gas to, or purchase gas from, the
releasing shipper in order to distinguish AMAs from standard capacity
releases.\4\ Accordingly, the Commission required that the release
contain a condition that the ``releasing shipper may call upon the
replacement shipper to deliver to, or purchase, from, the releasing
shipper a volume of gas up to 100 percent of the daily contract demand
of the released transportation or storage capacity.

* * *'' \5\ That obligation must apply for the greater of five months
or five/twelfths of the term of the release.\6\ In Order No. 712-A, the
Commission also clarified the delivery/purchase obligation portion of
the AMA definition in several respects not at issue here.\7\
---------------------------------------------------------------------------

    \4\ Order No. 712 at P 144-153.
    \5\ 18 CFR 284.8(h)(3), as adopted by Order No. 712-A.
    \6\ Id.
    \7\ See Order No. 712-A at P 79-82.
---------------------------------------------------------------------------

    4. In addition, the Commission denied a request by the Public
Service Company of North Carolina, South Carolina Electric and Gas
Company and Scana Energy Marketing, Inc., (collectively Scana) to
clarify that in a situation where parties include released capacity on
both an upstream and downstream pipeline in an AMA, the asset manager's
delivery obligation only applies to the released capacity on the
downstream pipeline that directly connects to the releasing shipper's
delivery point.\8\ The Commission explained that if the delivery
obligation did not apply to the full amount of the upstream released
capacity, the releasing shipper could include capacity in the upstream
release that it does not need for its own legitimate business purposes
during the term of the release. The Commission concluded that while
Scana was correct that the delivery/purchase obligation is not
cumulative of the capacity in a released chain of contracts that
constitute a single capacity path, the asset manager must have a
delivery/purchase obligation up to the contract demand of each specific
contract released to it.\9\
---------------------------------------------------------------------------

    \8\ Id. P 86-87.
    \9\ Id. P 87.
---------------------------------------------------------------------------

    5. The Commission also denied Scana's and BP Energy Company's (BP)
request for clarification that where released storage and
transportation capacity are combined in an AMA, the delivery/purchase
obligations associated with the release only apply to the
transportation contract. The Commission ruled again that while the
delivery/purchase obligation is not cumulative of the released
transportation and storage capacity, to qualify for the exemptions
provided for AMAs an asset manager must have the necessary purchase/
delivery obligation for each separate contract for released
capacity.\10\
---------------------------------------------------------------------------

    \10\ Id. P 88.
---------------------------------------------------------------------------

    6. The Marketer Petitioners seek clarification of both these
rulings. Marketer Petitioners argue that while the rulings reflect the
Commission's intent to confirm that the releases at issue are
associated with bona fide AMAs, they will lead to uncertainty about the
ultimate contractual delivery/purchase obligation at any specific
delivery or receipt points under an AMA contract. For example, they
state that a releasing shipper may have sequential transportation
contracts on interconnected pipelines to bring gas to a delivery point
on the downstream pipeline at the releasing shipper's city gate. For
various reasons, however, the contract demands of the contracts on the
upstream pipeline(s) may exceed the contract demand on the downstream
pipeline that directly connects to the releasing shipper's city gate.
Marketer Petitioners assert that this could occur as a result of the
need for a shipper to provide fuel and lost and unaccounted for gas
(LAUF) to each transporting pipeline in the chain.\11\ While the
Marketer Petitioners recognize that Order No. 712-A stated that the
asset manager's delivery obligation to the releasing shipper's city
gate is not cumulative of the contract demands under each contract,
they argue that Order No. 712-A could be read to suggest that the asset
manager has the obligation to deliver to the releasing shipper's city
gate a volume equal to the full amount of the contract demand on the
upstream pipeline, even though that volume exceeds the contract demand
on the downstream pipeline. They contend that such a result appears
inconsistent with Order No. 712's intent to promote efficient AMAs.\12\
---------------------------------------------------------------------------

    \11\ Marketer Petitioners' clarification request at 3.
    \12\ Id. at 4.
---------------------------------------------------------------------------

    7. The Marketer Petitioners claim the same may be true where a
releasing shipper has options for both (1) long haul transportation
from the production area and (2) short haul transportation from market
area storage that form a ``network'' whereby the releasing shipper can
serve its needs at its city gate delivery point. According to the
Marketer Petitioners, this may result in optional capacity paths for an
asset manager to transport gas, or withdraw gas from storage, to meet
the releasing shipper's city gate delivery point obligations. Marketer
Petitioners assert that requiring the asset manager's delivery/purchase
obligation to apply to the full contract demand under each capacity
release in the transportation chain creates significant uncertainty as
to the delivery obligation at the delivery points on the upstream
pipelines and on the downstream pipeline at the releasing shipper's
city gate.
    8. The Marketer Petitioners posit an example in their pleading
where the releasing shipper has capacity on upstream Pipelines A and B,
and on downstream Pipeline C. Pipeline C connects with the releasing
shipper's city gate. Both Pipelines A and B interconnect with Pipeline
C at Point Y, which is the releasing shipper's receipt point on
Pipeline C. (See Figure 1 below).\13\ The releasing shipper has 1,000
Dth per day of short haul capacity on Pipeline A from market area
storage to Point Y. The releasing shipper has 5,000 Dth per day of long
haul capacity on Pipeline B from the production area to Point Y. The
releasing shipper also has 5,000 Dth per day of capacity on Pipeline C
from Point Y to its city gate. Thus the releasing shipper has the
ability to transport 5,000 Dth from the production area over Pipelines
B and C to its city gate. The releasing shipper also has the option to
move 1,000 Dth per day from market area storage over Pipelines A and C
to its city gate, if it is unable to obtain the full 5,000 Dth/day to
fill pipeline B or because storage gas may be more economical on some
days.
---------------------------------------------------------------------------

    \13\ Id. The example in Figure 1 substantially replicates the
example filed by the Marketer Petitioners except that they included
storage withdrawal right figures that we omit here.

---------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] TR21AP09.001

    9. The Marketer Petitioners state it is unclear in this situation
if the asset manager's delivery obligation at the releasing shipper's
city gate is equal to (1) the releasing shipper's 5,000 Dth contract
demand on Pipeline C, or (2) the releasing shipper's 6,000 Dth total of
the releasing shipper's 1,000 Dth contract demand on Pipeline A and
5,000 Dth contract demand on Pipeline B. Marketer Petitioners also
question whether, if the delivery obligation is only 5,000 Dth at the
city gate, the asset manager nevertheless has a 6,000 Dth delivery
obligation at Point Y. Marketer Petitioners state that, without
certainty as to the Commission's view of the location and amount of the
required delivery obligation, it is unclear if all of the
transportation and storage capacity is eligible for inclusion in an
AMA.
    10. Marketer Petitioners thus request clarification that the ruling
that an asset manager's delivery/purchase obligation must apply to the
full contract demand under each capacity release in a transportation
chain is not intended to alter that asset manager's obligation at a
particular point, or in other words, that it does not add additional
delivery points to an AMA. Specifically, in the example described
above, they request clarification that, while the asset manager may
have a delivery obligation associated with the releases on Pipelines A,
B, and C, of 1,000 Dth/day, 5,000 Dth/day, and 5,000 Dth per day,
respectively, that would not alter the asset manager's contractual
5,000 Dth/day delivery obligation to the releasing shipper at its city
gate. They claim that such a clarification would affirm the
Commission's holding that it does not intend the delivery/purchase
obligation under an AMA to be cumulative of the total contract demands
associated with the capacity in a released chain and make clear that
the Commission did not intend to allow AMA customers to use the
Commission's rulings to enlarge their delivery/purchase entitlements at
a particular receipt or delivery point under an AMA.
    11. The Marketer Petitioners note that any concern that the
Commission may have about ``unneeded'' capacity being included in an
AMA could be addressed by the Commission clarifying that when an AMA
encompasses capacity released on more than one pipeline, the posting
should indicate that the AMA also involves capacity on other
pipeline(s) and should be posted by all the pipelines involved. They
assert that such a posting requirement would illuminate the totality of
the release capacity to be included in the AMA.

Commission Determination

    12. The Commission grants clarification in part and denies
clarification in part. As we stated in Order No. 712-A, the asset
manager's delivery/purchase obligation must apply to the full contract
demand under each capacity release in the transportation chain.\14\ In
other words, each release to an asset manager is a separate capacity
release that must have its own delivery/purchase obligation in order to
qualify as an AMA. As we also noted in Order No. 712-A, in the
situation where there is a capacity chain on several pipelines, the
delivery purchase obligation need not be cumulative to the extent that
gas delivered from the upstream pipeline to the downstream pipeline can
be transported using the released capacity on the downstream pipeline.
---------------------------------------------------------------------------

    \14\ Order No. 712-A at P 87.
---------------------------------------------------------------------------

    13. The Commission grants clarification that the asset manager's
delivery obligation at the releasing shipper's city gate need only be
up to the contract demand of the released capacity on the downstream
pipeline that interconnects directly with the releasing shipper's city
gate. The fact the releasing shipper may have also released to the
asset manager capacity on an upstream pipeline or pipelines with total
contract demand exceeding the released capacity on the downstream
pipeline does not increase the asset manager's required delivery
obligation at the releasing shipper's city gate on the downstream
pipeline. Thus, in the example set forth in Figure 1, the asset
manager's delivery obligation at the releasing shipper's city gate
would be equal to the 5,000 Dth/day released capacity on Pipeline C,
despite the fact the released capacity on Pipelines A and B totals
6,000 Dth/day.
    14. While a releasing shipper may release capacity to an asset
manager on an upstream pipeline(s) that exceeds the released downstream
capacity, the asset manager must have a delivery obligation

under each such upstream capacity release up to the contract demand of
that release. In the Figure 1 example, the asset manager's delivery
obligations on Pipelines A and B must be 1,000 Dth/day and 5,000 Dth/
day, respectively. Thus, to the extent the Marketer Petitioners seek
clarification that an asset manager's delivery obligation at delivery
points on upstream pipeline(s) cannot exceed its delivery obligation at
the city gate delivery point on the downstream pipeline, the Commission
denies that request. As the Commission held in Order No. 712-A, if the
asset manager's delivery obligation on the upstream pipeline did not
apply to the full amount of upstream released capacity, the releasing
shipper could include capacity in the upstream release that it does not
need for its own legitimate business purposes during the term of the
release.
    15. In such a situation, however, if the releasing shipper requires
the asset manager to deliver volumes on the upstream pipelines that
exceed the contract demand on the downstream pipeline, the releasing
shipper would be required to take delivery of the excess volumes at
points on the upstream pipeline or pipelines, and would also be
responsible for transporting that excess gas away from those points. In
the example in Figure 1, for instance, the releasing shipper could
require the asset manager to deliver 6,000 Dth to Point Y. That
releasing shipper, however, would have to take delivery of 1,000 Dth of
that gas at Point Y and make its own additional arrangements to have
the gas transported away from Point Y, since this quantity exceeds the
asset manager's released capacity rights on the downstream pipeline.
The releasing shipper could not require the asset manager to transport
more than 5,000 Dth/day on Pipeline C from Point Y to the city gate.
The asset manager could only be held responsible for transporting to
the releasing shipper's city gate a volume up to the contract demand on
the downstream pipeline.\15\
---------------------------------------------------------------------------

    \15\ The same analysis applies if the releasing shipper reserves
storage withdrawal rights in excess of its contract demand on the
interconnecting pipeline. See Marketer Petitioners' request for
clarification at 5.
---------------------------------------------------------------------------

    16. The Commission finds that this rule is straightforward, non-
discriminatory and the most reasonable to administer for both parties
and the Commission. It is also consistent with the Commission's
clarification in Order No. 712-A that the delivery obligations for AMAs
associated with a chain of upstream and downstream pipelines and
contracts are not cumulative. Further, it minimizes the potential for
parties to include unneeded upstream capacity in an AMA.\16\
---------------------------------------------------------------------------

    \16\ The Commission's additional explanation of its rule should
remove any uncertainty the Marketer Petitioners have concerning the
need to reflect fuel and LAUF in the contracts on each pipeline in
the chain. An asset manager may include the extra volumes necessary
to cover fuel retention and LAUF charges at each interconnecting
point in the pipeline chain. The customer may not, however, require
that the asset manager deliver the cumulative volume to the most
downstream delivery point. (See example on page 3 of the Marketer
Petitioners' clarification request).
---------------------------------------------------------------------------

Retail Access Programs

Requests for Clarification and/or Waivers

    17. In Order No. 712, as affirmed in Order No. 712-A, the
Commission determined that capacity releases by local distribution
companies (LDC) to implement state-approved retail access programs
should be granted the same blanket exemptions from the prohibition
against tying and the bidding requirements as capacity releases made in
the AMA context.\17\ In order to qualify for the exemptions, the
Commission determined that the released capacity must be used by the
replacement shipper to provide the gas supply requirements of retail
consumers pursuant to a retail access program approved by the state
agency with jurisdiction over the LDC that provides delivery service to
such retail consumers.\18\ In Order No. 712-A, the Commission clarified
that a marketer participating in a state-approved retail choice program
can re-release its capacity to an asset manager that will fulfill the
marketer's obligation under the state-approved program.\19\ The
Commission declined to grant a request for clarification, however, that
a wholesale supplier who obtains capacity directly from an LDC as part
of an unbundling program but who is not a marketer under the program
nonetheless qualifies for the tying and bidding exemptions.\20\ The
Commission determined that such a clarification was not appropriate for
this generic rulemaking proceeding because BP was requesting the
Commission to approve a specific deal structure that does not meet the
criteria under which the rule generally grants exemptions. The
Commission noted that BP or any other parties are free to file
separately on a case-by-case basis for approval of individual
arrangements that it believes may merit a waiver of the Commission's
bidding and tying strictures.\21\
---------------------------------------------------------------------------

    \17\ Order No. 712 at P 199; Order No. 712-A at P 115.
    \18\ Order No. 712 at P. 200; Order No. 712-A at P 115.
    \19\ Order No. 712-A at P 118.
    \20\ Id. P 121-122.
    \21\ Id. P 122.
---------------------------------------------------------------------------

    18. Several parties seek clarification of that ruling. National
Grid seeks clarification that an LDC releasing capacity as part of a
state-approved retail access program may release directly to a
marketer's asset manager as long as the asset manager has an identical
obligation to supply gas to the marketer as the marketer's obligation
to supply gas to the releasing LDC. National Grid asserts that certain
marketers that participate in its state-approved retail access program
are requesting that they be allowed to release directly to their asset
manager so that the asset manager, not the marketer, will be the one
who has to meet the creditworthiness standards of the pipeline.
National Grid asserts that cutting out the middle man will enable
marketers to avoid having to post scarce credit assurances.
    19. National Grid also requests clarification that an LDC that
releases to an asset manager can require the asset manager to release
capacity to marketers serving under the retail choice program and that
such a release will qualify for the exemptions. National Grid asserts
that the need for this clarification arises from the fact that the
number of customers participating in an LDC's retail choice program may
change from time to time and thus the LDC may release to an asset
manager only to find out that some sales customers have changed to
transportation only service. National Grid claims this change
necessitates a release by the LDC to the converting customers'
marketers. National Grid stated that the requested clarification will
allow for more efficient releases because the LDC could direct the
asset manager to effectuate those new releases.
    20. National Fuel seeks clarification that the prohibition against
tying and the bidding requirements do not apply to releases by an LDC
to a marketer when the marketer is acting as an agent of a retail
access marketer pursuant to a state-mandated retail access program. It
asserts the situation described by BP in BP's request for clarification
of Order No. 712--where a wholesale entity receives releases as part of
a state-approved program, for the purpose of selling gas to another
retail marketer that makes sales directly to retail customers--is not a
unique situation and should be the subject of the general rulemaking
proceeding. National Fuel asserts that not all marketers participating
in state-approved retail unbundling programs sell directly to

consumers. They claim that in New York, for example, the state choice
program allows both the release of capacity to retail marketers selling
directly to consumers and for the release of capacity to marketers that
are contractually entitled to act as agents for the retail marketers
selling to consumers.\22\ National Fuel explains that the latter
arrangements may occur because retail marketers may have difficulty
acquiring all the releases necessary to meet their obligations under
the program, often due to credit issues. National Fuel states that in
the agency situation the retail marketer will enter into an agency
agreement through which a second marketer becomes the first marketer's
agent for purposes of acquiring the released capacity from the LDC. The
agent marketer agrees to acquire the necessary capacity from the LDC
and to sell gas to the retail marketer at the city gate for the
purposes of fulfilling the retail marker's obligations under the
program. According to National Fuel, this sort of arrangement does not
raise the same concerns as that described by BP because of the
``agency'' relationship. National Fuel asserts that if the Commission
does not grant clarification of the regulation, then it should amend
the regulations to include both retail marketers in state-approved
programs and their agents.
---------------------------------------------------------------------------

    \22\ National Fuel request for clarification at 7.
---------------------------------------------------------------------------

    21. Alternatively, National Fuel seeks a limited waiver for the
situation described above. It states the waiver would only apply under
the following circumstances: (1) Releases to these marketers would
occur only when there is a valid, written agency agreement between the
retail marketer and the marketer receiving releases of capacity,
requiring the marketer to act as agent for the retail marketer and
obligating the agent to meet the retail marketer's gas supply needs;
and (2) the marketer acting as agent must do so as part of a state-
approved customer choice program and under published state-approved
tariffs and/or procedures. National Fuel argues that the result would
be fully consistent with both the goal of the exemptions for state
choice programs and the non-discriminatory and efficiency goals of
Order No. 712.
    22. The New York State Public Service Commission (NYPSC) filed in
support of both National Grid's and National Fuel's clarification
requests. The NYPSC asserts that Order No. 712-A should be clarified to
avoid ``hindering'' state retail access programs. It claims that the
releases at issue are made to effect service to the very same customers
for whose benefit the pipeline capacity was purchased by the releasing
LDC and that without the exemptions provided by Order No. 712 it would
be more difficult for marketers to provide service to their end use
customers. The NYPSC further argues that requiring the issue to be
resolved on a case by case basis does not foster the Commission's goals
and harms state retail access programs.
    23. Other LDCs located in New York also filed in support of
National Grid's and National Fuel's requests. Con Ed and O&R assert
that a release to a ``wholesale marketer acting as agent for a retail
marketer participating in a state-approved retail choice program is
equivalent to a capacity release directly to a retail marketer.'' \23\
They assert that based on the principles of agency law the principal
and agent are equally bound by the contract made by an agent acting
within the scope of an agency relationship, and thus a wholesale
marketer that obtains capacity as a replacement shipper, when acting as
agent for the retail marketer, is obtaining capacity for the direct
benefit of the retail marketer and state retail access program. They
also support the arguments regarding the potential creditworthiness
difficulties of the retail choice marketers. Con Ed and O&R seek
company specific waivers in the event the Commission denies the
clarification requests.
---------------------------------------------------------------------------

    \23\ Con Ed/O&R support for clarification at 4.
---------------------------------------------------------------------------

    24. NYSEG and RG&E lend similar support to the clarification
requests claiming that state retail access releases involve storage as
well as transportation and that without the ability to use an agent to
obtain the capacity and serve the retail load many retail marketers may
not be able to participate in the program. They also seek a waiver in
the event the Commission denies clarification.
    25. Energy America filed support for the clarification requests
stating that it has acted as agent for Direct Energy Services and other
retail marketers with respect to sourcing needs and managing
transportation and storage capacity. Energy America states that as
agent, it signs an agency agreement with the LDC making clear that it
is acting as an agent to provide service to the retail marketer under
the retail access program. The LDC then releases capacity to the agent
who transports and sells gas to the retail marketer at the city gate.
Energy America asserts that without a clarification or waiver, retail
marketers may be unable to participate in retail access programs.
    26. The NYSEMC filed comments requesting that the Commission reject
National Grid's clarification. It asserts that National Grid seeks a
blanket exemption for all marketers acting as agents in retail choice
programs, not a company specific waiver as suggested in Order No. 712-
A. Further, NYSEMC takes issue with the claim that the Commission
should grant the clarification because some marketers may not be able
to meet the financial or technical requirements of interstate
pipelines. It asserts that lack of financial capability is not a reason
to expand the scope of exemptions granted by Order No. 712.
    27. NYSEMC argues that granting a broad exemption as requested by
the New York utilities that also operate in Pennsylvania and elsewhere
would effectively result in a blanket waiver of the type denied in
Order No. 712-A. It also argues that granting the requested relief
would increase the risk of defaults by permitting less creditworthy
suppliers access to systems they would not otherwise be able to obtain.
It claims that it would not be in the public interest to allow
circumvention of creditworthiness standards in the current credit
climate and that relaxed credit requirements were actually one of the
causes of the current economic situation. It further argues that the
Commission would hinder the continued development of a viable and
robust competitive market by affording certain marketers preferential
credit treatment.
    28. National Grid answers NYSEMC's comments, claiming that NYSEMC
mischaracterizes National Grid's clarification request by framing it as
a request for an open-ended exemption. National Grid asserts that it is
requesting an exemption only where the wholesale marketer supplier
advises the LDC that the marketer has an obligation to supply gas to
the retail marketer that is equivalent to the retail marketer's
obligation to supply gas to the releasing LDC's customers. National
Grid claims such obligation could be created by an agency relationship
or some other contractual framework. National Grid also states that
NYSEMC's concerns about creditworthiness of small customers are
misplaced because the wholesale supplier would still be required to
meet the pipeline's creditworthiness standards. National Grid also
notes that granting its clarification would provide retail customers
with a greater choice of providers.

Commission Determination

    29. The Commission clarifies that the exemptions from bidding and
the prohibition against tying for releases to

marketers participating in state-regulated retail access programs apply
to any release where the marketer replacement shipper is obligated to
use the capacity to provide the gas supply requirement of retail
consumers in the program. Even if the marketer does not itself make
sales directly to the subject retail consumers, this condition can be
satisfied so long as the marketer has a contractual obligation to use
the full amount of the released capacity to supply gas to the retail
access marketer and the retail access marketer is, in turn, obligated
to supply that gas to the retail consumers pursuant to a state-
regulated retail access program.
    30. As stated above, in Order Nos. 712 and 712-A the Commission
exempted from bidding releases ``to a marketer participating in a
state-regulated retail access program as defined in paragraph (h)(4) of
this section * * *.'' \24\ In section 284.8(h)(4) of the revised
regulations, the Commission defined releases to a ``marketer
participating in a state-regulated retail access program'' as ``any
prearranged capacity release that will be utilized by the replacement
shipper to provide the gas supply requirement of retail consumers
pursuant to a retail access program * * *.'' \25\ This definition
applies to any replacement shipper which is obligated to use the
released capacity to transport gas which will be used to provide the
gas supply requirement of the retail consumers, whether that shipper
makes the retail sales itself or sells the gas to the retail marketer
who then resells the gas to the retail consumers.\26\ The Commission's
rationale in Order No. 712 for granting the exemptions from the tying
prohibition and bidding requirements for capacity releases by LDCs to
implement state-approved retail access programs applies equally to the
situation where an LDC releases capacity directly to the retail
marketer or to another entity which is obligated to transport the gas
on behalf of the retail marketer. The essential requirement is that the
replacement shipper either (1) is itself the retail marketer or (2) has
a contractual relationship with the retail marketer and/or the LDC
requiring it to use up to the full amount of the released capacity to
satisfy the retail marketer's obligations under the state-approved
retail access program to provide the gas supply requirement of retail
consumers.
---------------------------------------------------------------------------

    \24\ See 18 CFR 284.8(h)(1).
    \25\ 18 CFR 284.8(h)(4).
    \26\ Some of the parties requesting clarification describe an
``agency'' relationship whereby the agent would obtain the released
capacity and then sell gas to its principal, the retail marketer.
See National Fuel's request at 7. This arrangement, as well as what
we understand as a traditional agency arrangement, where the
principal would continue to hold title to the capacity and the gas,
and thus there would be no need for a ``resale'' to the retail
marketer (principal), are both acceptable to the Commission as
releases eligible for the exemptions from tying and bidding provided
the ``agent'' is obligated to serve the retail marketer's needs as
described above under the retail access program.
---------------------------------------------------------------------------

    31. The Commission rejects the argument that granting this
clarification will allow circumvention of interstate pipeline
creditworthiness standards. If a retail marketer is unable to satisfy
these standards, the replacement shipper supplier will be required to
satisfy the pipeline's creditworthiness criteria. If no party can meet
these standards then the pipeline does not have to allow the release.
    32. The Commission also grants National Grid's requested
clarification that an LDC that releases to an asset manager can require
the asset manager to release capacity to marketers serving under the
retail choice program and that such a release will qualify for the
exemptions from the tying prohibition and bidding requirements. This
condition is one that can be addressed in the agreement between the
releasing shipper and asset manager, and will allow LDCs and asset
managers to operate efficiently to effectuate the goals of retail
access programs.
    33. The clarifications granted above render the various requests
for waiver moot.

Termination of Dockets

    34. The Commission initiated Docket Nos. RM06-21 and RM07-4 to
address a petition filed by Pacific Gas and Electric Co. and Southwest
Gas Corporation concerning the potential removal of the maximum rate
ceiling on capacity release transactions and a petition filed by the
Marketer Petitioners seeking clarification of the operation of the
Commission's capacity release rules in the context of asset management
services. The issues raised in the petitions have been fully addressed
in the instant docket. Accordingly, the Commission hereby terminates
Docket Nos. RM06-21 and RM07-4.

The Commission orders:

    (A) The requests for rehearing of Order No. 712-A are denied and
the requests for clarification of Order No. 712-A are granted in part
and denied in part as discussed above.
    (B) Docket Nos. RM06-21 and RM07-4 are hereby terminated.

    By the Commission.
Nathaniel J. Davis, Sr.,
Deputy Secretary.
[FR Doc. E9-9111 Filed 4-20-09; 8:45 am]

BILLING CODE 6717-01-P


Second, if the distribution of emissions reductions is anticipated to be significantly different, then a two pronged visibility improvement test is employed. The first prong is that the alternative program must not result in a degradation of visibility at any Class I area. The second prong is that the alternative 186 program must result in greater visibility improvement overall,

based on an average across all affected Class I areas. See 66 FR 38133.

In 2002, the D. C. Circuit decided American Corn Growers. The court in that decision invalidated " the BART provisions" on the basis that EPA had improperly constrained State authority by requiring them to bifurcate visibility from the other statutory factors when making BART determinations, and by specifying that visibility impairment should be considered on a group basis when determining whether a BART eligible source is subject to BART. 291 F. 3d 1, 8.

Because EPA's policy of allowing alternative programs to BART was not at issue in American Corn Growers, the decision contained no discussion of how such alternative programs would be compared to BART   neither the step of estimating emissions from source

bysource BART, nor the criteria for the actual comparison ( i. e., the test). Therefore, EPA interpreted the court's vacature of the BART provisions to apply to the source by source BART regulations under 40 CFR 51.308( e)( 1). Accordingly, in our May 2004 reproposal of the BART guidelines, we did not propose any changes in section 308( e)( 2), and we retained the section on trading programs in the guidelines ( Appendix Y) as that section was proposed in 2001.

In June 2004, in the Supplemental Notice of Proposed Rulemaking ( SNPR) for the Clean Air Interstate Rule ( CAIR), we 73 Section 308( e)( 2) was based, in turn, on the precedent set by our interpretation of CAA 169A( b)( 2) in a single BART source context   see 64 FR 35739, citing Central Arizona Water Conservation District, 990 F. 2d 1531 ( 1993).

74 " Supplemental Air Quality Modeling Technical Support Document ( TSD) for the Clean Air Interstate Rule ( CAIR), May, 2004." http:// www. epa. gov/ cair/ pdfs/ saqmtsd. pdf 187 proposed to conclude that the CAIR will achieve greater reasonable progress than would BART for SO2 and Nox at BART eligible EGUs in CAIR affected States and therefore may be treated as a program in lieu of BART for those sources. In doing so, we discussed regional haze rule section 308( e)( 2) as precedent for the policy of allowing trading programs to substitute for BART. 73 However,

noting that the CAIR trading program affected only one category of BART eligible sources ( EGUs), rather than all BART eligible categories as envisioned for State developed BART alternative programs under section 308( e)( 2), we proposed adding a 308( e)( 3)

applicable only to CAIR. This section would provide that states that comply with the CAIR by subjecting EGUs to the EPA administered cap and trade program may consider BART satisfied for Nox and SO2 from BART eligible EGUs. In the CAIR SNPR and supporting documentation, 74 we provided analyses demonstrating that CAIR would achieve greater emission reductions than BART, and would make greater reasonable progress according to the twopronged visibility test previously proposed in the BART guidelines. 188 In February 2005, in CEED v. EPA, the D. C. Circuit invalidated a BART alternative program developed by the Western Regional Air Partnership ( WRAP), which was also based on a requirement of group BART analysis in setting source by source benchmark. It is important to note that the two pronged betterthan BART test was not at issue in CEED, as neither the States nor EPA had employed that test in determining that the WRAP's program achieved greater progress than BART. The issue on which the court based its decision was not how the two programs were compared, but how States were required to estimate reductions from source by source BART in order to make the comparison. The implications of this case to today's action are discussed in more detail below.

Finally, on March 10, 2005 we promulgated the final CAIR. In the final CAIR, we presented refined and updated analyses continuing to show that CAIR makes greater progress than BART.

We concluded at that time that we should defer a final " better than BART" determinations until ( 1) the source by source BART guidelines for EGU were promulgated, and ( 2) the criteria for comparing alternatives to BART were also finalized. We are taking both of those actions today, and, as explained below, are therefore also making our final determination that CAIR achieves greater progress than BART and may be used by States as a BART substitute. 189 B. Final criteria for comparing visibility progress of an alternative program to BART Proposed Rule As noted, the criteria for determining if an alternative measure achieves greater reasonable progress than BART ( also known as the " better than BART" test or the two pronged visibility test) were first proposed in the 2001 BART guideline proposal, 66 FR 38108, July 20, 2001, and reproposed in the identical form in the 2004 BART guidelines reproposal. 69 FR 25184, May 5, 2004. The test appeared as an element of the guideline's overview of the steps involved in developing a trading program consistent with regional haze rule section 308( e)( 2).

Specifically, the guidelines provided that States could first look at the geographic distribution of emissions under the trading program. " If [ the] distribution of emissions is not substantially different than under BART, and greater emissions reductions are achieved, then the trading program would presumptively achieve " greater reasonable progress." ( 69 FR at 25231). If the distribution of emissions is expected to be different, then States are directed to conduct an air quality modeling study. The guidelines then provide that "[ t] he modeling study would demonstrate " greater reasonable progress" if both of the following two criteria are met:

 visibility does not decline in any Class I area, and 190  overall improvement in visibility, determined by comparing the average differences over all affected Class I areas Comments Received Several commenters stated that the trading criteria contained in the proposed BART guidelines were, along with other parts of the guidelines, beyond EPA's authority to impose under the CAA.

Several State commenters asked for clarification of what should be considered a significantly different geographic distribution of emission reductions, for purposes of proceeding to the two pronged visibility test.

One comment, submitted by environmental groups in response to our preliminary application of the two pronged test to the CAIR in the CAIR rulemaking, goes to the permissibility of that test in general and is therefore relevant to the finalization of the test.

Specifically, these commenters stated that because section 169A( b)( 2)( A) requires BART for an eligible source which may reasonably be anticipated to cause or contribute to any impairment of visibility in any Class I area, EPA is without basis in law or regulation to base a better than BART determination on an analysis that uses averaging of visibility improvement across different Class I areas.

Final Action We are amending the regional haze rule to incorporate the two prong visibility test as it was previously 191 proposed in the BART guideline proposals. Specifically, we are adding the test to the rule provisions at section 51.308( e)( 3).

The EPA has the authority to prescribe this methodology under its general rulemaking authority provided by CAA § 301( a), and under CAA § 169A( 4) and § 169( e). The latter provisions require EPA to promulgate regulations to assure reasonable progress towards the national visibility goal, and to assure compliance with the requirements of section 169A, which include the requirements for BART under 169A( b)( 2)( A) and to promulgate such measures as may be necessary to carry out these regulations. The EPA has determined that source by source BART need not be required when it is not necessary to meet reasonable progress because greater progress can be achieved by an alternative means. The D. C. Circuit in CEED v.

EPA upheld this interpretation of the BART provisions'

relationship to the broader reasonable progress requirements of the Act. Slip. Op. at 13. In order to assure that such alternative programs meet the reasonable progress goals of the CAA, EPA has the authority, and perhaps a duty, to promulgate regulations governing how that determination is made.

Moreover, these requirements for making the ultimate comparison between an alternative program and BART do not affect in any way how states make BART determinations or how they determine which sources are subject to BART. It is in those areas where the Act and legislative history indicate that Congress 192 evinced a special concern with insuring that States would be the decision makers. Nothing in American Corn Growers or CEED v. EPA suggests that those cases rendered EPA's rulemaking authority under 169A( a)( 4) completely inoperable in any BART context.

With respect to the use of average overall improvement, we explained in the CAIR NFR preamble that we disagree with comments that CAA § 169A( b)( 2)' s requirement of BART for sources reasonably anticipated to contribute to impairment at any Class I area means that an alternative to the BART program must be shown to create improvement at each and every Class I Area. Even if a BART alternative is deemed to satisfy BART for regional haze purposes,

based on average overall improvement as opposed to improvement at each and every Class I Area, CAA § 169A( b)( 2)' s trigger for BART based on impairment at any Class I area remains in effect, because a source may become subject to BART based on " reasonably attributable visibility impairment" at any area. See 40 CFR § 51.302. In addition, within a regional haze context, not every measure taken is required to achieve a visibility improvement at every class I area. BART is one component of long term strategies to make reasonable progress, but it is not the only component.

The requirement that the alternative achieves greater progress based on the average improvement at all Class I areas assures that, by definition, the alternative will achieve greater progress overall. Though there may be cases where BART could produce 193 greater improvement at one or more class I areas, the nodegradation prong assures that the alternative will not result in worsened conditions anywhere than would otherwise exist, and the possibility of BART for reasonably attributable visibility protects against any potential " hot spots." Taken together, the EPA believes these factors make a compelling case that the proposed test properly defines " greater reasonable progress." The EPA anticipates that regional haze implementation plans will also contain measures addressing other sources as necessary to make progress at every mandatory federal Class I area.

We are therefore finalizing the test criteria in the same form in which they were proposed as part of the BART guidelines.

We also recognize that the test criteria leave some terms and conditions undefined, and we believe States and Tribes should retain the discretion to reasonably interpret and apply these terms as appropriate to the context of the particular program at issue.

First, in the proposed test we did not specify the time period which should serve as the starting point for comparison under the first prong. That is, we did not specify whether potential degradation should be determined in relation to visibility conditions existing at the time of the proposed program, or in relation to base case visibility projections for the time of program implementation. While either option is, we 194 believe, reasonable, in this rulemaking we have usedthe future projected base case, for the following reasons.

The underlying purpose of both prongs of the test is to assess whether visibility conditions at Class I areas would be better with the alternative program in place than they would without it. The first prong ensures that the program does no harm at any particular Class I area. It addresses the possibility that the alternative program might allow local increases in emissions which could result in localized degradation. The second prong assesses whether the alternative program produces greater visibility improvement in the aggregate than would source specific BART.

In both cases, the logical reference point is visibility conditions as they are expected to be at the time of program implementation but in the absence of the program. This insures that the visibility improvements or degradations determined are due to the programs being compared   source specific BART and the cap and trade alternative   and not to other extrinsic factors.

For example, if large increases in wild land fires are expected,

due to accumulation of fuel from past forest management practices,

a degradation of visibility from current conditions may be expected. It would be irrational to disapprove an alternative program because of a modeled degradation from current conditions,

where that degradation is actually anticipated because of smoke from such fires   sources which are not subject to the CAA BART 75 The regional haze rule requires States to establish reasonable progress goals for each Class I area that provide for improvement in visibility for the most impaired days and ensure no degradation in visibility for the most impaired days. The reasonable progress test in the regional haze rule remains as a separate test from better than BART. The SIPs must contain measures to achieve the the reasonable progress goal; such measures could include not only stationary source programs such as BART but also programs to address emissions 195 provisions. By comparing the alternative to future projected baseline conditions, such extrinsic variables are accounted for.

We are thus able to ascertain ( to the extent possible where future projections are concerned) whether visibility under the alternative would be worse at any Class I area, all other things being equal.

Therefore, in applying the test to the CAIR, we used the future ( 2015) projected baseline. We believe, however, that States should have discretion in determining the most appropriate baseline for this prong of the test, as long as the State's method is reasonable.

Second, although the proposed test indicated that dispersion modeling should be used to determine visibility differences for the worst and best 20% of days, the guideline did not specify the relationship between the worst and best days and the two prongs of the test. We believe that each prong of the test should ideally be based on an examination of both the worst and best 20% of days.

Thus, under the first prong, visibility must not degrade at any one Class I area on either the best 20% or the worst 20% days75 as from other types of sources. The no degradation ( on the 20% best days) component of the reasonable progress test must still be applied to the final future year emissions control strategy. This does not directly impact the conclusions of the better than BART test.

196 a result of implementing the alternative program; and, under the second prong both the best and worst days should be considered in determining whether the alternative program produces greater average improvement.

Third, the proposed guidelines did not define " affected"

Class I areas for purposes of the comparison. In applying the test to the CAIR, we considered all federal mandatory Class I areas in the contiguous 48 States for which data was available.

The principal Class I areas affected by the CAIR are those in the eastern U. S., therefore we calculated average improvement separately for the eastern areas, but also considered affects at all Class I areas nationally. We believe this was appropriate for a federally mandated program of the scope and magnitude of the CAIR. However, this may not be necessary for every BARTalternative program developed by States in the future, especially if proposed programs are limited to smaller geographic areas or are limited to source categories having significantly less widespread impacts than EGUs. In such circumstances, it may be reasonable for the States and Tribes involved to develop criteria for " affected" Class I areas. For example, the affected region could be considered to be the States and Tribes involved in the 197 trading program as well as immediately adjacent States, or Class I areas within adjacent States that are within some defined distance of participating States.

. With respect to comments on the degree of difference in the geographic distribution of emissions necessary to trigger application of the two prong test, we believe it is not necessary for EPA to define that in the rule. For our CAIR analysis, we explained in the SNPR that the fact that CAIR would produce greater emissions reductions than BART in most States, but less reductions than BART in a few States, was sufficient reason to employ the two pronged visibility test. 69 FR 32704. For other programs developed by States, a State would have the ability to make a reasonable decision as to whether there was a sufficient basis to make the demonstration that an alternative program would be better than BART based on modeling of the emissions distributions alone, or whether the State should proceed with the two pronged visibility test. The State's discretion is subject as always to the condition that it must be reasonably exercised, and must be supported by adequate documentation of the analyses.

Finally, on a related issue, we note that in a separate rule making to follow soon after today's action, we will be soliciting comments on whether there might be other means of demonstrating that an alternative program makes greater reasonable progress than BART, in addition to the two pronged visibility test we are finalizing in today's action. Such other means might take into 76 " Supplemental Air Quality Modeling Technical Support Document ( TSD) for the Clean Air Interstate Rule ( CAIR), May, 2004." http:// www. epa. gov/ cair/ pdfs/ saqmtsd. pdf; " Demonstration that CAIR Satisfies the ` Better than BART' Test As proposed in the Guidelines for Making BART Determinations" http:// www. epa. gov/ cair/ pdfs/ finaltech04. pdf.

198 account additional policy considerations, as well as the relative degree of visibility improvement of the two programs. C.

Final Determination That CAIR Makes Greater Reasonable Progress than BART Proposal As noted in the background section above, in both the CAIR SNPR, and NFR, we discussed the proposed approach of allowing States to treat CAIR as an in lieu of BART program for EGUs in CAIR affected States. In both actions, we presented analyses based on emission projections and air quality modeling showing that CAIR will achieve greater reasonable progress towards the national visibility goal than would BART for affected EGUs.

These analyses were conducted according to the criteria for making such " better than BART" determinations which had been proposed in the BART guidelines, and which have now been finalized in the regional haze rule at 40 CFR § 51.308( e)( 3), as discussed above in section IV. B. Below, we briefly recap these prior analyses. See 69 FR 32684, 32702   707 and 70 FR 25162, 25299   304 and associated Technical Support Documents76 for full details.

Scenarios Examined 77 199 The CAIR is applicable to 28 States and the District of Columbia and requires levels of SO2 and Nox emissions reductions based on those achievable on a highly cost effective basis from EGUs. BART, on the other hand, is applicable nationwide and covers 25 additional industrial categories, as well as EGUs, of a certain vintage. In our comparison, we sought to determine whether the CAIR cap and trade program for EGUs will achieve greater reasonable progress than would BART for EGUs only.

Therefore, the relevant scenarios to examine were ( 1) SO2 and NOX emissions from all EGUs nationwide after the application of BART controls to all BART eligible EGUs (" nationwide BART"), and ( 2) SO2 and NOX emissions from all EGUs nationwide after the emissions reductions attributable to CAIR in the CAIR region and application of BART controls to all BART eligible EGUS outside the CAIR region (" CAIR+ BART) .77 The latter scenario reflects the fact that source by source BART would remain a federal requirement outside the CAIR region, unless and until it is replaced by some other state or federally required program. Thus, in order to more accurately project CAIR emissions, it is necessary to impose BART controls outside the CAIR region, to account for potential load and emission shifting among EGUs.

In addition to these two scenarios, a third was used   the future base case in the absence of either program. This third 200 scenario was used to ensure that CAIR would not cause degradation from otherwise existing conditions. See section IV. B above for a discussion of why the future baseline is an appropriate comparison point for the first prong of the " better than BART"

test.

At the SNPR stage, a " CAIR + BART" scenario was not available, as the only projections available at that time had been developed for other purposes. Thus, the " CAIR" scenario used then, which was based on the Clear Skies proposal, was imperfect for purposes of this analysis in that it assumed SO2 reductions on a nationwide basis ( rather than in the CAIR region only) and assumed NOx reductions requirements in a slightly different geographic region than covered by the proposed CAIR.

For the CAIR NFR, we redid the emissions projections for both the Nationwide BART and CAIR + BART in the West scenarios. For the former, we increased the number of BART eligible units included by lowering the assumed threshold for BART applicability from 250 MW capacity for both NOx and SO2 to 100 MW for SO2 and 25 MW for Nox, and by reviewing the list of potentially BART eligible EGUs. For the latter scenario, we produced emissions projections based on application of CAIR level emission reductions in the States proposed for inclusion in the CAIR in the SNPR.

Emission Projections For the analyses in both the SNPR and NFR, we used the Integrated Planning Model ( IPM) to estimate 201 emissions expected from the scenarios described above. Tables 1 and 2 present the results from the SNPR and NFR, respectively.

Table 1 . EGU SO 2 and NO x Emissions as Projected in CAIR SNPR ( in thousands of tons per year)

2015 Base Case EGU Emissions 2015 " CAIR" 2015 Modeled Nationwide BART Additional Reduction from " CAIR" ( Nationwide BART minus " CAIR")

Nationwide SO2 9,081 5,260 7,012 1,752 Nationwide NOx 3,950 2,248 2,781 533 Table 2. EGU SO 2 and NO x Emissions as Projected in CAIR NFR ( in thousands of tons per year)

2015 Base Case EGU Emissions 2015 CAIR + BART 2015 Nationwide BART Additional Reduction from CAIR + BART ( Nationwide BART minus CAIR+ BART)

Nationwide SO2 9,084 4,735 7,162 2,427 Nationwide NOx 3,721 1,816 2,454 638 As can be seen in the numbers in the right most column, CAIR produced far superior emission reductions to nationwide BART, and the superiority of CAIR over BART increased between the SNPR and NFR projections, when the scenarios were corrected to more accurately reflect the anticipated reality in 2015.

Air Quality Modeling Results.

Using the above emissions projections, we completed numerous air quality modeling runs and postprocessing calculations to 202 determine the impacts of emissions and emissions control strategies on visibility in Class I areas. We quantified the impacts of the CAIR and BART controls on visibility impairment by comparing the results of the future year ( 2015) base case model runs with the results of the CAIR + BART and nationwide BART control strategy model runs. We quantified visibility impacts on the 20% best and 20% worst visibility days.

For the SNPR modeling, we used the Regional Modeling System for Aerosols and Deposition ( REMSAD) model to calculate these visibility impacts. This modeling used base year meteorology from 1996. Complete year ambient monitoring data, which is necessary to model future improvements in visibility, was available for 1996 from Inter agency Monitoring of Protected Visual Environments ( IMPROVE) monitors located at 44 Class I areas   13 within the CAIR region and 31 outside of it.

For the NFR modeling, we used the Community Multiscale Air Quality ( CMAQ) model. The base year meteorology used in the CMAQ modeling was 2001. This later base year enabled us to look at more Class I areas, because there were more IMPROVE monitors which had complete year data for 2001 than there had been in 1996.

Specifically, 81 of the 110 IMPROVE sites have complete ambient air quality data for 2001. Moreover, because in some cases a given IMPROVE monitor is designated as representing more than one Class I area, these 81 sites are representative of 116 Class I 203 areas. Twenty nine of the 116 are in the East ( east of 100 degrees longitude) and 87 are in the West.

Using the modeling results, we then applied the two prong better than BART test which had been defined in the proposed BART rule. As explained above, under the first prong, visibility must not decline at any Class I area, as determined by comparing the predicted visibility impacts at each affected Class I area under the ( CAIR) trading program with future base case visibility conditions. Under the second prong, overall visibility, as measured by the average improvement at all affected Class I areas,

must be better under the trading program than under sourcespecific BART. The future year air quality modeling results were used to make this demonstration.

The visibility impacts of the CAIR + BART scenario were compared to base case 2015 visibility conditions ( without CAIR or BART) to determine whether the CAIR resulted in a degradation of visibility at any Class I area. We also compared these visibility impacts with the visibility impacts of nationwide BART implementation, to assess whether the proposed CAIR would result in greater average visibility improvement than nationwide BART.

The CAIR passed the first prong by not causing a degradation of visibility at any Class I area, either in the West or nationally. This was true in both the SNPR and NFR modeling. The 78 See Footnote [ 5], Supra.

79 Eastern Class I areas are those in the CAIR affected states, except areas in west Texas which are considered western and therefore included in the national average, plus those in New England.

204 visibility projections for each Class I area are presented in the respective TSD's. 78 The overall results are presented in tables 3 and 4 below,

representing the SNPR and NFR modeling respectively.

Table 3 Average Visibility Improvement in 2015 vs. 2015 Base Case ( deciviews) as Modeled using REMSAD in CAIR SNPR " CAIR" Scenario Nationwide BART Class I Areas East79 National East National 20% Worst Days 2.0 0.7 1.0 0.4 20% Best Days 0.7 0.2 0.4 0.1 Table 4 Average Visibility Improvement in 2015 vs. 2015 Base Case ( deciviews) as Modeled using CMAQ in CAIR NFR CAIR + BART in West Nationwide BART Class I Areas East8 National East National 20% Worst Days 1.6 0.5 0.7 0.2 20% Best Days 0.4 0.1 0.2 0.1 As can be see from the tables, although the models produced different absolute values, in both cases CAIR produced significantly greater visibility improvement than nationwide BART. 205 For example, looking at the 20% worst days at Eastern Class I areas ( the areas most influenced by the CAIR, since it is an eastern program), in both cases the visibility improvements from CAIR were at least twice as great as under nationwide BART ( i. e.,

in the SNPR, 2.0 deciviews compared to 1.0 deciviews improvement,

and in the NFR, 1.6 deciviews compared to 0.7 deciviews improvement).

This historical overview is given in the interest of providing a more complete understanding of the analyses presented at various stages in the CAIR rule making progress. In the end,

however, it is the analyses presented in the CAIR NFR on which we are basing our determination that CAIR makes greater reasonable progress towards the national visibility goals than does nationwide BART. Therefore, these NFR results are examined more closely in the " Final Action" section below, in light of additional emissions projections we have conducted to insure that changes to the CAIR and BART rules made subsequent to the CAIR NFR do not affect that determination.

Comments received and EPA's Responses Although many comments were received regarding our proposal to determine that CAIR makes greater reasonable progress than BART, nearly all of them related either to the terms of the test itself, or to policy and legal implications of allowing CAIR required reductions to substitute for source by source BART.

These are addressed in sections B ( above ) and D ( below) 206 respectively. One commenter asserted, with respect to modeling presented in the SNPR, that the improvement of CAIR compared to source specific BART is so slight it may be potentially within the margin of error, and therefore insufficient for the better than BART demonstration , or for assuring that no hot spots will occur.

The EPA disagrees that the difference between CAIR and BART in the SNPR visibility projections was not significant. The visibility results presented in the NFR continue to show that the CAIR cap and trade program with BART in the non CAIR region provides considerably more visibility improvement compared to nationwide BART ( for EGUs only). The NFR modeling results show that the average visibility improvement from CAIR on the 20% worst days at 29 Eastern Class I areas is 1.6 deciviews ( dv) compared to only a 0.7 dv improvement from nationwide BART controls. In the " better than BART" TSD we have provided modeling results for 116 individual Class I areas. The modeling shows that CAIR will not create any " hot spots." On the 20% worst days, all of the Eastern Class I areas show more visibility improvement under CAIR+ BART than under BART alone. In many of the Western Class I areas,

nationwide BART and CAIR + BART in the West provide about the same visibility benefits. ( This is to be expected, since the CAIR is only applicable in the East.) While the visibility benefits are similar in the West ( outside of the CAIR region), they are clearly not similar in the East, where the CAIR is predicted to achieve twice as much visibility improvement compared to BART. 207 Final action The CAIR vs. BART comparison presented in the CAIR NFR was developed while both rules were under development and therefore subject to change. Since the emissions projections and air quality modeling presented in the CAIR NFR was completed,

several changes were, in fact, made to the CAIR region. In addition, since that time our assumptions regarding the likely maximum BART emission reductions from EGUs also changed.

Therefore, we recalculated the emission projections to see if the rule changes could possibly affect the determination that CAIR will achieve greater reasonable progress than BART.

Most significantly, the final CAIR included Arkansas,

Delaware, and New Jersey only for purposes of significant contribution to ozone non attainment by summertime NOx emissions,

whereas our modeling had been based on the assumption thatthese States would be included for contribution to PM2.5 non attainment by SO2 and NOx emissions. The new emission projections are based on the application of CAIR only for ozone in these States.

With respect to the nationwide BART, for SO2 the NFR projections assumed the application of a 90% control or 0.10 lbs/ mmBtu at uncontrolled EGUs greater than 100 MW. In the new projections, the control assumptions were changed to 95% or 0.15 lbs/ mmbtu, to reflect the presumptive control levels in the final BART guidelines. For Nox, the NFR projections were based on an assumed emission rate of 0.2 lbs/ mmBTU at all BART eligible EGUs nationwide. The new projections are based on the assumption of 208 combustion controls on all BART eligible units except cyclones which have SCR, and the operation of all existing SCR and SNCRs annually, instead of just in the ozone season. Finally for both pollutants, the threshold for application of controls was increased to 200 MW, to better reflect the presumptionsincluded in the final BART guidelines.

We used IPM to project 2015 emissions given these new parameters. The results are presented in Table 5 below, which also includes the CAIR NFR projections ( as reported in Table 2)

for the reader's convenience.

Table 5 . EGU SO2 and NOx Emissions as Projected in CAIR NFR and as projected in subsequent update ( in thousands of tons per year)

2015 CAIR + BART 2015 Nationwide BART Additional Reduction from CAIR + BART ( Nationwide BART minus CAIR+ BART)

CAIR NFR Nationwide SO2 4,735 7,162 2,427 Nationwide NOx 1,816 2,454 638 Updated Projections Nationwide SO2 5,042 7,953 2,911 Nationwide NOx 2,000 2,738 738 The updated emissions estimates for both the BART and CAIR with BART in the West scenarios are slightly higher than the NFR emissions estimates, but the difference between the CAIR + BART and nationwide BART scenarios are even larger compared to the NFR 80The 1,000 ton per year increase in NO x in Connecticut represents ~ 0.003% of the total EGU NO x in the 2015 base case and the 2,000 ton per year increase in SO 2 in New Jersey represents ~ 0.0005% of the total EGU SO 2 . Since the impacts on visibility from EGU SO2 and NOx are generally regional in nature, we would expect this small increase to have little or no impact on visibility in any Class I area.

209 determination. For SO2, the updated CAIR + BART achieves about 2.9 million tons more reductions than updated nationwide BART in 2015.

For NOx, the updated CAIR + BART policy is projected to result in about 738,000 tons more emissions reductions than the updated BART nationwide policy in 2015. The difference between the updated CAIR + BART and nationwide BART scenarios is now larger by 484,000 tons of SO2 reduction ( i. e., 2,911,000   2,427,000) and l00,000 tons of NOx reduction ( i. e. 738,000   638,000).

Implications of New Emission Projections for the Two Pronged Test The first prong of the better than BART test specifies that no degradation of visibility can occur at any Class I area. In order to be sure that Class I areas do not experience a degradation in visibility, we examined the updated State by State emissions estimates. Compared to the 2015 base case, in the updated CAIR + BART case, there are no individual Statewide increases in either SO2 or NOx ( except for a very small ~ 1,000 ton increase in NOx in Connecticut and 2,000 ton increase in SO2 in New Jersey). 80 That is consistent with the NFR CAIR + BART case in which no degradation was found. Consequently we have determined that no degradation would occur under the updated CAIR + BART emissions scenario. 81The difference between the updated CAIR + BART and nationwide BART scenarios is larger than the difference between the modeled CAIR + BART and nationwide BART scenarios. The " difference of the differences" is 485,000 tons of SO2 and 100,000 tons of NOx.

210 The second prong of the better than BART test specifies a greater average visibility improvement from the CAIR trading program ( CAIR + BART). The average visibility improvement from the NFR CAIR + BART case was much greater ( on the 20% worst visibility days) than the nationwide BART case. In the scenario we modeled for the NFR, the larger visibility improvement from CAIR + BART was achieved by reducing SO2 emissions by an additional ~ 2.4 million tons per year compared to nationwide BART and NOx emissions by an additional 638,000 tons per year compared to natiowide BART.

In the updated scenario, the emissions difference between the CAIR + BART and nationwide BART cases are even larger ( 2.9 million tons of SO2 and 738,000 tons of NOX). 81 The distribution of emission reductions changed somewhat in the new projections   that is, some States saw a larger difference between CAIR and BART,

while in other States the difference was smaller. The largest change was in Kentucky, where the new projections showed that emission reductions from CAIR were even greater than those from BART by an additional 200,000 tons per year. Among States where the change between projections went the other direction   that is,

showing that BART reductions were closer to CAIR reductions than 82 California, Delaware, Florida, Georgia, Iowa, Louisiana, Michigan, Mississippi, Missouri, North Carolina, Texas, and Wisconsin.

83 There were also four States where BART NOx emissions reductions were slightly higher than CAIR + BART ( a total of 4,000 tons per year). Those States are Connecticut, Delaware, New Jersey, and Oklahoma.

84 Alabama, Louisiana, Michigan, Mississippi, Missouri, New Jersey, North Carolina, Texas, Wisconsin 211 previously projected   the greatest changes were in Alabama and Pennsylvania, where the difference between the programs decreased by 46,000 and 45,000 tons, respectively.

Perhaps more importantly, in the new projections, there are fewer States in which BART reductions are greater than CAIR reductions. In the NFR projections, there were 12 States82 where nationwide BART SO2 reductions were greater than CAIR + BART reductions. 83 In those 12 States, BART emissions achieved ~ 686,000 more tons of SO2 reduction compared to CAIR + BART. In the rest of the States, CAIR + BART achieved an additional 3.1 million tons per year of SO2 reduction compared to BART. All told, the modeling showed that visibility improvement was greater under the CAIR than under BART on an overall average basis, both at eastern Class I areas and at all Class I areas nationally. In the new projections, there are only 9 States84 in which BART reductions are greater under nationwide BART than CAIR + BART in the West. In those 9 States, BART emissions achieved ~ 472,000 more tons of SO2 reduction compared to CAIR + BART. In the rest of the States, 85 We performed a similar analysis using projections including the Clean Air Mercury Rule, CAMR, which was promulgated after the CAIR NFR. The CAMR emission projections show slight additional emission reductions of SO2 and NOx as compared to the projections CAIR+ BART without CAMR, and are nearly identical in terms of geographic distribution. Therefore CAIR+ BART+ CAMR, like CAIR+ BART, passes the two pronged test for demonstrating greater reasonable progress than BART. This is discussed in more detail in the TSD accompanying today's action.

212 CAIR + BART achieved an additional 3.4 million tons per year of SO2 reduction compared to BART. 85 Due to the fact that the new projections show that the difference between CAIR and BART reductions is even greater than previously estimated, and the visibility improvements due to CAIR + BART were previously modeled to be much larger than BART, we can state with a high degree of confidence that the updated CAIR + BART scenario passes the second prong of the better than BART test.

D. Revision to Regional Haze Rule to allow CAIR States to treat CAIR as a BART substitute for EGUs In the SNPR, we proposed that States which adopt the CAIR cap and trade program for SO2 and NOx would be allowed to treat the participation of EGUs in this program as a substitute for the application of BART controls for these pollutants at affected EGUs. To implement this, we proposed an amendment to the Regional Haze Rule which would add a subpart 40 CFR 51.308( e) to read as follows:

A State that opts to participate in the Clean Air Interstate Rule cap and trade program under part 96 AAA 86A Geographic enhancement is a method, procedure, or process to allow a broad regional strategy, such as the CAIR cap & trade program, to accommodate BART for reasonably attributable impairment. For example, it could consist of a methodology for adjusting allowance allocations at a source which is required to install BART controls.

213 EEE need not require affected BART eligible EGUs to install, operate, and maintain BART. A State that chooses this option may also include provisions for a geographic enhancement to the program to address the requirement under § 51.302( c) related to BART for reasonably attributable impairment from the pollutants covered by the CAIR cap and trade program. 86 We proposed that this would be codified at 40 CFR 51.308( e)( 3); however that section now incorporates the " better than BART" test as discussed above. In today's action, as described below we are finalizing this provision of the rule,

where it will be codified as section 308( e)( 4).

The EPA's authority to treat emissions reductions required by the CAIR as satisfying BART was not affected by CEED v. EPA. As noted, the D. C. Circuit in CEED upheld the proposition that EPA can approve implementation plans which rely on alternative strategies to BART, as long as greater reasonable progress is achieved. CEED v. EPA, Slip. Op. at 13. Moreover, the CAIR program is not infected in any way with the " group BART"

methodology held invalid by the court. That is because CAIR 214 emission reductions levels were not based on the invalid " group

BART" approach or any other assumptions regarding BART, but were developed for other reasons. Specifically, the CAIR was developed to assist with attainment of the NAAQS for PM2.5 and ozone. Had EPA not performed the comparison of CAIR to BART for visibility progress purposes, the CAIR emission reduction requirements would remain unchanged. Therefore, EPA is not imposing an invalid BART requirement on States, but rather allowing States, at their option, to utilize the CAIR cap and trade program as a means to satisfy BART for affected EGUs.

We received numerous comments on this proposal, which are summarized along with our responses in the CAIR NFR preamble at 70 FR 25300   25302 and in the Response to Comment document . To summarize our responses to some of the most important comments:

( 1) We note that we are not constraining the discretion of States to determine which sources are subject to BART and to make BART determinations. CAIR affected States are not required to accept our determination that CAIR may substitute for BART. Under the amended rule, States simply have the option of accepting this determination.

( 2) The EPA does not believe that anything in the CAA or relevant case law prohibits a State from considering emissions reductions required to meet other CAA requirements when determining whether source by source BART controls are necessary to make reasonable progress. Whatever the origin of the emission 215 reduction requirement, the relevant question for BART purposes is whether the alternative program makes greater reasonable progress.

As discussed above, EPA has determined that CAIR does so with respect to SO2 and Nox from EGUs in the CAIR region.

Moreover, the fact that BART and CAIR originate from different provisions of the CAA does not mean that CAIR and BART emissions reductions would be additive if BART eligible EGUs in the CAIR program were required to install and operate BART. Such source specific control requirements would simply result in a redistribution of emission reductions, as other EGUs could buy the excess allowances generated by the installation of controls at BART units. The net result would be the same level of emission reductions, but at a higher total cost, because the ability of the market to find the most cost effective emission reductions would be constrained.

( 3) Although regional haze rule section 308( e)( 2) is not directly applicable, as the CAIR is covered by the special provision newly codified at 308( e)( 4), this determination is consistent with the policy contained in 308( e)( 2) requiring inlieu of BART programs be based on emissions reductions " surplus to reductions resulting from measures adopted to meet requirements as of the baseline date of the SIP." The baseline date for regional 87 See " 2002 Base Year Emission Inventory SIP Planning: 8 hr Ozone, PM2.5, and Regional Haze Programs," November 8, 2002, Guidance Memorandum, http:// www. epa. gov/ ttn/ oarpg/ t1/ memoranda/ 2002bye_ gm. pdf 216 haze SIPs is 200287; therefore CAIR reductions are surplus to requirements as of that year.

( 4) We agree with commenters that it was premature to make a final determination whether CAIR makes greater reasonable progress than BART in the final CAIR because at that time the BART guidelines and the criteria for making such determinations had not been finalized. In today's action, both those rule makings are complete and therefore such a determination is ripe.

( 5) We disagree with commenters who thought that CAIR should be considered " better than BART" regardless of whether a State participates in the cap and trade program. Our demonstration that CAIR makes greater reasonable progress than BART is based only on an examination of emissions reductions from EGUs under both programs. The CAIR emissions projections and modeling assumes that EGU emissions will be capped at the levels specified in the CAIR. Therefore, States that choose to meet their CAIR emission reduction requirements in a manner other than through the participation of EGUs in the CAIR cap and trade program would have to develop an appropriate demonstration that the measures they employ make greater reasonable progress than would BART for any 217 affected source categories, if the State wanted its CAIR required reductions to substitute for source by source BART.

( 6) We disagree with commenters who asserted that CAIR should satisfy BART for States that are subject to CAIR only for ozone season Nox. We explained in the final CAIR preamble that a State subject to CAIR for NOx purposes only would have to make a supplementary demonstration that BART has been satisfied for SO2,

as well as for Nox on an annual basis. We wish to clarify here that a State which is only subject to CAIR for Nox, but which also chooses to participate in the CAIR trading program for both SO2 and Nox, may consider BART to be satisfied for both SO2 and Nox from EGUs. Because we modeled these States as controlling for both SO2 and Nox in the CAIR NFR, our better than BART demonstration presented in that action would be valid in that scenario. Conversely, if such States choose to participate only in the ozone season Nox trading program, the updated projections presented in today's action demonstrate that BART would be satisfied for Nox, but such states would still need to address BART for SO2 emissions from EGUs.

( 7) We noted in the final CAIR preamble that although we believe it is unlikely that a State or FLM will find it necessary to certify reasonably attributable visibility impairment at any Class I area, as a legal matter that possibility exists. That is,

the determination that CAIR makes greater reasonable progress than BART is made in the context of BART for regional haze under CAA 88Similar to the BART factors, the reasonable progress factors are: the cost of compliance, the time necessary for compliance, the energy and nonair quality environmental 218 169B, and does not preclude a finding of reasonably attributable impairment under CAA 169A. The CAIR cap and trade program does not include geographic enhancements to accommodate the situation where BART is required based on reasonable attribution at a source which participates in the trading program, but States retain the discretion to include such enhancements in their SIPs.

( 8) Our determination that CAIR makes greater reasonable progress than BART for EGUs is not a determination that CAIR satisfies all reasonable progress requirements in CAIR affected States. Each State, whether in the CAIR region or not, is required to set reasonable progress goals for each Class I area within the State as required in regional haze rule § 308( d)( 1), and to develop long term strategies, considering all anthropogenic sources of visibility impairing pollutants, as required by § 308( d)( 3).

In setting the reasonable progress goals, the State is to consider the amount of visibility improvement needed to achieve a uniform rate of progress towards natural background conditions in the year 2064. ( This uniform rate of progress is sometimes referred to as the default glide path). The State is also to consider the statutory reasonable progress factors contained in CAA § 169A( g)( 1). 88 impacts of compliance, and the remaining useful life of any existing sources subject to such requirements.

219 In doing so, we anticipate that States will take into account the degree to which CAIR emissions reductions are projected to bring visibility conditions at its Class I areas in line with the default glide path. In some States, the improvements expected from CAIR, combined with the application of the reasonable progress factors to other source sectors, may result in a determination that few additional emissions reductions are reasonable for the first long term strategy period. Nonetheless,

each State is required to set its reasonable progress goals as provided by the regional haze rule and cannot assume that CAIR will satisfy all of its visibility related obligations.